Before making the decision to hire new employees, increase overhead, and scale your business, it's time to do some serious soul searching. Here's a checklist.
You have customers. You’re starting to build a team. You might even be turning a profit. In other words, you might have finally moved beyond “start-up” mode, and you’re ready for the next level. Before making the decision to hire new employees, increase overhead, and scale your business, it’s time to do some serious soul searching. Here’s a checklist you should apply to your business, looking at both fundamental performance metrics and harder-to-quantify factors, before making the decision to expand. If you can truthfully say that these indicators apply, you’re probably ready to make the leap.
1. You have confidence in your revenue model Do you have revenue? Great. Now, what’s accounting for each dollar of that revenue? Getting new business is fantastic, but in order to scale confidently, you must have a predictive model, however simple it is. You must be able to pinpoint a certain activity, expense, or metric that is leading to a dollar amount. The key here is to have a good feeling that you can predict your revenue based on things within your control. What you’re looking for is the ability to show a relationship between inputs and outputs. For instance, making 150 sales calls yields, on average, one new customer. Or, for every 300 unique visitors to your website, you gaining three customers. This confidence in your ability to isolate the activities or metrics leading to revenue is a crucial indicator that you’re ready to grow.
2. You are profitable and have a path to positive cash flow Being profitable alone isn’t enough. Just as the ability to predict revenue is equally as important as the revenue itself, you also need the ability to predict your profits and control your costs. This may seem obvious, but it’s actually much subtler than people think. You need to be able to identify the amount of money and time you put into selling a certain amount of your product, or to provide a particular service. Once you’ve identified this relationship between inputs and outputs, you need to think very critically about how sustainable it is to grow your business given the amount of time and money spent for each dollar of profit. The only exceptions to this rule are companies that have decided strategically to fund their businesses through rounds of financing. (Keep in mind that scaling a company in that manner can be unpredictable and unreliable.)
3. You have a strong accounting system and a cash flow forecast Just as you should be able to predict future performance, to scale a company you must implement a system that helps you see what your business will look like one month, one year, and even five years down the road. You must be able to forecast cash flow, preferably in the form of a model or financial tool that allows you to change variables and costs, allowing you to recast your projections, cash, and income. Think of this cash flow forecast as getting the air checked on your tires: you want to know if you have enough air before you get on the road, not when you’re driving 70 miles per hour on I-40.
4. You’ve developed a strong, core team of long-term employees You have to look closely at your personnel before you decide to scale. You’re building a foundation on your current staff. If you’re not confident in both their ability and their commitment to the company, it’s not time to add more employees and overhead. You need at least three to five people who you feel will be with you over the long run. This is not a management team. This is a core team of “long-termers” on whom you can count. When the chips are down, these are the guys you can rely on. You can measure these individuals, not necessarily by how long they’ve been at the company, but by their level of buy-in.
5. You have a company ethos that you’re comfortable with This is more than a mission statement. This is an ethos: a way you do business and look at the world and what your company stands for. As you expand and add people, you need something strong, tangible, and not necessarily in flux. As new employees enter a company with a strong ethos, they can fold into that philosophy and core principles. If this ethos is strong enough, new employees will be overwhelmed and absorbed by the culture. You won’t need to teach the ethos to them, because they will learn by osmosis.
BRIAN HAMILTON is the co-founder and chairman of Sageworks, an Inc. 500 honoree. Hamilton is an original co-developer of FIND (Financial Information into Narrative Data), which converts financial numbers into plain language.