For any “Startup To Scale-Up” founder, seeing your business grow from a fledgling idea to a thriving company is incredible. With growth comes new challenges, especially regarding capital and cash flow.
As you scale up operations, expenses multiply while revenue lags. This makes navigating working capital needs vitally important during the Startup scale-up phase.
This article will explore the financial challenges startups face when transitioning to the next level and how to tackle them.
Accurately Assessing Capital Needs
As a business grows from a small startup to a big company, its money needs change a lot. At first, the focus is on making the product and checking if people want to buy it. Money is mostly used for research, making designs, building prototypes, and starting the business.
When the product starts selling well and the business wants to grow more, it needs a lot of money upfront to make that happen. Also, the time it takes to get paid by customers gets longer as the business expands to new places.
Because costs go up and it takes longer to get money in, the business needs more working money during this growth phase. Getting money and managing how money comes in and goes out becomes very important to keep the business going smoothly.
During this time, keeping an eye on numbers like the working capital ratio is very important to make sure the business stays financially healthy while growing quickly.
Many startups don’t realize how much money they need to grow in a good way. Knowing exactly how much working money you need while growing helps you plan how to get money and run the business better.
1. Why the Working Capital Ratio Matters
Working capital means a company’s money that’s easy to use. It’s what’s left when you subtract what you owe soon from what you own soon.
For example, cash, things customers owe you, and stuff you can sell soon. And from what you owe soon, like short-term loans, bills, and taxes.
The working capital ratio compares how much easy-to-use money you have to how much you owe soon. It shows if your business has enough money saved up to pay for daily expenses, bills, and unexpected costs.
A positive working capital ratio signals fiscal stability and gives investors and lenders confidence in your financial fitness. As a rule of thumb, a working capital ratio between 1.2 and 2.0 is considered healthy.
If your company’s profits are too low, it might make people worry about whether you can pay your regular bills and handle tough times when money is tight, especially if the economy is unstable or there are other problems from outside.
2. Vigilance Around Cash Flow Cycles
Monitoring cash flow cycles is equally vital. The cash conversion cycle calculates how long a business can convert resources like inventory and accounts receivable into cash available to pay bills.
- When money moves through these cycles, it gets stuck. If the cycles take longer, payments are delayed. For companies that are growing but don’t have much money available, slower conversions make it harder to have enough cash for everyday needs.
- Including financial planning in daily tasks and plans helps manage growth smoothly.
- Making sure you have enough money while growing big means asking small and big questions about your money, like: How long can you keep going with the money you have? Are you spending money at a rate that you can keep up with?
3. Stage-Wise Financing Solutions
As businesses grow from the start to the big company, the money they need changes. It’s important to pick the right way to get money that fits where the company is at. There are good money options for each stage of growth.
At the start, when a company is just a seed, having extra money isn’t as important. Usually, the people who started the company pay for things themselves or get small amounts of money from friends, family, or angel investors. They use this money to make the first version of their product, hire some key people, and get their first customers.
Good ways to get money at this stage are using personal savings, doing crowdfunding campaigns, joining programs that help startups, and getting money from angel investors online.
When startups prove their product works by getting some customers, they start getting bigger rounds of funding called Series A. They use this money to make more of their product, do more things, and hire more people.
As companies keep going, they need more money for things like making their product, paying their workers, and advertising. They can get this money from venture capitalists, banks, or by using things they already own to get loans. They can also get money by selling the right to get paid for their work early.
4. Right Capital Mix to Minimize Risk
Smart business owners don’t rely on just one way to get money. Instead, they use different methods that fit their company’s needs.
- Debt-Equity Ratio
- Cost of Capital
- Diversification
- Flexibility
- Risk Management
- Cost-Benefit Analysis
Focusing on keeping your finances stable when growing helps you avoid constantly asking for more money just to stay afloat.
Building stable business operations around the money you have keeps you from annoying the same investors by asking for more money all the time.
Using different types of money that match how your business is growing makes your organization strong and able to handle tough situations.
Final Thought
Concentrating on keeping your money steady as your business grows stops you from always needing more money just to survive.
Creating stable business systems with the money you already have prevents you from bothering investors for more money all the time.
Using various kinds of money that fit how your business is expanding makes your organization strong and able to handle challenges.