Growth is exciting. It can also be expensive.
Maybe you're thinking about hiring another employee, moving into a larger space, purchasing equipment, adding a new service, opening another location or expanding into a new market.
These can all be signs of a healthy business. But before committing to growth, it's worth asking an important question:
Can the business financially support the next step?
Growth decisions shouldn't be based on instinct alone. Your financial information can help you evaluate whether an opportunity makes sense—and what needs to happen for it to succeed.
Here are seven questions I encourage business owners to consider before making a significant investment in growth.
1. Can We Afford the Upfront Investment?
Start by understanding what the decision will actually cost.
Hiring an employee involves more than salary. There may be payroll taxes, benefits, equipment, technology, training and recruiting costs.
A new location may require a deposit, buildout, furnishings, technology and additional insurance. New equipment may require financing and ongoing maintenance.
Identify the full cost of the investment before deciding whether the business can afford it.
2. How Will Growth Affect Our Cash Flow?
A business can be profitable and still run short of cash.
That's especially important during periods of growth because expenses often increase before the additional revenue arrives.
You may need to add staff today to serve customers you expect six months from now. A new location may require months of expenses before reaching its revenue potential.
A cash-flow projection can help you estimate when money will go out, when additional revenue may come in and whether the business has enough working capital to cover the gap.
3. How Much Additional Revenue Do We Need?
If you're investing $100,000 in growth, simply generating another $100,000 in revenue doesn't necessarily put you ahead.
There are costs associated with producing that revenue.
Before expanding, determine approximately how much additional revenue will be needed to cover the new expenses and contribute to profit.
This is where understanding your margins becomes particularly important. The stronger your grasp of the economics of your business, the easier it becomes to evaluate whether a growth opportunity is realistic.
4. What Happens If Growth Takes Longer Than Expected?
Business projections should include some optimism—but they also need a dose of reality.
What happens if a new employee takes longer to become productive? What if customer demand is lower than anticipated? What if construction costs increase or a new service takes six months longer to gain traction?
Consider more than one scenario.
What happens if everything goes according to plan? What happens if it doesn't?
Knowing how much flexibility you have can make a growth decision much easier to evaluate.
5. Do We Have the Right Financial Information to Make This Decision?
If your bookkeeping is months behind or you aren't confident in your financial statements, it becomes difficult to evaluate a major investment.
Before making a growth decision, you should have a reasonable understanding of revenue, profitability, cash flow, debt and other financial commitments.
You don't need perfect information. But you do need information reliable enough to make an informed decision.
Your financial statements shouldn't simply tell you what happened last year. They should help you decide what to do next.
6. How Will We Pay for the Growth?
Will you use cash reserves? Take out a loan? Establish a line of credit? Finance equipment? Contribute additional owner capital?
Each approach affects the business differently.
Borrowing, for example, preserves cash but creates future payment obligations. Using cash avoids debt but may leave the company with less cushion if something unexpected happens.
This is an area where your CPA, banker and financial advisor may all have valuable perspectives. Significant growth decisions often benefit from having your advisors working together.
7. What Are the Tax Implications?
Taxes shouldn't drive every business decision, but they should be part of the conversation.
Hiring employees, purchasing assets, borrowing money, changing owner compensation or expanding into another state can all have tax consequences.
Expansion across state lines deserves particular attention. Hiring an employee or establishing business activity in another state may create new tax, payroll or filing obligations.
Ideally, talk with your CPA before making a major decision rather than discovering the tax consequences afterward.
Growth Should Be Intentional
There is no financial statement that can tell you with certainty whether you should expand your business.
What good financial information can do is help you understand the risks, evaluate different scenarios and make the decision with your eyes open.
Sometimes the numbers will support moving ahead. Sometimes they'll suggest waiting six months. And sometimes they'll reveal a different way to accomplish the same goal.
Julie Moran, CPA works with small-business owners in Massachusetts and across the country to interpret financial information, evaluate opportunities and make thoughtful business decisions.
Considering the next stage of growth for your business? Schedule a conversation with Julie. https://calendly.com/julie-juliemorantax/30min
Frequently Asked Questions About Financial Planning for Business Growth
How do I know if my small business is financially ready to grow?
Start by evaluating profitability, cash flow, available working capital, existing debt and the expected cost and return of the proposed expansion. A financial projection can help determine whether the business can support the investment.
Should I create financial projections before expanding my business?
Yes. Projections allow you to estimate future revenue, expenses and cash needs. It's also useful to model different scenarios in case growth occurs more slowly than expected.
Should I use cash or borrow money to finance business growth?
There isn't one answer for every business. The decision depends on available cash, borrowing costs, future cash needs, debt obligations and the expected return on the investment.
What financial information should I review before hiring an employee?
Consider current revenue and profitability, cash flow and the employee's complete cost—including wages, payroll taxes, benefits, technology and other expenses. You should also estimate the additional revenue or capacity the new position is expected to create.
When should I involve my CPA in a business expansion decision?
Ideally, before you make a major financial commitment. Your CPA can help evaluate financial projections, cash flow, tax implications and different scenarios so you understand the potential impact before moving forward.
This article provides general educational information and is not intended as individualized tax, accounting, financial or legal advice. Business circumstances vary. Consult your professional advisors regarding your specific situation.
