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Pitfalls to Avoid When Growing Your Business

A strong economy drives business growth. I think most of us can agree on that. Growth is usually good…

But if it is not controlled growth, it simply will not be sustainable.

In this blog, I outline several pitfalls to avoid when growing your business (especially in a high growth scenario). It’s all about managing the growth properly.

We have two current clients that are experiencing high growth, and they can barely make payroll.

With a pipeline of huge sales, how can this be possible…?

Their lack of planning on systems and procedures has also caused the management to not sleep well at night.

SCFO Lab Members: The reason most income statement projections fail is because of a lack of ability to accurately project sales! Start the Sales Genie EP now.

What Happens in a High Growth Scenario?

So, what happens in a high growth scenario? It should be all good news… The problem is that many times the decision maker(s) of a high growth company have never experienced high growth. Sometimes, these can be startups or a business that developed a new product.

If you have not experienced it, then it really is hard to imagine all the things that can take place.

Example of a High Growth Scenario

Let’s look at an example of a high growth scenario in a made-up company…

You are a manufacturer of widgets and you own a manufacturing facility. You have 50 employees before the company is about to explode in growth.

Your VP of Business Development or VP of Sales brings you new contracts that will significantly change the size of your company.  These contracts will double, triple, or even quadruple your business in the next 18-24 months.

So no worry about generating sales….

But there are several questions that need to be asked and pitfalls to avoid in this company.

Pitfalls to Avoid When Growing Your Business

Inventory: How are you going to fill all those orders?

You need to purchase a lot of inventory of raw material. In addition, your purchasing transactions just tripled in dollars and quantity. Finally, you have enough machines to manufacture items for the next 12 months… But next year, you will need to acquire more machines to keep up with demand.

Labor: What about labor?

The purchasing person is working already 50 hour weeks, and you know you will need to hire another purchasing person. Your plant labor needs to increase to compensate with the increased workload.

Right now, your 3 person accounting team includes 2 bookkeepers and a controller. You realize you need a cost accountant.

Systems, Process and Procedures

You have used a basic accounting system for 10 years, but you realize that you have outgrown the accounting system. It is not the right system because it does not handle cost accounting or standard costs. You want to integrate purchasing and inventory modules.

For years, you kept inventory and work-in-process on spreadsheets. Now, the dozens of spreadsheets are not reconciling. It’s time to automate inventory.

The once per year physical count of inventory is no longer enough. You need to have cycle counts and maybe at least a full physical count quarterly.

For years, you have operated informally, but you now you realize you need to have written policies and procedures.

Accounting

You have run your business on a hybrid cash/accrual system, never really got to full accrual accounting, and never really worried about GAAP financial statements. Maybe you should…

You never considered having your financial statements audited; however, with all this growth, you might sell one day. Having your financial statements audited would add value to your business.

Your company is growing so much, you need more than financial statements that tell you what happened in the past. Now, you need projections, budgets, and dashboards.

It’s time for a strategic financial partner. It’s time for a CFO.

Click here to access our Goldilocks Sales Method, and learn how to build your sales pipeline and project accurately.

Human Resources

Your admin person that did a great job all these years is now dealing with 3 or 4 times as many employees. It’s time to hire someone that has a good understanding of labor laws.

Payroll was done in house. Now with so many hourly people and manual time sheets, it’s time to upgrade and integrate payroll to the accounting system or have it outsourced.

Consider automated time keeping and get away from the multiple spreadsheets.

Legal and Tax

Your new sales take you out of State. Now, you are selling in 5 different States.

Have you created nexus in these other States? They have State taxes… Oops!

You had to hire a few people on the ground in the other States; your labor laws just got really complicated.

Sales and Use tax… Are you paying the correct taxes, not paying them, or over paying them?

You developed a new process or Intellectual Property (“I.P.”). Did you register this? Did your attorney suggest maybe creating a new legal entity that has the I.P.?

By creating the new legal entity or new legal entities, did you realize you just created a lot of complex accounting work by having all those legal entities?

Note: We recently had a client that created 19 legal entities because their attorney wanted to “protect” them from everything. Now, they had to consolidate all those entities with hundreds of intercompany transactions.

What is your Exit Strategy?

You will be quadrupling the size of your business in the next 2-3 years. You thought to yourself one day… I might want to sell this business.

What does it take to sell your larger company?

