In my practice, one of the things that I often deal with is change . . . or sometimes lack thereof. I see companies at both ends of the spectrum when it comes to change. Some are in a constant state of flux – desperately trying to change in order to find something that works. Others are so afraid of change they won’t try anything new. I talked a company during 2010 uses green ledger sheets for their accounting! They are wedded to the past.
Some companies are trying to do a little bit of everything and aren’t doing anything well. This is almost always a recipe for disaster. When companies don’t commit to goals and objectives it is easy for them to lose their way. They may start down a path only to change direction before they are able to see results. They are always “sticking their toe in the water” to gauge the temperature but never diving in and committing to an idea or objective. They are dabbling. They have tried to change so many times that future attempts are lost on the organization. These are the companies that are in a constant state of flux. Chaos rules.
At the other end of the spectrum are companies (usually guided by a single majority owner) that are afraid of committing to change. They continue to do things the way they have always done them. As a result, their market share erodes or they end up owning 100% of a shrinking market. Their competitors have walked away. In rare cases this may be a lucrative spot, but in most they are serving a handful of customers who have refused to change as well. Often, the company is serving the current owner but doesn’t have a robust future (and won’t unless the next generation of management shakes things up and moves the company forward).
It’s that time of year where most companies are wrapping up 2010 activity and thinking about 2011. It’s a natural time to ask oneself what you want the company to look like at the end of 2011. Will you be satisfied if your company looks the same at the end of next year as it does today?
In order to truly be successful, one has to commit to an objective. If you’re a company that dabbles and is in a constant state of flux, it’s important to decide on a few key priorities and stick to them. On the other hand, if you’re one of those companies that are afraid to change, I’d encourage you to start making incremental changes in order to build momentum. Meaningful change is hard. But anything worthwhile comes at a price.
What do you want to change during 2011?
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
Thursday, December 30, 2010
Tuesday, November 30, 2010
Don't Be Too Much Like The Big Guys! (November 2010)
For small companies, emulating the practices of “the big guys” usually has value. There is a reason why the big guys have been successful and gotten big. But they should only be emulated to a point. They have resources that the small guys don’t and that needs to be considered.
Financial statements should be treated differently in big companies vs. small. Yes, in both you are going for predictability and understanding, but in small companies, they must be simpler and easier for the management team to understand. They must also cause focus.
In big companies, you have a finance staff to understand, explain, provide variance analysis and make sure people are watching. Despite some notable exceptions (Enron & WorldCom, for example) big companies are actually pretty good at this. Internal financial analysts spend their days understanding changes and variances and can report to senior management. They watch the income statement, balance sheet, statement of cash flows and understand how these three statements relate to each other.
Small companies are different; they have neither the staff nor the depth of understanding. Accordingly, their financial statements must provide more focus on key issues. Where big companies often use the balance sheet to smooth certain income statement trends, small companies should use the income statement to shine a light on period to period variances.
In big companies, there is a reserve booked each period for bad debt. Usually this is a percentage of sales and insulates any month from a large bad debt write-off. If managed properly, this is an appropriate practice. In a small company, this same practice takes the focus off the income and onto the balance sheet (which unfortunately, receives only minimal attention). While it helps match revenue and expenses, it also tends to obscure bad debt issues which management needs to understand so that they can manage credit and customer relationships. Before deciding how to treat an issue like this in your company, consider the management team and their understanding of the issue.
Another example I saw was a company that accrued legal expenses monthly (buried deeply in the SG&A line). The result was that they actually used the accrual account to put money onto the income statement when needed. They were managing results. Not only were they fooling the Board, but they were fooling themselves. They didn’t understand their own financial statements. I stopped this immediately. While I use this practice for predictable expenses (dividing the known cost of the annual audit by 12 is a good example), doing the same thing with an unpredictable item such as legal expenses hides the true cost from the income statement and makes a cost that is already difficult to control virtually impossible to control.
