What top financial indicators should you focus on to master business growth in 2020? The current abundance of cheap financing and over-reliance on it is not sustainable. As a growing business, you need to be prepared to improve your financial health, face economic downturns and compete with other growing companies to attract capital and finance their growth phase.
In this video, Can, Finance & Strategy Officer at Growth Tribe takes a look at the most relevant financial indicators throughout the five steps of business growth and why cash flows, profitability and indebtedness are critical factors for a company to sustain its growth and wellbeing.
Let's take a look at the general stages of business growth.
First, Existence. Once a company has validated its proposed existence by getting enough customers and becoming a viable business, we could aim to get an accurate picture into the future by looking at its net income.
This ratio is helpful to measure the number of times a company can pay off debts with cash generated within the same period.
Second, Survival. A company has to ask itself:
1. Can we continuously generate enough cash to break even?
2. Can we produce enough cash flow to scale up to a size that is large enough for our industry?
Third, the Success phase. Here's where companies might adopt aggressive growth strategies that might prioritise speed over efficiency. Take Airbnb, LinkedIn, Amazon.
Even these practices might sound like the perfect recipe for failure, they have been made possible in the past ten years due to businesses abilities to raise money in rounds of funding from debtors, venture capitalists and private equity investors.
Fourth, the Take-off stage. This is a pivotal period for a company's life. If the company overcomes the financial and managerial challenges of this stage, it can become a big business.
Fifth, Resource Maturity. This is where the company tries to consolidate and control the financial gains brought on by rapid growth but also its inefficiencies incurred in exchange for gaining speed. For this, the best business practices are fully implemented.
Tools such as budgets and standard cost systems can become natural. Consider that the current environment of low-interest rates and cheap funding is not going to last forever.
To be prepared for more adverse scenarios, we revisited the five stages of business growth and highlighted how they interact with some of the key financial indicators.
It's not about a one-size-fits-all solution, but about following the essential steps for business growth and how they interact with proper financial practices.
Let us know what you think about the current financial environment and your opinions about financially sustainable growth in the comments below!
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