Reasons Businesses Have Cash Flow Problems Due to Growth
Business owners dream of growth opportunities that rapidly increase demand for products and services and bring in plenty of additional revenue. But business growth can be a mixed blessing. It costs money to ramp up production, and the added revenue from increased sales often takes time to catch up with the expenses you accrue. Cash-flow management for a growing business can be a tricky endeavor. Understanding the processes and challenges can help you to plan effectively and better manage available capital.
A growing business is one that is experiencing an increase in demand for its products or services. Most companies need to have the resources on hand to meet this demand if they are to meet their customers' needs in a suitable time frame. This readiness costs money, because you must purchase inventory before you can begin to generate revenue. The more inventory you have sitting in your warehouse, the less cash you have on hand for day-to-day expenses such as rent and payroll.
Business growth often requires changes to your company's infrastructure. You may need to rent a larger space to accommodate increased production or inventory, or you may need to invest in new equipment to achieve greater efficiencies. Investments in infrastructure tend to pay themselves off over the long term, but you must nonetheless find a way to pay for them in the short term. This delay in recouping infrastructure investments can create cash-flow challenges for businesses that are growing.
Although small-business owners can play a role in generating growth by advertising or soliciting new accounts, growth often occurs on its own schedule, as a result of fads, market conditions or publicity. It can be difficult to predict and plan for business growth spurts, and, as a result, many companies do not have necessary cash on hand when demand for their products and services soars. As a result of these shortfalls, you may need to purchase inventory at retail rather than wholesale prices, further increasing the strain on cash flow.
Small-business loans are the ideal form of financing for a growing company, because interest rates tend to be relatively low. However, the process of applying for a small-business loan takes time, and the owner of a rapidly growing business often needs cash right away or is too busy to compile all of the documents that a bank requires. Applying for a business credit card or a small-business line of credit takes considerably less time, but interest rates for these types of financing tend to be high. High interest rates can make cash flow for a growing business even more challenging.