Growing your company is good. Or is it? There are five things to consider when assessing if a growth opportunity will help or hinder your company according to Summer Massey, Loan Manager at Arvest Bank and Kala Forehand, Treasury Management Adviser at Arvest Bank.
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- - Growth can be a reason companies fail. Today we're going to address five things to consider when assessing new growth opportunities to help make sure your revenues exceed your expenses. Hi I'm Kala Forehand with Summer Massey from Arvest Bank.
Summer, growth can be bad when uncontrolled. How does that happen?
- Companies often inaccurately assess opportunities. They overestimate the revenues from an expansion, a new line of business, or a territory and they underestimate the costs. Or worse yet, they do both.
- So what's a good step to avoid this?
- An initial first step would be benchmarking, it's a great tool for management. Developing relationships with peers in different markets can offer insights about opportunities. Other resources for benchmarking are CPAs and bankers. They can help set proper performance expectations by comparing industry ratios.
Another resource is an RMA subscription that can offer industry standards. If a company thinks a new territory will allow an economies of scale situation and they think they'll increase their margins from 20 to 40%, but industry standards show that 25% is more realistic, then management needs to rethink that opportunity.
- How can growth impact vendor relationships?
- There needs to be an honest dialogue with suppliers. Your suppliers might be very willing to support your growth, but in reality they may not have the capacity to do so. Management may even want to consider getting financials from key suppliers to assess their financial stability to meet the increased demand.
- So what if a growth opportunity comes from a large national distribution chain, such as Home Depot, or Wal Mart?
- Certainly a great opportunity, but it would be something that management would want to assess. For instance, do they have a savings or access to lines of credit to carry the cost in getting in with this kind of growth? And will this concentration put other customer relationships at risk? In other words, don't put all of your eggs in one distribution outlet.
- What are some other things that management should consider when looking at a new opportunity?
- Ultimately cash flow isn't just about the amount of money, but the timing of the cash inflow in relation to the outflow. There are a few things to consider. For instance, is it better to borrow or to pay cash to ramp up operations? And on the flip side, should they let customers pay cash or offer payment terms or incentivize for early payments? Sometimes accepting ACH payments or credit card is an option for cashflow crunch associated with growth. But keep in mind you have to assess the potential revenues against the fees incurred.
- That's great insight for cash inflow, but what about the expense side of the operation?
- On the vendor side, they can control cash by paying with purchasing cards which can slow down accounts payable for up to 30 days, or utilize lines of credit to take advantage of vendor early pay discounts. Think about it, a 1% discount would pay for itself quickly compared to the charges associated with a line of credit. Before you jump off and start negotiating with key vendors, though, you'll want to understand how it will affect them and the relationships that you have with those vendors.
- These are helpful to assess if growth is good for the company, but there's one extremely important question for the company to ask before launching into growth. Do they have the capacity to take the company to the next level?
- That's a great point, Kala. For most companies, a banker, CPA, peer mentor, even consultants can help with the opportunity assessment. However, if the company's management doesn't have the ability to answer questions that we've discussed, the growth opportunity should most likely be passed and instead the next step might be for the company to invest in talent and build a team that can accurately assess opportunities.
- Thank you, Summer, you've given great recommendations for cash flow management. As a reminder you can go to sbjlive.net and search Why Businesses Fail to see the entire series.
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