My last article touched on financial considerations for business owners surviving their first three years in business. In the piece, I pointed out a few important areas of focus: growth, monitoring financial statements, managing debt, learning income trends, keeping cash on hand, and holding the appropriate types of insurance as a few items that should be on the radar screen of business owners throughout the Survival Stage.

Many companies fight to survive for some time, and formal planning is essentially limited to cash forecasting. Some businesses, however, are able to grow in size and profitability. Today, we’ll focus on what’s next for successful businesses, and examine year three and beyond.

Years Three Through Five

A business has a drastically improved chance of surviving long-term if it has made it through the first three years. Cash flow and trends have been established, and there is now a foundation to build upon. This is the stage in which a business will stagnate or continue to grow and expand. Most of the unpredictable mistakes have been made and overcome, now the focus of your business should be people, process, and product (in that order). Mastering those areas can dictate the difference between building and sustaining larger margins, and simply treading water.

People
Make sure you not only have the right people, but that they are in a role that best suits their skillsets. For example, your best salesmen may not necessarily be the most effective leader. Jim Collins puts it very well in Good to Great: “…get the right people on the bus, the wrong people off the bus, and the right people in the right seats.”

Process
Process is vitally critical to success and often overlooked. The old adage ‘work smarter, not harder’ may be illustrated by a clear, defined, and scalable process (or lack thereof) for almost everything you do. You can have someone giving max effort but completely spinning their wheels. A defined process for product development, hiring, marketing, evaluating, expanding, etc., helps everyone involved understand the roles, expectations, and deadlines for business operations.

Product
Obviously, what you are selling is the cornerstone of your business. Your product will not be viewed by every potential client/customer in the same way that you do. Make sure to ask for feedback and input from clientele on their experience with your service, design, quality, etc. Why were people pleased? What was left to desire? How can you make it better? How will clients share their experience buying from you with others? Your brand is not tangible, but is as much of a product as what you are selling.

As mentioned above, people, process, and product should be your main focus. Beyond revisiting and evaluating those areas of your business, there are plenty of other priorities for business owners as you continue to grow out of the survival stage:

Continue to refine your budget.
With three years of financial data on the books, you should now have access to enough information to create a meaningful budget.

Pay Yourself
Set a realistic salary for the owner(s), who likely weren’t receiving a regular paycheck up to this point. Having stronger data on cashflow and a solid budget will help drive these numbers.

Outsource financial items to professionals.
It may have been okay in the startup phase to DIY the business’ tax returns and various filings, but the business is now likely at a point where a professional is needed. Tax laws are getting more complicated, making it harder for the average person to keep up with the changes. A tax professional will know where money could be saved, where potential mistakes are being made, and ultimately take the burden off your hands so you can focus on growing.

Revisit insurance policies and executive benefits.
If the company has grown, or has brought key employees on board, different types of insurance coverage (or levels of coverage) may be required. Executive benefits can be used to recruit, reward, and retain key employees. Buy-Sell Agreements may help transition the business should something happen to you. Key Person insurance can help soften the blow of lost revenue and/or assure company stability should you lose a key employee (hence the name). The process of identifying risks to your business and options to transfer that risk will be comprehensively covered in a future article.

Evaluate your cash situation
Is there excess cash that can be put to use, either paying off a debt early, investing in a piece of equipment, or expanding the team? It is crucial here to set priorities for how cash should be spent. Even with detailed analysis, our job is very much an art and a science. What is ‘optimal’ numbers-wise may not be the most comfortable from an emotional standpoint. If it’s important to you to free yourself from debt, the choice might be early loan payoff. If you have aggressive growth goals, then adding equipment, expanding the facility, or hiring more people (while making minimum debt payments) could be the way to go. It’s different for each owner based on priorities and goals. As long as you are made aware of what you are giving up by making one choice over another, the ‘right’ decision doesn’t have to be what looks best on paper.

Begin saving for retirement (and consider setting up a retirement plan for employees)
There are many types of plans that may be established depending on the needs of your company, size of the team, and anticipated team participation. I work closely with Krilogy’s Retirement Plan Advisor, Matt Haywood, who assists in all phases of Employer Sponsored Retirement Plans, from initial plan design to a fiduciary assessment of your current plan. Together, we will provide insight into investment management, fiduciary services, and employee education for existing plans in a future article.

Beyond Year Five

According to the Bureau of Labor Statistics, about half of all businesses survive at least 5 years. Countless hurdles have been overcome, though it doesn’t get any easier from here. Business owners who have found success essentially have two options:

1. Maintain the status quo, hire someone to run the business and use the revenue to pursue philanthropy, enjoy hobbies, run for office, start up new a new enterprise, etc.
2. Replace the challenge of survival with the challenges of expanding and continuing growth.

For those who choose Option B, these challenges could include decisions such as the purchase of a building, bringing on partners, acquiring another company, facing tax challenges, or separating from a partner. If your business has become your retirement plan, it’s time to start thinking about succession planning. ALL business owners (of companies large or small) inevitably step away due to either: lack of success, retirement, owner transition, acquisition, or by death. The end is guaranteed to happen, and planning for it is imperative to the future direction of your company. Don’t allow succession planning to fall into the bucket of to-do items that are ‘high-priority, low-urgency’.

Every business owner deserves to have a sounding board who will help navigate the many intricate and complex issues business ownership presents. My job is to understand each unique situation, provide sophisticated options, and help business owners effectively make decisions. That’s a role that I’m proud to serve for many clients. In some cases, I’m simply reaffirming what they already believe to be the right decision. In other cases, I’m serving as the impartial outsider, offering a perspective on decisions they may not have otherwise considered, or outlining the pitfalls they may encounter by making one decision over the other. Regardless, I approach each scenario with abundance and authenticity, supporting clients to make the most informed decision possible.

I look forward to sharing more financial insights for business owners throughout the coming year as I dig deeper into topics related to insurance, retirement plans, taxes, estate planning, business valuation, business succession, and more. In the meantime, I’m happy to answer any questions you may have, and welcome your feedback on subjects you’d like to learn more about.

Important Disclosures