Do you know what it’s going to cost you to achieve your growth ambitions for your business?
Why is this so important to know? Many businesses forge forward without fully considering the financial implications of the growth decisions they make and can find themselves in treacherous situations where their cash position puts their business at risk (or worse) which is such a shame considering all the “blood, sweat and tears” they had put into getting it where it is.
We work with a lot of business owners who all have different strengths in different areas but many feel that finance is not one of them. They are often good at setting goals for the business size and sales they want to achieve in the next year, 2 years, 3 years, but they’re not always very strong on what it will cost or how they will fund it. So if you feel like this too, don’t worry, you’re not alone
So what are the key things you need to think about when it comes to financing growth? Well every business when seeking to grow will need to fund 2 elements:
- Building up the customer base
- Building up the capacity to serve that customer base
The cost of building up the customer base
When thinking about building up your customer base, you will need to establish the cost of a sale. One of the first things you need to be clear on is your conversion rate on prospects. This will tell you how many leads you will need to generate to hit your sales targets (i.e. if your conversion rate is 25% your leads target will be four times your sales target). Then you need to make sure you know how you are anticipating hitting this new leads target and what will that activity / marketing investment cost you to generate that volume of leads.
In addition to the cost of the leads themselves you need to make sure you consider what impact that volume of leads will have on your sales function or department within the business? Will it require more resource, be it through people, systems or collateral and therefore what will they cost, as this will be a knock on cost of growth.
The cost of building up the capacity to serve that customer base
The second key element is what will be the cost to build up the capacity of the business so that it is able to serve the increasing customer base. We’re going to look at it from the view point of being a service, product or project based business.
Service based businesses
If you run a service based business as many UK businesses are, then what additional talent will you need in order to be able to fulfill the increasing service demands and what will they (along with their associated on-costs, overheads and equipment) cost you? Remember when thinking about this growth in talent that it is not only the front line staff involved in the direct delivery of the product that you need to consider, but the knock on effect of those staff and services and what it takes in terms of support functions to enable the delivery team to do their job.
Product based businesses
If you run a primarily product based business, your costs are likely to be largely fixed in relation to the price you buy your products in at (although of course if you are placing larger orders with suppliers you may well be able to negotiate better discounts). You will though need to consider the additional capital outlay required in order to have the stock available for the increased volume of customers, and any system or human resource required for facilitating the purchase of those items.
Project based business
If you run a project based business the likelihood is you bill on the basis of milestones reached within the project. There can often be significant costs you have to cover to reach that milestone before getting paid so this sort of business needs access to plenty of cash. If in a growth phase you are planning to increase the volume of projects that will run simultaneously, then you will have this capital outlay multiple times over. You need to make sure you have projected this accurately and how much you are likely to have had to spend our on all of the multiple projects before you start to receive payment as you will need to make sure you have sufficient access to cash to cover this.
What to do about it?
It is important to build up an accurate picture of these growth costs, stress test them and be realistic with yourself as to the possible fluctuation in returns on new marketing and sales efforts while they bed in. It is all too easy to be overly optimistic in these scenarios which is ultimately detrimental to any growth initiative because if you haven’t anticipated the possibility of slower growth or lower returns, you may find your cash reserves depleting faster than you’d anticipated and therefore lose your courage and cease the new initiative and start to cut costs before it’s really had the chance to start to take effect and have a positive impact.
So once you have that clear picture of what it will cost you to grow the next question is how to fund it?
How to fund it?
There are numerous sources of finance available. One is to simply save sufficiently out of profits of the existing business in order to be able to invest in growth. Many business owners choose to do this and this is a good, solid low risk strategy. What it does mean though is that growth is likely to be slower than if you get access to an external source of finance, because you have to wait and save up your profits before you can start to grow.
Alternatively, you could look to borrow money which you then pay back over a period of time. There are many ways to do this. From the most traditional going to your bank for a loan, to friends and family loans, to personal borrowing against existing assets to alternative online funders and peer to peer lending platforms.
You could also consider getting an investor on board. Many business owners we know are reluctant to do this and we certainly wouldn’t advocate doing it hastily, but there are a number of high growth businesses who find this approach very useful, not only for the funding it provides, but also for the expertise it brings on board. If you get an investor who has experience in the industry, it is in their interest to insure you succeed and they will not only be getting their money but their support, expertise and connections.
According to the “Scale Up Index 2018” (Beauhurst & Scale up Institute) looking into high growth businesses, there was a direct correlation between the proportion of Small and Medium sized businesses that took on equity investment and the speed of their growth.
What is needed to get debt or equity funding?
However in order to acquire debt or equity funding you are going to need to produce a strong financial story relating to your growth plans that is backed up with as much evidence as possible demonstrating how you are going to get the return you are promising. This is because anyone loaning you money is going to want to know how they are going to get paid back and anyone investing in your company is going to want to know how you are planning to grow it and therefore grow the value of their shares to a point where they can sell for a profit. One of the simplest starting points to achieving this is the ability to produce a detailed financial forecast that illustrates the anticipated growth timeline of your business and the anticipated spend, returns and therefore cash position at every point.
If you are growing organically then we recommend you look at yourself as your own investor and still produce a detailed financial forecast as it enables you to still track whether you get the returns you are anticipating on the investments you choose to make and have much better control over your finances.
Look out for our next Building Blocks for Growth resource which will be a basic template for a financial forecast.
As we said earlier if you struggle with this sort of thing as a business owner, you are far from alone. We have many clients who say the same thing. If you would like some help and support in understanding how you might better manage your finances, ensuring full sight of where you are at any given time and plan finances for the future growth of your business, or if you would just like to understand more about our services and how we support the owners of growing businesses to achieve their ambitions please feel free to give us a call on 0203 189 1287 or send us an email at info@engineeringbusinessgrowth.com.