The bottom line is that financial statements are a tool. The CFO or Controller has to consider management’s expertise before making decisions about the best practice of looking at monthly statements with the goal of improving that understanding over time. Of course, at year end, GAAP (Generally Accepted Accounting Principles) prevails, and monthly statements should follow GAAP as closely as possible – but with an eye toward simplicity, transparency and understanding.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
Financial statements should be treated differently in big companies vs. small. Yes, in both you are going for predictability and understanding, but in small companies, they must be simpler and easier for the management team to understand. They must also cause focus.
In big companies, you have a finance staff to understand, explain, provide variance analysis and make sure people are watching. Despite some notable exceptions (Enron & WorldCom, for example) big companies are actually pretty good at this. Internal financial analysts spend their days understanding changes and variances and can report to senior management. They watch the income statement, balance sheet, statement of cash flows and understand how these three statements relate to each other.
Small companies are different; they have neither the staff nor the depth of understanding. Accordingly, their financial statements must provide more focus on key issues. Where big companies often use the balance sheet to smooth certain income statement trends, small companies should use the income statement to shine a light on period to period variances.
In big companies, there is a reserve booked each period for bad debt. Usually this is a percentage of sales and insulates any month from a large bad debt write-off. If managed properly, this is an appropriate practice. In a small company, this same practice takes the focus off the income and onto the balance sheet (which unfortunately, receives only minimal attention). While it helps match revenue and expenses, it also tends to obscure bad debt issues which management needs to understand so that they can manage credit and customer relationships. Before deciding how to treat an issue like this in your company, consider the management team and their understanding of the issue.
Another example I saw was a company that accrued legal expenses monthly (buried deeply in the SG&A line). The result was that they actually used the accrual account to put money onto the income statement when needed. They were managing results. Not only were they fooling the Board, but they were fooling themselves. They didn’t understand their own financial statements. I stopped this immediately. While I use this practice for predictable expenses (dividing the known cost of the annual audit by 12 is a good example), doing the same thing with an unpredictable item such as legal expenses hides the true cost from the income statement and makes a cost that is already difficult to control virtually impossible to control.
The bottom line is that financial statements are a tool. The CFO or Controller has to consider management’s expertise before making decisions about the best practice of looking at monthly statements with the goal of improving that understanding over time. Of course, at year end, GAAP (Generally Accepted Accounting Principles) prevails, and monthly statements should follow GAAP as closely as possible – but with an eye toward simplicity, transparency and understanding.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
Sunday, October 31, 2010
Competing Silos (October 2010)
Last month, I wrote “Is Ignorance Bliss?” which was about the effect that a lack of perspective on a company’s financial situation has on an organization. One of the side effects of this is silos within an organization. While the lack of financial perspective isn’t the sole cause of a silo-ed organization, I certainly believe it is a contributing factor.
“The silo effect” is people working only with their own or departmental goals in mind, often to the detriment of other departments or the entire organization. I almost always find that there is a lack of perspective on financial performance for the organization as a whole. People simply don’t understand the “bigger picture”. It’s often not their fault. No one has ever given them the data and facts, even in a limited fashion.
Rather than pulling together and fighting against the competition, people end up fighting with each other for internal resources. Victories are about winning vis-à-vis other departments. People consider it a “win” when they get to add a person and another department doesn’t. When they get above average raises for their people. Or when one department gets new computers while another doesn’t. These “victories” are often based upon the political influence of department heads (i.e. how effectively they lobby their points) as opposed to the optimum allocation of resources within an organization. This is destructive to the organization, causes further competition, resentment by the “losing” departments, and contributes to an apathetic attitude toward the decision making process.
I believe people are naturally competitive. If that is true, then why not give them someone to compete against that is healthy to the organization? Otherwise that competitive energy will end up hurting the organization rather than helping it. Employees will end up competing with each other as opposed to your competitors in the marketplace.
There is story that at one point in the history of Anheuser-Busch they launched a “Kill Miller” campaign. Think about that. Two words and everyone in the company knew the objective. Moreover, it could be measured in terms of market share. Ultimately, everyone would know how the company was doing in its quest.
I spent five years at LensCrafters. The leadership team there clearly knew how to focus the organization’s competitive juices toward company objectives. There were times when it was simply inspiring to see the entire organization focus on an objective . . . and exhilarating to be part of accomplishing the goal.
