Sounds too bad to be true – right? Growing your business broke. How can that happen?

Well, it happens everyday in this country.

Death Of Businesses

We are losing businesses in this country quickly – something that we have never seen in this country before. And, while this data is a bit dated, 2007 to 2011 (the last actually data the US Census Bureau has) – it is estimated that this trend will continue if not accelerate.

Bottom line: We are still creating about 500,000 new businesses each year but are also losing more than we are creating. Why?

Why Businesses Close Their Doors

There are probably as many reasons that businesses close down as there are businesses. Some close for personal reasons – the opportunity is gone, new opportunities arise, just do not want to do it any more – to forced closures – just can not keep up with the company's bills.

If you survey 100 businesses that have recently closed and asked them for their top 10 reasons why their company shut down, you will get 100 different lists. However, common among all of those lists will be reference to anability to manage and finance growth.

In fact, according to a NY Times article concerning the “Top 10 Reason Small Businesses Fail,” found that five of the top 10 reasons had to do with:

  1. Out-of-control growth.
  2. Poor accounting.
  3. Lack of a cash cushion.
  4. Operational inefficiencies. And,
  5. Dysfunctional management.

All of which leads to statements like this:

If that company is already out of cash (and borrowing potential), it may not be able to recover.

Not having cash or the ability to get cash (working capital) can lead to – like these companies – growing yourself broke.

Growing Broke

So, what does that mean? It means that your business is growing so fast (faster than you can handle financially) that you end up with more customers or customer orders than you have ever had (making your sales look good). But, for any number of reasons, poor collections, untimely payments, bad working capital management, etc., you just do not have the money or can not get the money needed to 1) service all those customers (even though you agreed to do so) and 2) meet your current bills (although money may be coming in a few days or weeks or whenever – it is not here now to meet current, pressing obligations).

And, if you stop meeting or exceeding your promises to customers as well as are unable to pay suppliers, vendors and especially employees on time, you will lose your business – by choice or by force.

So, let's look at an example: Your service business usually has rough 10 active customers on any given day. And, based on how you have run your business over the years, you have 5 of those customers paying while you start on (and incur the cost of) those other 5 customers. No problem.

Then, one day you get another customer (growth). Yet, while you are happy about the new business, you do not have the money coming in to start that new job – which needs to be started right now.

So, what do you do? Do you ignore the new customer and wait until you have the money to get started? Do you take those funds from another customer's job to start this new one? Do you just ignore them all?

In most cases, one or two additional customers can be handled. But, if you start getting more than your business can handle, you find yourself short the working capital needed to service those jobs (even though you have additional sales – booking sales and collecting revenue are two different things). At that point, the money you have coming in – which is used to start and complete other jobs – is not keeping pace with the money that you have going out – to pay bills and other obligations. So, you start playing around with your accounting and maybe even with your actual cash – which might buy you a day or even a week. But, in the end, you will miss a payment or a deadline and your company will start to spiral out of control.

You start missing customer deadlines and you start losing customers – not one or two but in groups. Or, you miss a supplier's payment and you lose that supplier or you miss a payroll and you end up in jail. Either way, you grow your company but as you do not have the money to manage that growth, you grow yourself broke.

How Do You Solve This Problem?

You can not just do one thing. You have to manage several aspect of your business – especially your working capital – at the same time. Here is a short list of items to concentrate on:

  1. Have a great payment and collection policy to ensure that you are getting paid when you expect or forecast to be paid. This could be done using discounts to accelerate payments or pending payments up front or any combination.
  2. Manage your expenses. If you are growing and growing at such a rate that your capital is taking a hit, find ways to slow down your expenses. Look at ways to extend, delay or flat out ignore your cash out flows – like with economies of scale – to ensure that you always have more money coming in (actual cash – not just sales but revenue) than you have going out.
  3. Manage your working capital. It makes no sense to be paying your suppliers, vendor, etc. in 30 days when you are collecting payments from your customers say every 60 days. That just does not work. Switch that around and get your money in before it has to go out.
  4. Manage your growth. Yes, it hurts to turn down business. But, if you can not meet your promise to a new customer, you have to say no. Better to say no and hope the customer just feels unimportant (as that may make the customer want to work with you even more) then to buy. You do not deliver and those customers, if they do not sue you, will surely bad mouth you. But, congratulate the ego of those customers and they will not say a word to anyone out of fear of additional embarrassment.
  5. Have – already in place – the ability to get needed working capital funding if and when you need it – like the time you were already swamped and you landed that big, dream contract you thought you would never get. Based on how your business earns its revenue – already have in place – relationships with lenders that will quickly fund your capital needs. Would hate to see you miss completing jobs on time for existing customers or have you turn down that dream customer all because you did not have the working capital on hand to manage your growth.

Now, this list is not all inclusive and all items do not work for all businesses as each company is unique and has their own unique obstacles to deal with. But, you should be able to refer from this list what you need to do in your own business. Remember, the focus is on ensuring that your company has the working capital to fully satisfied customers or it has to cut back on those customers or grow itself broke.