Finance U

Too Much, Too Soon?

Q: My pager business has a chance at a government contract that would add 40 percent to my sales. There's not much profit in the contract. How fast is it safe to grow?

A: George M. Dawson (gdawson@txdirect.net) is a consultant and author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes" (Dearborn, $16.95, 800-621-9621):

Stop! It takes discipline not to charge after new sales, but you don't want profitless or cashless growth. Usually "not much profit" means it's really a loss. Forty percent is major growth. It can strain your company and move costs you think are fixed to a higher level. You'll liquidate your company through profitless growth.

Look at the problem as your customer would--strategically and tactically. The strategic approach uses the Sustainable Growth Equation developed by Robert C. Higgins in his book Analysis for Financial Management (Irwin/McGraw-Hill, $56.38, 800-262-4729). Using your balance sheet and income statement, the equation answers the question, "How much sales growth will my company's present financial structure and dynamics allow?"

The tactical approach is to develop a cash-flow projection model. Show how your company really operates--by week or by month. You'll see a cash crunch ahead of time and determine what to do about it (such as delay your payments or reduce expenses), and you can measure the dollar impact of each tactic.

Most business-planning software programs do cash-flow projections. My favorite is Ronstadt's Financials at http://www.lordpublishing.com.

E-mail George M. Dawson your financing questions at bsumag@entrepreneurmag.com.

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This article was originally published in the January 1999 print edition of Entrepreneur with the headline: Finance U.

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