As we emerge from the largest financial crisis we’ve seen in 8 decades, companies have a unique opportunity for expansion. But growth presents a new set of challenges, so it’s also a good idea to plan cautiously for the future. We all need a cushion, and the art is finding the sweet spot of just how big that cushion should be.
I’ve seen plenty of businesses that subscribe to a philosophy that the only way to grow is to take on debt. The idea is that in this artificially low interest rate environment, the influx of capital will help a company gain more while they work off debt. It’s the “you have to spend money to make money” theory, which to a certain extent is true. However, if things go sour, you have a hard time shouldering the added debt burden.
On the opposite end of the spectrum, if you build up a big stash of cash, sitting on too much of it isn’t going to get you very far.
As a company, we tend to lie somewhere in the middle. Our “rainy day” fund got us through the hard times that started in 2008. We made adjustments to our spending and used the money market account we had established to fill in as needed. I’m convinced this is what kept us from having to eliminate a single position.
Here are three suggestions to find balance in a cash flow cycle:
- Adjust cash on hand in proportion to work in your backlog. We generally look out 6 months as we plan how much cash to keep on hand. How does our contract base look? If we have affirmed sources of income, we might be a little more liberal with our spending.
- Incur debt, but only for appreciating assets. When you take on debt, a portion of revenues must be allocated to payments instead of growing the company. The added burden is mentally exhausting, just like it would be in your personal life. Ask yourself if ROI is greater than the cost of servicing the debt, then proceed with caution.
- Use cash to get customers. A solid financial background can be passed along to your customers. As they try to acquire their own financing, your stability will help lenders make a favorable decision. In short, the more positive our financial picture is, the easier time customers have getting the funding they need to build.
A carefully planned growth strategy can be leveraged as a kind of insurance policy for your company, and as a way to inspire customer confidence. What are you doing to manage your growth?