Four Elements to Consider when Growing your Business
Hi, I'm Dr. Dave Kohl, professor emeritus agriculture, economics and Academic Hall of Famer from
Virginia Tech, Blacksburg, Virginia. Over the years, interacting with many of you, you often get
frustrated because you can't grow fast enough. Well, the theme of today's talk is how do we stay
out of the growth ditch?
Well, one of the things that I find is there's about four or five elements that you need to consider as
you're growing a business. Number one, always overestimate your time and money by 25%.
So, if it's going to cost $500,000, you better add 25% and you better add 25% more time until
you get up to full operations.
Another element is to take your term debt after your expansion, and make sure that the term
debt does not exceed five times of EBITDA. And of course, EBITDA is just net income plus
interest and depreciation. So, if you had $1 million dollars of term debt, non-operating debt,
$200,000 in EBITDA, the ratio would be 5:1.
Another element that I'm really looking at, is take your working capital and one of the things is
add up your principal and interest payments and interest on operating capital, and make sure
you have at least $5 of working capital for every dollar of debt service. For example, if you had
$500,000 in working capital and your debt service was $100,000, the ratio would be 5:1.
The other element is, and this is particularly important in growth, is to make sure that your
working capital to operating expenses as at least 25%. But then, 25 to 30% of that working
capital could be turned to cash within a 90 to 120 days.
Well, hopefully some of those suggestions will keep you out of that financial growth ditch.
We'll see you the next time.