Not preparing a proper budget can have catastrophic consequences on your business. How much capital you need to grow?
I recently had the pleasure of speaking at the Craft and Hobby Association’s (CHA) Winter Conference in Anaheim, California. The CHA represents small businesses in the craft and hobby industry which together generate around $29 billion in domestic revenues. I was energized by many of the participants who attended my address as they told me about their plans to move forward “full steam ahead” with their growth plans despite difficult economic conditions. After my address, I spent about an hour speaking with attendees and identified a key concern which is shared by most business owners: 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 growth budget 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 growth budget, keep in mind the following recommendations.
Your best case is not your base 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. When I look at a revenue projection I always ask “is it realistically possible for you to do much better than this?” If the answer is no, then I tell them that they have just shown me their best case scenario. Their base case—the realistic one—needs to be less aggressive.
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.
Work with 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.