It takes time to set a strategy for an exit. It takes time to “professionalize” management and your back office.

Do you have a succession plan so that the business does not look like a one man show?

Do you have a 3-year budget with projections?

SCFO Lab Members: If you want to build your exit strategy and/or access your readiness for market, check out the Exit Strategy EP

How to Have Sustainable High Growth

I have hit on some of the basic topics that come up in a high growth scenario. There are many more things to consider.

The first thing that comes to mind is how are you going to pay for all this?

Do you have sufficient working capital?

Sometimes, you can manage working capital and have sustainable growth.

Many times, you need some sort of financing because of the timing differences in working capital. You cannot afford to sustain this high growth with out the financing.

Cash and working capital are key to the sustainable growth.

But just as important is having the right people. Not just having the right people on the bus… But having them in the right seat on the bus is critical. Not everyone is meant to sit in the same seat in a larger company. This applies to the management team as well as employees.

I have actually seen situations in high growth companies where the person that really needed to be fired was the owner or CEO.  Because the CEO of a $5 million dollar company is not necessarily the same CEO of a $50 million dollar company.

Don’t get me wrong… The ownership does not have to change. You can still own the business. But that does not mean you need to be an employee running the business.

Summary

In order to have sustainable high growth that will allow you to sleep well at night consider the above items but you must have the following…

  • Enough working capital
  • The right people in the right seats “on the bus”
  • More and different systems, process, and procedures
  • A strategic plan that will allow you to have a sustainable bigger company

Projections are a helpful way to grow sustainably and avoid an uncontrollable high growth scenario. Download our free Goldilocks Sales Method to start building your pipeline and projecting accurately.

Pitfalls to Avoid When Growing Your Business

Pitfalls to Avoid When Growing Your Business

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PEO or Outsource Payroll

See Also:
Advantages of a PEO
What is a PEO?
How to Select a PEO
Professional Employer Organizations FAQ’s
Service Department Costs

PEO or Outsource Payroll

Do you have a PEO or outsource payroll? Under the PEO Arrangement, there is a co-employment relationship in which both the PEO and the Business Owner have an employment relationship with the employees. Contractually, the PEO and the Business Owner allocate and share many of the traditional employer responsibilities and liabilities. For example, the PEO assumes responsibilities and liability for employment related matters such as Payroll and Payroll Taxes, Employee Benefits, Human Resources Management, and Safety and Risk Management. As a result, the Business Owner can concentrate 100% on growing their Business.


Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs


Outsourcing is a contractual arrangement, absent an employment relationship, with a vendor (and its supervised personnel), for services, either on the customer’s premises or off-site at the vendor’s location, to perform a function or run a department that was previously staffed and supervised by the customer directly. Furthermore, examples include: Payroll Processing, Financial Auditing, Agent of Record Services, and Legal Services.

Today’s Professional Employer Organization (PEO) is a “hybrid” of all of the honorable characteristics of the Staff Leasing Business Model. In addition, combine it with all of the efficiencies of the Outsourcing Business Model.

Guide to Outsourcing Your Business's Bookkeeping and Accounting


If you’re interested in becoming the trusted advisor your CEO needs, then download your free How to be a Wingman guide here.

PEO or Outsource Payroll

Strategic CFO Lab Member Extra

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PEO or Outsource Payroll

Originally posted by Jim Wilkinson on July 24, 2013. 

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Service Department

See Also:
Administration Expenses
Outsource Definition
Advantages of PEO Services for the Business Owner
Sunk Costs
Joint Costs

Service Department Definition

Many companies require support activities as well as core activities to produce their goods and/or services. Support services, or a service department, do not contribute directly to the production of goods or the providing of services, but they are necessary for the company to operate. In addition, consider service departments, support services, or administrative services support activities.

The costs associated with these support services must be treated in accordance with accepted accounting practices. They also may be allocated to the cost of goods and services produced by the company and/or allocated to other departments within the company. Furthermore, support services costs often comprise a large portion of overhead costs.

Because these activities are not the core activities of the business, managers often must decide whether to keep support service activities in-house or to outsource them. Often an outside organization that specializes in the particular support service in question can perform the activities in a more cost-efficient way. As a result, it may benefit the company to outsource that particular activity.

