Which is more likely to put a company out of business: too much business or not enough?
Most people assume it’s not enough business since no money is coming in, but it’s actually a trick question. Both can put stress on a business and if they aren’t prepared…bye, bye business!
Thankfully, WerkFromHome (WFH) software company hired an exceptionally awesome Fractional CFO that had them prepped for growth that came unexpectedly. WFH was founded in 2015, specializing in setting up safety and security programs on computers for remote workforces. They knew their service was great and invested in a Fractional CFO to make sure their finances were as buttoned up as their service offering. It’s a good thing too, because once COVID hit, their business exploded. They had taken steps to prepare for business growth before it happened, allowing them to scale quickly without major growing pains. If they weren’t prepared, they wouldn’t have been able to answer the unexpected demand a global pandemic brought their way.
Are you prepared to capture future growth like WFH? If you feel an industry change is coming, or foresee a future opportunity you want to confidently jump on when the time comes but don’t feel confident your business can handle it, now is the time to prepare. I’d love to serve as your growth advisor, helping you to weigh the costs of rapid growth with the reality of your business books and processes. Schedule a consultation today to learn more about financially planning for business growth.
How can I prepare my business for BIG future growth?
As a business owner, you want the best for your business. Setting your company up for success no matter the market and economic conditions is a wise move in today’s ever-changing world. Here are five things you can do now to plan for future growth of your company:
1. Create scalable systems and processes now. When entrepreneurs start a business, many owners just figure things out as they go, because they do everything themselves. They know what needs to be done and they do it! But before hiring begins, this information needs to be extracted from their head and placed into systems and processes to be shared with others. Otherwise, every new team member is following a slightly different process, which risks an inconsistent customer experience. This can hurt your reputation and stunt growth.
Putting these scalable systems and processes into place before you hire will avoid these inconsistencies and speed up the training process.
If it’s just you — or if you have a small team — solidify your processes now so that when a hiring blitz comes, your new people are trained well, quickly. At first, this process racks up a lot of cost without matching revenue. But the upfront investment will eventually pay off because you save time and money by avoiding long training times, turnover, and lost customers.
Pro tip: If you are expecting growth, be careful to not hire too soon! It’s a drag on your profits if a new hire doesn’t have anything to work on. Instead, get your ducks in a row now with who you already have on your team so that when the time comes to hire, you’re ready. (Not sure about the right time to hire? I can help with that!)
2. Determine who you need to hire as you grow. Increased payroll and training expenses are a huge investment, so you want to be 100% clear on what positions you need filled and when.
- First, ask yourself: “Do I really need to hire more people?”
- If the answer is YES, the next question is: “What kind of people do I need to hire? Customer service? Sales? Back office?”
- Once you know that, then you can ask, “When do I need to hire for these roles?”
This last answer depends on training time: If your existing employees are at maximum capacity taking care of your customers, how long will it take a new hire to be up and running before they can confidently take on their own customers? Is specialized training needed before they can do this? Do they need to spend a week watching training videos and doing ride-alongs with your existing employees? Two weeks? Two months? You’ll need to build in this training time (and the payroll cost before they can begin positively impacting your revenue) when considering a hire date.
Pro tip: The timeline for hiring is truly a balancing act: too early or too late and you may sabotage your bottom line. A great technique to find the right balance is to hire part-time or outsource positions. You can also find creative ways to bump up productivity without hiring at all — like switching from paper accounting processes to digital software.
3. Be wary of over-investment in infrastructure. Once you know who you’ll need to hire, list out all of the costs associated with making this hire: computer, desk, phone, company vehicle, additional hardware. Look at the cost of hiring and buying equipment compared to the return on investment (ROI) you’ll receive. If it will take a few years or more to get a positive return, it may not be a good investment! Hire a Fractional CFO (like me!) to look at the numbers and help you decide when to make your move. A large cash outflow too soon can break a business.
4. Consider the growing pains of cash flow management. When you invest in your business, the initial cost isn’t always recouped right away. When WFH’s growth exploded during COVID, they needed to buy dozens of high powered computers for their new hires. This expense was increased further because each computer had to be loaded with special software – and safety processes followed – that delayed utilization of these assets. In other words, the company spent the money on items they needed but couldn’t use them to service their customers for several weeks. This expense/revenue lag time can be really hard on your cash flow. It’s critical that you know and understand your cash flow runway so that you can correctly forecast your financial health as business grows.
Pro tip: If done responsibly, opening a line of credit when things are steady and business is good is a great idea to extend your runway, giving yourself more time to pay for expenses until revenue starts rolling in.
5. Don’t panic if your profitability is reduced during the first stages of rapid growth. Because of increased expenses during initial growth, your profitability WILL go down…and that’s normal! Remember, you have to take on expenses (buying new equipment, hiring and training new people, etc.) before revenue comes in. You just need to know how much lower of a profit margin you can handle to keep things financially healthy. Calculating your cash flow runway can help with this. A loss in your business on a monthly basis is OK as long as you have enough cash to cover that loss…you just don’t want this to be happening long-term.
Pro tip: Don’t forget to consider your owner’s draw amounts. Whatever you take out does not show up on the income statement, so factor that in when considering how long your runway is. You can also lower your owner’s draw amount (if you can swing it!), leaving more cash in the business as a planning mechanism before you start the growth spurt to leave some reserves. Think of it like an emergency fund for your business.
Is your business ready for future growth?
You don’t need to be afraid of growth, but you also shouldn’t be naive about the dangers of growing too quickly. Let me help you prepare your financial systems and processes so that your business is set up for success, no matter the situation. Schedule a call with me today to get started!
