I am writing a blog series on how to start a business. If you’d like to review previous posts on this series, you can find them here:
So You Want to Start a Business
Revenues, Direct Costs and Expenses… Oh My!
How Can You Earn More Revenue without Spending More Time
Direct Costs and Gross Margin
Keep Expenses LOW!
Profit is NOT an Ugly Word
Creating a Financial Forecast
Sanity Check – Does your Business Make Money?
Market Research… it’s about the Questions!
Do Free-Samples Work?
Marketing is the Key to Starting a Thriving Small Business
Planning for Growth
You now have your small company cruising along; but you find you are working day and night to keep up with your amazing marketing and sales efforts. Companies in this emerging stage normally find out that they did not plan for the growth they are seeing. A lot of stuff can go right in this phase, but not if you don’t plan.
Typically, when a Solopreneur tries to grow into an Entrepreneur, he or she is constantly worried they don’t have enough money to hire an employee; or subcontract work to someone else. They then work too much and have a hard time meeting their customer’s expectations while still keeping their marketing and sales efforts in motion. This burn-out problem could be avoided by planning for added labor costs of staffing up before you get to this point. I talked about this idea in my post on hourly rates. When you complete your financial plan, make sure you set your rates to account for facility rent, management costs, vacation time, health benefits, or whatever other costs you need for a fully functioning company. Don’t feel like you need to go cheap on the rates you charge your clients.
It is quite normal for a company to pay its costs before it gets paid by its clients. This lag in payment creates a cash shortage. Most small business owners ignore this shortage because it seems like it is temporary. However, when a company wants to grow this gap can be quite substantial. A startup company will typically not have sufficient cash flow to pay its bills in its first 6-months to 12-months of operation. When you are a small company, this cash shortage is normally easy to anticipate and wait out. However, when your company is growing, it is like you are starting up a company all the time. This startup cash requirement in addition to your client payment gap can cause such a cash shortage, it will force you to go out of business. One way to avoid this trap is to have sufficient cash to pay your costs for 6-months of company operation even if your company had no revenue. One year of cash is even better. Don’t wait until you need the cash to make plans. Get a line-of-credit or line up investors long before you need the added cash. You’ll feel much better and your company will be able to stay strong through periods of growth.
Solopreneurs are normally not thinking about staff because they feel like they can handle the work load by themselves until the workload gets more intense. Then it happens… A large sale and you either cannot service your new client; or you scramble to find someone to work with you to serve your large client. It is advisable to work out training, staffing, payroll administration, benefits administration and staffing plans well in advance of your need for added staff. If you are reluctant to do this, at least find a few colleagues who you can partner with if your workload grows out of your control. It is embarrassing and damaging to tell a client you cannot serve their needs just because you failed to plan for growth.
The best way to plan for additional staff is to think about what tasks you can outsource before it is time to do so. Many business owners outsource book keeping and administrative staff first because they feel like they are needed to provided the core talent for their business. They then think about hiring an assistant to help them with core skill tasks feeling like they can train someone to take their place later in the business. This is certainly a reasonable plan. However, you’d be surprised at how many successful business owners do the opposite. It is sometimes best for the owner to continue to maintain momentum in sales and marketing while they hire added staff to deliver the work promised to customers.
Pulsating Sales Revenue
It is common for small companies to put all of their effort into securing backlog work for their company. Once this backlog is in the door, the company expends its resources delivering the work to its customers. While this customer delivery is happening, sales drop. Depending on the length of the sales and delivery cycles, this activity can create a pulsating revenue stream. Revenue increases right after sales; and then drops as work is completed. This pulsation can damage the stability of sales and of operations of any small company and create work instability for the entire staff. Solopreneurs experience this problem more than most because they are the sales person and the operations person. Solopreneurs need to develop a discipline around maintaining sales and marketing efforts around achievable deadlines for projects to make it all work.
Facilities vs Virtual Office
Many small white collar service-oriented businesses start off in a home office. Then they grow into either a network of home office employees or contractors; or move into an office space. Either model can work well. Although, it is critical to determine which type of business you plan to operate. If you plan to stay virtual, you need to create a plan for virtual communication, virtual client meetings, and temporary meeting space if face-to-face meetings are ever necessary (and they will be). If you plan to move into an office space, try to create a 3-phase facility growth plan that doesn’t leave you cramped in too small of a space when your company continues to grow.
While planning for growth is important, it is also important that you do not over-staff or over-spend before it is evident your growth is really happening. This is usually not a problem with most frugal entrepreneurs, but it can happen. A business owner hires enough staff to deliver $5 Million in revenue, but only has $2 Million in sales. This is a recipe for a massive financial loss and a lot of disappointed employees. It is okay to make plans and be ready to make offers and sign lease agreements when the sales are closed; but always inadvisable to make premature expenditures hoping that growth will materialize. This move can usually be pulled off by large investors, but is ill-advised for small companies. And just so you know, the large investors lose money on these moves all the time… but they can afford it. If you’re a small business owner, you cannot.
Growth is Good
Regardless of how you grow, growth should always be your objective as a small business owner. One thing to keep in mind about running a business… it is either shrinking or growing. Plan for growth and you will be able to grow much easier than those who did not cover this base.
This is the last blog post in my series on starting a how to start a small business. If you feel like I have missed something, I would love it if you contacted me and let me know.