Be careful – it really is possible to ‘grow broke’

It’s been a tough five years or so, but the economy is finally showing steady improvement.

Business owners are starting to breathe a little easier. Little do they know that real danger waits around the corner. The danger is growth. We are all looking forward to growth. Growth is good, except when it is too much of a good thing.

There already are businesses that are “growing broke.” Their growth from the recovery is outstripping their financial and managerial resources. As a result, they become overextended.

There are several key tactics for dealing with the risk of growth. Most owners know that cash flow is a concern. However, relatively few understand what to do about it. Start by digging into your working capital needs. Cash almost always goes out before it comes in because more merchandise is needed to fill the shelves, operating supplies must be increased, accounts receivable grow, accounts payable must be paid before the receivables are collected, overtime pay mounts, perhaps increased staff is needed and must be trained, and lines of credit may not be adequate.

Rapid growth increases the cost of doing business and increases the needed level of working capital. Now is the time to get a full and true picture of your operating costs. Which costs must increase to fund growth and which are moving up because no one is monitoring them?

You may not be able to pass on increased costs. Your customers are watching their expenses and their cash flow closely and may not be willing to pay for the cost of your unmanaged or uncontrolled growth.

Monitoring and controlling all these items require you to do more than look at your income statement (P&L). Your P&L will tell you whether you are making money. It will not tell you where your cash is going. Running out of cash is the cause of growing broke.

If digging into your balance sheet is not part of your management routine, now is the time to learn how to use your balance sheet to help manage your business. Ask your accountant to help you understand the various sections of your balance sheet and what they mean.

While you are at it, ask your accountant to help you set up a system to monitor the key indicators specific to your business. Available cash is certainly one of the key indicators. The level of accounts receivable and, more specifically, the number of days it takes to collect those receivables should be watched.

Some firms will want to monitor inventory turns. Others will want to closely watch staff wages and overtime hours. Ask for guidance if you are uncertain how to use these suggestions.

Insist that your financial statements are prepared and ready for review within a few days after the month’s end. If you are reviewing your January statement in March, you are behind the curve.

Some indicators should be monitored weekly rather than at the end of the month. In times of rapid growth, you may want to review some items such as cash and sales daily.

Recovery is under way. Stay on top of your business to insure that you benefit from your growth.

Don’t be one of those who “grow broke.” Dan Bowser is president of Value Insights Inc. of Durango, Chandler, Ariz., and Summerville, Penn.