Many businesses aspire to scale. Growth however amplifies everything that is struggle in the business and makes the problem compound.
If your cash is tight right now, then the first thing you need to do as a CEO is to check the key numbers before you pursue any of your scaling up plans.
In this blog, we are going to show you how to discover if you are ready, financially at least for the scale up journey and what to do if you are coming short.
Of course, your first reaction would be “but I’ve got short window of opportunity here and I need to act fast”. Please allow me to clarify.
Most businesses, at least those we know and have interacted with would rush into scaling up, if the opportunity presents itself. This especially was the case during the Pandemic when some businesses saw a surge in demand and they were celebrating the growth.
When everything went back to “normal” they realised that they had lost money in the process. That decline continued for a few more years and was reflected in an accelerated spend rates i.e. cash burn rates.
Another issue we see is that a lot of executives fear that they might not have sufficient cash to grow. So, instead of trying to understand their business model and what it can or cannot do, they try to secure external capital for growth.
This is also not helpful for the growth and the business.
Numbers tell you a lot. If you can just take the time to truly understand what’s going on in your business, you will minimise the mistakes you make and reduce the losses you incur with your decisions.
How do you successfully run a business using data and ensure it reveals the truth?
There are 3 key numbers you need to look at:
1. Profitability – understand your profit engine.
Understand your profit engine:
How are you generating your margin?
Is everything that you are doing contributing to that margin?
What is the maximum you can get and what is the relationship between your margin and your operating expenses.
There are 2 metrics in this – gross margin and contribution margin and the key driver is the productivity of your people.
Start with establishing targets for your margins monthly and monitor there during the month. Do not wait till month end to check your numbers, as it is too late. You won’t be able to make any adjustments.
2. Working Capital
Once you get your profit engine identified you go to the balance sheet and your working capital.
Working capital as in the net of your Accounts Receivable, Inventory/WIP and Accounts payable and differed income (if any). So take out cash and debt.
The net of those numbers is what matters.
You can use our Money for Growth tool to calculate these metrics.
3. Relationship between your Profit and Capital
After you identify profitability and working capital you compare the two. What matters here is the relationship between the net profit to revenue and working capital to revenue on a rolling 12 month basis.
If the percentage of working capital to revenue is greater that the percentage of net profit to revenue then your business has negative cash flow. This means that for every 1 GBP of business there is a negative GBP of cash.
The issue with a negative cash flow is that you will need to pour money in the business to grow. Getting bigger to make less money makes no sense, right?
Rectify your money problems before you scale up with our Money Multiplier for CEO tool.
The good news….you can make adjustments to your approach to profit and capital. You can either find ways to boost your profitability or reduce the requirements for working capital. This will ensure that your retained profit (to revenue) is greater than your working capital (to revenue). In some cases, this could be the best decision you will ever make as it will solve most of your cash flow problems you encounter during growth.
We can help you to get profitable and create a cash flow positive in preparation for scale. Then you can focus on selling and execution.
In the last few years we have invested in the development of moneyXplier® that has turned our cash flow management tools into a scalable solution. Click the link below to access your tool.
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