Do I really need venture capital to maintain growth and avoid cashflow problems?
My business is profitable and growing and I think I will soon have to do more recruiting. So far, I have always had enough money to re-invest and have not taken outside finance. However, now I have investors knocking on my door and they are suggesting that I could hit cash flow problems if I don’t fully prepare for growth. Their motives are clear enough; they obviously want a slice of my company. But how should I ensure that cash flow doesn’t become an issue?
A. Alysoun Stewart at Grant Thorton writes:
This is a fundamental issue – success creating its own problems. These arise from increased indirect costs in anticipation of sales growth (such as recruiting new staff) and by the growing gap between costs and collecting the revenue. These problems are manageable – ensure you have adequate visibility of any impending shortfalls, minimise their size and consider the funding options in good time.
To ensure visibility, supplement your annual budget with a rolling weekly cash flow forecast. This should consist of known future transactions and pretty firm forecasts and extend far enough into the future to enable timely action to address any problems.
Consider also how to minimise increasing cash requirements: managing debt to agreed credit terms and encouraging customers to pay by direct debit; minimising stock holding levels, such as by streamlining lead times for customer deliveries and looking at just-in-time stock management; looking at supplier terms and exploring whether growth will give you increased buying power, enabling you to re-negotiate or shop around for better terms.
Keep your budgets ‘live’, and if you see unexpected cash shortages consider whether it is the best time to increase your indirect costs or whether this would be better deferred.
However, growth does drive the need for cash, so how can you fund it? You could consider invoice discounting/factoring to accelerate debt collection, commercial bank loans or overdraft facilities, and equity funding from additional individual investors, private equity or venture capital. The latter depend very much on your business profile in terms of size and growth potential. But always bear in mind that, in the long term, the most expensive form of borrowing is equity.