If it is a given that people in your organization are going to compete (and I believe that to be the case), then give them something to compete against that is healthy to the organization. Make sure they know that the true competition is about winning customers in the marketplace and providing better products and services than the next guy. Not about who gets a new desk or office chair or which department gets a slightly bigger share ot the raise pool.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
“The silo effect” is people working only with their own or departmental goals in mind, often to the detriment of other departments or the entire organization. I almost always find that there is a lack of perspective on financial performance for the organization as a whole. People simply don’t understand the “bigger picture”. It’s often not their fault. No one has ever given them the data and facts, even in a limited fashion.
Rather than pulling together and fighting against the competition, people end up fighting with each other for internal resources. Victories are about winning vis-à-vis other departments. People consider it a “win” when they get to add a person and another department doesn’t. When they get above average raises for their people. Or when one department gets new computers while another doesn’t. These “victories” are often based upon the political influence of department heads (i.e. how effectively they lobby their points) as opposed to the optimum allocation of resources within an organization. This is destructive to the organization, causes further competition, resentment by the “losing” departments, and contributes to an apathetic attitude toward the decision making process.
I believe people are naturally competitive. If that is true, then why not give them someone to compete against that is healthy to the organization? Otherwise that competitive energy will end up hurting the organization rather than helping it. Employees will end up competing with each other as opposed to your competitors in the marketplace.
There is story that at one point in the history of Anheuser-Busch they launched a “Kill Miller” campaign. Think about that. Two words and everyone in the company knew the objective. Moreover, it could be measured in terms of market share. Ultimately, everyone would know how the company was doing in its quest.
I spent five years at LensCrafters. The leadership team there clearly knew how to focus the organization’s competitive juices toward company objectives. There were times when it was simply inspiring to see the entire organization focus on an objective . . . and exhilarating to be part of accomplishing the goal.
If it is a given that people in your organization are going to compete (and I believe that to be the case), then give them something to compete against that is healthy to the organization. Make sure they know that the true competition is about winning customers in the marketplace and providing better products and services than the next guy. Not about who gets a new desk or office chair or which department gets a slightly bigger share ot the raise pool.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
Monday, September 27, 2010
Is Ignorance Bliss? (September 2010)
There is an old saying, “Ignorance is Bliss?” But is it really? I often see key managers in organizations operating with little or no knowledge of the company’s financial situation. While this may allow them to go about their duties without the burden of understanding the financial position of the company, it doesn’t allow them to help the business as much as they should.
While I’m not suggesting that everyone in the organization have a detailed understanding of financial performance, it is important for key managers to have a working knowledge of the financial facts so that they can make business decisions with that perspective in mind. Too often (particularly in poor performing organizations), I see companies where the CEO tries to shelter the rest of the organization from dealing with the facts.
On the flip side, successful organizations tend to share financial performance measures much more broadly than do poor performing organizations. I don’t think this is coincidence. Nor do I think it is because successful organizations are proud to share their results while poor performing are ashamed to do so (although that is likely true). I think there is a cause and effect relationship.
Organizations that find a way to share financial performance measures and, more importantly, reward employees for overall performance, get better results. Employees throughout the organization can work toward a common goal and have a financial perspective (if not a detailed understanding) for decision making. They better understand why management takes certain actions and can make decisions that are consistent with those of senior management.
If the “grass roots” of the organization has no appreciation for the financial performance of the firm, you often find them making decisions that are in direct opposition to those that more senior management is making. Nowhere is this more apparent than in struggling organizations where employees are “empowered” to make spending decisions but lack the proper context with which to make those decisions.
Imagine trying to row a boat with other people if there was no agreement on which direction you wanted the boat to go. How effective do you think you would be compared to a boat with people all rowing in the same direction at the same pace?
Think about your organization. Is ignorance really bliss?
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
While I’m not suggesting that everyone in the organization have a detailed understanding of financial performance, it is important for key managers to have a working knowledge of the financial facts so that they can make business decisions with that perspective in mind. Too often (particularly in poor performing organizations), I see companies where the CEO tries to shelter the rest of the organization from dealing with the facts.
