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Posted: April 24, 2012

Can you afford to grow?

Make sure you have the necessary capital before you ramp up

Jon Wiley

The down economy over the past several years has forced many business owners to focus on their cost structure and run a more lean enterprise.  This effort has resulted in many companies making better margins and becoming more profitable even with a flattened revenue stream.  But there comes a point when there are no more costs to be cut and, if the company is to continue to improve, the focus has to return to growing revenues.  The question is: are your current financing arrangements capable of supporting that growth?

I am often surprised by the number of companies that underestimate the capital required to comfortably manage their growth prospects.  Of course, not all companies are created equal.  Some companies need to carry large or seasonal inventories that eat into cash while others have long manufacturing cycles that do the same.  For some fortunate companies cash can be turned into revenue in a much shorter timeframe.  Regardless of your company’s circumstances, you need to understand the relationship between cash flow and growth.

Many companies plan for obvious growth related expenses (marketing, equipment, etc.) but forget to include working capital needs in their plans.  A new marketing campaign or piece of equipment might create the additional supply or demand needed to increase revenues but you will likely also need working capital to account for the increased up-front costs in providing your product or service.  

A solid understanding of your company’s financial metrics will allow for the creation of a model that will help you to predict the proper capital requirement to cover your planned growth.  Do you know how long it takes your customers to pay?  How much inventory will be required?  Do you have a handle on your other variable costs?  A good financial model will include all of this information in a format that will allow you to adjust your growth forecasts and understand how different growth rates will affect your capital requirement.

The results of not having the proper amount of financing in place to support growth can be very costly.  You don’t want to have suppliers cutting you off for late payments or customers going to competitors because you can’t deliver the amount of product you promised.  Don’t assume that increased revenues and profitability will cover the costs associated with growth.  The reality for most companies is that it takes additional cash to meet the demands of a growing company.  The end result of putting growth capital to work can be a larger, more profitable company that can continue to grow and generate more exit opportunities.

If you have ample cash in the bank or a line of credit that will facilitate your growth capital requirements, all that is left is to put your plan into action and go after the business.  If you don’t have access to the capital your growth model says you will need, it’s time to look at your financing options before following through with your growth plans.
 

Jon Wiley is a Managing Director in the Denver office of Hunter Wise Financial Group.  Hunter Wise is a national investment banking firm providing institutional financing, merger and acquisition, divestiture and advisory services, to middle market companies in a broad range of industries. Contact Jon at jwiley@hunterwise.com or 303-833-1131.

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