The main risk in the growth of a young company
Sales are accelerating and there are many promising opportunities to propel your business. Nothing seems to be able to stop you. Except maybe what is, in my opinion, the main risk of the growth of a young company …
Faced with promising growth prospects, entrepreneurs are ready to invest all their resources in order to successfully grow their business. Often, they jeopardize the financial health of their business by creating critical pressure on its liquidity.
Here are two examples I’ve encountered over the past year that illustrate the repercussions of this error. In both cases, the entrepreneurs found themselves in a very uncomfortable situation.
The first example is that of a young company with high potential which wanted above all to make known its brand and increase its revenues. The company funded the opening of new branches and business development efforts out of its working capital. At the time, the entrepreneurs noticed no problem: there were funds in the company coffers and they used them.
What they did not consider was that these funds came from taxes collected, which were to be repaid to the government a few months later. When they presented their numbers to me, I saw the situation. Not only had they spent more than the business had generated in the past year, but they were in dire straits with a shortfall of tens of thousands of dollars in no time. Here, to achieve the same growth without sacrificing the financial health of the company, the investments should have been financed by appropriate debt. If the company is unable to finance its expansion, it is probably not ready for it.
The second example is that of a mature company, working in a very different sector of activity, which experienced a similar situation. Noting a strong demand for their product, which stands out brilliantly on the market, the entrepreneurs wanted to increase their production capacity. By increasing their production and therefore their sales, they were convinced that the profits would be there. However, they forgot to take into account a crucial factor: their conversion cycle is very long. Several months, if not almost two years, elapse between the time the first inputs are purchased and the sale of the products. So they too funded the growth of their business directly from its working capital, which became insufficient to support the business’s activities. Unable to pay their bills, the entrepreneurs experienced significant stress.
If you want to make sure you can support the growth you are embarking on, you have to be careful not to sacrifice the financial health of the business. If funding is needed, it should be obtained at the start of the project, not when the business finds itself in a precarious situation.