A client recently said to me: “I want to grow our business and stop the cash burn – how do we do this? When is it the right time to invest and grow?”
What a tough question to answer. Each business is at a different stage.
We spent a day examining his business and determining what the growing pains were. He had started the business a few years ago and it grew from scratch to R15 million turnover last financial year. This year they will probably exceed R20 million turnover.
It was generating solid turnover growth, but they never had any cash.
“Why?” he asked.
After reviewing the business financials, it was quite clear that the internal systems were not in place. He could not possibly understand the profitability of the products they were selling due to these inadequate systems.
Therefore, they could not take the next step.
The first question I asked was: “Where do you want to take this business – what’s your goal? To build up the business and exit down the line, or are you looking to exit now? Or do you wish to keep this business, if we can generate the right ROI?”
The response was: “We don’t have sight of the numbers or where this business could potentially go, without this clarity it’s hard to move forward”.
Something I see very commonly here in the SME businesses I work with – no clarity around the financials.
Step 1: For this particular client was to build a reporting framework around their products to determine what was profitable and what wasn’t. If there were non-profitable products (or those that deliver low profit), should we dump them or only include them in the online offering?
Step 2: Build a fully flexible 3-way financial model (Profit & Loss, Cash Flow and Balance Sheet) for the next 3 years. Play around with the assumptions, i.e., what other products can we put into the offering to customers?
Step 3: Monthly reviews against the plan – what worked, what didn’t work and the reasons why?
The right time for a business to grow is when they can balance new customer demand with their internal systems and processes. Moreover, in the instance of this client, increasing recurring revenue streams. Growing faster generally costs more per customer as they need to engage more expensive channels within the business model.
Scalability is about engaging and retaining existing customers with new offerings, attracting new customers with both existing and new offerings or expanding into new markets or geographies.
To scale your business, one must consider how the business model will affect the bottom line and most importantly cash flows. If you have low capital expenditure requirements and can grow your business with a similar or improved gross profit margin, it is much easier to deliver real growth for the long term and provide a wider product range to your customers.
It is early days working with this client, but the potential is significant.
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