Starting a growth strategy takes cash because you usually have to pay for increased inventory or staff salaries before you collect cash from sales. Often lines of credit are a good source of temporary funding for starting growth. Two sources are business lines and home equity lines.
How growth later creates cash flow issues catches many businesses by surprise. The SVP of Business Services of a credit union once told me: “Borrowers don’t go bad 1-2 years after a bad year. They go bad 1-2 years after a good year. They build to a capacity they can’t maintain. They can no longer handle their fixed costs”
These businesses don’t realize they are sowing the seeds of their destruction. Everything works until it doesn’t. Even when cash flow is good, run a cash flow projection with reduced sales. Can you reduce expenses enough to survive?
One way to prepare for this is to build emergency cash savings equal to 3-6 months of your expenses. Another way to reduce this cash crunch is to keep some expenses variable so they rise and fall with sales. Options include freelancers, contract labor, and renting (instead of buying) equipment and buildings.
Keep your eyes wide open both for the opportunities of growth and the cash pitfalls it may cause. I wish you steady cash flow and I wish you well.
- Rob Stephens
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