Growth And Development Is Impossible Without New Capital

I believe this issue is the cause of many downfalls and failures of small business entrepreneurs. They commence a growth program without ANY new capital infusion to support it, believing the growth will be fueled by revenue from new sales. Self-liquidating growth? Nice idea, but it doesn’t work. This is an impossible dream and will absolutely result in frustration, huge losses and eventual failure, yet so few understand this and so many attempt to implement this strategy.

Here is the simple set of issues controlling this phenomena and preventing success:

1. There is rarely adequate cash from current sales revenue to cover current operations.

2. Since my assumption includes an ongoing operation, there are typically past sins that also require debt service out of current operating revenues beyond daily overhead requirements putting more demand on the scant cash flow and profitability that is already stressed.

3. Any launch of a new product, service, ad program, etc. is a strategy meant to increase revenues and requires some investment. This would come out of operations – where else – and now the table will collapse since some available cash was applied to the growth program leaving payable and operational overhead in default.

In fact, what happens is that if the new program is successful and creating new orders and new additional revenue, the cost of production, work in process, inventory, etc. will choke you before you get off and running. There is never enough cash to support all three areas. Current operations, past obligations and fuel for growth cannot be funded out of current revenues.

Yet, despite this rule, so many bet the farm on their latest and greatest innovation and effort believing that increased sales from new expansion will solve their issues when in all reality it will implode them.

Why you ask? Need more to be convinced?

Cash flow and profitability, those are the reasons. Receivables are always 45-60 days away, so right off the bat you are not seeing your cash for a long time. Payables like payroll and taxes come weekly and are unmerciful, demanding immediate payment and typically are increasing with growth and development. Cost of goods, work in process, inventory, advertising and marketing costs, all the extras required to launch new efforts must be paid for putting greater pressure on the cash flow.

Lest we forget the intoxicating reality of cash flow vs. profitability, the only excess capital you really have to spend are the elusive increased profits from additional sales, the presumed solution to the cash flow problems you are trying to resolve and considering the nature of any new innovation or launch, how much additional profitability can you really expect and collect in the short- or medium-term? Not much I would venture, certainly not adequate if you consider the collection aspect of the cash flow.

There simply will not be enough additional profit available to fund the growth as already described as the existing cash flow is far too demanding to allow room for expansion. Thus the assumed solution to most is sell harder and create more immediate revenue. Wrong answer. It will all be absorbed by overhead, work in process and inventory, receivables uncollected and marketing efforts. More is worse, it will kill you faster. It will not work, don’t go there, you will fail.

The only workable answer? A growth and development plan requires substantial investment and additional working capital. A cash flow plan will reveal this reality. Do one, see what it says for you. There are no surprises here, there is no magic, it’s just simple arithmetic.

Growth and development must be separately and additionally funded. Plan accordingly, do not fall into this trap as so many do. The big three will eat your plan up: current overhead, past payables and cost of development, coupled with the inconsistencies of account receivable collections and account payable payments.

Do your homework and prevent failure. Do not believe the answer to your cash flow problems is a new launch resulting in additional revenue if you do not have the additional funding to support it. This is a disaster that can be avoided. Call if you need help.