Few things can match the excitement of the first day of business. For many people, it’s the realization of a career-long dream to be their own boss. Even for the serial entrepreneur who has been through the process multiple times, there’s still an adrenaline rush when the website goes live and/or the doors unlock and all of the planning and preparation comes together.
Most businesses have some form of funding lined up at the outset to get them to the starting line. However, executives often discover early on that the pre-opening plans and projections may not have properly estimated the financial resources they need. Perhaps the initial rush has exceeded expectations and additional funding is needed to meet the higher demand. On the other end of the spectrum, initial results may be lower than projected and your business may need financing to get through the slow times while you wait for your product or service to catch on.
Our most recent post in this growth series focused more on the initial funding and financial planning steps to get you to the starting line and through the earliest days of operations. This week, we’ll look more at the options available to keep growth going once the “Grand Opening” signs come down and the confetti is cleaned off of the carpet.
Evaluate your choice of entity
Sometimes a new business starts out assuming that the simplest structure will be the most advantageous. When it comes time to seek additional sources of funding, limitations may become apparent that weren’t considered at the outset. We’ve found that structuring as a separate limited liability company (LLC) can make a new venture easier to manage. If you didn’t start out as an LLC it’s possible to switch to this form of business once you’re up and running. Advantages include:
- Easy segregation of costs and expense tracking related to a new venture.
- Along those same lines, the separate LLC structure can make it easier to model out cash flows and expenses for a financial institution if borrowing is in the future.
- Easier business model to take on investors if equity financing is in your future.
- When it comes time to think about an exit strategy, this form makes it easier to sell the business.
What to do with cash flow?
Depending on how long it took to set up the business and how financially strapped the owners were while getting it off the ground, those initial cash inflows can feel like a deep breath of air after having been held underwater until you thought you would drown. Many owners feel tempted to pull cash out and celebrate early success. Equity investors may be clamoring to see some cash distributed as a reward for their willingness to take a chance on the business.
The problem is, it takes money to make money. Keeping cash on hand helps to protect against short-term hiccups that can sidetrack a growing business. More importantly, it keeps your balance sheet strong at a critical time in the life cycle of the business. If you’re looking to grow through selling equity stakes or taking on debt, investors and lenders alike will look much more favorably on a business that reinvests those initial cash flows from immediate growth.
This may be one of the most essential skills for a business owner looking to keep growth going. Once you’ve got some track record of initial success under your belt, a “proof of concept” as it were, the next step is to build out projections and anticipated cash flow needs. Those who would fund your business, either through loans or equity investment, will ask for specifics about how you plan to get from where you are today to the success you envision for tomorrow. The better you are at this, the more likely you are to succeed in funding your business’ continued growth. Documenting existing customer sales and purchase orders and laying out a clear vision of the factors you consider when you forecast growth will play a key role in convincing those with capital that your business is a smart bet.
The tax breaks discussed last week can also play a key part in funding new growth. Opportunities like the R&D tax credit as well as other federal, state and local incentives can help lower your tax hit in the early years and free up funds that might otherwise have gone to the government.
As noted at the start of this series, please share your questions and comments with us throughout our growth series. Every business has some unique insights and experiences that can help all of us continue to meet and exceed our growth goals.
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