Skyrocketing growth is every small business owner’s dream, but the reality is that it comes with its unique challenges. To scale your business, you’ll need careful planning, strategic decision-making, and financial acumen – all things your accountant can help with. A good accountant is a crucial partner in your growth journey. Learn how your accountant can help your small business manage cash flow, ensure compliance and financial reporting, and provide valuable insights on financial projections and funding options.
Manage your cash flow as you grow
Cash flow shows how much money moves in and out of your business, while profit is how much you have left after paying all applicable expenses.
Proper cash flow management is the lifeblood of a growing business. Your accountant can analyze your cash flow patterns and identify cash bottlenecks to help optimize your cash flow. They can provide real-time insights to help you make informed decisions to prevent cash crunches during rapid expansion.
Profit margins for businesses should generally be at least 10% or more. Below is an example of a 10% profit margin and how that impacts salary expense and timing of growth.
Example:
Suppose your revenue is $1 million, with $100,000 in profit. Your fixed costs are $400,000.
REVENUE minus FIXED COSTS minus PROFIT = SALARY CAP
$1 million - $400,000 - $100,000 = $500,000 salary cap
Similar to a hockey team, you can’t exceed the salary cap without paying fines. While your company may be waiting to make the next hire, your profit will fluctuate. Ensure your revenue grows before you begin hiring more people on your team.
Help with budgeting and forecasting
In times of rapid growth, your accountant can help your small business figure out what to expect for the next year (forecasting) and how much you’ll spend on each line item (budgeting). Your budget will often include the following:
- Payroll or costs of goods sold
- Facilities
- Marketing
- Overhead
- Admin labour
- Other operating expenses - software, professional liability service
- Depreciation
- Interest expense
Your accountant reviews your actual expenditures to build your budget and runs scenarios to forecast where your company will be in a few months.
Example:
You’re an HR consulting firm that does $1 million in sales and want to ensure you have a 10% profit margin.
These are the fixed costs that you know shouldn’t change significantly:
- Costs of goods sold ($200,000)
- Marketing ($80,000)
- Other operating expenses ($100,000) and
- Overhead ($20,000)
Total fixed costs = $400,000
Profit margin: 10% = $100,000
Salary cap: $500,000
So by deducting the fixed costs and the profit margin, you can determine the amount you have left for salaries, (aka “salary cap”). In this example,
$1 million - $400,000 - $100,000 = $500,000 salary cap
With a 10% growth rate in revenue, and assuming the fixed costs don’t change, your salary changes as follows:
Sales: $1.1 million
Fixed costs: $400,000
Profit margin: $110,000
Salary cap: $1.1 million - $400,000 - $110,000 = $590,000
You can see that your salary cap has increased to $590,000. Variable costs can be factored in as well.
If your actual salary cost is $525,000, at $1 million in sales, you’re over your salary cap by $25,000. You can review your sales goal to maintain the profit margin.
Sales = ?
Total fixed costs = $400,000
Profit margin: 10% = $100,000
Salary cap: $525,000
By adding these costs, you can determine that you need to hit $1,025,000 in sales ($400k + 100k + 525k) to keep your profits equal. You can play with the other factors as well.
Maintain financial reporting
When your small business experiences rapid growth, financial transactions and reporting may become more complex. For example, bookkeeping must be completed differently if you want to forecast costs and revenue growth.
Accounts receivable, accounts payable and cash balances need to be kept up to date – it’s much easier to use these accurate numbers to build forecasts. With Xero, you can see expected payment dates on your bills to help you manage receivables and cash daily. Your accountant can ensure your small business has a Xero online plan with good processes in place.
There are new regulations and compliance requirements, and failing to meet these obligations can halt your growth trajectory and lead to severe consequences. Luckily, your accountant is likely well-versed in accounting standards and tax regulations – ensuring your business dots every “i” and crosses every “t.”
While you focus on your core business, your accountant can streamline your financial reporting processes, maintain accurate records and submit your required returns on time – leaving you with peace of mind.
Provide insightful projections
With rapid small business growth, seeing where you’re headed is important. Your accountant can help you see your financial future by analyzing historical financial data and marketing trends and reviewing growth patterns. These projections can help you anticipate potential challenges, develop strategies for sustainable growth and make informed decisions.
Adjusting quickly is imperative – and your accountant can help you accurately forecast revenue, expenses and profitability every step of the way. They can help you create goals and business KPIs so you can track your progress.
How much additional revenue does your company need to hire a senior manager? We can help you figure it out!
Explore your funding options
Growth often requires additional capital investment, and numerous options for funding growing companies exist. Your accountant can help navigate the world of financing. You’ll need a trusted advisor to guide you through different funding options, including traditional bank loans, venture capital, angel investors and crowdfunding.
Your accountant can determine what your cash balance needs will be as you’re growing.
Example: At Month 14, your business will be at a low point in cash, so let’s figure out when you need funding.
Banks typically need a three-to-five-year cash flow statement, balance sheet and income sheet for funding. By helping you prepare financial statements and business plans, your accountant can demonstrate your company’s growth potential and increase your chances of securing the necessary funds.
See our blog, Small business loans and grants in Alberta and Canada, to help you find the best route for capital and financing.
Rapid business growth can be exhilarating – a journey of opportunities and challenges. Having a reliable partner by your side is crucial to help you manage cash flow, maintain compliance and gain valuable financial insights. Collaborate with your accountant so you can confidently steer your business toward sustainable growth and successful opportunities that lie ahead.
As experienced small business accountants and advisors, we've helped small business owners and solopreneurs achieve their goals and navigate the challenges of running a successful business. If you want to grow your business, consider partnering with True North to help guide you. We can help with a specific matter or create a strategic planning program that grows with your business.
Read our related article, From startup to scaling up: Why entrepreneurs need growth advisory from their accounting firm
Learn more about our small business advisory services.
Find more Strategic Advisory topics relevant to you and your small business.
