For a business in its early stages growing and scaling is an exciting prospect. But where there is opportunity, there is also risk. 

The scaleup journey fundamentally comes down to finance. So, it’s important for scaling businesses to remain financially shipshape and to build a platform for sustainable and consistent growth.

For those in this position, there are challenges ahead and here Chris Lewis, partner at Albert Goodman, explores some of the problems and pitfalls that scaling businesses may face… and how to navigate them.  

Cashflow

For any business, of any size, cash flow is critical. Healthy cash flow means a healthy business and as an owner-founder, you have to understand your cash, profit and working capital cycle.

Longer capital cycles can tie up capital long term, meaning you’re not earning a return. While shorter capital cycles will make your business more agile and able to free up cash faster. 

This point will come up a lot, because it’s important, but there is a difference between invoicing and being paid. Work out robust payment schedules with clients or customers and create billing structures, beyond just raising an invoice at the end of the month. 

People

When it comes to investing in people, there really isn’t a hack or a hard and fast rule here. Bringing people into your business during that growth period is always a tactical gamble.

One scenario may be: you’ve won a lot of new business and you need people to deliver the work. While you may have that pipeline under your belt, ask yourself are the payment structures in place so that you can meet payroll for those new hires? 

Another scenario might be that you’ve found the most perfect individual for your business, but there isn’t really a role right now. Do you risk that person going elsewhere, or do you bring them into the fold, taking a gamble that it’ll pay off later down the line? 

Whichever side of the line you find yourself on, these decisions have to be fiscally informed. How will a number of new hires change your payroll and cash flow? Do you have enough to initially absolve the costs of a new hire, and if so, for how long? 

Tax Systems & financial practices

For an owner-founder having a good solid grasp of tax systems is important. Knowing your PAYE, corporation tax, VAT as well as your breakeven points, and how to run a debtor’s report are critical to your growth and your day-to-day business. You’d be surprised at how many business owners aren’t aware of these things. 

Getting this wrong can have a real negative impact, so it’s important nothing is left until the last minute. 

If you’re an owner-founder, you need to be au fait with the tax system around your business. But if you need to bring on a third party to deal with your tax for you, the earlier you can make this call, the better. 

The right tool for the right job

Accounting practices and tools have come on a long way. Businesses can now access off-the-shelf financial tools, that give them great levels of access and insight into their financial data.

There are lots of tools out there, but it’s a case of finding the right one for you. Don’t just commit to the first one you find, take the time to scope out what works for you. 

In the early stages, as long as you have a good grasp of your company finances, you may be able to manage finances with limited, or no, expert financial assistance. But there will always come a point where you will need greater support, and you’ll need to make that all-important leap. 

Expert Help

In my own experience, it’s quite rare for startups and scaleups to have financial leadership in place, be it an FD or a CFO.  I’ve known organisations turning over upwards of 5 million and still not having appointed either. So as a ‘younger’ business, you don’t immediately have to have a financial c-suite in place from the get-go.

Having an outsourced accountancy or financial role will however go a long way to keeping your organisation ship shape. Someone who understands the tax systems, deadlines and timescales can really help you with the nitty-gritty of financial management and planning, giving you the time to focus on growing your business.

The role of the owner-founder

The role the owner-founder chooses to take will significantly influence how the business scales. 

It’s understandable that owner-founders want to have a hand in everything. But there must come a point where concessions must be made, things must be delegated, and responsibilities relinquished.

If you’re an owner-founder, with limited financial and accounting experience, then while it’s important to maintain oversight, you really need to be hiving off the actual doing to more experienced hands.

If your background is in finance then by all means take the reins. But know that there will be other aspects of the business that you will need to relinquish.  When you are scaling, having a mindset of ‘I’m the only person who can do this’ will only limit you. 

Dangers of Growing too quickly

Scaling up and growing your business is an exciting time. You want to take on new business, get projects underway and be busy. But know there is such a thing as growing too quickly. 

If you’re taking on new clients and projects hand over first, you’ll be busy. But if you’re taking on this work and the cash facility and payment structures aren’t in place, then that’s going to be detrimental to your growth. 

If you have the existing cash facility to seize opportunities as they come, great. But if you’re taking on work, then stretching your cash flow to the point where meeting payroll is putting you in the red, that’s not a sustainable platform for growth. 

Once again, understand that there is a real distinction between invoicing and getting paid.

Author: Chris Lewis

Chris has been in general-practice for more than 15 years providing the day to day support clients require, whilst also having specialist experience in areas such as; advising on the tax-efficient extraction of profits from limited companies, research and development claims, the raising of finances via Enterprise Investment Scheme share issues, company reorganisations including purchase of own shares and share for share exchanges, and producing investment prospectuses and business plans.

Chris works closely with the corporate finance team on business valuations, and undertakes valuation work in his own capacity as a court appointed expert valuing companies for divorce proceedings.

Shona Wright

Shona covers all things editorial at TechSPARK. She publishes news articles, interviews and features about our fantastic tech and digital ecosystem, working with startups and scaleups to spread the word about the cool things they're up to. She also oversees TechSPARK's social media, sharing the latest updates on everything from investment news to green tech meetups and inspirational stories.