If you’re in finance, your instinct likely tells you to always protect the money—and your gut’s not completely wrong. But business debt isn’t always a bad thing.
It’s not uncommon for high-growth companies to use debt financing to achieve positive cash-flow status and fund business expansion. In 2019, global corporate debt held by non-financial corporations reached over 75 trillion U.S. dollars—that’s almost two trillion more than the previous year. In the United States, most companies hold business debt in the form of unsecured bonds.
Sometimes, it’s OK to take on healthy business debt for expansion. Investing in business growth now can help you inform future decisions. While there’s no magic formula to define what’s “healthy” debt, you can answer these questions to decide if your company is ready to prioritize growth over business debt.
Are You Putting Money Toward Competitive Drivers?
As Deloitte put it, “all growth is not created equal.” Business growth should give your company a competitive advantage.
Some growth investments aren’t necessarily competitive drivers. Mergers and acquisitions (M&A) can increase market share, but they require big upfront investments. Putting money toward M&A may not necessarily give a company an immediate competitive advantage or a worthwhile ROI.
Marketing and branding can also be questionable growth investments, as many companies tend to stretch beyond their means. It doesn’t matter how compelling your campaigns are—if your acquisition costs regularly exceed revenue, you could be in trouble.
If you take on business debt to grow the company, consider investing in the following three areas to give your brand an edge over other leaders in your industry.
- Cloud-based Technology
As more and more businesses use cloud-based services, now is the time to invest in this technology.
By 2022, 28% of enterprise IT spending will shift to the cloud. Last year’s pandemic has made cloud services even more essential. With worldwide spending on cloud computing forecast to grow by 18% this year, many companies already realize the value of cloud-based technology. Seventy-four percent of tech CFOs say cloud computing has the “most measurable impact on their business,” followed by the Internet of Things and artificial intelligence.
Planful’s Total Economic Impact study showed that the benefits of cloud-based services extend to financial planning and analysis (FP&A). An investment in Planful cloud-based FP&A capabilities increased productivity and capability for financial planning staff—leading to $731,630 in savings over three years without increasing headcount.
- Talent Acquisition
The employees you hire matter—a lot. In Inc’s Build 100 survey, more than 50% of respondents ranked “people/talent” as a primary driver of competitive advantage and identified that attribute ahead of nine other factors.
To build a strong workforce, you’ll need talented recruiters. From this perspective, your talent acquisition roles are also incredibly important competitive drivers.
A survey by Cielo Talent even revealed “a correlation between investing in a Talent Acquisition function and increasing profits by up to 20%.” Moreover, the study showed that “as a Talent Acquisition function matures (i.e., moves from Low to High Impact), so does an organization’s productivity and profits.”
- Customer Experience
Today’s customers don’t just want a great product or service. They want top-notch customer support, as well. According to Zendesk’s Customer Experience Trends 2021 report, “75% of customers are willing to spend more to buy from companies that give them a good customer experience.”
Put your money toward improving the customer experience to retain your existing clients, and in the process, attract more clients through word of mouth. If customers don’t have pleasant post-purchase experiences with your brand, they likely won’t want to buy from your company again. But if you offer superior customer service, you may be able to increase prices and see higher profit margins as a result.
Is the Company in a Fast-Moving Industry?
If you’re in a fast-moving industry, there’s likely continuous, high market demand—especially if you have a unique product that gives your brand a competitive edge. In this case, your company is likely in a position to grow.
A good indication that a fast-moving industry company is ready to grow is when it needs money to keep up with the demand. A company with retail distribution might have a massive purchase order in hand, but is slightly strapped for resources to fulfill the order.
Slow-moving industries (or slow-burn industries) generally involve a time-consuming manufacturing process and require a lot of capital to get going. It might take a long time to see a return on your growth investments, so companies should expand with caution.
How do you know if you’re in a fast or slow-moving industry? Fast-moving industries usually require continuous innovation to set your company apart from the rest. Your product likely exists in a pure competition market structure where the demand is high if consumers like the product and sales happen quickly. Some examples of fast-moving industries include food service/restaurants and consumer goods products that are durable, such as clothing, cosmetics, toiletries, and packaged food.
A good sign that a slow-moving industry company’s ready to expand is when it already has resources—such as labor, machinery, and raw materials—in place to meet current demand, without having to get into a severe cash crunch. Examples of slow-burn sectors include construction, metals, and petrochemical.
Do You Understand the Company’s Cash Flows?
In an ideal world, a company would be on stable ground before it’s ready to expand. Most of the time, this isn’t the case. Businesses expand without being cash-flow positive.
But that doesn’t mean cash flow shouldn’t be a consideration when growing. If you don’t have a clear understanding of your finances, it’s easy to overlook how scaling could dramatically increase costs—and potentially sink the business.
Overly optimistic projections contributed to WeWork‘s significant financial loss and failed IPO—a major step down from being one of the world’s leading unicorns. The company’s downfall is a lesson in the importance of truly understanding your cash flows.
A powerful FP&A tool can help you manage the company’s cash flows. Through accurate course correction, eliminating many manual processes, and providing detailed insight into cash flow from various activities such as financing and operations, Planful speeds up planning and decision-making.
With in-depth analysis and insight, it’ll be easier to decide if you need to cut expenditures, collect receivables sooner, or take action—be it taking on business debt or getting an investor—to scale or increase revenue.
Business Debt Should Inform, Not Determine, the Company’s Growth
Let’s face it: Growth often means debt. The key isn’t being afraid of debt—it’s often finding the right balance between the two. When it’s the right time to scale, you can begin figuring out how to go about expansion—whether it’s through debt or equity financing.