When you're not a "startup" anymore...

All of "Hamilton" is great, of course, but, among the multitude of great lines, there's one in particular that always speaks to me as a business owner. During Cabinet Battle #1 (a rapped debate about America's fiscal strategy), Hamilton states to Jefferson, "Thomas, that was a real nice declaration. Welcome to the present; we're running a real nation."

Though the line is directly referring to conflict between the Federalists and Anti-Federalists, it always makes me think of the challenges startups face after they've achieved their first measure of success. You start with your own personal "Declaration of Independence" (from your previous job), start a company, and then just fight to survive. One day you wake up and it's a real business. The question then is, "Now what?"

Speaking from our own experience growing a fast-moving startup over the past five years, I wanted to offer our advice on what to do next when your startup grows up.

 

Scaling economically.

scaling economicallyIronically, in a lot of ways, it's easy for a startup to be profitable. The staff is small and working like crazy, and no one expects a huge salary or a ton of perks, so you get a lot of bang for your buck out of the few people you have. You probably don't have an office yet (maybe just a co-working space), so there's not that huge monthly expense hanging over your head. The overhead in general is low, and you're really putting your A-game out there for every possible sale.

Sure, it's not sustainable in the long-term (unless you are cool with regular nervous breakdowns), but in those early days you can often at least break-even, even if you're not rolling in the dough.

Eventually, you realize that your staff does need to grow, or that you do need a place everyone can work centrally. (Though you have to be careful not to add those costs just because they're things you want. See our prior article, Living a Lie: The mistakes that make entrepreneurs go broke.)

Scaling is not without its risks, but there are steps you can take to mitigate those risks. Having a budget is key, obviously, but it is also helpful to map out conditional budgets for if you add various expenses, such as rent (or if you were to have a slow sales month). You can use those to establish a set point for when you're willing to add to your overhead. (For example, once we are regularly at x recurring revenue, we will sign a lease on an office, or hire support staff.) This can allow you to scale at a safe pace, without over-expansion.

 

Managing changing stresses.

growing business stressWhen a startup is new, your main stressor is where the next sale is coming from. As the business grows and acquires clients in greater numbers, some of those stressors go away, and new stressors are added.

One of the biggest headaches in a growing company stems from managing a growing staff. When the company is small, you're operating in your area of expertise. As the company grows, you have to learn more about being a leader. Hiring and managing employees can take a mental toll, especially as you realize that the systems that worked when the company was smaller are no longer sufficient. (For instance, you will likely need to invest in a CRM that can help your new staff navigate their workload. Even if the original startup members don't need it, new employees will.)

Additionally, as you get more and larger clients, the clients themselves will require additional management. It can be hard to deliver the same level of personal attention when your time is spread so thin between them. It will become necessary to delegate some of the customer service duties to other staff (terrifying as that may be).

This is not to say you drop contact with clients, or aren't available when they need something; it just means you unload some of those duties onto other people, so the client can get what they need (even if they're no longer getting it directly from you).

 

Becoming who you are supposed to be.

writing your storyIt's not uncommon to feel a bit "lost" as your company grows. I experienced a small existential crisis the first time we signed and began work with a new client with whom I myself had never directly communicated. Once I got over the brief panic that I might no longer be needed, I realized how freeing it was, that I knew we could bring in revenue without my involvement. As we grew and hired additional staff, I didn't have to work on every single account; a new admin meant that I didn't have to manage the filing and calendar anymore.

I began to have something almost resembling "free time", and for me, that was terrifying. I had to figure out what to do with myself.

Fortunately, I really enjoy the study of business, in general. I began focusing on how we could improve processes, expand into new markets, and stay ahead of changing trends. I worked for us to become one of the first Xero-certified partners in our area, and began focusing on new business types (B-Corps, for example), so we could be prepared to serve upcoming businesses.

