Is your business ‘Growing Broke’?
The ideal for any business is to be generating cash to cover its costs, while at the same time be generating a good level of profit. ‘Growing Broke’ is when the business is growing, but profits aren’t increasing at the same rate, and cash flow is becoming ever tighter. To the outside world, everything is rosy, but it’s a damaging position to be in.
So how do you recognise the problem, and how do you get out of it?
Growing Broke is usually easy to spot as a business owner, even without a good grasp of your business numbers:
- Do you spend ever increasing time juggling cash?
- Do you have more people phoning to chase money than you can pay?
- Are you working more and more hours, for less and less reward?
- Are you taking on more staff to deal with sales, but wonder why you’re struggling to pay them?
These are just a few signs that you could be in trouble.
So what can I do?
Rather than keep adding to the overheads in a bid to catch up, it’s time to stop and draw breath.
- Get a proper set of management accounts for your business, together with a cash flow statement and a cash flow forecast. This is the most important step to take! These can be produced relatively simply and will tell you where your cashflow gaps are going to come from, so that you can prepare for them. They will also highlight any major problem areas in the business.
- Check you have enough capital in the business. This is essential to ensure a business can survive, and is often the root cause of ‘Growing Broke’; where the business just hasn’t got the cash to sustain the growth. Business owners too often start a marketing push on the back of a great idea, or a fabulous opportunity, without properly capitalising the plan!
What types of capital are there?
Working Capital – This is the cash the allows you to meet your obligations as they fall due.
- Cash in the bank.
- Payments coming in from sales made.
- Stock – if applicable.
Long Term Capital – This enables the business to grow, and a lack restricts that growth.
- Money invested in share capital.
- Money tied up in long term assets for the benefit of the business e.g. Equipment, buildings
Is there an easy way to tell which one I’m short of?
Yes! There are some pretty reliable indicators for each type:
- Juggling payments to suppliers.
- Worrying about meeting the wage bill at the end of the month.
- The bank balance is reducing despite winning more orders.
Long Term Capital:
- You sell widgets and could sell double the volume you currently make, but can’t afford the machines to buy them.
- You could generate more orders but can’t house the people required to fulfil them.
Both types of capital should be positive in a business, and if they aren’t, you need to act – FAST! A lack of working capital can have the most damaging effect on a business, as it can cause it to fail entirely. In practice there is often a lack of both.
How can I get more Capital into the business?
Before you look for any type of additional finance, it’s essential to be absolutely sure you can support the repayments without jeopardising the business and any related security. That said, there are a range of sources of additional capital:
- Banks – Overdrafts, short term loans, invoice factoring)
- Alternative Finance Sources – there are a wide range of options from a developing industry. Find out more from our previous blog.
Long Term Capital:
- Mortgages against property
- Longer term loans
If you’re unsure about the capital position of your business, are considering expansion plans, please get in touch now to ensure you are not going to be heading into a ‘Growing Broke’ situation. We can spend some time with you, or your bookkeeper if you have one, to set up some reports that will enable you to be comfortable that all is in order. It doesn’t have to be expensive, and we promise it won’t be painful! If you’re struggling, we can help you review your options and to sleep better at night.
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