Scaling up can be a make-or-break moment. Perhaps your launch went well and now you’ve got some traction” With a well-designed core product or service, some encouraging financial figures, and a thriving customer base, you’ll be on your way to attracting a second round of investment. But should you focus additional funding on growth or profit?
It’s good to have a clear idea of whether you’ll use funding for growth or profit before you even start approaching investors.
Going giddy over growth
Broadly speaking, young business bosses usually look for growth because they need to get known, and are maybe challenging established players, if not industry assumptions. This is understandable.
However, focusing on growth does not mean the business model shouldn?t be profitable, or that the business should give its products or services away for the sake of reaching as many customers as possible.
There’s also the temptation to grow by starting to own more things and employing lots of salespeople and other staff on permanent contracts. Then you need a lease on a larger premises, heftier insurance, HR people, lots of IT and much more. This might feel good at first. But in reality, you’re narrowing your options for the future and increasing your liabilities.
It’s also possible to run into problems quickly. Without orders, you’ll be like an empty machine. With too many orders, the operations side of your business may feel overwhelmed and unable to keep up with the delivery of products or services. Service levels may slide and you may even lose valuable customers in all the chaos.
Profitability is not enough
That said, let’s assume that you decide to invest across the business, sales then increase and you’re profitable. Is that good enough” The answer is: Possibly, but you could be missing something essential.
You may be wondering whether to focus on growth or profit, but have their place, and there’s something more fundamental to any small business … cash. It’s essential to maintain cash in a sustainable way.
I’ve seen growing, profitable businesses go bust because of a lack of cash-flow management. These are business tragedies where outstanding visions, ideas and careers went up in smoke and all because bosses didn’t focus on the right dial at the controls. It’s almost as if their early success then became their downfall when it was time to scale.
Cash is the lifeblood of any business. It doesn’t matter what huge success exists just around the corner if your funds suddenly dry up. Never stop thinking “cash”.
Five tips for cash-flow sustainability
(1) Use the know-how of outside experts to get a crystal clear idea of your best revenue and cost model for keeping the cash flowing smoothly.
(2) Build a balanced business strategy where growth and profitability are always in-sync with cash-flow building on each other, rather than competing against each other.
(3) Manage your shareholder/stakeholder expectations. Get them to buy into a realistic strategy that’s for the medium/long-term, taking stress off the business.
(4) Even when your reserves are healthy, avoid the temptation to blow money on purchases you don’t need yet. You’ll thank yourself later.
(5) Always “think cash” and create a system that allows you to make accurate cash forecasts. This will give you a greater sense of confidence, security and a sense of your real financial health so you make the best decisions around growth and sales.
Stefano Maifreni is founder and director of Eggcelerate, the business expansion experts.