At Riyad Bank, we are committed to help your business develop and succeed. The purpose of this Business Guide is to help you ensure that your cash assets work as hard as you do.
When your company is growing fast there could be a number of challenges which are new to you and your cash flow. In today's business environment, your liquidity or cash flow is your lifeline. After all, you have to pay your bills, the payroll, suppliers and meet any other financial obligations, often on a daily basis.
By reviewing your various options, including the potential for investing your surplus cash, you may be better positioned to achieve both your business and personal financial goals.
It's a bit of a paradox but companies are often crushed by their own growth. A boom can bring about many changes in your organization. You might start taking on numerous commitments at once, sign lucrative contracts in record times and watch your orders soar. But of course, all of this requires greater cash flow needs, growth planning and the right financing.
Take a proactive approach
Fast growth is not always easy to handle, but a step-by-step approach can help entrepreneurs make it more manageable. It is essential that, even in a boom period, you keep control of the situation.
Defining your growth objectives
Be strategic about your growth. It's a good exercise to first ask yourself some very basic questions, in order to determine your key objectives:
Do I have the necessary capital to finance my growth?
Am I having cash flow problems, or am I managing well? For instance, do I have assets that I could turn into cash if need be?
Am I expanding too quickly?
Am I growing because I want to be more profitable or is it growth for growth's sake?
Am I hiring too fast?
Am I collecting my receivables fast enough?
Is my inventory in line with my growth?
Is my production line efficient?
Does my management team have the right competencies to handle my company's growth?
Do a growth diagnosis of your company
Essentially this means analyzing how you manage your company and how to gain more control over the aspects of your business that affect your cash flow.
Generally, a comprehensive growth diagnosis includes an analysis of your sales, overhead, receivables, inventory and assets. Try and assess whether your inventory and capital assets are absorbing too much of your cash flow, if they do, take the necessary steps to tightly control them. This will help you define your refinancing requirements and help you avoid future liquidity problems.
Ensure your growth is sustainable
Be certain that your company is not undergoing seasonal or one-time-only growth.
Prepare a growth strategy
This will enable you to understand the risks and opportunities for your company. Your strategy is a result of looking closely at internal resources, the market, the economy, competitors, marketing and distribution channels and demographics.
Forecast your cash requirements
Completing an analysis of your cash inflow and outflow will enable you to determine future cash requirements. Knowing this, you can look at your current financial situation and assess if you can make improvements. You may be able to get additional financing for working capital, restructure your debt or convert unused assets into cash.
Analyze receivables and payables
This will allow you to assess how you can improve your liquidity problems. To improve how you manage your receivables, be sure that you:
Do credit checks on clients or seek appropriate references
Have clear payment terms
Use the right collection methods
Resolve problems quickly
Monitor the collection time and take the right means for substantially overdue accounts, such as freezing accounts
If your credit policy is affecting your cash flow, are there any ways to reduce your collection time?
Apply the same logic in examining your payables. A sale is not a sale until the money is in your bank. Ask yourself:
- How much commercial credit do you get from your suppliers?
- How much interest do you pay?
- Do you wait until the due date to pay your suppliers or do you pay them in advance?
- Can you get an extension on your commercial credit?
- Do you use the "just-in-time" method i.e. reduce your inventory by closely coordinating reorders and deliveries?
Through vigilant planning you can consider using a rigorous streamlining system that addresses overheads such as, rent, equipment, human resources, office supplies, etc.
Be sure you set concrete goals for cost-cutting, assign an accountable and secure employee to buy-in and help reduce costs. Be particularly careful about maintaining cost controls during growth spurts where businesses often binge with spending.
Ensure that your lenders will continue to consider you as a viable client and give you the financing that you need to meet your needs.
Remember that high-growth companies can be risky for financial institutions. You can also look for alternatives to conventional debt financing. For example, you can negotiate better payment schedules with suppliers, or look at leasing vs. buying assets.
For further information contact your local Business Banking Officer through: