Q: I’ve recently won a large contract that will require me to grow my business by around 50 per cent in the next few months. But I’ve heard that rapid growth is bad. Why?
A: As usual, it mostly comes down to money. In most trading businesses there is a need to pay up front for things such as materials and labour, while the payment from the customer comes much later.
The more business you do, the more money it takes to make these early payments.
It is called working capital and if you do not have enough, you can run out of money before the job is completed - and if the job isn’t completed, you won’t be paid.
How do you cope with this risk? First, make some cash flow forecasts to see how much is needed. The forecast is a tabulation of all the cash that you expect to come in and out of the business on a daily, weekly or monthly basis.
Be sure to allow yourself some contingency. Excel spreadsheets are excellent for this task and there are some useful guides on the Grow your Business part of the Business Link website (www.businesslink.gov.uk/grow).
Once you have an estimate of the cash reserves needed to complete the contract and sustain your business, you can take the steps necessary to reduce the requirement and/or make extra cash available.
Staged payments are commonplace in construction. They minimise cash needs through partial payments as each stage of the work is completed.
Where suppliers offer credit terms, you may feel that by making full use of these facilities you may be able to cover the additional cash needs.
Before you rely on credit, check that you will not exceed the limit each supplier has set.
Where a good supplier relationship exists, it may be possible to negotiate an increased limit and even extended terms on the strength of a new contract.
When you still foresee a shortfall in working capital, a discussion with your bank to extend your overdraft facility may well be the solution.
The discussion will be more fruitful if you apply early - not when you are struggling to make payments - and when you have clearly forecast requirements.
There are other considerations when planning expansion. Will your management effort and administrative resources be spread too thinly? Will you be able to hire the right labour and subcontractors?
In many cases, extra cash can help solve these problems, too, so factor them into your cash flow forecast.
The key to coping with growth is to plan and forecast.
Laurence Thomas is an adviser with Business Link