Small businesses are started every day, often by a passionate entrepreneur with a problem they’re itching to solve.
Although owning a business isn’t without its struggles, the rewards are often worth it. As an entrepreneur, you’ll enjoy far greater freedom and flexibility than you ever could as a regular employee. And with the right mindset and a proper understanding of the hardships you’ll face, you can put together a plan to tackle any bumps in the road.
With that said, one of the biggest challenges that almost all small businesses face is that it’s virtually impossible to break even or turn a profit right away. It often takes two to three years before a business can accomplish either of these goals. That said, how fast you reach profitability depends on a variety of factors, including your type of business. So, if you’re past the three-year mark, read on. This isn’t necessarily a sign that it’s time to throw in the towel.
To make matters worse, small business owners usually don’t have the luxury of a large line of credit or significant startup capital that they can invest in marketing and promotional strategies. This requires them to operate on the smallest budget possible while the business is growing, and therefore, use low-cost methods to grow their business.
It should come as no surprise that this fine line is too tough to walk for many small businesses. And that’s the purpose of this article. To explain the growth objectives, financial management tactics, and how to analyze the growth and cash flow of your small business to help you grow your business and run a more successful company.
Let’s get started.
Many studies show that setting goals effectively has a strong correlation with company performance. A business that closely aligns its goals across the entire organization generally achieves a higher level of financial success. Goals allow business owners to assess themselves and their employees, allocate resources and provide managers with direction. To increase your chances of making forward progress, we recommend that you clearly define each goal and outline how you will reach it. It’s also important to set realistic goals and assign specific timelines for when you expect to achieve each of them.
To help you plan for your goals, we also recommend classifying them as short-term, intermediate and long-term goals.
- Short-term goals typically relate to cash flow and sales.
- Intermediate goals involve hiring profitability.
- Long-term goals often deal with the owner’s personal wealth.
For a new business, short-term goals can be objectives that you’re looking to accomplish in as little as a month or two. In some cases, it might be something on your to-do list that you need to get done this week, like fixing a broken food storage fridge. As you might imagine, these goals are typically specific tasks that are easy to define and thus easy to determine when the goal has been reached. Other short-term goals for small businesses include choosing a point of sale system or improving the performance of your weekly email newsletter.
Additional types of short-term goals for a new company could be to hire and train your first employee within three months of opening your business. Alternatively, it could be to hit a certain sales volume so that you can negotiate a better price from your supplier. This can help your profit margin, and get you closer to breaking even or even profitability depending on the rest of your financial situation.
Intermediate goals for the new company are typical objectives you want to hit within six months to one year of being in business. They normal include goals for revenue and net income. Intermediate goals may also deal with personnel issues, such as hiring and training objectives. Additional examples of intermediate goals for small businesses include the reduction of expenses and equipment upgrades.
Intermediate planning often includes the application of a more permanent solution to a short-term problem. Assume for this example that a basic training program solved some problems you were having with specific employees in the short term. You could then schedule similar training for all employees as a way to proactively prevent these problems from developing as you bring on new hires and grow your team. In this example, intermediate planning prevents short-term problems from recurring, helping you achieve bigger goals and build a sustainable business.
The time frame for long-range goals is usually two to three years, depending on your company’s growth rate. These goals generally deal with profitability or, at a minimum, breaking even. If you want to build a sustainable business that turns a profit, you want to hit break-even as quickly as possible. From there, the goal is to begin turning a profit.
Not only does doing so ensure that your business can continue to operate, but as the owner, you can begin to reap some of the benefits of running your own business. Namely, enjoying the freedom and flexibility that being your own boss affords. You might also begin collecting a salary at this point.
The expansion of a business into new markets or industries is also a common long-range goal, often with the ultimate objective being to become the biggest and most profitable business in a particular industry or geographic location.
