A client recently said to me: “I want to grow our business and stop the cash burn – how do we do this? When is it the right time to invest and grow?”
What a tough question to answer. Each business is at a different stage.
We spent a day examining his business and determining what the growing pains were. He had started the business a few years ago and it grew from scratch to $750k turnover last financial year. This year they may potentially reach a turnover of $1.2m.
It was generating a great turnover and growing but they never had any cash.
“Why?” he asked.
After reviewing the business financials it was quite clear that the internal systems were not in place. He could not possibly understand the profitability of the products they were selling due to these inadequate systems.
Therefore they could not take the next step.
The first question I asked was: “Where do you want to take this business – what’s your goal? To build up the business and exit down the line, or are you looking to exit now? Or is this business a keeper if we can generate a great RoI?”
The response was: “We don’t know the numbers or where this business could get too as we have no clarity on the numbers”.
Something I see very commonly here in the SME businesses I work with – no clarity around the financials.
Step one for this particular client was to build a reporting framework around their products to determine what was profitable and what as not. If there were non profitable products (or those that deliver little profitability), should we dump them or only include them bundles in the online offering?
Step two: Build a fully flexible 3-way financial model (P&L, Cash Flow and Balance Sheet) for the next 3 years. Play around with the assumptions, i.e what other products can we put into the offering to customers?
Step three: Monthly reviews against the plan – what worked, what didn’t work and the whys around both.
The right time for a business to grow is when they can balance new customer demand with their internal systems and processes. Moreover, in the instance of this client, increasing recurring revenue streams. Growing faster generally costs more per customer as they need to engage more expensive channels within the business model.
Scalability is about continuing to engage customers with new offerings, and to engage new customers with your offering to the market.
To scale a business one must consider how the business model will affect the bottom line when you expand operations. If you have low capital expenditure and can grow your business with the same revenue / expense % it is much easier to deliver greater numbers in the long term and provide greater options to your customers.
It is early days working with this client but the potential is endless.