On the flip side, successful organizations tend to share financial performance measures much more broadly than do poor performing organizations. I don’t think this is coincidence. Nor do I think it is because successful organizations are proud to share their results while poor performing are ashamed to do so (although that is likely true). I think there is a cause and effect relationship.
Organizations that find a way to share financial performance measures and, more importantly, reward employees for overall performance, get better results. Employees throughout the organization can work toward a common goal and have a financial perspective (if not a detailed understanding) for decision making. They better understand why management takes certain actions and can make decisions that are consistent with those of senior management.
If the “grass roots” of the organization has no appreciation for the financial performance of the firm, you often find them making decisions that are in direct opposition to those that more senior management is making. Nowhere is this more apparent than in struggling organizations where employees are “empowered” to make spending decisions but lack the proper context with which to make those decisions.
Imagine trying to row a boat with other people if there was no agreement on which direction you wanted the boat to go. How effective do you think you would be compared to a boat with people all rowing in the same direction at the same pace?
Think about your organization. Is ignorance really bliss?
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
Tuesday, August 31, 2010
Are You Busy or Bored? (August 2010)
Are you busy or bored at work? It’s a question worth asking and the answer can probably give you insights into your company’s financial position even if you’ve never seen an income statement or balance sheet.
If you’re busy (and there never seems to be enough hours in the day), odds are that your company is staffed appropriately and is profitable. This is especially true if you look back several years and realize that you and those around you are doing more with less, have improved processes, and are more efficient than you were several years ago. Frankly, this is what it takes just to stay even with the competition in the marketplace.
If you’re bored . . . and you can tell that others around you are bored at work, chances are that your company is struggling financially. Regardless of your role, you’d better be busy enough that you’re adding value well beyond your salary. And I don’t mean 10% or 20% more . . . that’s not even enough to cover employment taxes and fringe benefits. I’m talking about adding value of 2x, 3x, 5x or even 10x your salary. Depending upon your industry, that’s what it takes to pay for corporate overhead, capital investment, and to earn a fair return for the shareholders who have invested in your company.
If you and those around you are bored, you’d better do something about it because either one of two things is going to happen. Either someone is going to realize it and single you out as a cost reduction opportunity or your company will not survive very much longer. It may take months, even years, but eventually the company will wither and die. Even if it doesn’t go out of business completely, it will be a lifeless shell where people are showing up but are just going through the motions. Sooner or later, however, chances are that you’ll end up unemployed.
I recently heard about a factory worker who was frustrated about his plant closing. At the same time, he admitted to being bored at work and “hardly working” for years. What’s amazing is that he really didn’t make the connection that it was the actions (or lack thereof) and those around him that brought about his state of unemployment. Sure, he held onto a job longer than he should have, but no company can survive a large percentage of unproductive employees indefinitely.
Whether you make twenty thousand, two hundred thousand, or two million dollars per year, you have to add more value to the business than you’re taking out in order for the company to survive.
So, as you go about your next work day, ask yourself if you are busy or bored? Regardless of the answer, ask yourself if there are ways you and your co-workers can add more value to the business? Adding value is the best way of assuring continued employment by working for a profitable company.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
If you’re busy (and there never seems to be enough hours in the day), odds are that your company is staffed appropriately and is profitable. This is especially true if you look back several years and realize that you and those around you are doing more with less, have improved processes, and are more efficient than you were several years ago. Frankly, this is what it takes just to stay even with the competition in the marketplace.
If you’re bored . . . and you can tell that others around you are bored at work, chances are that your company is struggling financially. Regardless of your role, you’d better be busy enough that you’re adding value well beyond your salary. And I don’t mean 10% or 20% more . . . that’s not even enough to cover employment taxes and fringe benefits. I’m talking about adding value of 2x, 3x, 5x or even 10x your salary. Depending upon your industry, that’s what it takes to pay for corporate overhead, capital investment, and to earn a fair return for the shareholders who have invested in your company.