Business owners that set these types of goals typically have a larger plan in mind when they start their business, which will usually require additional outside financial resources like venture capital and highly-trained individuals to accomplish. Some small business owners seek to expand their businesses as quickly as possible, which is a high-risk, long-term goal that carries a large potential reward.
Taking a business public is another long-term goal of some entrepreneurs. The business must demonstrate a consistent history of financial performance to attract the types of investors needed to do this. This process also requires an owner to hire the right individuals to create the operational changes needed to go public.
To manage growth in a sustainable way, a business owner must take on a number of duties, including the management of finances. This process usually requires an owner to prioritize specific areas of financial management and focus on the most important ones. As this type of work requires specialized knowledge, it’s often necessary to hire professionals who are experts at helping businesses manage their finances. However, that doesn’t mean there aren’t things you can do as the business owner to help your company maintain financial discipline.
Staying in control and organized is one of the keys to sound financial management. It may be tempting to perform these tasks as needed, such as recording transactions when they come in or sending out invoice reminders when you think about it. However, this approach can cause items to get missed, especially when your life is as hectic as the typical small business owner’s To prevent this from happening, schedule time in your calendar that you’ll dedicate to address financial management and accounting tasks.
Get the Right Tools
For retail and food service businesses, point of sale (POS) software is an essential tool for financial management since it gathers data that helps keep the business on track. This data helps owners understand employee performance, track work hours, manage inventory, and monitor sales.
All POS systems provide sales data to some extent, although their specific reporting capabilities vary greatly. It’s important to select a solution that produces detailed reports that record best-selling items, returns, and profit margins, which are necessary for understanding the overall financial health of your business.
A POS system should also track sales by criteria such as department, product, and employee. This capability lets an owner adjust staffing and floor space allocation accordingly. On-screen reports provide snapshots of sales data that are easy to understand, while exported reports are primarily used for accounting purposes.
Stay on Top of Your Responsibilities
As a business owner, the brunt of financial responsibility falls on your plate. That means staying on top of the less exciting parts of running a business. For example, it’s your responsibility to track expenses, pay taxes, repay loans, and manage communications with investors and other stakeholders. Running a business also carries daily responsibilities such as recording transactions, monitoring payments and budgeting. These tasks aren’t always the most pleasant, but staying on top of them is critical to keeping your business running smoothly, and also maintaining legal compliance.
Savvy business owners know the importance of continuing education. You can learn more about accounting and financial management by reading articles, attending classes online or at your local college, listening to podcast, or watching webinars. You can also join the local chamber of commerce or small business association to connect with fellow entrepreneurs. You’d be surprised how friendly other business owners can be. Don’t hesitate to ask for advice or pick the brain of a fellow local businessperson. Just be prepared to return the favor in kind.
The same strong will and sense of independence that helps business owners build their vision can also make them reluctant to seek help. However, financial professionals are often needed to resolve problems. Sometimes, a company’s survival requires the owner to admit defeat and hire a professional, such as a chartered accountant.
It might seem that rapid growth is always a good thing for small businesses. However, they often grow too quickly, especially when owners become overwhelmed with their early success. It’s natural for a well-run business to grow, but it’s also important to know why it’s growing, particularly if it’s doing so very rapidly. Growth can sometimes larger problems, like the following, that can cause you massive issues down the line.
An expansion should be based on a sound financial evaluation rather than the owner’s personal desire to do so. This type of overly rapid expansion can cause businesses to take advantage of a market opportunity even if they lack the necessary capital to succeed. Undercapitalization during expansion is one of the most common reasons for a small business to fail.
Inability to Manage Business Processes
Rapid expansion can cause managers to struggle with creating new processes to handle the increased workload, often to the point that they neglect essential business functions. Small businesses often only have one or two managers, which can increase the business’s risk of failure if those managers cannot create or adapt to new processes quickly. A growing business must also have time to hire and retain qualified personnel.
