I am always impressed with the energy of entrepreneurs and their plans to move forward “full steam ahead” with their growth plans despite difficult economic conditions. Each entrepreneur can rattle off key concerns and usually at the top of the list is: how to figure out how much capital is really needed to grow. The overwhelming majority of small business owners that I have encountered always seem to underestimate how much money it really does take to grow.
Failing to prepare a proper budget for growth can have catastrophic consequences on your business. It’s very painful to set out on a growth plan only to find that you have run out of cash when you are on the cusp of achieving your goals. This happens to companies of all sizes and is most prevalent among business owners who have never managed a process of rapid growth.
When preparing your budget, keep in mind the following recommendations.
Your best case should not be your only case
Many small business owners prepare a single revenue projection for their growth plan and calculate their cash needs based on this scenario. Some wisely add a cushion to what their projections indicate they need and feel comfortable that this amount of money will allow them to achieve their needed growth. Unfortunately, many revenue projections aren’t realistic or assume that almost everything will go as expected, something that seldom happens. Most budgets are based on a best case scenario and are too aggressive. Entrepreneurs need to create a realistic base budget with at least a couple different revenue assumptions. This helps them see the good, the bad and the really ugly!
Run a cost sensitivity analysis
Scenario planning is also important for projecting the costs associated with your growth. If you have been running your business for several years, then you should have a good feel for your fixed and variable costs and your projections should therefore be defensible. This confidence can lead to overreliance on the projections. Surprises on the cost side can also kill a growth plan and for this reason you need to run a sensitivity analysis.
This analysis consists of modifying your assumptions for key costs and analyzing the impact of those changes on your overall projections. It’s important to run sensitivities on all important costs and combinations of costs. What would happen to your plan if you have to change suppliers and spend 20 percent more for your raw materials? And your liability insurance rates were to double? Or what if gasoline reaches $5 per gallon as some economists predict? Your model still needs to work under these new assumptions.
Seek someone with experience
Experience is the best teacher, but not the cheapest one. Rather than “learn from your mistakes” it’s better to work with someone who has already accomplished what you are setting out to do. Make sure that someone on your team (a partner, investor, advisor or consultant) has specific experience growing your type of business to the level you want to achieve. This is the best investment you can make towards your future success.
Don’t be afraid to ask for help. Chances are you know a lot of smart business people. Take them out to lunch or coffee and ask them their advice. People love to give advice.
Executing a successful growth plan is very realistic for small businesses because there really is almost unlimited opportunity relative to your starting point. But make sure you do it right and follow these recommendations.