Once your business has survived the start-up phase, it has got a solid foundation to grow. Business and financial advisory services are critical at this stage of development. Consider these major areas or functions of your company to focus on as you look to take it to the next level.

Financial and Tax Reporting

Businesses in the growth stage usually have more-sophisticated financial reporting needs than start-ups. As a result, those that previously relied on cash- or tax-basis accounting methods may need to graduate to accrual-basis methods and follow U. S. Generally Accepted Accounting Principles (GAAP).

Lenders and investors may require CPA-prepared financial statements, which include the following (listed in increasing level of assurance):

  • Compilations,
  • Reviews, and
  • Audits.

Audited financial statements are considered the “gold standard” in financial reporting — and they are required for companies that are regulated by the Securities and Exchange Commission. But compiled or reviewed financial statements may suffice for most closely-held businesses at this stage of development.

The key difference is the level of work needed in an audit to determine whether the financial statements provide reasonable assurance that they are free from material misstatement and conform to GAAP. For example, auditors may conduct analytical testing procedures, physically inspect assets and send third-party verifications. They also evaluate internal control systems and report on control weaknesses.

Additionally, once a business turns a profit, it usually owes federal and state income taxes (or tax obligations pass through to the individual owners if it is not a C corporation). Mid-year and year-end planning meetings with financial professionals are essential to find opportunities to lower taxes now and in future tax years. Your financial advisors can also alert you to pending tax law changes that could affect your business tax situation.

Working Capital Management

Cash shortages are common for businesses during periods of growth. The main culprit is “the cash gap” — that is, the time between:

  • When your business must pay suppliers and employees, and
  • When it receives payment from customers.

For businesses that make or build products from scratch, the time to convert materials and labor into finished goods, sales, and (finally) cash receipts can be significant.

A line of credit can alleviate seasonal or temporary cash crunches. Lenders typically will request financial statements, tax returns, and updated business plans before approving credit applications. In addition, owners of businesses in the growth phase customarily must sign personal guarantees for business loans.

You also may need other cash management techniques that target the following three components of working capital:

1. Receivables,

2. Inventory, and

3. Payables.

Professional advisors can provide working capital metrics to help evaluate how your business measures up against competitors. They can also recommend strategies for improvement, including tips to speed up collections, reduce bloated inventory while maintaining adequate safety stock, and negotiate more-favorable terms with suppliers.

Marketing

Once you have established a foothold in your industry, marketing is key to expanding your reach to customers. Professional branding can provide a more cohesive, slick appeal and help differentiate you in the marketplace at this phase of development.

Company branding should be integrated into all aspects of business operations. This may include:

  • Product packaging,
  • Signage and uniforms,
  • Website and social media posts,
  • Print collateral and direct mailers,
  • Advertising campaigns,
  • Promotional items, and
  • Corporate events.

Business advisors can track the return on marketing programs to help determine what is working and what may need improvement.

Strategic Investments

Business growth may be organic or inorganic. Organic growth comes from internal efforts. Examples include launching new products, expanding into new geographic markets, building new facilities, and investing in new equipment. Your business has limited funding, so it cannot pursue every strategic growth opportunity.

Business advisors can help evaluate competing investment alternatives using financial modeling and analytical tools, such as accounting payback, internal rate of return, and net present value. These kinds of analyses bring discipline and sophistication to the strategic decision-making process, which can foster buy-in from lenders, if necessary.

Inorganic growth comes from mergers and acquisitions (M&As). Essentially, you are acquiring new revenue-building capabilities from external sources, rather than building them in-house. For instance, your company might acquire a competitor with a top-notch sales team, or it might merge with a supplier to become more vertically integrated.

When conducting M&A due diligence, your professional advisors can be a valuable resource. In addition to evaluating the purchase price, they can devise deal terms — such as earnouts, installment payments, and stock deals — to bridge the gap between the asking and offer prices. They can also explain the tax implications of deal structures and manage post-deal financial reporting requirements.

Risk Management

Businesses that are laser-focused on growth sometimes overlook operating risks. In turn, dishonest people may see this lack of attention as a vulnerability — and exploit it. Two key business risks that growth businesses face today are:

1. Fraud. This includes theft of assets, intentional financial misstatement, and corruption. Fraud schemes may be committed by employees or people outside your organization — or they may involve collusion among multiple individuals.

2. Cybersecurity. Hackers may gain access to your company’s systems to steal valuable data or install ransomware. Cyberattacks can be costly, interrupt business operations, and impair value.

Your business advisors can help identify and prevent operating risks and recommend IT professionals to fortify your cyber-defenses. They can also help evaluate business insurance needs to mitigate general liability, directors and officers, and specialty risks. As your business grows, its insurance needs may change, and coverage levels may need to be dialed up (or down). In some cases, you can save money by bundling multiple insurance products — including employer-provided health care coverage — with a common provider.

Human Resources

Human capital is essential to growing your business. Hiring workers with the right skills and experience to fill open positions can be challenging today. You will also need innovative programs to enhance employee satisfaction, performance and retention. A positive and thriving workplace culture should be at the forefront of these programs.

A fundamental benefit that every business should offer to employees when it is in the growth phase is an employer-sponsored defined contribution retirement plan. While Simplified Employee Pensions, SIMPLE IRAs, and solo 401(k) plans might work well for start-ups, you now may need a more robust retirement plan that can continue to grow with your business. Popular options to consider include traditional and Roth 401(k) plans. The Roth version allows employees to contribute after-tax dollars without having to worry about income-based phaseouts.

The right business advisors can help you devise strategies for hiring, retention, leadership training, and employee benefit and wellness programs. They also can assist you in choosing outsourcing services to fill positions temporarily while you are doing a talent search or when a key person takes a leave of absence.

Bringing on a Professional Management Team

As your small business grows, it may eventually reach the point at which it outgrows your ability to handle all the leadership responsibilities. Professional advisors can help you transition to a professional management team.

Doing so may require an extensive executive search, sometimes in other geographic markets. Also consider looking internally for promising employees that would be strong candidates for becoming part of a larger management team. Promoting insiders helps maintain business continuity, build morale and demonstrate a viable career path for other employees.

A professional management team can breathe new life into a business — for example, by creating the opportunity to refresh your branding or website, offering tax and accounting insights, expanding access to capital, and revitalizing the corporate culture. Or, if you are so inclined, it can enable you to more readily devise an exit strategy that allows you to cash out on the sweat equity you have built in the business.

Ask the Pros

Companies need guidance from experienced professional advisors as they mature. Do-it-yourself accounting and business planning can result in frustration and missed opportunities. Our team is here to help determine the optimal path forward based on your business and personal situation.

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Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.

 

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