By: David Light
Often times business leaders mistakenly associate successful growth with expansion. It is
possible that if a business isn’t growing, then it may be in certain decline. However, intentional
and risk filled growth is not always indicated – and can be fateful if done incorrectly. The
balancing act of viable expansion is multifactorial and relies heavily upon strategy, leadership,
operational ability, and most importantly – cash. This article will break down the 3 key points
that business leaders should consider prior to expanding their organization as they relate to
cash flow.
1. Signs that indicate readiness – Signs are objective. They should not just be opinions
or desires to open a new location, region, or service line. They should be based on 2
principals; 1) Is your cash position healthy? Which in short order means, how much
available cash do you have on hand? A normal operational reserve must be available,
plus a budgeting reserve for expansion. 2) Are your cash flow trends positive? This
seems like common sense, but also should be verified with solid month over month
financials, supported by trending key operational statistics. The leader should be able to
present a concise report on the company’s cash position and trends to the key decision
makers, prior to moving forward.
2. Forecasting and Planning – While experiencing the excitement of potential expansion,
it is easy to overlook the actual risks involved. From a cash flow perspective, the most
conservative models should be created that underestimate revenue and overestimate
expenses. There should also be an overestimation on the amount of time this venture
will take to get off the ground and start generating additional cash flow and profitability.
Notwithstanding the conservative nature of modeling, a precise outlook of expenses
should be used, as well as reasonable time frames for the project being considered.
3. Overprepare! – The time to be approved for a business line of credit is NOT when you
need it. This should be done well in advance, as a plan b, and in preparation for
upcoming strategic initiatives, all when cash flow is positive and trending well. Keep in
mind, expansion is never going to be as easy or as seamless as it looks on paper. The
unpredictable human factors will be plentiful, as well as unforeseen integration issues
that can trigger delays and obstacles that will all relate back to increasing the burn rate
of cash.
In summary, the leader should be objective, conservative, and over prepared before embarking
on an expansion that could strain cash position or flow for the business. Limiting the use of
opinions, assumptions, and feelings, and getting outside verification of strategy, should result in
better decision making for the organization and more success in all areas of its operations.