business growth and the (inevitable) funding gap

Business Growth & The (inevitable) Funding

Gap

Essential for all SMEs and startups

that are planning for growth

© Virtual FD 2010 | [email protected]

Growing your business will inevitably require funding, either directly (on new equipment, systems, product development) or indirectly through increased amount of cash tied up in working capital (i.e. more customers on credit and paying you after you have to pay your suppliers and staff).


This short presentation illustrates the impact on future cashflows as a result of growth, the funds that will become tied up in working capital and remaining free cashflow (e.g. to hold in reserve or pay dividends).


A good forecasting tool should assist forecasting business growth by clearly highlighting funding gaps in advance, giving confidence in the overall return in cashflow terms and reduce the risk of over trading and tying up all your cash up in working capital.


The Static

Assumptions•Revenues increase from £100k in Month 1 to £300k per month by end of financial year. So annualised £1.2m pa To £2.5m for the year

•Gross Margin % maintained at 50%

•Overheads increase from £40k per month to £60k per month (additional headcount + sales costs)

•The business is turning a monthly profit of £10k which projected to grow to £660k for the year.


Illustration 01•Customers pay in cash in month of sale

•Suppliers paid in cash and payroll expenses paid in month

•So effectively an in-month cash working capital cycle, with only VAT paid quarterly in arrears



Illustration 01

Cashflow follows profits except for VAT ; more money in bank from collections of VAT which is paid quarterly in arrears (in Apr, Jul, Oct).

Working capital = VAT balance, which increases in line with trading.

Profits grow from £10k per month to £100k by end of year, £660k in total for the year.

Illustration 02•50% of customers pay in next calendar month, 50% in two months following sale.

•Suppliers are paid in following calendar month.

•Overheads paid in month. PAYE / NI paid in following month.

•VAT paid quarterly in arrears.



Illustration 02

£75k funding requirement to deliver growth with H2 returning to overall cash positive position and £350k in cash by year end.

Working capital grows from c.£40k x 7 times to £280k due to increase in trade debtors (£550k at year end).


Illustration 03•50% of customers pay in next calendar month, 25% in two months following sale ; 25% within 90 days.

•Suppliers are paid in following calendar month.

•Overheads paid in month. PAYE / NI paid in following month.

•VAT paid quarterly in arrears.



Illustration 03


7 months of funding required with £100k peak funding gap in H1. Cash reserves recover in H2, with £300k cash by year end.

Working capital requirement increases with £600k+ of debtors by month 12.

Challenges•Expanding your business will most likely require funding even if these activities are profitable immediately.

•The impact on your working capital and funding requirement will be complicated (or increased) further by;

- Growth pattern ; smooth / lumpy / seasonal- Increasing credit terms to new customers- Lower Gross Margin % on new products, services, markets, channels- Holding stock


Conclusion•You should have a clear view of what growth your business can support and afford (e.g. Revenue, credit terms) in cashflow terms BEFORE you grow.

•Revenue growth of £1.3m in twelve months could only deliver cashflow return of £300k in the financial year with remainder tied up in working capital. Understand the difference and align your expectations.

•Take control of the growth of your business in cashflow terms, and quickly reforecast if / when something unforeseen arises that adversely impacts on your forecast or cashflow position.


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business growth and the (inevitable) funding gap

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