A recent survey by commercial financing firm CIT reveals that midsized companies are focusing increasingly on growth strategies. This trend is even more accelerated here in Silicon Valley and the overall San Francisco Bay Area with startups and SMBs.
“The survey found that very few finance executives think their companies can afford to stand pat. In fact, 8 in 10 survey respondents acknowledged that their companies must review and revise their growth strategies frequently in order to adapt to changes in the business environment. Overall, executives in the survey listed a wide variety of challenges that they expected their companies would face in the coming year, including stiffening competition, the need for better cost control, and the push to acquire and retain talent.”
However, there are deep concerns about the ability to grow profitably:
“Choosing the right path to growth — or rather, to profitable growth — can be one of the biggest challenges for a CFO in a midsized company. More than three out of four executives in the survey (77%) agreed that their companies needed to invest more for growth, but almost as many (69%) said they also needed to cut costs to improve profitability. So, in fact, the right path might turn out to be several paths."
And with the need for more growth capital, there is concern about how to increase revenues, profits, and cash flow:
“Not surprisingly, the ability to generate cash was uneven among the surveyed population. A majority of finance executives (57%) reported that their companies’ revenues were higher than they were a year ago; however, 45% said either that revenues have stagnated (24%) or that they are doing worse than a year ago (20%).
"The controller of a manufacturing company noted: 'Increased inventory, slowing cash flow, [and] increased A/R … will be a drain on our cash flow, which could impact the growth initiatives we have in place for the year. We may have to draw down our credit line to sustain operations while cash is tied up in inventory and A/R.'
"Such companies are more likely to find themselves between a rock and a hard place when it comes to finding the funds for growth. This may explain why the CFO of a firm in the wholesale/retail trade lamented, 'We have curtailed all but necessary investments in people and capital projects.'
"Other companies, however, find themselves in the enviable position of trying to keep up with their own growth ambitions, and such companies are actively seeking new sources of funding to fuel those ambitions. A head of finance from a private telecommunications firm wrote that the company’s most significant challenge these days is 'finding lending sources with sufficient capital to meet our needs as demand accelerates for our assets and technology.'
"For such fast-growing companies, the pace of growth is simply taxing their ability to keep up. A CFO in the health care industry noted, 'Expanding to new territories has an impact on our cash, as new ventures don’t produce the necessary cash flow to support themselves. This has led us to either use our free cash flow or borrow more money from the bank.'"
The chart below reveals how a majority of CFOs are relying on Operating Cash Flow as the most important source of growth capital, followed by debt financing.