Will your cashflow let you grow?

High growth firms consume cash faster than the businesses can generate it. While they might be able to generate increasing sales, that in itself does not mean that cash will flow in the door at the same time, or that it will be sufficient to provide the infrastructure which underpins the increasing levels of activity.

It is not just work in progress which has to be financed; there are large investments in accommodation, new employees, logistics capabilities and information systems to be funded. Without an increasing source of finance, high growth companies run out of cash and hit a wall.

You would think that being successful in generating ever higher levels of sales would be a recipe for success but, in fact, it brings its own challenges. You are constantly on the search for new staff, you run out of office space and warehouse capacity and your telephone system will have insufficient capacity to cater for all the new people.

At the same time, you need to increase inventories, develop new channels to market and spend more on logistics. If you are very lucky and have high margins and a mostly cash sales business, you might just be able to find enough cash to fuel the engine, but few companies are that fortunate. Most firms have some level of credit sales and their margins are not high enough to provide the buffer to fund high levels of growth.

Financing growth becomes critical once the rate of growth exceeds about 10% pa. From this point on, the business needs to constantly invest in capabilities and capacity to support the increasing sales. The growth of the business needs to be modelling so that cash needs can be ascertained and financing options explored.

Some businesses will be able to use debtor, inventory and property assets as security to secure additional funds but services based businesses will have difficulty. Almost without exception, those firms selling products and services with intangible benefits are going to have to use equity financing. In some cases they might be fortunate to be able to access angel or venture capital financing, but they will be in a very small minority. Others will need to find private investors among their family and friends or seek a listing on an exchange, perhaps one of the secondary listing boards.

Securing finance is, however, not an easy or quick exercise. A highly attractive venture might be able to resolve their needs in a few months but the average business is going to spend six months to 18 months on the exercise. Any type of public listing is a giant undertaking which demands considerable senior executive time and, often, significant changes to internal governance and reporting systems. Even bank finance has its challenges when the lender requires additional protection through performance guarantees and more extensive reporting requirements.

Basically without solving the financing needs, high growth over any extended period is simply not possible for the vast majority of firms. The financing needs have to be treated seriously and be given priority if growth is to be supported.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.