My business is growing, but my bank account is shrinking! Here’s 4 reasons why.

Growing a businesses means you’ll consume a lot of cash.

No one told you that, did they? When your business grows from sales of $350,000 to $800,000, your income isn’t going to double. In fact, it may go down! It might be harder for you to stay profitable at $800,000 than you were at $350,000! How can that be?

growing a business

When you first start out, you have no business and no income, but as soon as you get your first client your income rises dramatically. That client pays you and most of that money goes into your pocket. Your expenses are low; after all, it’s just you and your computer on the dining room table, right? Then you get another client, and another… Pretty soon things are humming along and you start to get some help, a phone system, a better website, someone to do the books… Pretty soon there’s a big pile of expenses there that you are supporting before you are getting paid.

This is a really inefficient period for a business to operate in. You have added a lot of expenses, a lot of new capabilities, but they aren’t working very hard to make you money. Maybe you bought a phone system, but there’s just 3 of you. If you added 4 more people the phone system wouldn’t cost any more — but it would be working harder.

The way out is through

If you graph the cash flow of a growing business it looks like a U. It starts out high (when your expenses are low) then as the business grows your cash flow starts to shrink! It’s going the wrong way because you are adding expenses that are pure overhead. They aren’t adding a lot of benefit to the customer, but you need them to stay in business. This can be distressing — should I go back, cut expenses and make more money? If I keep growing my business, will I ever make good money?

The truth is that you need to spread that overhead cost over a larger base of sales. You need to grow your way out of this. Here’s 4 ways that growing a business costs you money.

1. You need support.

You’ve been doing your own bookkeeping, your own scheduling and admin, fixing your own computers; there’s lots of things that you have been doing that you can hire someone else to do for a fraction of what you could make in those hours. Maybe you’ve hesitated to get help with these things because you are afraid of adding more costs, but now it’s holding back your growth.

It’s time to get help. Buy back some of your hours and spend them marketing to new clients and delivering services. Instead of worrying about adding costs, focus on adding sales.

2. You need to pay people.

Once you start to have more work than you can do on your own, you need to think about building a team. Even if they aren’t full-time employees, you still need to pay them for the work they do! “Great. I’m earning $150/hr and paying $50/hr — that’s going to make me money, right?” Sure, until they screw something up, or take too long to complete something. Oh, then there’s training and development time, and time coordinating everyone’s activities and project management… But (hopefully) these are one-time costs. Once you get people trained and a system in place, you can be more efficient; and your margins should improve.

It takes almost the same amount of work to manage a team of 8 as it does a team of 3. Bigger teams create more process and structure and rely less on informal communication. That’s in part because it is necessary, but also because it’s more efficient.

So don’t be afraid to grow your team.

3. You need more things.

Your computer on the dining room table worked for a while, but now you need an office. (Or at least someplace to meet people that’s not a coffee shop, right?) You’ve got some team members now and they need computers, phone extensions, business cards… The website you and your neighbor hacked together is looking a little, well, like you hacked it together…

If you are going to have a team, you need to give them the tools they need to be successful. Having an office and a team behind you means you can bring more value to your clients. You appear less risky to them. It might even mean you could raise your prices in order to pay for it all.

4. You are lending money to your clients!

“What?!? Why would I loan my clients money? They are big businesses with deep pockets and I’m a struggling entrepreneur. Why should I loan them money?”

But you are. You are loaning them money! When you send them an invoice and they pay you in 30 days (or 45 days, or, gulp 90 days!) you are loaning them money. The more work you do, and the longer it takes to get paid, the more money that should be in your bank account accumulates in your accounts receivables. There are many businesses who grow so fast that they go broke because they need to pay their employees before they get paid by their customers and they can never close that gap!

As you grow, you need to pay attention to getting paid! Get paid in advance whenever you can, or at least get a big chunk up front. Find things that the client wants (early access, preferred service, better appointment times, etc.) and tie them to on-time (or early) payment. Don’t let your accounts receivable grow faster than your sales.

These are just a few of the ways that business growth hits you in the pocketbook. We’ll be talking about these things in more detail through the month here on the blog.

Are you growing a business? Where are you on the growth curve? Is your bank account full, or shrinking?

Small Business KPI Reporting Tool

Photo credit: matchfitskills

Comments

  1. Brad, this is really helpful – a year or so ago, we hired a part-timer for IT – it has made a huge difference to have someone with responsibility for the technical things for which we, the partners, do not have the capability. This part-timer also helps us develop marketing materials and has learned he’s quite good at it. It’s definitely helped us grow our business to the next level.

Speak Your Mind

*