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Build the base

Posted on 20/3/2018 by Tom Holmes

Companies are a lot like pyramids: they need a firm base if they’re not going to crumble. And while Egyptian monoliths rely on stone and gravel to touch the clouds, companies rely on an altogether different supporting structure: finance. Nutbourne’s Marcus Evans offers the following insight on why it’s so important for SMEs to build from the ground up.

Growth depends on your model: When you start your organisation, you need a small financial base to support it. As you grow, the base needs to be bigger. You need to invest in staff, pay creditors, rent and various taxes.

“Your ability to grow is informed by your business model,” Marcus says. “Do you retain profit in the organisation or do you spend it? Do you have repeat monthly income? Are you investing profit in the short term so that you can grow in the medium to long term? These are important questions for SMEs.”

Growth isn’t always linear: “It’s never the case that year-on-year we get 30 to 40% profit,” Marcus says. “You get periods of consolidation, then an uptick, followed by small growth and then more consolidation. This happens when you retain profit, use it to build the infrastructure – staff, systems etc – that allows you to take on more clients which eventually leads to profit before the cycle begins again.

“Having retained profit has helped Nutbourne tremendously. One year we went from £300k turnover to £750k. The following year, that was £900k, and the year after it was £1m. The following year it jumped to 1.8m. So the growth wasn’t huge in the middle three years, – but it was consistent. We consolidated, and built and invested where we had to. When the time comes, we are prepared for another big leap in growth.”

Cash flow is the absolute king: We’ve spoken a lot about the importance of cash flow to SMEs. Without good cash flow, your business is at risk of going bust. Again, Marcus says, your business model dictates your cash flow.

“You need a solid financial base to deal with outgoings. Depending on the business model, that could be up to six months salary. If you have a model that has a reoccurring revenue stream, it makes life easier. To start with, you can plan. You need to know what’s coming in, what costs you’re going to incur and where you can invest to allow for growth.”

Like building a pyramid, running a successful business is hard (ok, we’ve never built a pyramid, but it looks hard). But if you’ve got a rock-solid base, and a solid platform for growth, the sky really is the limit!

Posted in Business

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