Why growth is bad for your bank balance

Growth is good. But it comes with big challenges.

With the hype in the startup world, growth, in the form of a mythical hockey stick, has become one of the much-vaunted and sought-after business metrics.

As we frequently see reported globally, the highest growth and highest-valued technology startups are rarely profit or cash flow positive – think Uber and WeWork.

What that means for the majority of business owners, is that balancing growth with cash flow or capital needs is one of the key operational challenges.

It’s probably what you’ll lose sleep over (if this is you, take a breath and fill out our growth early warning signs checklist).

Put as a simple equation:

Time + Money = Growth

It’s not always that easy to distill, but the concept means either taking your time to grow organically at a rate matching your business structure, or you’ll need to pay to fast-track that growth. The problem is that many businesses experiencing fast growth don’t have a solid understanding of their model, or potentially that the growth is not always good. We encounter this daily. We met with Founder M who was thrilled with the fast pace of growth of their company but after looking at their bank balance, they had a gut feel something wasn’t quite right.

The metrics looked great and business was booming – the user base was rapidly scaling, while sales and revenue were growing quickly. Then we took a look at the real figures. What we found was that although the company was growing rapidly, for every dollar it made in sales, it was losing 20 cents. That’s not a long-term business model that anyone wants to be in charge of.

A deeper discussion with Founder M also brought forward the stress they were under and the challenges with operational cash flow. We were able to develop a historical financial model of the business which in turn allowed us to forecast the impact of this continued growth. Discovering that the fast-paced growth was actually hurting cash flow with a serious impact on working capital, enabled this founder to make some quick changes that have changed the way the business operates.

In this case, it was some simple changes in how invoicing was being managed which gave the business a clear view to prioritise the improvement of their processes and systems around invoicing.

Here are some of the common concerns we see every week in high-growth companies

Capacity constraints

Capacity issues are when you start struggling to meet deadlines or fulfill your service agreements.

How to manage this:
Good record-keeping is essential to know that the time taken to meet your targets or deadlines is creeping up. It likely will mean that your gross margins are starting to decline. If you know it’s a problem you can identify the solution which could mean raising prices, or hiring staff, or a combination of the two.

Cash flow issues

High growth doesn’t always mean cash in the bank. In fact, in most cases, it’s the opposite, and cash flow issues are one of the most common struggles in all kinds of business. This area in particular is where the term “creative accounting” starts to come into its own where business owners try to find cash flow where they can, and that will inevitably lead to problems.

How to manage this:
Knowing and understanding your business fundamentals and cash flow is essential. One solution is to build a three-way financial model to see the impacts of decisions on your bank balance.

Too busy for admin

If you’re too busy working on the business to run it, you’re about to hit some problems. We commonly see business owners who are in trouble due to missing payroll, not paying superannuation properly, or even missing their quarterly tax payments.

How to manage this:
Ensure you have the right support in place to keep your admin responsibilities on track. Depending on the size and scale of your business, this might mean looking at hiring staff, upskilling, or an external option such as a virtual CFO or consultant.

Feeling stressed

Often overlooked in business is how you’re feeling. Growth can easily equate to high stress, lost sleep and decline in your overall well-being. But being stressed and busy isn’t always an indicator your business is doing well. As we saw in the case study at the start of this article, understanding how you are servicing the growth is essential to ensure it is meeting your business goals.

How to manage this:
Use stress and busyness as early warning signs to take a break and ensure you are across all your company fundamentals to ensure you’re growing in the right direction.

Take a moment to think about how these affect you

If you’re wondering whether your growth is about to create challenges for you, we’ve created this checklist. If you’ve checked more than two boxes, and need help, feel free to reach out to our team for help.

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