Before you expand your business…

…ask your accountant these 4 questions.

Ask Your Accountant Before Expand Your Business

Do you know when the time is right (or wrong) to expand your business? We often see startups attempt to expand too quickly before they are at the appropriate stage in their growth. To know if you have reached the right phase in the evolution of your startup you will likely have to play a little game of risk versus reward. There is always a risk in growth. If there wasn’t, then every business would be growing successfully. But, if you play your cards correctly, or in less cliché terms, if you have a good handle on your company health, you will know when the time is right to expand your business. These are our four (plus one bonus!) questions to ask your accountant before preparing to expand.

1. What’s the status of my free cash flow?

The first question to ask your accountant if you wish to expand your business is whether you are cash flow positive. Also, do you have enough cash on hand to carry you through an expansion? Ideally, you should have at least six months of cash on hand to cover the extra costs of expansion.

Most businesses must spend more cash to fuel their growth. They must invest in some or all of the following: hiring more employees, buying more inventory, buying more equipment. And it usually takes many months before any growth and additional profit is created from this investment. Therefore, having a safe level of cash on hand, and ensuring you understand your cash flow projections are key.

2. What analytics do I need to assess the risks involved with expanding my business?

Take the time to crunch numbers and review your metrics to make sure the profits from expansion outweigh the risk and the cost to scale. Understanding what your payback period is for your investment will let you know how long it will take to recoup your additional costs.

Your accountant should also be able to help you determine pricing strategies for new markets. If you are thinking about expanding internationally make sure you have done your due diligence. Along with qualitative research into industry competitors and language barriers, it is important to investigate things like tax compliance, licensing and foreign laws in your expanding market.

3. How predictable is my revenue stream?

If you have done your reading, you will know how important it is to have predictable revenue and even better, recurring revenue. In an ideal world, you have both sustainable and repeatable revenue. Understandably, this is not possible with every business model, but your accountant can help you figure out ways to increase your recurring revenue. Since recurring revenue is more predictable, it lets you feel more confident about investing in growth as you already have a good base of existing recurring revenue to support the business.

4. Am I either eligible for debt financing or in a good financial position to raise equity?

Find out if your financials are in adequate order to secure some investors or fish for VC and angel funding. This comes full circle back to your free cash flow. If you have a good free cash flow that is attractive to investors, it shows you are in good financial standing to fund both operations and growth. Of course, if you do not wish to give up any ownership for business expansion you may need to look into debt financing. In either case you will need a solid business plan with accurate financials in order to secure the funds needed to expand your business.

Bonus Question: Do I have the right team in place?

Ok, this last one probably can’t be answered by your accountant, but it is an essential question to ask before you expand your business. As we covered in our seminar on company culture for growth, you want to have solid incentives in place to build a culture and a team that shares your values. In fact, a good team can be your catalyst for growth. We recently did an audit of our capacity per team member and it helped us see where we had room to grow. While your accountant may not be able to provide leadership training or dictate whether you have a trustworthy team, they can assist you in setting up the necessary calculations and financial goals for profit-sharing, rewards, and other incentives.

Now that we’re part of one of Chicago’s most prestigious CPA firms, Ostrow Reisin Berk & Abrams, Ltd, you’ll also find us online at www.orba.com.  With our ORBA colleagues, we’re positioned to offer you an expanded array of state-of-the-art services. 

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