We all want to grow our business. Increasing revenue is good, right? Well yes … but not if you’re growing broke. Your business might be generating more income but is that delivering more profit? And do you have enough cash to fuel the growth? Understanding your numbers is the foundation for all successful business growth strategies. Growing too fast can send you broke because growth needs cash.
Here are the five financial foundations you need in place to achieve sustainable growth:
- Up-to-date, accurate financial data
- Understand your numbers
- Reliable cashflow and cashflow management tool
- Pricing strategy that delivers profit
- Options for funding growth
#1 – Up to date financial data
It sounds like a no brainer but accurate, up-to-date financial information is essential for all business owners. Without this you are literally flying blind. Keeping receipts in a shoebox and reviewing your financial statements once a year simply doesn’t work. Invest in cloud based accounting software like Xero, which allows you to generate a Profit and Loss and Balance Sheet anytime from any device. Set aside time each week to update and review your business’ financial situation.
If you need help keeping on top of your data entry, ask for help. Your bookkeeper or accountant is a great place to start. They can show you how to streamline processes to make management of your finances easier and faster. Get training on how to use your accounting software or watch free online video tutorials.
#2 – Understand your numbers
Before you embark on any growth plans, invest in your financial literacy. Most women go into business with great passion and commitment but very little financial education. You need to understand your numbers to make informed, strategic decisions.
Get help to understand key financial ratios for your business like – how much working capital you need? Working capital is the money you need to fund the day-to-day operations of your business. How much money do you need to keep the doors of your business open?
Keep an eye on your gross profit percentage. To calculate this number, divide your gross profit (revenue less cost of goods sold) by total revenue. This percentage tells you if the goods or services you provide are priced correctly (it should remain fairly static). If the percentage starts to drop it could mean your costs have increased and you’ve not adjusted your pricing to ensure you’re still making a profit. See point #4 – pricing strategy.
#3 – Cashflow management tool
Here’s a simple truth. You need cash to grow your business. Before embarking on major growth plans, your business should have stable, reliable cashflow. If you’ve not achieved that elusive goal, you need to understand how much capital is required to fund the growth and have access to funding options.
Business growth requires good cashflow to be sustainable. Businesses experiencing rapid growth often run out of cash. To avoid growing broke, cashflow management is critical. If you’re new to cashflow management a simple spreadsheet is a great place to start. If you’re planning to expand the business and need to keep a close eye on cashflow, we recommend using a free cashflow forecast tool like Skippr. They can also help with finance options.
#4 – Pricing strategy that delivers profit
Too often business owners focus on growing their top line revenue or their total income. We regularly hear “Business is going really well, I’m generating more sales and my revenue is increasing”. A better financial metric to focus on is growth in your bottom line or business profitability.
Do you know if your current product or service is making a profit? How much does it cost for you to deliver your product or service? Here’s where so many business owners get it wrong. Make sure your cost of goods sold (COGS) includes the actual costs of producing your product or delivering your service as well as your overheads, sales and marketing expenses. This can mean a whole range of things like EFTPOS fees, packaging, credit card fees, payment gateway charges, advertising campaigns, showroom or storage costs. Don’t forget to factor in rising costs such as superannuation payments and electricity.
Getting your pricing strategy right before investing in growth plans means you’re more likely to grow revenue that delivers an increase in your business’ profit.
Step #5 – Funding for Growth
The last financial foundation you need in place to successfully grow your business is funding. Either having access to enough cash to fund the growth yourself or a plan to access funding from a traditional or non-traditional lender. When most women in business need funding, they go to their bank. Here’s some interesting facts: 20% of funding applications submitted through traditional lenders are rejected outright. It takes on average 30 hours to collate all the documentation required to secure a bank loan. That’s 75% of a 40-hour week.
There has been an explosion in different funding options in the last couple of years. Business women now have access to four types of lending options – traditional debtor finance, equity finance, grants and even crowd funding. What’s critical is to match the funding purpose with the funding type. Connect with an expert in this space. Know how much you will need to fund the growth, what is the best funding option and how quickly you can get access to the funds.
We encourage business women to have a growth mentality. We help women in business put in place financial foundations to ensure they don’t end up growing broke. There is more to generating growth than simply selling more products or services. Having accurate, up-to-date financial information and a good understanding of what your financial reports reveal about your business is critical. Applying a pricing model that ensures every product sold or service delivered actually makes you money. Plus having stable cashflow with access to cash or funding arrangements to sustain the growth are all essential foundations.
If you want to invest in improving your financial literacy and have more money, more time and less stress in your life, check out the Acceler8 Academy Program or call us on 1300 222 353. We can help you achieve sustainable growth that delivers a more profitable business.