The period of growth is quite an interesting phase in running a business. While revenues are on the rise, new customers keep coming in, teams are growing, and new opportunities emerge every day.
However, with growth also comes a new challenge known as the complexity of finances.
It is common for a business that was earlier in the manageable range of finances to find it difficult to manage cash flow due to increased costs, employees, clients, vendors, and plans for expansion.
In many instances, it is not the lack of revenue but rather the fact that an entrepreneur doesn’t adapt his financial strategy to match the pace of growth that puts obstacles in the way of prosperous development.
Here are some common financial errors that might slow down the work of successful companies:
1. Concentrating on Revenues Alone
Revenue is one of the most apparent indicators of success; however, it fails to tell the entire truth about the financial standing of a company because there are companies with a significant level of income that are failing, with their expenses growing at an even faster pace as compared to their profits. When evaluating a business’s financial health, important factors to take note of are profit margins, operating cost, customer acquisition costs, cash flow, and working capital. The former two describe how much is being sold and how much free cash is at hand.
2. Ignoring Cash Flow
A common mistake among growing businesses is assuming that profitability guarantees sufficient cash on hand. The reality is very different. Scaling Expenses Too Fast. Growing business is exhilarating. It gets more customers, and thus it hires more people, moves to bigger premises, purchases more technologies, invests heavily in marketing, etc. If revenues don’t grow at the same rate, fixed costs become a burden. Therefore, expansion needs a solid financial plan.
Before putting more money aside for additional expenditures, companies should ask themselves:
Will they be able to receive measurable value from their spending?
Will they be able to pay it back if something detrimental happens to a business?
Is such expenditure critically needed now, or can it be postponed till better times?
As a business expands, there may be a noticeable rise in the need for working capital. Therefore, it is vitally important to track things like:
- Money coming in
- Money going out.
- Accounts receivable.
- Accounts payable.
- Payment cycles.
- Cash reserves.
A company’s growth may become problematic without proper cash-flow planning.
3. Over-Expanding too Quickly
With growth also comes excitement. New customers lead to hiring more workers, occupying bigger premises, buying technology and increasing marketing costs along with overall operational expenses. It is crucial to note that without the corresponding levels of revenue coming in, fixed costs could become heavy.
Before adding fixed costs, every business should properly define:
Is this cost going to provide tangible benefits?
Can the business afford this cost if the pace of growth is lowered?
Is it necessary to incur this expenditure at this very moment?
Smart growth is neither about avoiding expenditures nor spending money casually.
4. Growing Without Knowing Unit Economics
While a business might be able to attract numerous clients in no time, this does not technically mean that it is actually creating value for them.
Unit economics helps businesses to analyze the profitability of the specific unit that it sells, depending on-
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (LTV)
- Average Revenue Per Customer
- Gross Margin
- Contribution Margin
- Retention Rate
When a business spends significantly more to acquire customers than it can reasonably expect in return from those customers, scaling the business may simply lead to increased losses.
Growth only becomes worthwhile when the economics surrounding that growth are sound.
5. Relying on Funding as a Solution for Everything
While external funding can give businesses the capital they need to grow, make products, hire people, or enter new markets, funding certainly doesn’t replace financial discipline. If a company suffers from inefficient operations, poor unit economics, or uncontrolled spending, then raising more funds will only delay the underlying issue.
Before raising funds, founders must answer:
- How much money is actually needed?
- What is the money going to be used for?
- What milestone is expected to be achieved with the funds?
- How long will the funds last?
Fundraising should be used to reinforce an already good strategy, rather than to cover the absence of one.
6. Not Having a Financial Buffer
A growing business often reinvests all of its profits into growth efforts.
However, while reinvesting helps businesses grow, not having a financial buffer gives companies a serious disadvantage in times of troubles.
Having the right amount of cash available allows businesses to provide more flexibility in case things go wrong. The amount of cash differs depending on the company’s business model, expenses, and risk levels. However, the main point is simple: don’t start a business that can be maintained only if everything goes right.
7. Taking Risks When There is No Reliable Financial Information
Intuition is essential in entrepreneurship; however, financial decisions should not be based solely on it. Business owners should always have access to timely and accurate information about the entity’s financial position.
Proper financial reporting can help answer questions like:
- Which products or services are the most profitable?
- Where do expenses cut the most?
- Are margins going up or down?
- Which customers bring the most value?
- How much cash does the company have?
- How long is the business able to go on with no changes in spending?
Having a solid data allows transforming financial decisions from mere guesswork into informed choices.
8. Balancing Short-Term Growth and Long-Term Financial Planning
A business can have a successful quarter and think that its growth will just last forever. However, proper financial planning requires thinking further than the upcoming months.
Different situations must be taken into account in business:
- What would happen in case of a faster development?
- What if the growth process comes to a halt?
- What if the costs go up in price?
- What if one of the main clients leaves the company?
Making plans helps businesses prepare for uncertainty.
9. Forgetting about financial due diligence
While companies are becoming larger businesses develop partnerships, buy other companies, look for investments, or enter the market.
At this stage, it is necessary to conduct financial due diligence.
It is important to have an understanding of the company’s financial records, and obligations.
With financial documents in place, it will be easier for investors and strategic partners to evaluate companies.
Financial transparency is more than just compliance with the law.
10. Developing faster than the business can do
One of the major mistakes in finance is believing that faster development is automatically better.
Growth creates pressure on cash flow, production processes, hiring, IT, and management.
It is necessary to have a proper infrastructure to deal with rapid growth.
The objective is not only to grow.
The objective is to grow in a proper way.
The Importance Of Financial Discipline Along With Business Development
A company must pay attention to its financial aspects from the very start and not only when it has financial issues.
In order to prevent problems in finances, a growing business must regularly check its financial situation.-
- Revenue and profitability
- Cash flow
- Operating expenses
- Unit economics
- Working capital
- Financial projections
- Funding requirements
- Cash reserves
- Investment decisions
Financial plans must change with the growth of the business because some decisions that were effective in the beginning may not work later on.
It has to learn how to get good financial visibility, spend money wisely, plan realistically and make decisions based on facts.
Financial discipline is necessary, as well, and it means that a business does not stop to enjoy the success it has achieved.
The main reason for slowing down does not necessarily mean that a company is growing too slowly. Sometimes, it means that the financial side of the business is not strong enough.
