Now it’s time to magnify all the good things you are doing in your business and watch the profits multiply.
How? By adding a strong financial foundation. That means relationships with bankers, lines of credit and perhaps even an investor.
Why? Because growth requires cash — or at least that you don’t run out of cash!
So let’s get started.
Step 3: Build a Stronger Financial Foundation for Growth
Over the last 4 or 5 weeks you’ve built a deep understanding of your cash flow and operating efficiency. Now its time to focus on the foundation of every great business: access to enough cash to fuel growth.
Even the strongest business will run out of cash from time to time… and this is particularly true if your business is growing fast. The faster you grow, the more cash you need. In an expanding company, the need for cash will almost always outpace the cash coming from customers.
In these cases, the key to growth is a great relationship with bankers and potential investors. Ready to do some careful self-promotion? This step is not for the shy or insecure.
First, if you don’t have a good one-on-one relationship with an executive at your bank, now is the time to do something about that. Call and ask a bank manager or senior-level banker out to lunch. Give him a tour of your facility, find out about all the extended services he can offer you (including “payment and treasury services“)… and start making use of them.
Next, dip your toe into the debt pool. Nothing helps a business grow faster than a couple of credit cards and a revolving line of credit, and you’ll need to leverage your new friendship at the bank into as much of this as you can get.
Need inventory for a big job? Charge it to a card, pay the card with the credit line, and in 2 or 3 months, pay off the credit line with the proceeds from the sale. You’ve effectively let the bank finance your growth for almost no cost. And all the while, you’ve built your credit score and reputation as a savvy business person.
But before you go begging for credit, be prepared. A banker will evaluate you on at least 2 easy metrics: Debt Coverage and Quick Ratios. Here’s how to figure them before you go to the bank:
- Debt Coverage: Also called Debt Service Coverage Ratio. This answers the question, “Do you have enough positive CASH FLOW at the end of each month to make the loan payment?” Most banks will want to know that you can generate about 1.25 times as much cash as you’d need to make the minimum payment. Keep in mind that this is AFTER the loan — so if you have things that are sucking up cash now, and can replace them as part of the loan package, then you can show that “new” cash flow to the banker. Ask your banker what his usual “coverage ratio” is, then sit down and see if you can meet it.
- Current Ratio: The current ratio compares your short-term LIABILITIES to your short-term ASSETS. You’ll need a balance sheet to find these numbers. (You do have a balance sheet, right?). Specifically, find your CURRENT ASSETS by adding up cash, marketable securities, accounts receivable and inventory. Divide that by your CURRENT LIABILITIES, which is the sum of accounts payable, loans payable, tax liabilities and accrued expenses. ASSETS / LIABILITIES is usually expected to be about a 2 to 1 ratio, although the number may differ in your industry. Again, ask your banker what result he hopes to see.
Of course, banks will only take you so far. Well before you max out your credit cards or bank loans, start looking for a couple of angel investors. We’ve written a lot about this in other posts, so I won’t go into detail here. Click through to see several other blog posts on how to find and evaluate angel investments.
The bottom line this week is to know that you will have the cash you need to continue operating — and growing — your business in the months and years to come. Not only will a healthy credit line help you finance growth, but I bet it will help you sleep better at night.
So rest up. And when you’re ready to think about how to spend that cash in the best, most strategic way possible, check out my next installment. Step 4 of my business make-over will focus on building a great strategy. So stay tuned… I’ll send another installment each week or so.
Want a quick review? Here’s the titles of the whole series.
- Week 1: Listen to What your Business is Telling You
- Week 2: Measure Performance & Identify Key Drivers of Profit
- Week 3: Build a Stronger Financial Foundation for Growth
- Week 4: Grow Faster with the Right Strategy