Unplanned growth: The death of a business?

June 2016

While some people aren't surprised when start-ups fail due to lack of cash, the same can't be said when a mature business runs into trouble with cash flow due to unplanned growth.

Few people are surprised when a start-up business fails, particularly when they grow too fast, however, it's not just start-ups that fail: Mature businesses can also fail when they fail to manage growth.

Why do start-ups fail?

The majority of start-up businesses fail because they are undercapitalised, grow until the money runs out and then can't afford to fund further growth. Without any real history, bank finance is often hard to get and without assets to leverage, it's hard to fund continued growth.

It's an easy trap to fall into. The entrepreneurial spirit that drives start-ups often is the same thing that keeps business owners focused on growth: the faster you drive sales, the quicker you bring in cash and the more successful the business will be. 

The cycle of sales and profit is often bereft of two critical components: finance and cash flow management. A sustainable business will have all three.

Why do maturing businesses fail?

The failure of mature businesses is often the result of unplanned growth opportunities or poorly managed growth, for example, a major sales contract or taking on a big new client and not realising the impact on the businesses resources (both financial and human). These issues expose the business to greater risk but unfortunately they are often recognised too late.

While business owners are usually very good at what they do and have an excellent knowledge of the business they conduct, the services they offer and their customers, few have a high level of financial management expertise. When a big opportunity arises, it's not uncommon for the critical financial questions to be overlooked.

Sudden growth comes at a cost. That cost can be at a profit or at a cash flow level and free cash and liquidity are the most typical victims.

Why should The Big Opportunity raise cash flow red flags?

Big one-off opportunities can also be dangerous because they are rare. For businesses without strong financial management and control, there is simply no way of understanding what impact the opportunity will have until they have experienced it. With no background history to rely on, the warning signs of impending financial crisis don't appear.

Profit and cash flow are not the same and where operators don't have a lot of financial expertise they generally rely on profit analysis without considering the cash flow implications. You need to understand the cash cycle and its timing within your business.

The first step is to understand that sudden change creates a different dynamic and brings cost and cash flow implications with it. It's essential not to embark on sudden change without identifying what these implications are.

A better way to manage growth and cash flow

Big opportunities can bring with them big risk and the best starting point to understand its financial impacts on your business is with your accountant. 

They will be able to walk you through the short, mid and long-term consequences for your cash flow, but also potentially identify other opportunities that will support your business as it grows. There may be grants, concessions, tax implications and tax planning strategies that can help your business to adapt as it grows.

If you're looking at an opportunity for your business or struggling with current growth pains, contact Bates Cosgrave on 02 9957 4033 or via our web contact form to find out how we can help your business.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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