Striving for growth is a natural state of being for most entrepreneurs. More revenue, more profit, more customers… It all sounds good, right?
If only. When I talk about my company’s growth, I can tell right away if I’m speaking with an experienced entrepreneur or a newbie. The newbie is all excited about the fact that I get to add staff. The experienced entrepreneur looks a little worried and asks, “How’s your cash flow?”
One of the challenges of growth is that it’s not only revenue that increases. Expenses do, too. And they often grow before the top line does. Emotionally, it can be a roller coaster, as we try to stretch our cash so we can take on new opportunities that may take a while to pay off.
For most companies, growth is not smooth. Instead, they go through a series of events, each of which forces them to expand in a slightly different way. You’ve got to plan for these events before they actually happen.
An experienced entrepreneur will be able to recognize these events, which is just one of the many reasons you want one as an advisor. Here are some of the signposts he or she will help you spot:
Customer validation of product or process
Has a major customer validated your product or process? In my industry, customers often work with a first prototype to make sure the specifications and features are all appropriate. That prototype gets tweaked according to customer feedback.
Once the customer decides they like your product, the demands on the business go well past engineering. You’ll probably need new infrastructure to meet the customer’s demand, more capital and cash flow to produce the product, and a higher level of service to meet the customer’s expectations.
It is common for early customers to be fairly local. But what about your next customers? What if there are opportunities outside your region or even country? We still need face-to-face interaction, especially when building trust in new relationships. Videoconferencing only goes so far, especially if the purchase of your product or service seems risky to the buyer. You’re going to need to budget for the time and the money to travel, driving your expenses up.
Do you or your team have the skills to execute on all the opportunities in your pipeline? Or will you need to find new people in order to grow? You want to be scouting for talent before you need it, because it takes time to find the right people. Paying them will also drive up expenses, so you need to balance the opportunity to hire with real customer commitments. Prepare for heartburn when you don’t quite have the customer commitment, but you don’t want to lose a good candidate.
As a company grows, it may need more physical space. In addition to rent, you’ll have to contend with utilities, furniture, and IT costs, not to mention the loss in productivity when moving into a new space. Ideally, your company would move during a quiet period before things heat up, but sometimes the stars don’t align that way.
These signposts vary by the type of business you are in, whether it is cyclical in nature, and the nature of the customers you serve. However, all growing businesses go through stages, and these stages all entail new types of expenses. The best way to recognize a growth spurt is to track leading monthly indicators for your business and watch the trends. Then, listen to your gut.