Every successful entrepreneur knows it takes more than a great idea to successfully launch a business. But once your business is up and running, it's time to create a business growth plan. To grow your business, you need to pinpoint your ideal customer as well as identify key performance indicators or KPIs. Some of these—like net profit and liquidity ratio--will be a part of your company's financials. Others--like customer satisfaction—will be tracked in other ways, but still closely linked to financial performance. Because of this, your company's financial operations should form the backbone of your plan for growth.
Key Components for Growth
The financial decisions you make will have a significant impact on how successful you are at sustainably scaling your company. As you develop a solid system for financial operations, focusing on these three parameters will not only help you track KPIs, but provide your greatest opportunity for influencing your company's rate of growth:
- Operating cash cycle. This is the length of time your company's cash is tied up in working capital before the business is paid for the goods and/or services it produces. Shortening this can mean more cash available for growth.
- The amount of cash needed to finance each dollar of sales. This includes both working capital and operating expenses. Reducing this figure through greater efficiency is another way to free up more capital for growth and expansion.
- The cash that is generated by each dollar of sales. This figure is key because, along with the amount of cash to finance each sale, it will help determine the amount you have available for reinvestment in growing your business.
As explained by Harvard Business Journal in its analysis of how to strike a balance between generating cash and utilizing it to grow, these three components of your company's financial operations determine what is known as the self-financeable growth--the rate at which your company is able to sustain its growth through revenue alone, without drumming up additional outside capital. Understanding how much of your company revenue is available for reinvestment for growth will provide insight into the efficiency of your business operations, as well as the rate at which profit margins are spurring growth. You'll also gain insight into the degree of success of various product or services lines and better understand the demographics for customer segments that hold the most growth potential. It may even spur ideas for new products or services.
Best Practices for Business Growth
With the above three critical financial measurements in mind, here are key financial operations best practices for creating a plan for growth:
Set a strong foundation by budgeting
Budgeting is key to planning and controlling all your financial activities. An annual budget provides a comprehensive blueprint for your expenses and income. It will help you identify areas where you can cut costs and channel additional revenue for growth opportunities.
Manage Cash Flow
Simply put, cash flow is the movement of money in and out of your company. Effectively managing your cash flow is absolutely key to developing a growth plan, including both cash outflow and inflow. Begin by reviewing historical financial data, as well as using sales projections, to predict what future cash flow will look like. Reviewing past data will help you identify and address any trouble spots. But to grow your business, you will need to determine ways to reduce cash outflows, increase cash inflows or both. For example, negotiating more favorable payment terms with vendors and suppliers or simply identifying discounts for practices like early payments or bulk orders. To increase cash inflow, your company could look at ways to speed up collection of accounts receivable, for example.
In order to grow your business, you need to establish a method of financial forecasting that is relevant to your business as well as accurate. Your forecasts should be based on historical data, industry analyses and market trends. You can use multiple techniques to get the best picture of future financial performance. Be sure to consider outside factors as well, such as economic conditions and trends, and probably regulatory changes. By being thorough in forecasting, you will be able to more easily anticipate opportunities as well as challenges to managing your company's finances and establishing a plan for growth.
Identify New Revenue Streams
Although you will use current revenue streams when reviewing performance and in forecasting, developing your company's plan for growth means you will need to think beyond your current revenue streams. Be creative in considering new types of revenue that could make your business more profitable. Involve your entire team in developing new ideas that have a revenue stream attached and focus on those most likely to be sustainable in the long run. Focus on your company's current strengths. This will often help you better identify areas for growth.
Financial discipline goes hand-in-hand with attaining growth. By staying within budget and carefully tracking cash inflow and outflow, you will be able to identify areas for improved efficiency rather than just throwing more money into building capacity. By putting these best practices into place, you will be able to more easily identify ways to generate more available capital for reinvestment into the future growth of your company without relying on outside sources.