Internal Tools Unable to Keep Up
To run smoothly, a business must be able to obtain information on budgeting, cash flow and sales growth in a timely, efficient manner. A dramatic increase in bureaucracy, such as meetings and memos can indicate the need for a better project management solution, or other internal tool upgrades like new accounting or marketing software. It’s also important to monitor information systems closely during this period to ensure the demands for their services haven’t exceeded their capacity.
Increasing Overhead Costs
Rapid growth is often accompanied by a direct increase in operating costs, which can erode a business’s profit margin. This process can greatly hinder financing during a time when it’s needed most. Increased overhead can also make it harder to meet payroll, causing employees to slack off, or quit entirely. Without a big enough team to handle the increased workload you’re now dealing with, it’s very likely that your business will fail.
Difficulty in Paying Loans
A small business typically needs to take out loans during an expansion phase, but servicing these loans can consume cash flow fast. Furthermore, growing companies have difficulty managing their accounts receivable, despite increased sales. The resulting financial distress can cause small businesses to fail.
Keeping the Wrong Employees
Small business owners often lose touch with key employees that kept the business running during a growth spurt, and these employees leave for better opportunities. Furthermore, a phase of rapid growth can cause a business to lose focus and retain unproductive employees.
Over-Reliance on Partners
Businesses often rely on a very small number of key partners when they expand, including customers, lender, and suppliers. If something happens to one of these partners (e.g., they go out of business), it can seriously cripple your growth. It’s especially important for small companies to diversify their product lines, markets, and distribution channels during a period of early growth when there’s little margin for error.
Cash Flow Management
Most businesses today operate on a “buy now, pay later” basis, making cash flow management (CFM) a critical component of daily operations. However, treating CFM as a bookkeeping function restricts its capabilities. It can also assist business owners in making decisions related to various financial issues, such as:
- Timing of payables
- Short-term financing requirements
- Scheduling of major purchases
- Forecasting cash requirements
- Analyzing receivables and payables
- Controlling costs and debts
Monitoring Cash Flow
Operating a successful business requires a clear understanding of its cash flow. The monitoring and analysis of cash flow also provide a broader picture of the business beyond control over its daily operations. This capability allows potential problems to be identified and corrected before they become serious.
Forecasting Cash Requirements
Predicting future cash requirements is also essential due to the far-reaching impact that cash flow has on a business. An intelligent cash flow forecasting system allows an owner to closely monitor payables and receivables. Forecasting also creates more opportunities for stronger daily operations and future growth.
Analyzing Account Receivables and Payables
The effective management of account receivables is necessary because depending on your industry, your business could wait for four to six weeks before receiving payment for your products and services.
Improving the rate at which a business converts its receivables into cash requires a proactive approach. Receivables should be prioritized according to the urgency to get them by a particular date. This strategy allows a small business owner to determine if a particular receivable is critical to making short-term expenditures, such as hiring additional personnel or increasing inventory temporarily for the holiday season.
Controlling Costs and Debts
The key to controlling costs and debts is ensuring that revenue always exceeds costs. This strategy often requires a business owner to prioritize debts to determine which ones to pay first. For example, payroll should have the highest priority since employees who aren’t being paid tend to quit. Suppliers should be paid next, especially if they’re local. Short-term negative cash flow is also a good reason to use an existing line of credit.
Financial statements include a business’s balance sheet, cash flow statement and income statement. Some companies also provide statements of owner equity. Financial statements should be published at least once a year, although the SBOs of fast-growing businesses may prefer monthly or quarterly statements.
We hope this post has helped you understand the importance of planning and monitoring your progress towards your growth objectives. Particularly because doing so will help you prevent your business from expanding too rapidly, which is a common cause of failure. It’s also vital that you analyze your business’s growth to ensure it’s growing for the right reasons. Lastly, you must monitor cash flow carefully since it’s highly likely that you’ll have negative cash flow during the start-up phase. As we’ve tried to make clear, the process of managing growth, particularly if it’s rapid, isn’t easy. But with dedication, determination, and an eye for the details, you’ll find success.