Financing Your Business Growth

It is a well-established truth that businesses live or die based on their cash flows.  If you intend for your business to grow, you will most certainly need more cash than what is required for maintaining a steady turnover.  You might be asking two questions: 1) How much will I need? and 2) Where will I get it?

How much will I need?

In any business, cash is typically tied up in the short term in things like stock (be it raw materials or goods ready for re-sale) and debtors, i.e. customers who owe you money.  On the other hand, your business will probably take advantage of your supplier’s credit terms, which gives you some cash in the bank for the duration of the credit terms.  However, this cash is not usually enough to finance your operation while you are waiting for the inventory to become sold goods and for your customers to pay their debts.  This shortage of cash is known as working capital requirement.  It is useful to look at the working capital requirement as a percentage of sales.  For example,

Current Assets                                             £250,000

Current Liabilities                                        £150,000

Working Capital Requirement                     £100,000

Sales                                                              £500,000

% of sales                                                       20%


What this means is that for every pound of sales, £0.20 will be required to fund the working capital.   If your business wants to grow its sales, you can work out the cash requirements using this model.  For example, if your business wishes to grow its sales from £500,000 to £750,000, the working capital requirement will grow from £100,000 to £150,000, or by (£750,000 – £500,000) x 20% = £50,000.

Besides the working capital, funding growth may require investment in fixed assets, e.g. new equipment, new premises, etc.  Cash required for this capital investment needs to be added to the working capital requirement to determine how much additional cash the business needs to achieve a set level of growth.   In our example, let’s assume the new level of growth can be achieved if we invest £75,000 in new machinery.   The cash requirement for the first year becomes:

Working capital requirement                      £50,000

Capital investment (fixed assets)               £75,000

Total Cash Requirement                              £125,000


Where will I get it?

There are two main sources of funding – shareholders / owners and debt.  If the additional sales (£250,000 in the example below) bring in profit (let’s say at 30%), this could be used as part of the funding.  In our example, 30% margin would give £75,000 in profit, which leaves £125,000 – £75,000 = £50,000 to be found via a loan.

If, however, the business is generating a loss, there may not be enough cash left in the business to reinvest in growth, leaving a much higher proportion of growth to be funded by loans.  Banks, or other sources of debt finance, may view a high proportion of loan funding as too risky, which essentially leaves the business without the necessary cash to fund the desired growth levels.

But do not despair: there are numerous ways to improving your working capital – including (among many others) reducing the debtor days, just-In-time stock management, different pricing strategies and internal efficiencies – which will allow you to fund growth internally.  Whatever the scenario, staging your growth in such a way that you can grow safely is paramount to your business survival and success.