Controlling Cash Flow
Things to consider when adding overheads
- Treat the expansion program as if it were a new business. It is a good idea to do a separate cash flow forecast and to determine the cash needs of the new project.
- When determining the “ramp-up” of the project, remember that the time taken for the expansion happens right away, and is usually more expensive than anticipated. The revenue and subsequent cash receipts usually ramp up more slowly than anticipated. A best and worst case scenario is a good way to do the plan for the new project
- If you need bank financing for the expansion, you should develop a mini-business plan showing the effects, both long term and short term, of the expansion. As we have seen in the previous examples, sometimes companies need financial assistance to facilitate growth. Your banker can help you find the right kind of financing for your business.
Seasonality and growth – timing your growth
The time when you embark on a growth strategy can make a huge difference. Depending on the “seasonality” of your business revenue, there are better and worse times to begin your growth period. Seasonality is simply the differing levels of revenue that occur during different months of the year. Some businesses are very seasonal. Some are fairly stable (Ladies Clothing is a highly seasonal industry whereas Grocery stores have more similar monthly sales). In a highly seasonal industry, choosing the wrong time for expansion can be devastating to your cash flow – as you will have to wait too long for your revenue growth, leading to a cash flow crunch.
Things to consider when timing your growth
- It is crucial to know two things when determining when to time your expansion – when do customers actually buy, and when do customers make buying decisions. For example, people do Christmas buying in December – but they do their Christmas shopping in November and December. This means that you must be in a position to influence their decision in November.
- The more volatile the monthly pattern, the more important the seasonality issue will become. Retail fashion was chosen for the example because it is very seasonal and therefore illustrates the point quite effectively.
- If you can’t time your expansion properly, then don’t do it.
© 2009 "Start Small, Grow Big" Barbara Mowat and Ted James, with the contribution of William Erichson on Chapter 6, "Financing A Growing Business". All rights reserved. Reproduced with permission. No part of this work may be reproduced, distributed, amended, modified, edited, transmitted in any form, or translated in any way without the prior written permission of the copyright owners. www.ImpactCommunicationsLtd.com.