The need to manage growth (yes some businesses are experiencing growth)
Even in these tougher economic times there are still businesses that are experiencing significant growth. Whilst we always want growth it comes with its own set of challenges.
Systems and procedures come under stress. Often new procedures are added on an ad-hoc basis in reaction to situations arising. In isolation each of these procedures may make sense but taken together it may end up a mess. Also these ad-hoc systems can suck the life of the team morale. Given these potential problems it is necessary to sit down and look where the business is going and put in place the systems for the business necessary for when it is much bigger than now. By taking this time the impact of the systems on the culture of the firm can be properly considered. The hardest thing in business is to maintain the great culture that is place as the business grows.
In a growing business cashflow is king. (This is always the case in any business but in a growing business it becomes supercritical). So with this it is critical to know what is happening in the numbers. If all that is measured is the daily/weekly bank balance and then the monthly profit and loss statement / balance then the business can easily run into trouble. I do not propose that a business should measure everything that moves. What I am saying that in a growing business it is important to measure what is important to the client and also measure the items that affect working capital. So what it is that is important to a client and how do you measure it. This will vary from business to business however to give an illustration of a financial advising firm – the best ways to measure whether clients are happy is to measure the number of referrals. Unhappy clients will not refer, only happy clients will.
Unfortunately many small businesses do not know what their working capital needs are. It is necessary to measure debtors days, stock turns, creditors days, cash balances and whatever else in your business that impacts on working capital. How much working capital is needed to fund the sales growth? What happens if the customers become just a little slower in paying? As business growths because of the stress on the sytem it is an unfortunate consequence that debtors days can extend. This can be because not enough time is spent on chasing up outstanding income. However the greatest reason for the debtors extension is usually because there has not been enough screening of customers.
The measurement of working capital and it’s various component parts is not something to be done once a month but rather at a minimum every week.
There are other challenges that come from growth but these two (systems and cash) are the two most critical. Also these apply to any business even if due the current economic situation there is not a lot of growth.
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