I also started focusing on who I wanted to be as a business leader, and who we wanted to be as a company. In a lot of ways, the company's growth has freed us to circle back to those original goals and mission statement. It's not enough just to grow a successful business; we want to stay in line with why the company was founded in the first place.

It's easy to imagine what you think a business owner should look like (see our article What makes an owner? for some prime examples) and fall into the trap of backing too far off from the company, or becoming an absentee owner. This is not what embracing your changing role means. It means that, instead of ordering business cards, you're calling referral partners (not that you're relaxing on a yacht while the minions do all the work).

 

It seems ironic that success should bring so many difficulties, but adapting to those new challenges is what sets companies apart. Be flexible, stay committed, and plan for everything you can, and you'll keep the fire you started growing strong.


Weird Dog Habits

Your Accountant's Weird Habits - Explained

If you have a pet in your family, maybe you've seen those articles purporting to explain why your dog spins in a circle before lying down, or why your cat would rather drink from the faucet than a water dish. To many people, there is a creature even more alien and perplexing than any animal: the finance professional.

Your bookkeeper or tax professional might say or do things that don't make a lot of sense to you. Some of their actions might seem flat-out contradictory. But, as with any exotic species, there is a reason behind all of it.

I want to break down a few of the most commonly complained-about behaviors, along with the explanations behind them (with the assistance of cat pictures).

 

First annoying habit: My accountant keeps nagging me to get organized.

Your bookkeeper wants you to have a system for tracking open customer balances, or wants you to keep all your expense reports in one place. It's frustrating, because the whole reason you're paying them is for them to "keep up with that stuff".

So why do they do it?

For starters, good bookkeeping relies on complete information. (A balance sheet showing $1M in the bank doesn't mean much if there's a $995K liability that got left off.) Unless you have an in-house accounting staff, your bookkeeper is relying on you to get that information to them. A good organizational system ensures that all of the information is getting to who needs it.

Furthermore, most accountants charge based on time expended, and though good accounting can be had at a good value, it's still not cheap. Paying your accounting service to dig through files and hunt down info is a waste of their time and your money.

Accountant Cat 1
Accountant Cat is tired of looking for your payroll reports.

 

Speaking of "time", my accountant freaks out if I don't get certain information to them right away. What's the rush?

Certain items, particularly related to tax filings, can incur massive penalties if late. Your accountant needs the information in advance of those deadlines, to record it and check for accuracy. (Inaccurate filings can also, of course,  result in penalties.)

If your accountant is pestering you to get information to them quickly, it's because they are trying to keep you out of trouble and save you money.

Accountant Cat 2
Accountant Cat on April 10th, waiting on you for info.

 

Since we're already talking about taxes...Why does my accountant try to make me spend money I don't want to spend? For instance, why do I have to treat certain workers as W-2 employees, instead of paying them as contractors?

Because worker classification is a big deal. Not paying employees correctly can result in audits, fines, and even lawsuits. Your accountant is being a stickler about the rules because they don't want you to get sued.

Accountant Cat 3
Accountant Cat, finding out you're paying your 9-5 office assistant as a 1099 contractor.

 

Still talking taxes...Why does my accountant say I can't take this cool deduction I found? I saw online that I can expense my home office/car payment/pet kinkajou/etc.

Present blog excluded, internet advice is no substitute for real, professional guidance. Though you'll seeing many articles claiming that you can write off an entire car payment, or take a "home office" deduction, the actual guidelines surrounding those items have specific criteria which must be met. Unfortunately, small businesses, particularly those which are sole proprietorships, are frequent targets for audits. Taking excessive, unqualified deductions puts you at an even greater risk. If you trust your tax professional, trust that they will advise you of deductions for which you do qualify. (If you are not happy with your current tax professional, we can recommend some.)

Accountant Cat 4
Accountant Cat has some bad news about that great deduction you found...

 

So I have to spend extra on employees, but can't take any of the fun deductions. And now I'm being told that I need to watch my spending on meals, and look at ROI for things like advertising. Is my bookkeeper just a kill-joy?