If you and those around you are bored, you’d better do something about it because either one of two things is going to happen. Either someone is going to realize it and single you out as a cost reduction opportunity or your company will not survive very much longer. It may take months, even years, but eventually the company will wither and die. Even if it doesn’t go out of business completely, it will be a lifeless shell where people are showing up but are just going through the motions. Sooner or later, however, chances are that you’ll end up unemployed.
I recently heard about a factory worker who was frustrated about his plant closing. At the same time, he admitted to being bored at work and “hardly working” for years. What’s amazing is that he really didn’t make the connection that it was the actions (or lack thereof) and those around him that brought about his state of unemployment. Sure, he held onto a job longer than he should have, but no company can survive a large percentage of unproductive employees indefinitely.
Whether you make twenty thousand, two hundred thousand, or two million dollars per year, you have to add more value to the business than you’re taking out in order for the company to survive.
So, as you go about your next work day, ask yourself if you are busy or bored? Regardless of the answer, ask yourself if there are ways you and your co-workers can add more value to the business? Adding value is the best way of assuring continued employment by working for a profitable company.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
Saturday, July 31, 2010
Are You Working On The Business? (July 2010)
There is a question that often gets asked, particularly of small business owners. That is: Are you working “on” the business or working “in” the business? While the distinction may sound small, it is critically important.
Too many small business owners find themselves working “in” the business. This means they are working on day to day operational issues. They are interacting with customers, employees and vendors. They are dealing with near term financial issues. They may actually be responsible for a major functional area of the business rather than having someone take care of it for them and only involve them in key decisions.
While resources are always tight in small businesses (they are also tight in well run large businesses), if a business is to rise to the next level, a substantial amount of time must be spent thinking and acting on the issues that will help the business get there. This is what is generally meant as working “on” the business.
Working on the business is about opening up new sales & distribution channels as opposed to chasing the next sale. It is working with your team to develop a long range strategic & financial plan. It is understanding the sustainable growth model of the business (see last month’s newsletter). It is having discussions with the Board about forming strategic alliances that could help the company in the long term. It is thinking about where the market is going and being ready for (or leading) marketplace shifts that you see occurring. It is about understanding what the customer needs, how they perceive your product or service against those needs, and how you can deliver better against any gap. It is about understanding the overall competitive landscape. And it is about understanding the enterprise value that you are creating.
Obviously, I could go on and site countless examples of activities that have more to do with working on the business than in the business. The key point, however, is that unless the CEO and top management team spend time and energy working on long term strategic business issues, they are likely to find themselves doing the same thing over and over year after year with about the same result. A good business doesn’t stand still. It is always striving to move forward.
When resources are tight and time is limited (both of which are usually the case) it is always difficult to find time for issues which are don’t impact the business today or tomorrow. But without the foresight to focus on the “the bigger picture”, it is unlikely that the business will move forward in any meaningful way.
Ask yourself: What you are doing today which will alter the course of your business over the next three to five years? If the answer is “nothing” then carve out the time to tackle some of the longer term issues that are important to the business. You’ll be glad that you did!
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
Too many small business owners find themselves working “in” the business. This means they are working on day to day operational issues. They are interacting with customers, employees and vendors. They are dealing with near term financial issues. They may actually be responsible for a major functional area of the business rather than having someone take care of it for them and only involve them in key decisions.
While resources are always tight in small businesses (they are also tight in well run large businesses), if a business is to rise to the next level, a substantial amount of time must be spent thinking and acting on the issues that will help the business get there. This is what is generally meant as working “on” the business.
Working on the business is about opening up new sales & distribution channels as opposed to chasing the next sale. It is working with your team to develop a long range strategic & financial plan. It is understanding the sustainable growth model of the business (see last month’s newsletter). It is having discussions with the Board about forming strategic alliances that could help the company in the long term. It is thinking about where the market is going and being ready for (or leading) marketplace shifts that you see occurring. It is about understanding what the customer needs, how they perceive your product or service against those needs, and how you can deliver better against any gap. It is about understanding the overall competitive landscape. And it is about understanding the enterprise value that you are creating.
Obviously, I could go on and site countless examples of activities that have more to do with working on the business than in the business. The key point, however, is that unless the CEO and top management team spend time and energy working on long term strategic business issues, they are likely to find themselves doing the same thing over and over year after year with about the same result. A good business doesn’t stand still. It is always striving to move forward.
