5 Common Finance Challenges Faced by Growing Small Businesses & How to Solve Them
Growing your business is such an exciting time! You’re bringing in new customers, you’re launching new products, and you’re taking your business to the next level.
But just like those awkward teenage years, in business, when you’re faced with a period of rapid growth, you’re likely to deal with some major growing pains. And when you’re growing a small business, those pains are likely to come in the form of new financial challenges.
But don’t worry! For every problem, there’s a solution. Here are five common financial problems faced by growing small businesses (and how to solve them):
Challenge #1: Growth Costs Cash
The first finance hurdle that every small business will face during its growth process is this: growth costs cash. There’s just no way around it. If you want to grow, you have to invest in that growth.
Now, there are some obvious cash needs, like buying more materials to increase production or hiring a new marketing consultant to help put together your growth strategy. But then, there’s also the more subtle, and less visible hidden cash impact: the delay between money out to vendors and money in from customers.
Unless you get cash in advance for your products and services, then when you create a new product, there’s a delay between spending the money to create and distribute the product and when you get the actual cash from your customer. The faster you grow, the more cash will get tied up during that delay period. If you don’t carefully map out your growth strategy and how fast you expect your sales to grow, it can devour your entire cash flow.
The good news is, this challenge is manageable. Before you implement your growth strategy, it’s important to get clear on the rate at which you expect to grow and how much cash you’ll need to support that growth. If you have the cash on hand, great! If not, you’ll know before the launch, how much you’ll need to borrow or invest to sustain your growth.
So, for example, let’s say you’re working with an outsourced provider, and you pay them $100 for their services, which are due upon delivery. You then sell those services to your customers for $150, but you don’t collect from them for two weeks. So there’s that delay period of 14 days where you’re out $100 per customer.
If you add 10 new customers, that’s an immediate negative cash flow of $1,000 for that delay period. So, to sustain that growth, you would need to borrow $1,000 to hold you over and make sure you have the cash to run your business until you collect from your customers.
Keep in mind, this information won’t show up on your forecast P&L; this is information you’ll need to pull from your forecast balance sheet and cash flow (which, as I’ve mentioned before, is an incredibly important report in your business).
Challenge #2: Growing Your Business But Not Growing Your Processes
Another major growing pain that a lot of small businesses go through as they expand has to do with processes. They’re all about growing the business, but they don’t grow their operational processes to match.
When you grow your business, you’re expanding into new areas of possibility, and it’s an exciting time. But the flip side to that coin is as you grow, you’re faced with a new set of challenges you probably didn’t encounter when you were starting at zero. If you don’t update your processes to accommodate those new challenges, they can put a halt to the entire operation.
The shoebox of receipts that supports a million-dollar business just won’t support a 100 million-dollar business. You’re going to need a better way to manage your financials.
If you want to sustain the growth you need to take your business to the next level, you need to rely on stable processes. So, instead of trying to take your business from a million to a hundred million in sales while relying on “shoebox bookkeeping”, you would invest in bookkeeping software that manages your financial records for you.; and reflects the fact that you are now a real grown-up business.
If you’re cringing because you know in your gut that there are processes in your business that need upgrading, please, don’t worry! There’s actually pride in looking at your processes and realizing that your business has outgrown them. Your current processes enabled you to get this far, and they did their job well! But as you grow, it’s about adjusting those processes to be a better fit for where you are today — and for where you want to go.
For a simple example, when you’re first starting out, and have one client, one person on your team can manage that relationship (usually you!). But when you grow to 20 clients, you don’t want to add employees for 1:1 attention; instead, you’ll set up communications and reporting processes that would allow each person on your team to manage multiple clients.
This way, you can maintain the same standard of client service while keeping your costs down — and increasing your profit margin.
And that, my friend, is what improving your processes to support your growth looks like in action.
Challenge #3: Who’s Doing What?
Another complication that companies face as they grow, is what I call “who’s doing what?” When your business was smaller, you (and your team) go with the flow and get things done in whatever way makes sense. Messes are cleaned up later. That “roll up your sleeves and get it done”-mentality is awesome when you’re a smaller company.
But as you grow, that kind of “whatever works” attitude can actually impede your growth. What worked when you were a smaller business isn’t necessarily going to work when you start to scale, and a lack of clearly defined roles can cause things to slip through the cracks. The more you grow, the more people will feel unsure of what they’re responsible for and what they should be doing.
As you plan for growth, it’s important to structure your organization in a way that’s more process-driven than people-driven. By focusing on the processes that need to happen, you can identify the gaps, assign people clear responsibilities, and delegate process ownership.
You might face some resistance from your team as you moved towards a more structured way of doing things, but once everyone gets their head around the new structure, the process will run more smoothly and you’ll be able to grow in a way that prevents things from slipping through the cracks.
Challenge #4: The People Who Got You Here Might Not Be the People to Get You There
This is a tough one. As a business owner, you feel a huge loyalty to your team. As you should — they’re the people that helped your business to flourish and get you to where you are today.
But here’s the harsh truth: the people who got you here might not be the people to get you to the next level.
For example, let’s say you’re part of an organization that was built on the drive, vision, and brute force of a small team. They’re passionate about your business idea and they built your organization into something hugely successful. They have a certain set of characteristics that only a very small breed of people have. They were perfect for this phase of your business.
But if their skill sets and talents can migrate as the business grows, these specific people may not be able to manage through the new set of challenges and the necessary changes in culture that support a larger and more stable business. For this stage you need infrastructure and process discipline – that’s not always a culture that your group of start-up stars will thrive in.
It can be difficult to admit that everyone on your current team doesn’t necessarily fit into your next stage of growth, but admitting that you need a different kind of help doesn’t mean giving up on your team. For many of them, driving to where you are now has brought them extraordinary professional growth and experience – and networking! For their sake as well, another start-up culture may be the best fit.
And an important note: Some skills do translate perfectly from start-up through growth. Don’t write people off arbitrarily! Test it out, match the company needs with their skill sets and see if they can still enjoy the game.
When you’re scaling your business, get really honest about your own and your team’s skills. Celebrate the fact they’ve gotten you this far, but realize you will need to hire new people with the right skill set to take you to the next level. Then hire those people.
Challenge #5: You Grow Too Quickly
Believe it or not, there can be too much of a good thing, and that includes growth. It’s wonderful to see a new volume of customers reach for your product or service; but if you can’t keep up with the demand, you will end up with some serious problems to deal with.
Growth is only a good thing if you can keep up with it. If a thousand new customers buy your product, but you can only deliver the product to five hundred of them, the other five hundred customers will be left in the dark — which isn’t good for your profits or your reputation.
Accurate forecasting is the key to growing at a rate suited to your ability to meet demand. Knowing your numbers (present and future) and exactly what you’ll need to support your growth will allow you to take on new clients in a way that makes sense for your business.
If you have a sales program, it’s also super important to keep your sales team in the loop on how many new clients you can support. Salespeople, by nature, are overachievers (that’s why they’re so awesome at what they do!), but you don’t want to sign new clients faster than you can serve them.
A word to the wise: the keyword here is prevention. It’s much easier to avoid taking on too many new clients than it is to try to manage the process once you’ve already outpaced your ability to meet demand.
As you grow your business, you’re likely to face some growing pains. But when you work through those challenges and set yourself up for success, you’ll be able to take your small business to levels you never imagined.
- PAM PRIOR
"Your First CFO" on AMAZON