No, they just don't want you to go broke. Going bankrupt isn't just bad for you; it also means you can't pay your vendors (like your bookkeeper). So they have a vested interest in keeping you solvent.

Because, no matter what your business, one thing we all have in common is that we like to get paid.

Accountant Cat 5
Accountant Cat could lighten up if you'd stick to a budget.

The Financial Reasons Small Businesses Fail

Almost every entrepreneur has heard the statistic:  80% of small businesses fail.  There are many reasons this happens, and can include everything from market slumps to lazy owners.  To enumerate every way a business can go under would be an endless, impossible task.

However, there are a few financial characteristics frequently found in struggling businesses.  Here are the most common financial reasons small businesses fail.

There's no plan.  It's not uncommon to meet new small business owners who have a brilliant product idea, a well-developed marketing plan, a slick website, and not one thought given to their budget.  We've already written on the tough financial questions to answer before starting your own business, but the importance of a solid financial bedrock cannot be overemphasized.  A well-researched budget and fixed goals is the key to surviving that crucial first year in which most businesses go under.  Great customer service and spot-on marketing are not enough to balance out shaky financials.

Speaking of customer service...

Poor credit management and pricing strategies are bad for everyone.  No one craves popularity like an entrepreneur and, when your business's success is entwined with how well-liked you are, the urge to avoid offending anyone becomes even stronger.  In the early days of a business, when there are only a few customers, there is a common impulse to let clients slide on late payments, or to offer frequent "friends and family" discounts.  It's easy to justify this with the logic with the idea that you need to establish customer loyalty, and you can tighten the reins a bit when you have a solid customer base.  There are a few reasons this doesn't work:

  1. Clients who don't pay on time aren't going to appreciate the slack you've given them in the past; they are going to resent the restrictions you enforce in the future.
  2. Likewise, your patrons who are just coming to you for the lowest price will quickly go elsewhere when your rates rise.

Lenient accounts receivable and cheap pricing might gain you a quick boost in early sales, but they are not a sustainable model.  Delivering a product you can be proud of, at a price that is worth your hard work and can keep your business afloat (and actually requiring customers pay you that fair price) ensures that your customers the pleasure of patronizing your business for years to come.  Because you have to remember...

Cash is king.  Yes, it's a cliche, but that doesn't make it any less true.  A great business model matters little if you run out of money before you can implement it.  Managing cash flow is key to not just the health but the continued existence of your business.  Here are a few of the most common cash pitfalls small businesses face:

1.)  Insufficient capital.  In all likelihood, your business will not be immediately profitable.  So not only do you need enough cash to get your business started, but you need enough to allow yourself to operate at a loss for a while.

2.)  Not having a large enough cash cushion.  Think "Princess & the Pea" levels of padding.  Regardless of how well you plan, the economy is unpredictable.  Look to history for examples.  No one expected the Boston Molasses flood which, in addition to the damage caused and lives lost, resulted in a nearly $11M settlement (in today's money) for the responsible company.

3.)  Over-investing in fixed assets.  It's great to plan for the long-term but, if you don't plan for the short-term as well, your business will not get a long-term.  Sacrificing too much of your cash for something like manufacturing equipment (even if you're getting a great deal) can hurt you, as that is not a liquid asset and will be of no help to you in the event of an emergency (i.e. your factory flooding a major metropolis with 2.3M gallons of molasses).  Think of it like a game of Monopoly; if you start building hotels too soon and suddenly need cash, you're stuck selling all your buildings back to the bank for half-price, and you know bankruptcy is right around the corner.  Only, in real business, instead of losing yet another game to your annoying brother-in-law, you've lost your entire livelihood.

Expanding your business is the ultimate goal, but maintaining cash flow gives you the solid foundation you need to build upon.

80% of new businesses fail, but that means 20% succeed.  To be that 1 out of 5, have a plan, know your value, and remain patient.  Better to start small and grow something big than to start too big and dwindle away.