Do You Know When The Time is Right (or Wrong) to Expand Your Business?
Think you are ready to expand your business? We often see startups attempt to expand too quickly before they are at the appropriate stage in their growth. To know if you have reached the right phase in the evolution of your startup you will need to weigh the risk against the potential reward. There is always a risk in growth. If there wasn’t, then every business would be growing successfully. But, if you play your cards correctly, or in less cliché terms, if you have a good handle on your company health, you will know when the time is right to expand your business. These are our five questions to ask your accountant before preparing to expand.
- What’s the Status of My Free Cash Flow?
The first question to ask your accountant if you wish to expand your business is how your cash flow looks. Do you have enough cash on hand to carry you through an expansion?Most businesses must spend more cash to fuel their growth. They must invest in some or all of the following: hiring more employees, buying more inventory, buying more equipment. And it usually takes many months before any growth and additional profit is created from this investment. Therefore, having a safe level of cash on hand, and ensuring you understand your cash flow projections are key.
- What Analytics Do I need to Assess the Risks Involved with Expanding My Business?
Take the time to crunch numbers and review your metrics to make sure the profits from expansion outweigh the risk and the cost to scale. Understanding what your payback period is for your investment will let you know how long it will take to recoup your additional costs.Realistically, what additional revenue can you generate and at what margins? How long will it take to ramp up? What if you fall behind schedule? Your accountant should be able to help you with a cost benefit analysis based on different possible outcomes.
- How Predictable is My Revenue Stream?
If you have done your reading, you will know how important it is to have predictable revenue and even better, recurring revenue. In an ideal world you have both sustainable and repeatable revenue. Since recurring revenue is more predictable, it lets you feel more confident about investing in growth as you already have a good base of existing recurring revenue to support the business. Understandably, this is not possible with every business model, but your accountant can help you determine your recurring revenue and brainstorm ways to increase it or manage your business around more cyclical or difficult times.
- Am I Either Eligible for Debt Financing or in a Good Financial Position to Raise Equity?
Are you able to finance the expansion through normal bank channels? Can an SBA backed loan be a good alternative? Should you consider talking on an investor? Each of these options adds a layer of complexity, oversight and cost which must be factored into the decision making process. In any case, you will need a solid business plan with accurate financials in order to secure the funds needed to expand your business.
- Do I have the Right Team in Place?
This is an essential question to ask before you expand your business. As we covered in our seminar on company culture for growth, you want to have solid incentives in place to build a culture and a team that shares your values. In fact, a good team can be your catalyst for growth. We recently did an audit of our capacity per team member and it helped us see where we had room to grow. While your accountant may not be able to provide leadership training or dictate whether you have a trustworthy team, they can assist you in setting up the necessary calculations and financial goals for profit-sharing, rewards and other incentives.
Once you have the answers to the above five questions, you will have a good idea of whether you truly are in a strong enough financial position to expand your business. If so, let us be the first to offer our congratulations as there is nothing we love more than seeing a business grow!