One of the key challenges involved with growing a small business, is that it involves items of expenditure that are both lumpy and large.
Lumpy i.e. they come in one-off chunks rather than more frequent bite-sized pieces, and they are large relative to the company’s profits. For instance: the costs of moving to larger or better located premises, taking on an additional member of staff or buying a new piece of equipment.
In these situations I come across a number of pitfalls:
• The office move goes well, however the market crashes and what looked like affordable rent suddenly isn’t. Or not quite so bad, it takes nine months longer than planned to scale up the revenue leaving a hole in the cash flow.
• The new member of staff who joined with such promise, turns out to be ineffective. After six months of trying to make it work, and paying the recruitment company fees, the company and staff member agree to termination and it’s back to square one.
• A new edit suite is purchased on a financing deal to spread the costs. However, it involved a personal guarantee which gets invoked when the business has to liquidate 2 years later.
There are clearly risks involved with growth, so what is the best way to navigate yourself and your business through this potential minefield?
I’ll split the tasks into three categories – preparation, planning and implementation.
Preparation:
1) Review your business’s track record of growth – and future projections. How is the market growing? How are you doing relative to the market? Get all of these sanity checked by someone who can bring cool logic rather than passion and optimism (which hopefully you bring!).
2) How much of your business is based on repeat business – ideally on contract? For instance regular customers who come to you every week or month, or clients paying you on a retainer, or on monthly Direct Debit for services used during the month.
The higher your proportion of revenue from these sources compared to one-off project or individual sales, the lower your risks of taking on additional regular costs.
3) What are your options to expand? Most importantly, how much will they cost and for how long would you be locked into them (or need to give them for a fair evaluation)?
4) Work out best, average and worst case scenarios with cash flows.
5) Explore your financing options – through existing reserves, additional investment from yourself of others, or via a bank loan.
In summary, the preparation piece is about fully understanding the risks you would be taking on in pursuing the growth option. Do check out the fine print on any finance deals/investor deals/lease contracts, ideally with a professional, but certainly with someone with actual experience, to avoid any nasty surprises down the line.
In part 2, we’ll explore how to develop your plan, and in part 3, how to implement it.
