Learning to grow: financial balance and business growth.

It's not just about growing, but how we do it.

When facing a business growth project, the how matters as much as the how much. Large numbers sometimes obscure other basic principles of financial management and can lead us to make serious mistakes that jeopardize the solvency and continuity of the business.

 All growth is good in principle if it is done in a balanced way, if we have sufficient economic, productive, and labor capacity. But....

-Lack of production capacity may lead us to be unable to deliver our product within the committed deadlines. 

-Lack of labor capacity may also affect the former, meaning we have the means and infrastructure but not the necessary staff to make it work.

-Lack of economic or financial capacity will prevent us from making current payments, necessary investments, debt payments, interests, etc.

All these aspects are interconnected. The economic structure must be correlated with the financial structure. We talk about a balance between employment and resources, between Assets and Liabilities. We talk about Financial Balance.

-We analyze the general solvency through the Solvency Ratio which compares total assets with total liabilities. 

    Solvency Ratio = Assets / Liabilities

The minimum balance will occur when all fixed assets are financed with fixed liabilities, as well as all current assets, by short-term liabilities.

The desirable balance to achieve greater financial security will be one where permanent liabilities exceed fixed assets.

- The most immediate solvency is given by another ratio: Cash Ratio.

Cash Ratio = Cash + Receivables / Current Liabilities.

By Cash, we mean liquid money, by Receivables, goods and rights that can be quickly converted into money, and by Current Liabilities, short-term debts.

This ratio, also known as "quick test," measures the company's ability to meet the payment of its short-term debts.

The existence of deferred payments and receipts is a market reality, so cash management is very important for companies to have the necessary and sufficient means at all times to meet their most immediate debt obligations.

Sometimes, with the obsession of growth, these basic financial principles are forgotten, leading to the use of unbalanced resources that absorb our liquidity and prevent us from meeting our obligations to suppliers, payroll payments, energy expenses, rents, etc.

To control this ratio, it is advisable to have a good Cash Plan that reflects the amounts we are going to pay or collect to synchronize deadlines and achieve constant cash flows so that our liquidity is always sufficient.

In conclusion, we can say that:

- Growing is good in principle and is part of business objectives.

- It stops being good if it exceeds our capabilities.

- It implies developing a good planning that reflects, among other things, how to manage the timing of operating, investment, and financing operations, the latter being a fundamental tool for facing good business growth.