Service Department Cost Allocation Methods

In accounting, there are several methods for allocating the costs associated with service departments to the products produced by the company and also to the internal departments that benefit from the support services. These cost allocation methods include the following:

Support Services – Examples

Some examples of support service departments that you may commonly find in a company include the following:

If you want to improve your financial leadership skills, then click here to learn more about the SCFO Lab.

service department, Service Department Definition, Service Department Cost Allocation Methods

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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Management Definition

See Also:
Activity Based Management (ABM)
Warning Signs Of A Company In Trouble
Budgeting 101: Creating Successful Budgets
Planning Your Exit Strategy
Outsource Definition

Management Definition

What is Management? The management definition is a single or group of individuals who challenges and oversees a person or collective group of people in efforts to accomplish desired goals and objectives. Furthermore, the definition of management includes the ability to plan, organize, monitor and direct individuals. The management definition is also a person or collective group who possess the executive abilities to lead a group through hardships, aspiring to meet an organization’s purpose and visions.

Management Functions

With an understanding of what is management, there are several management functions and roles that are needed in the management function of planning for an organization’s success. Management function examples include the following:

Organizations must identify the viable management functions organizing for growth and future success. They should also develop a business management structure to separate different management functions and roles; however in smaller companies, individuals may often take on multiple management functions. In comparison, larger firms will segregate different job management functions leading for organized management functions and skills.

Business Management

Organizational best practices are the business management description guidelines frequently outlined in standard company policies and procedures. Furthermore, a business manager reinforces these aids to ensure specific job functions are carried out in a preferred business approach. Organizations may hire a business manager for one or multiple functional areas to provide specific industry or product knowledge and have overall responsibility for business operations. Business manager responsibilities may include supervising an entire company, division, or territory to generate the highest revenue return from business activities.

In addition, some of the business manager’s duties include the following:

  • Managing a team
  • Providing industry or product expertise
  • Meeting desired performance measures

If you want to learn more financial leadership skills, then download the free 7 Habits of Highly Effective CFOs.

Management Definition

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Management Definition

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Malcolm Baldrige National Quality Award

See Also:
Total Quality Management
Theory of Constraints
Activity Based Management
Capital Structure Management
Retainage Management Collection

Malcolm Baldrige National Quality Award

The Malcolm Baldrige National Quality Award is an award for excellence in quality improvement and quality management. It sets very high standards for quality. Furthermore, firms that win the award have demonstrated excellence in the quality of systems, processes, and consumer satisfaction.

The US Congress established the Malcolm Baldrige National Quality Award in 1987. As a result, only US firms receive Malcolm Baldrige quality awards; however, the award is recognized internationally. The US President gives the Baldrige award to the winning firms. Malcolm Baldrige was Secretary of Commerce from 1981 to 1987. Baldrige was a strong proponent of quality management at U.S. firms, so he helped draft the Malcolm Baldrige National Quality Improvement Act. As a result of his efforts, Congress named the award in his honor.

Several Malcolm Baldrige quality awards may be given annually to manufacturing companies, service companies, small and large businesses, education organizations, health care organizations, and nonprofit organizations. Furthermore, the purpose of the Baldrige award is to raise awareness of quality management among consumers. It also motivates U.S. companies and organizations to raise their quality standards and strive for excellence in quality improvement and management.

Malcolm Baldrige National Quality Award Criteria

Each year many companies apply for the Malcolm Baldrige National Quality Award and the winners are chosen based on seven criteria. The criteria are leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; human resource focus; process management; and results.

Baldrige Criteria

Baldrige criteria includes the following:

1. Leadership
2. Strategic planning
3. Customer and market focus
4. Measurement, analysis, and knowledge management
5. Workforce focus
6. Process Management
7. Results

Baldrige National Quality Program and Baldridge Award Winners

For more information on the Malcolm Baldrige National Quality Program and to see a list of firms and organizations that are Baldrige award winners, go to: quality.nist.gov.

If you want to learn more financial leadership skills, then download the free 7 Habits of Highly Effective CFOs.

Malcolm Baldrige National Quality Award

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

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Malcolm Baldrige National Quality Award

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Gross Up

See Also:
Adjusted Gross Income Definition
Gross Profit Margin Ratio Analysis
PEO Arrangement Compared to Outsourcing Payroll
Payroll Accounting
Purchase Option

Gross Up Definition

Defined as paying a full amount without any deductions, gross up is most often used in terms of salary for employees.

