Over the last 24 hours I have talked to two fast growing businesses who are in need of cash. Both business owners described their frustration that they feel like the need for cash is never ending. One business owner asked, “does it ever end?” Does the need for cash ever end for a growing business. Unfortunately in almost any circumstance the answer is no… As long as you are growing your business you will need more investment, more loans, more financing of receivables etc. There are always going to be upfront costs to acquire new customers, and you won’t see a return on your upfront investment for weeks, months, or even years depending on the business.
In case you thought after you get that loan or that round of investment you have reached the promised land, let me provide a an example that illustrates why you will likely require additional funding with each step of growth.
Growing Business – Growing Pains
I want to start with a fast growing VOIP phone service company that I have worked with. Their business model is highly profitable over the life of a customer, but it is laden with up front costs each time they acquire a new customer. Think about the costs that go into each new phone line they sell.
- Travel – In order to get the sale in the first place you will need to spend cash traveling to visit the client, develop and present a proposal.
- Sales Commission – Right off the top the sales guy is going to want to get paid for bringing in the sale
- Phone Installation – The phone service company may or may not provide installation for new clients
- Support – Initially the client is going to need additional support during the first few weeks or months as they get used to the new phone system
The problem, as you can see, is that each time the company adds a new phone line they may have $100 worth of up front expenses, and they may only profit $15 a month per phone line. If that is the case it will take them 7 months to breakeven. Once they have reached that breakeven point the business model is wonderfully profitable, but they have a real need for cash up front.
As long as this business is accelerating growth it will always need more cash. Take a look at your situation. If you feel like you are growing and should be profitable, but you always need another cash infusion, this may describe your situation. There is no magic bullet to solve your financing needs. That is why they call entrepreneurship FUN!