This is part 1 of Ravit Insights series on the 7 Cash Flow Drivers essential for SMEs.
Image credit: Volodymyr Hryshchenko via Unsplash
One of the first cash flow drivers anyone in business will look at is revenue growth.
It is good to grow, but like anything, growth oftentimes comes at a cost, and a common mistake that many business owners make is counting growing revenue alone as a sign of good business health.
In our series we’ll also outline first if each cash flow driver is positive or negative. This will mean whether it is a drain to your cash (negative) or if it will free up or bring in cash (positive).
Cash flow negative: Revenue growth is usually associated with negative cash flow.
So first, what do we mean by revenue growth?
It is simply the amount of money your business is making from the sales of its products and services, and how much this is increasing or decreasing over time.
It’s important to look at the growth rather than a revenue snapshot, as how it is changing over time will give you a better indicator of how your business is really going and should account for things like changing seasonality.
Growth is a challenge
To consider how challenging revenue growth can be, meet Tom:
Tom runs a fast-growing consulting business. He put in the groundwork for business development, looked at his financial model each month and was happy to see how quickly his revenue had increased month-on-month.
But despite this, it was a challenging time for Tom.
Strong revenue growth was hiding that he was spending more on subcontractors, and he’d started burning the candle working late every day to get his work done. Some of his clients were taking time paying, and he was out of pocket covering contractor costs.
Overall he was actually taking home less money than he was when his revenue was lower.
Tom’s challenges with the issues surrounding revenue growth are common.
For example, a service business will need more hours (either more staff or increasing time with existing staff) to meet demands created by growing revenue or orders.
In product-based businesses increasing revenue will likely mean a requirement to increase orders, which also comes at a cost.
This is one of the biggest killers in companies, where growth translates to increase in capital requirements.
The solution to managing this growth for someone like Tom could be one of several options.
He could opt to dial back his new business, so he can cover the workload himself – a case where a decline in revenue could be beneficial for the long-term. Or he could opt to hire a full-time role to save money on pricier sub-contractors.
The lesson there is also that if you start to run low on resources, bringing in more sales could actually decrease your cash flow and profitability, not to mention cause you stress.
Understanding your growth
When we talk about growth, you probably have an image of a line headed up and up and up.
But your business trajectory probably looks quite different as revenue growth is not likely to be linear.
It changes over seasons for some businesses. It ebbs and flows for others.
Understanding why and how it is changing for your business is essential. A dip for the season is a different issue to a dip because your sales tactics have stopped working.
How to generate sustainable revenue growth
Revenue growth done well means:
- You understand when and how to hire
- Understand your finances (a financial model can help!)
- There’s enough cash in the bank to cover operating and staff costs and fund the growth
- You’ve set up business systems and processes to ensure fundamentals are strong as you grow (ie invoices are being paid!)
- You re-evaluate how things operate as you scale
Revenue growth is just one of the seven cash flow drivers all business owners should understand.