Gross Up Explanation

Gross up, explained as a method for human resources to gain the benefit of their wages as soon as possible, is more simple than it appears. When salary is grossed up it is paid fully without any deductions that are not required, like 401k payments. This allows the employee to begin using their entire income as soon as possible. Though gross up wages are paid in full, deductions required by the government still occur. An employee will not be able to avoid income tax when they gross up; taxes will still need to be paid before the final amount is then given to the worker.

Other payments can also receive the gross up calculation. For example, a payment for the purchase of a business can be grossed up. In this case, the receiving party will take their full amount of payment rather than having to wait some time for completion. This allows the previous owner more freedom than if some of the payment is withheld. Gross up operating expenses and other payments occur, as well.

Example

Stella works for a financial services company. Stella, an investment advisor, has a keen sense for prudent investments. Through her years of experience she has earned this skill as well as the art of negotiation. Both of these abilities have worked to her advantage.

Stella is interviewing for a new job. The employer knows that Stella is well suited for the work. Stella also knows this. The interview runs smoothly as Stella continues providing answers.

When it comes time to negotiate salary Stella prepares her words. She begins with the salary she deserves, which it appears her employer is ready to accept. Then Stella brings up the option of her receiving a gross up paycheck, calculator in hand, with some figures. She shows the interviewer how she can make more income while saving the company money. Her explanation is simple; she can invest her wages and receive greater gain in the long run if she is fully paid now. On the other hand, the company will only feel a slight decrease in cash holdings from this. Stella’s resume and years of experience give backing to her claims, that she can be trusted, and the validity of her gross up formula calculation.

Stella completes her argument and is granted a gross up salary. She is satisfied that she has created a good situation for her and her company. She leaves the office with a smile on her face.

gross up

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Develop a Controller

See Also:
Hire a CFO Controller
How to Compensate Sales Person
How to Form an Advisory Board
Train People For Success
How to write an Action Plan

Skills to Develop a Controller

1. Accounting Skills

Keep up to date on the latest accounting rules and know which rules apply to your company. Are you publicly traded or privately held? Cash or accrual basis? Know when to call in help, if the company has auditors, seek assistance if needed.

Management of an accounting staff is an important skill for a controller. Knowing the most efficient way to structure an accounting department and the skills that you can expect from various levels of staff will allow you to accomplish the work load cost effectively.

2. Human Resources Skills

This area often falls under the umbrella of the controller in smaller companies. Areas to be aware of include the following:

  • Paperwork needed when an employee is hired
  • Steps to take to document performance problems
  • Illegal questions in a job interview
  • How to legally perform drug testing
  • How to legally perform background checks

It is an extremely important area to keep the company out of legal trouble. Know when to seek outside assistance. There are consultants whose practices are specifically to provide guidance for smaller companies.


Download The 5 Guiding Principles For Recruiting a Star-Quality Team


3. Insurance Knowledge

Knowledge of health, workers compensation and liability insurance is helpful. The controller is often responsible for shopping for policies that best fit the needs and budget of both the company and the employees. There is a trade off between premium and coverage and the controller needs to be able to make the appropriate evaluations.

4. Tax Knowledge

Taxes are an area that can create enormous liability for a company. Knowing what taxes apply to the company’s business and who to call for help is critical. Tax issues to be cognizant of include the following:

Be aware that unrecorded tax liabilities can put a company out of business or endanger the value of a company in a sale transaction.

5. People Skills

In the controller role, people skills are extremely important as the interactions with stakeholders, both inside and outside the company, are numerous, including the following:

  • Positive interactions add credibility
  • Managing the entrepreneurial owner is important in order to meet their expectations and information needs. They must have comfort in knowing that the controller duties are handled well
  • Managing employees is also a key relationship in order to have happy, productive employees. Employee turnover is costly.

Managing all these relationships is necessary to maximize your effectiveness.

6. Payroll Knowledge

Whether in-house or out-sourced, payroll knowledge is critical. Some important areas for a controller include the following:

  • Understanding the paperwork required in order to withhold from an employee’s paycheck
  • The payroll requirements of the various states where the company has employees
  • When manual payroll checks are cut, the rules for remitting withheld taxes timely
  • Which payments to employees are taxable
  • Payroll implications of accountable versus non-accountable expense reimbursement plans
  • The payroll tax relationship of where an employee lives and works

Before your hire your next Controller, download and access your free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team.

develop a controller

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develop a controller

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