While David Packard’s famous quote, “More companies die from indigestion than starvation,” may or may not have rigorous data or research behind it, the point is still valid: Growing your business too fast can have serious negative consequences.
To better understand how growing companies can avoid the potential pitfalls of hyper-fast growth, I talked to Deep Gujral, a New York City-based accounting expert who works with high-growth startups and businesses. Gujral, Principal of Withum’s Technology Advisory practice, has advised over 300 growth companies backed by venture capital since leaving his position as the Director of Finance at an enterprise SaaS company in 2011. Here are his top tips for business owners and founders looking to grow and scale their business.
1. Build Accounting Procedures That Prepare You for Rapid Growth
If during rapid growth the company doesn’t have good processes and functions, a lot of things will slip through the cracks. For example, if an ecommerce platform or SaaS platform starts getting significantly more orders and closing bigger deals, a lack of process could mean missing invoices and gaps in procedures that lead to lost revenue, and the company can lose track of returned goods, resulting in inaccurate inventory.
A lot of the things that were done while bootstrapping the company won’t work during rapid growth. For example, tracking inventory in a spreadsheet. What a company doesn’t realize is when revenues double or triple, that same process will break. Being able to do it on a smaller scale doesn't mean it will work on a larger scale, and you never want the accounting and finance function to be the Achilles heel of the organization.
2. Set Up the Right Metrics and KPIs for Measuring Success
Oftentimes a founder doesn’t have a lot of insight into his or her own business. In light of this, standard key performance indicators (KPIs) and metrics, such as order volume, how profitable each client is, or even a record of how long they’ve had each client, won't accurately measure success. Figuring out the fundamental metrics for your business and how you get that out of the finance and accounting system is key. We've seen enterprise software clients grow so quickly they’ve missed invoicing new clients who have gone through onboarding. There are compliance issues related to different states and sales tax issues as you start doing business in different states and foreign countries.
Business owners often don’t fully understand unit profitability, or they don’t have very clear financials so they can’t make quick decisions. The lack of data often limits company growth and gives no clear answers to questions like: "How many employees should I hire?" "What’s the projected profitability by third quarter if we hit a certain sales number?" "What resources would we need if we scale and who do we hire when we hire that person?" The financials directly affect real business issues and decision-making.
3. Use a Ledger-Based Accounting Software
Consider using QuickBooks online or Xero. Don’t try to put all your numbers in a spreadsheet. Different software packages are right for different kinds of businesses. These systems can go a long way in ensuring accounting and invoicing procedures are scalable and serious revenues don’t get missed.
4. Store Data in One Location and Document Your Processes
Invoices should be stored in one centralized cloud location. Don’t rely on paper. Document all your processes so procedures like how to invoice a customer can be shared with new employees as your company grows. Steps to consider in the process are: How do you receive payment? How do you make note of that payment? If you’re really building something that will scale, you’re not going to be the only one doing it. A lot of startups only have one person who knows how to do the billing, and they haven’t written it down, so if someone else is handed the task they won’t be able to do it.
5. Examine the Compliance Issues for Your Industry
Often what comes back to haunt companies that have experienced rapid growth and raised a lot of capital are compliance issues. For instance, it’s important to make sure you are compliant with all local and state tax laws, and human resource rules and hiring requirements. Other common compliance issues include contractor versus employee rules, medical leave, and paternal and maternal leave.
6. Hire the Right Skill Sets to Offset your Company’s Weaknesses
When you’re making your first hires, you want to hire people with skill sets that offset your weaknesses to create a strong and balanced team. It’s important to:
- establish a formal human resources roadmap of all expected hires over the short-term and long-term
- create detailed descriptions of each role and its purpose
- establish metrics for success for people hired within each role
- implement an objective hiring process that includes skills-based testing, leadership potential assessment, and other role-specific testing criteria
With this in place, employees will fully understand the responsibilities of their role and growth opportunities as the company scales.
If you find yourself in the envious position of owning a high-growth company, use these tips from Deep Gujral to help ensure the continued success of your business.
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