Rapid growth and the extra demands it places on working capital will put the business under pressure.

In some cases businesses struggle through, in others they fall over in the growth phase.

Cash flow optimisation is important in the short term. You need to understand:

• your cash flow cycle
• the demands of extra trading stock
• the impact of increasing debtors; and
• the effect and timing of your basic operating costs.

Good cash flow forecasting is essential for any well run business. You need a realistic forecast that has been worked up from the operations and budget projections of your business.

This should then be accompanied by some sensitivity analysis, which is simply alternate forecasts that assess the effect if your basic assumptions are out by 10%, 20% or 30%.

However, cash flow management is not enough. Unless your cash flow forecasts are accompanied by a capital management plan you aren’t in control of your business.

Capital management starts by identifying how much capital the business needs and how much is being provided by the owners. The reality is that your business is only funded from capital, debt, and retained profits. In the early days of the business, there are no retained profits so it comes down to capital and debt.

From the start there is a continuing requirement for capital management. This is about understanding:

• the initial requirements or establishment costs of the business
• additional capital that will be required to fund growth
• the timing and amount required to replace or upgrade capital equipment
• funding required to repay loans and retire debt
• taxation requirements
• the expectations of the shareholders for access to profits

None of these items appear in the operating budgets of your business, yet each of these suck cash from the business. You could have a profitable business and be cash flow positive from operations, yet be under significant cash flow pressure.

If you want to grow your business successfully, then a capital management plan must be regularly reviewed and a capital expenditure budget should be prepared each year.

A capital expenditure budget details the amount of money needed to spend on capital items or fixed assets such as land, buildings, roads, equipment, etc. that are projected to generate income in the future. The capital budgeted should include replacement, acquisition, or construction of plants and major equipment, both generally and for individual capital expenditure projects.

• working capital growing faster than revenue
• management "buying" sales at the expense of margin
• loss of a key customer
• general industry downturn or consolidation

• difficulty in obtaining finance
• increase in staff turnover
• increasing creditor pressure
• inability to pay tax and superannuation liabilities
• impending banking covenant breaches

It is critical for management not to leave it too late so ask your Accountant or Business adviser for help. Many businesses that end up in receivership could have been saved if they had heeded early warning signs and sought advice at the appropriate time.