Thursday, January 27, 2011

Can You Afford To Grow?

Can You Afford To Grow? No I’m not kidding. Can you afford to grow? You might be asking “Can you afford not to grow” but there is a price to grow and it is not in sales the true measure of possible growth is found in your cash flow and your profit margin.

Sales are nice and profits are nicer, but a business from the one man army to the fortune 500 live and die by cash flow.

I have been talking about growth and doubling your business this year and it is a nice thought to have a business or your personal sales twice the size it is right now, isn’t it, but can you afford to do it?

Rolling up my sleeves let’s get serious and get our heads out of the sales growth clouds today. How can you afford and grow in sanely. How can your plan for growth and determine the amount of ADDITIONAL cash you will need, and yes my friend you will need cash to grow.

Start by asking the right questions:

1) How much is it and over what time frame?

2) What is my gross margin?

3) How much overhead will you need to add to achieve this goal?

4) How long will it take you to get paid?

If you can answer these 4 questions you can make an educated guess as to whether you can afford to grow (and how fast) or not.

Example. Let us say you want to grow $500,000 this year. Your gross margin is 30% and you don’t expect any change because of the new business except that you will need to add $50,000 in overhead expenses for commissions, bookkeeping, personnel etc. Additionally you expect your average return on account receivables to hold steady at 35 days.

Start by figuring out the cost of goods sold on the new business. Since your gross margin is 30% that comes to: $350,000, add in the extra overhead you need to make it happen ($50,000) and you end up with $400,000 in new SPENDING. To keep this simple we will then divide this up by the number of days in the period (you could do this by month, quarter or whatever) which in our case here is 365 days and you find out that the cost of this new business is $1096 dollars a day. If you did not lose your teeth on that one pick yourself up off the floor and then multiply that number by the number of days that it takes you to collect your money witch in our example is 35. So we end up with $1096 x 35 = $38,360.00

This is only a rough formula to show you what you might need but any kind of forecasting is rough at best. But you need a tool to show you the numbers in black and white.

Now with the economy starting to expand you don’t want to be truing down business so what can you do?

1) Reduce your collection time.

2) Extend your payables by a week or so (best to talk to your suppliers and let them know what is going on so they can support you in this. It does mean more business for them, so they might go along with it if they feel you know what you’re doing.

3) Borrow money. I am not anti bank but I don’t like to borrow money. If you go that route you need to add in the interest rate against what your gross margin is.

4) Borrow against receivables with an asset lender. Did this once, hated it; you lose total control of your receivables but no red tape and can get money very fast. Again they have their place in the world of business but they are the place of last result I would go to.

5) Angels. Friends, relatives who know you and love you who would float you a short term loan.

Larson Notes & Satire: So are you still game to double your business this year. Can you afford to do it? Do you want to do it? The blog above can give you a rough idea if you can do it.

Can you Take the Larson Challenge to double your sales this year and get listed on our web site @ ?

As for me here at Larson’s we spent all last year ramping up so we could double our sales. Now it’s time to put the pedal to the meddle and go for it.

Howard Larson
Larson & Associates
Target Marketing & Telesales Professionals for new account acquisition
Making good businesses great and great businesses even better

P.S. We make telesales for small business affordable by offering programs down to only 15 hours a week. Maybe you could add telesales into your marketing mix call today and find out.

P.P.S. Take the Larson Challenge to double your sales this year and get listed on our web site @ . Email us your company name and web address to get listed. Make this year your best ever!

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