In normal times, growth in excess of 15% per annum will put a strain on most businesses. In a recovery cycle, percentage growth can be buried by what appears to be smaller absolute growth in working capital requirements. It is these incremental changes that happen faster than normal and put a lot of pressure on the business. They can put a business owner in exactly the place they do not want to be. To avoid this situation, every business owner should first understand the “cash conversion cycle” in their business.
With precise knowledge of the cash conversion cycle, and some basic estimating skills, it is easy to predict the amount of working capital required for a “normal” growth cycle. What is less clear is how much difference there will be in the historic customers’ payment processing as they too rebound. Sales improvements will end when the cash required to support that growth is not available. Without this knowledge in hand and without the support of financial institutions, a business can get into a debilitating cash position at the wrong time.
So, plan for the growth you want and understand the cash you need to support that growth. Ask your banker and vendors for the flexibility required to regain your previous revenue operating levels.