Top 4 Things Growing Companies Should Know

To my fellow Business Owners,

There are several things you should know when your company is growing or beginning a stage of growth.   First, it’s not easy! Growth can create a lot of headaches and challenges related to people, processes, financing, and profitability.  It can be painful and maybe that’s why many owners are completely happy in the $1M-$5M revenue range.

I’ve pulled together four things to keep in mind if you’re wanting to grow your business.

1. Focus Growth on Most Profitable Products/Projects/Divisions/Services/Customers – Would you rather be a $5M in revenue company bringing 20% to operating income (making $1M operating income) or would your rather be a $10M in revenue company bringing 10% to operating income (still making $1M operating income)? I would much rather manage a $5M in revenue business than a $10M in revenue business if I was making the same amount of money.

The first thing you need to do to understand your most profitable lines of business is to create financial statements by product, division, customer, or service.  Once you have a good handle on your most profitable lines of business, then incentivize your sales staff in those areas.  Sounds pretty simple, huh?  I can help you with it.

2. Growth Sucks Cash – Verne Harnish, in his book Scaling Up says “Growth sucks cash. This is the first law of entrepreneurial gravity.  And nothing ages a CEO and his or her team faster than being short of cash.  Yet many growth company leaders pay more attention to revenue and profit than they do to cash when it comes to structuring deals with suppliers, customers, employees (think bonus plans), or investors/banks.  And when they receive their monthly financial statements, the cash flow statement is either non-existent or ignored.”

Please keep cash top of mind while you’re growing.  It’s fairly simple to project and monitor this on a monthly basis.

3. Monitor Your Growth – Create a monthly or weekly dashboard report (Excel is fine), that shows the top 3-5 key drivers of the business. The dashboard should monitor your numbers in percentages rather than dollars!  It should include measures of profitability, projections for the next 3-6 months, and working capital.  Monitoring your growth through a dashboard will allow you to make quicker management corrections.

4. Understand Your Capacity – In service-based companies, people (wages) are the number one expense to the company. Sometimes wages are 60%-70% of revenue!  Construction and manufacturing industries are a little more complicated when it comes to capacity.  On a very basic level, if you understood your wages by department as a percentage of revenue, then you’re one step ahead of most business owners.  For example, if you are a marketing/advertising agency and you knew your non-admin staff were always 50% of revenue over the years.  Then, it rose to 60% of revenue suddenly.  At first glance, it appears you have capacity to take on new work.  Or, let’s say it dropped to 40% of revenue.  Now it appears you may want to add an employee because your staff may be feeling over-utilized. You will want to research the reason for any increase or decrease in the percentage of wages to revenue.

Depending on how employees are logging their time and your billing procedures, you may want to understand capacity through the lens of utilization and realization.  These are terms mostly used in professional services industries.  Here’s a very quick overview:

If an employee usually logs 40 hours of work per week and 20 of those hours were coded directly to client work, then that employee is 50% utilized. That’s a simple way to look at utilization.  BUT, what if you incentivized your employees to be 100% utilized?  And, somehow all your employees were coding 40 hours a week to clients.  You’re probably already one step ahead of me here, but this is where realization comes into the picture.  If an employee coded 40 hours of time to a client but you know you can only bill 20 hours of that time, then the employee is 50% realized.  This is why professional service companies are always monitoring both utilization and realization on their employees. Now, there is always context and a subjective realm when discussing numbers, especially when discussing utilization.  Employee’s compensation, personal leave, or amount of work available are all variables.

Going from $5M in revenue to $10M in revenue will require both patience and courage.  Just remember the grass isn’t always greener at $10M if you don’t focus on the right things and manage them well.

All the best,

Why did I start KC CPA Solutions?

I left a job with one of the top CPA and Outsourced CFO firms in the Kansas City area.  I loved the firm.  I had a steady paycheck, good salary and benefits, great clients, wonderful colleagues, and a work environment that is hard to find in the accounting world.  The partners at the firm were my mentors and taught me how to think like a business owner and how to make good business decisions.  But, why leave something so good for something that is still unknown?

One word, family.

I didn’t always dream of being a business owner.  I didn’t dream of working for myself.  I saw too many business owners eating dinner at their desk rather than at home with their family.

However, I did dream about being a good father, husband, neighbor, and friend.  I dreamed of coaching my kids’ sports teams.  I dreamed of picking my kids up from school or teaching my kids what it means to be a good neighbor.  I want to teach them that life sometimes isn’t about accumulation, but it’s about letting go.  Even if that something you’re letting go of created so much security for your family.

As I was working in my previous job, I began to wonder if I could create a better life for my family.  What if I could structure my work in a way that would allow me to be a more present father to my three kids?  What if I could create a business which allowed me to live a middle-class life and focus on the depth of my relationships, rather than the amount in my bank account?  What if I could create value for a few select clients using my knowledge I’ve gained over the years without the 50-60 hour workweeks?

Can this be a success? I understand success by how John Wooden defined it by saying “Success is peace of mind, which is a direct result of self-satisfaction in knowing you made the effort to do your best to become the best you that you are capable of.”  That’s all success is to me.  My effort towards what I value most in life.  Doing my best at what I can control.  I will do my work and do it well, then “Let God and Let Go” as they say.

Financial Expertise Without the Overhead

What if I told you my solution pays for itself?

Let’s think in simple numbers.  If I had an idea for your business and it would save you $10K in expenses per year.  I estimated it would cost $2K to implement and about $1K of annual fees for maintaining.  It’s a win-win.  Personally, I love working with companies with the “share the savings” type of business model.  I would pay $2 for someone to turn it into $10 anytime.  This is how I want to work with my clients.

My goal is to find enough ideas to save you time and money to pay for my services.  If I can’t, then there is no need to hire me.  Sure, I can prepare financials and add some clarity to your financial health.  But, the value is in what I do with the financials.  The value is the story behind the financials and where we want to take the story.

It’s always interesting to hear the question, “I need a Fractional CFO for my business, what’s your monthly or hourly rate?”  Or, “I’ve grown my business to the point that I think I need a controller or CFO. How do I know?”

Most small businesses don’t have enough work or challenges for a full-time controller or CFO.  I’ve seen companies hire a full-time controller or CFO and pay anywhere from $120K-$150K per year in salary.  The company is also paying for benefits, vacation, payroll taxes, training, and office space for this person, which can drive the total annual expense up to $150K-$180K.  That’s a monthly cost of at least $12,500!  If the CFO can implement enough value through ideas to make up for the hefty price tag, then it may make sense for the small business to make the hire.  It’s been my general experience the small business owner doesn’t need a CFO in the office eight hours a day.

A CFO’s role is to be a change-agent, strategist, and finance expert by owning the budgets and financials.  They are the liaison between management and professional service providers (i.e. bankers).  They are reviewing incoming correspondence from the IRS, states, and other regulatory agencies and determining the necessary response.  Small businesses can only handle so much change in any given year.  Sure, a good CFO could have several ideas that could save the company time and money, but the company may not have the capacity to implement the ideas.

 Enter the Fractional CFO…

I offer companies a way to scale their business and ease into having a finance expert.  Sure, there are always ideas that can save the business time and money, but it’s best to choose to implement the ideas that are the top priority for the business owner.

I can offer business owners clarity to the financial health of the company and understand the story the numbers are telling.  The fun part is where we take the story!