People don”™t start businesses with the hope they”™ll never have to make a single hire. After all, you don”™t launch a company to do everything yourself. To paraphrase Gordon Gekko, growth is good. But there”™s bad growth, too.
From Day 1, the most important thing is to have a detailed business plan. Owners must understand their cash needs and how they’re going to satisfy those needs. Whether it’s personal funds, family funds or investor funds, cash is still king. If the idea is to grow, typically you’re not going to be able to grow with your own resources. You’re going to need help.
For business owners just starting out, this can be an easy thing to push to the side. Entrepreneurs have great ideas, boatloads of energy and a strong desire to succeed. What they don”™t always have is accounting acumen and an ability to forecast budgetary needs. It”™s crucial to remember that the paperwork is just as important as the product.
I can do it all ”” for now
To be fair, there are plenty of entrepreneurs who can handle their company”™s finances as well — at least in the beginning. But there”™s usually a tipping point where they”™re no longer able to manage everything.
That”™s when it makes sense to hand off the accounting, forecasting and budgeting functions before they’re ready to bring in a controller or chief financial officer. That enables them to focus on operations and the growth of the business.
Consulting a skilled tax adviser in the early stages is an important component to business development. There are strategies related to tax accounting methods that can create big tax savings — or be costly if they are ignored. Always consider whether a cash or accrual method of filing a return is more advantageous. And be in clear communication with lenders who may request financial information as part of their diligence process. Different methods may be employed for book and tax purposes.
Life in the fast lane
A business owner with deep pockets and a high-risk tolerance always has the most latitude. Someone with a hot new product ”” to go along with the deep pockets and high risk tolerance ”” knows it”™s critical to get it to market. In that situation, it”™s imperative to grow rapidly in order not to miss the window.
Regardless of speed, the main difference between good growth and bad growth is that good growth is always thoughtful. It’s understanding the infrastructure that you have and that you need, whether it’s people or resources, and making sure those are in place in order to grow organically or through acquisition.
Entrepreneurs engaged in thoughtful growth are always looking at the forecast. When is the cash going to run out? What is the plan for when it does? If entrepreneurs can look at their cash burn and realize they”™re going to be through it in six months but have a plan to raise capital, that”™s okay. If someone has no idea what their cash burn is, no concept of when it”™s going to run out and no plan to raise more, that can be debilitating.
Bad growth can be reversed
Scaling for the proper rate of growth is the key to enduring success for any business. But even if a company has to scale back or make cuts, there”™s still a path to prosperity. We expect losses initially with most businesses. The Cinderella stories make the news for a reason.
For the average company, it’s going to be a winding road. Step back and assess your spend and where you can save money. Even if it”™s a profitable product and you have a nice gross margin, it still may not generate enough cash for your inventory and equipment needs to keep up with your growth trajectory.
As exciting as it is to watch a new company launch or see a fledgling business spread its wings, it only becomes rewarding when you know it”™s here to stay. Growth is good. But sustainability is sublime.
Andrea Harrington is a partner at the accounting and advisory firm Fiondella, Milone & LaSaracina LLP (FML) with five offices in Connecticut, including Stamford. She can be reached at partner@fmlcpas.com or at 860-657-3651.
