Are you feeling ready to scale? What is your indication that now is the time? For some, reaching a revenue milestone may have influenced this decision, but revenues are not the only variable to factor. In this blog we will walk through financial considerations you should be paying attention to before pulling the trigger on scaling.
Here are 5 indicators to consider before you commit to scale:
Backlog: If prospective clients and customers have to be turned down due to a lack of inventory, lack of employees or simply because you do not have enough time in the day then it may be time to scale.
Financial Performance: Another clue you may be ready for scaling is that you have achieved profitability, the business is stable, and you have strong customer retention. If you are repeatedly surpassing your sales targets, then challenge your business to accelerate by scaling.
Predictability: A sign your business is not likely ready to scale is when you have really big revenue swings from period to period. These swings are occurring beyond seasonality fluctuations, these swings are happening because sales results are lumpy, the industry has many procurement hurdles, and more. Measure the difference between your best results and worst results and if the ratio between them is narrow you are likely ready to scale.
You can’t keep up. When your business reaches a certain threshold you may experience a decline in customer satisfaction and retention because you are not able to keep all the balls in the air. Unexpected customer or employee churn may be an indication that your next plan should be to scale.
Confidence outside the core team. To scale a business means to rely on a local/task team, whose knowledge and dedication will often be at a different level than those of the “core team”. Because most tech start-up founders have product and engineering backgrounds they tend to overweigh the importance of the scalability of technology and under appreciate the importance and complexity of the non-technological factors. This results in a focus towards what it takes to launch in a new market, rather than what it takes to be sustainably successful there.
If your business exhibits a few of these signs then it may be time to consider scaling – which means reinforcing your infrastructure, dreaming big and planning ahead.
But before you start posting jobs, consider these financial must haves:
A financial roadmap. You are about to take your business where it has never been so if you want to be risk rational you need to layout your financial roadmap. As Maya Angelou said “Hoping for the best, prepared for the worst, and unsurprised by anything in between.”. That sounds about right when it comes to scale preparation. Create a 3 year monthly budget based on forecasted revenues that take on various scenarios to ensure you understand how much cash you may need before you reach cash flow break even once your hiring begins.
Audit ready accounting records. Get your books in order now because it’s likely you are going to want to establish or increase your corporate line of credit, or receive growth funding either through banks or investors and therefore you’ll need your accounting records in good shape.
Access to capital. Letting your financial roadmap be your guide you’ll want to ensure you have sufficient working capital (aka cash) to ensure you don’t run out of money. Make a list of all the potential sources of cash that you can access and initiate conversations. I have yet to see a business that had too much cash, but have seen far too many starved of it.