Five honest questions advisers and owners should ask yourself when faced with a great growth opportunity
Whether it’s a favourable exchange rate, a supplier discount, earlier shipping, an acquisition opportunity, quicker delivery, a larger customer order or any rare business opportunity, but when business opportunity knocks it is important that you and your client look at the opportunity from all angles. Business growth carries risks, so here are five honest questions to make sure that growth opportunity doesn’t turn around and bite them.
1. What is the real impact on your working capital?
The first thing to come under pressure, particularly for importers and large scale buyers, could be their cash flow. To service your new client or fulfil that big order, they may need to outlay significant money on extra stock, and maybe equipment, staff and premises. Such investments could mean spending big up front, then waiting patiently, sometimes for weeks or months, for the income to flow.
How can a business continue trading smoothly when its cash is tied up in stock and debtors? Trade Finance and invoice financing is potentially a great solution as it can pay suppliers up front (giving the client flexible repayment terms), then bring forward payments on your customer invoices to keep your cash flow cycle within manageable limits. In this way, the business can maximise its buying power and accelerate purchasing decisions, whilst minimising the impact on its cash flow.
Cash is king, so before your business takes on the client it is important to have set clear terms of trade, and understand the new customer’s track record in meeting those payment terms.
2. What is the impact on your customer base?
A large new customer, or an unusually large order from an established one, will skew your customer base so your revenue is more reliant on just a few clients. Naturally, the business will focus on making the most of the opportunity, scale up re-orient the business towards better meeting the needs of that customer. However, this leaves the business much more exposed if that customer terminates their agreement with the business or even fails. A good number of customers helps spread the risk thereby protecting the business against the impact of a major client failure. This means ensuring that you continue to look after existing customers even when you’re flat out pursuing your big growth opportunity. Todays small customer could well be that big opportunity tomorrow.
3. How lucrative is the opportunity, really?
Business history is littered with examples of opportunities which have failed to deliver on their promise. It is always important to run the numbers, calculate the breakeven point, and consider a number of scenarios to test, whilst checking your assumptions. There is risk attached to almost all opportunities, so advisers and owners should ensure that risk is fully worth the reward, and for SME owners that risk is often substantial.
4. What is the impact on management focus?
Before diving into action, take a good look at how things are working already in the business and assess the impact of trying to take advantage of that opportunity.
How much time and effort will the opportunity divert from current areas of focus? How will it impact on current plans? Do you need to scale up in order to take advantage of the opportunity and if so, what challenges might this entail? Do you have the required funding in place to make it happen?
5. Can you pull it off? Does the business have the skills internally to manage the opportunity? Will failure put its’ reputation at risk?
The biggest growth opportunity in the world is worth little if it does not materialise. In fact, if it puts the business at severe risk it can be downright dangerous.
Some honest self-assessment is required at this point about the business’ internal capabilities: 'Do I and my team have the skills to full take advantage of the opportunity over the long term? Does the team have the stamina and commitment to navigate the challenges and see it through? Does the business has the management capacity to ensure it comes off as expected? Can the business keep the opportunity going? If staff and expertise are lost, how can it be replaced? Do we have the right systems in place to make it work? Will our funding be able to support it? Will we be able to recover if it doesn’t happen as expected?'
A thorough assessment from all angles of how that new opportunity will impact on your business will help the business prepare to fund it and make the most of it. It may even save it.