Business growth – the financial essentials
A client of ours, long-established as a one-man company, is about to win several large contracts. Clearly this is very good news, but not without risks and pitfalls.
Our guy, both excited and nervous about what the future holds, came in for a chat.
Time to discuss the financial essentials of business growth.
Three important areas to consider:
Profitable business growth
Do your sums and make sure that when you pitch for new work (and repitch to renew existing contracts) you are making a decent margin.
There is not much point in winning low margin work and no point at all in winning unprofitable work.
“A sprat to catch a mackerel” can easily turn in to a sprat to catch plankton!
Remember that your overheads (property, IT, accounting, administrative costs) will also increase as you grow and these additional costs have to be paid for by profitable sales.
Cashflow is so important. Get into the habit of putting your invoicing schedule and payment terms into your proposals and get them agreed upfront.
If you do not do this then you are likely to get cashflow difficulties but if you agree invoicing and payment terms upfront then you are likely to get paid when you want and you have a good stick to beat the client with if they try to pay slowly.
Cashflow during a period of growth is vital because when you grow you need more resources – typically people – and your staff, HMRC and the suppliers of the additional goods and services you buy will want to be paid.
The downward spiral is when you have to pay your suppliers well in advance of getting paid.
At one level this lack of funding simply inhibits growth but more extremely this is what causes so many growing businesses to go bust.
A really good tip is to run two bank accounts and regularly transfer cash from your current account into the savings account in order to build up the cash to pay future tax and other bills.
Staffing was particularly important in this case because our client is on the cusp of hiring his first employee. And in a few months his second.
Hiring the right people at the right level of pay (plus employer’s national insurance) and then making sure you always have the funds to make the payroll and tax payments is not easy.
You can build in some contractual safety nets – a probationary period and then a relatively short notice period – just in case things don’t work out.
And, although you will have advertised for a self-starter with pots of initiative, in reality you have to make time to train, supervise and help your new staff.
With a great deal going on, it still makes sense to make sure your business is being stretched (but not breaking) before you bring in your next person.
All in all, an exciting time for our client, but lots of change and much to manage. And guess what? It doesn’t really ever stop if you want to keep on growing.
So the lesson is to learn how to manage successful growth early on and keep applying the same disciplines as you get bigger.