Is it possible for your business to create profitable growth without borrowing money?

Most business owners and financial experts say no, but after this Great Recession and tight credit sure to continue, the less your business needs to borrow, the better. So let’s look at the following four questions:

A. Why must your business borrow money to grow profitably?
B. What is your real cost of not getting paid just as you invest in your business?
C. What can you do to match expenses to revenue?
D. What’s the best way to increase your margins and profitable growth while borrowing as little as possible?

A. Why must your business borrow money to grow profitably?
Businesses borrow money because most customers don’t pay for goods and services until after they are produced and consumed. Before then any business must:

• Buy raw materials
• Spend money to produce goods or services on:
  • Direct labor
  • Direct materials
  • Direct overhead
• Invest money on sales and marketing to create paying customers.
• Spend on overhead

As long as there is a timing issue between spending and receiving funds, businesses need to borrow money. But it does raise the next question.

B. What is your real cost of not getting paid just as you invest in serving your customers?
Your costs are:

• The actual financial outlays you make to purchase the abovementioned items
• The opportunity costs of not spending money to grow your business
• Any financing costs of carrying accounts receivable for your customers
• Your debt collection costs when you realize you aren’t going to get pad

Furthermore the drain on your emotions, energy and passion are significant.

C. What can you do to match inventory to expenses?

1. Inventory plays a large but different impact on a P&L statement than it does on a balance sheet.
   When purchased, and applying standard costing rates, the raw materials go into inventory but do not become an expense then. As labor and overhead are added (also at standard costing levels) during the conversion process, inventory becomes an asset on the balance sheet and an expense on the P&L. Those monies also show as asset on the balance sheet and do not hit P&L as expense.It is when finished goods are sold that the asset comes off the balance sheet and the expenses in making it (at standard) hit the P&L as expenses. Don’t assume that expenses on a P&L and balance sheet assets track together or at a predictable rate to sales.
   Reducing inventories and turning them fast is critical.
2. Don’t assume that all customers for your goods and services cost the same to satisfy.
   Most firms determine standard customer costs based on costing out average service activities. Just as different customers pay different prices for what they buy, the costs of servicing these customers differs greatly. In good times high maintenance customers could be subsidized by more efficient ones. In this Great Recession with its tight credit, high cost customers cannot be carried. Ensure every customer is paying their way based on how much they cost to service.

3. The uses of scarce cash need to be equally scrutinized across all three major company functions of sales, operations and finance.
   When cash is scarce and it becomes king, all three functions place different demands in their zeal to spend it. Marketing wants to invest in more service and features to raise margins. Operations wants to invest in order to reduce inventory and cut lead times. And Finance wants ration as much as possible by slowing down payables and speeding up receivables. Understand the sources and uses of cash in your business as the less you keep the more you will need to borrow.

D. What’s the best way to increase your margins and profitable growth while borrowing little?
Add value that increases prices without increasing variable costs. Find every way you can to increase the amount of expertise and knowledge that your customers value in your products or services. Doing so allows you to charge more because your value is perceived by customers as helping them to become more successful. And knowledge and expertise should not add additional costs, either variable or fixed. Instead it helps brand your business, create differentiation, and increase your margins, all without borrowing more.

Maybe it is not possible to increase profitable growth without borrowing money.

But every bit of growth you can create without increasing credit become sales dollars you can take to the bank, instead of borrow from it.