When resources are tight and time is limited (both of which are usually the case) it is always difficult to find time for issues which are don’t impact the business today or tomorrow. But without the foresight to focus on the “the bigger picture”, it is unlikely that the business will move forward in any meaningful way.
Ask yourself: What you are doing today which will alter the course of your business over the next three to five years? If the answer is “nothing” then carve out the time to tackle some of the longer term issues that are important to the business. You’ll be glad that you did!
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
Wednesday, June 30, 2010
Sustainable Growth (June 2010)
Some time ago, I worked with a formula called the sustainable growth rate model. Generally, it takes a company’s profit margins, the amount it wishes to retain for growth (as opposed to pay out as compensation to management or dividends to investors) and compares this amount to the projected net assets required to support growth. It also factors in the company’s leverage ratio – how much it finances through debt versus equity.
For those of you who haven’t thought in mathematical equations since being tested on them at the end of the semester (myself included), let me try to put that in plain English. Generally, the after tax profit margin minus dividends paid out to shareholders leaves capital available for growth. Every dollar of growth requires so much capital to support it. Depending upon the life cycle of the company, this may be made up of funds for working capital (accounts receivable for example), or it may be capital expenditures for capacity expansion. Whatever the specific make up, the point is that there is a certain amount of growth a company can support based upon internally generated funds. Further, most companies operate with a certain ratio of debt and equity (as a company grows, it can generally support more debt). Growth beyond that must be supported by additional outside capital either by issuing new equity or increasing the leverage of the firm. Whether the company chooses to fund expansion with debt or equity will determine the amount of leverage and therefore financing risk that the business takes on.
Obviously, just because a formula determines a growth rate doesn’t mean a company can actually grow at that rate. Market and competitive factors as well as the company’s management team are critical factors. The formula is simply meant to suggest the maximum rate at which the company can grow given certain financial assumptions.
The rate at which a company grows and how it chooses to finance its growth, however, is an issue that every company must deal with one way or another. Either they choose to grow with internally generated capital, to issue new equity, to borrow to fund growth, or ultimately not to grow beyond their comfort zone. Some companies spend time thinking about these issues during their strategic planning process. Others may simply operate within their comfort zone which is an implicit decision about leverage, growth and risk tolerance guided by the ownership/management group.
If you believe you have growth opportunities ahead of you, it’s worth spending some time working through various growth assumptions and how those might be financed over both the short and long term.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
For those of you who haven’t thought in mathematical equations since being tested on them at the end of the semester (myself included), let me try to put that in plain English. Generally, the after tax profit margin minus dividends paid out to shareholders leaves capital available for growth. Every dollar of growth requires so much capital to support it. Depending upon the life cycle of the company, this may be made up of funds for working capital (accounts receivable for example), or it may be capital expenditures for capacity expansion. Whatever the specific make up, the point is that there is a certain amount of growth a company can support based upon internally generated funds. Further, most companies operate with a certain ratio of debt and equity (as a company grows, it can generally support more debt). Growth beyond that must be supported by additional outside capital either by issuing new equity or increasing the leverage of the firm. Whether the company chooses to fund expansion with debt or equity will determine the amount of leverage and therefore financing risk that the business takes on.
Obviously, just because a formula determines a growth rate doesn’t mean a company can actually grow at that rate. Market and competitive factors as well as the company’s management team are critical factors. The formula is simply meant to suggest the maximum rate at which the company can grow given certain financial assumptions.
The rate at which a company grows and how it chooses to finance its growth, however, is an issue that every company must deal with one way or another. Either they choose to grow with internally generated capital, to issue new equity, to borrow to fund growth, or ultimately not to grow beyond their comfort zone. Some companies spend time thinking about these issues during their strategic planning process. Others may simply operate within their comfort zone which is an implicit decision about leverage, growth and risk tolerance guided by the ownership/management group.
If you believe you have growth opportunities ahead of you, it’s worth spending some time working through various growth assumptions and how those might be financed over both the short and long term.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2010 Homza Consulting, Inc.
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