By Patrick Hogan, CEO of Handle
Business is booming. You’re building a network of new clients and contractors. Sales numbers have never been higher.
It’s every material supplier’s dream to move on from the early startup stage to the more exciting growth stage where there are plenty of opportunities to increase revenue. However, handling rapid growth is a challenging feat. Without sufficient preparation, things can spiral out of control and you might find yourself working with negative cash flow.
The period of rapid growth is the phase where you experience a surge of new clients and acquire bigger contracts that require a higher volume of materials to supply. In this period, you will notice that money becomes tight.
As more sales come in, it’s likely that you’ll need to purchase more inventory, hire more employees to manage the rising number of clients, and even get new offices to house new employees. These activities will require you to input more money than you may be used to. If you do not have the proper controls in place and grow beyond your means, it will result in serious cash flow problems. This can derail your business permanently.
That said, it doesn’t mean you should be afraid of growth. Growth is a good thing. It amplifies your company’s valuation and attracts new investors. What you need to do is prepare for eventual crunch with effective cash handling. To guide you, here are some ways material suppliers can maintain positive cash flow during the growth phase.
1. Have a firm grasp of why you are experiencing rapid growth
Before anything else, you need to have an idea of your current business situation. If your construction supply business is experiencing rapid growth, then surely you are on the right track. But pinpointing exactly what causes your rapid growth can help you take the best course of action and address potential areas that will cause cash flow issues.
Take a step back and hit your books. Analyze sales trends, inventory levels, expenses, debts, and receivables. The data will allow you to determine your current financial status and estimate the impact of each aspect’s growth on your cash flow. For example, if inventory absorbs too much of your cash, you can either put some controls in place or look into refinancing.
2. Analyze your costs and identify how much capital is really needed
As your business grows, you will have higher operating, infrastructure, and personnel costs. You need to keep up with these rising expenses or else you’ll be unable to finance your growth.
Operating costs include the purchase cost of the materials you sold to clients, as well as the expenses directly tied to the daily administration and maintenance of your business. By analyzing your operating costs, you will have a firm grasp of how they affect your margins and bottom line, allowing you to adjust as needed.
Rapid business growth will also affect your personnel costs as you will need to fill staff positions to keep up with the demand. Additional personnel also means additional demands on HR and an increase in payroll. Make sure you hire the right people as you move through the growth phase. It can be tempting to just hire whoever comes first, but if you’re not careful, hiring mistakes can significantly affect your bottom line.
With an increase in inventory and employees, you will need more office and storage space. It may be time to pack up and move to a larger office and warehouse. But before doing so, you have a lot of factors to consider. Is the growth of the business sustainable? Should you hire more personnel or try remote teams to save on costs? Is your inventory management optimized? All of these should be factored into your decision to move to a bigger office or warehouse.
3. Streamline your billing and collection process
The construction industry is notorious for huge gaps in billing and collection. And since you’re a material supplier, you are typically the last person in the payment hierarchy. For this reason, you have to create an effective credit policy and be proactive in managing construction receivables. Your credit policy should determine the total amount of credit your company will allow. Additionally, you should have clear payment terms that include pertinent deadlines to encourage speedy payment.
In the growth phase, the sudden influx of project deals will make billing and collection a challenge. If you fail to balance collection with other aspects of the business, sending invoices will be slow and prone to mistakes. And the collection will be even slower. You will lag behind your rising expenses until your cash reserves are depleted.
There are several ways to streamline your billing and collection process.
- Vet clients before granting credit. If you’re working with a new client, consider getting a higher amount of money upfront to lower your risk.
- Impose penalties for late payments. This will encourage clients to pay on time.
- Use dedicated software to automate the entire process and reduce the impact of human error.
Dealing with rapid growth can be pretty nerve-wracking, especially if it’s your first time. To ensure the long-term sustainability of your business, it’s crucial that you have a firm grasp on the effects different aspects of your business have on your cash flow.
Patrick Hogan is the CEO of Handle where they build software that helps contractors, subcontractors, and material suppliers secure their lien rights and get paid faster by automating the collection process for unpaid construction invoices.