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From $1 Million to $20 Million: How to use finance and accounting to grow your business. (Part 2)

November 5, 2021 ROARK

What does it mean to go from $1 million in revenue to $20 million? What accounting changes are needed? How will the financial statements change? What is an excellent way to start thinking about this transition as an entrepreneur or business owner? This blog post will look at fundamental changes that happen when you go from a business generating $1 million in revenue to $20 million.

If you haven’t already read our first blog post, From $1 million to $20 Million: How to use finance and accounting to grow your business (Part 1), please do so now and then return to this blog article.

Industry Considerations in Finance & Accounting

All businesses are different and the key drivers that affect profitability. Every industry has its nuances, and the finance and accounting world is no different. Let’s look at some key sectors to understand issues that may be important as these businesses grow from $1 million to $20 million.

Manufacturing 

The manufacturing industry is one of the most complex because it has to support and balance several different perspectives. All businesses are different and the key drivers that affect profitability.

Critical to this is their costs of goods sold and how efficient companies are at getting things from raw materials to finished goods. And that’s where cost accounting comes in. Understanding the difference between fixed and variable costs, coping with changing material prices, understanding labor efficiency, and multipliers (i.e., hours worked) are required per item produced. All these variances can give you much insight into the cost of goods sold.

Some business owners don’t account for the break-even point of their products before pricing them. They price the product at a loss, realizing that it is not sustainable in the long run.

Distribution/Transportation

When it comes to distribution transportation businesses, you’ll need to get every area of your company as efficient as possible. Any inefficiency will have a ripple effect on the success of your business because so much can go wrong when transporting tons of supplies, even before considering any commodity-related problems that inevitably arise. 

eCommerce 

If you’re making sales to a multi-state audience, there are many complexities. There are tax filings and shipping costs on e-commerce that can be more complicated than in the past. And new cases make it all more complicated.

Retail/Hospitality

You manage the cash register (don’t lose your profits on the production line) in a retail or hospitality business. You don’t want to lose any of it in employee theft or inventory shrinkage. You must deal with and understand shrinkage. If you don’t know how much it will cost, it will be more than you want—a lot more.

Construction

In building construction, before you bid to build, you need insights into what goes on with these projects when completed. It’s similar to manufacturing. Most often, it’s more complicated than the contractor realizes, and there is much revenue that gets lost if plans aren’t perfect before construction starts.

Software or Life Sciences

The investment must be going both to revenue and growth, especially if it is a venture-backed company. You will have to account for the complicated accounting of selling software or biotechnology products and provide investors with better information on what they’re investing in.

Ensure you have a great Certified Public Accountant (CPA)

First of all, you need to find a good CPA. The most common mistake start-up businesses make hiring the first person they find on Google or someone in their small network.

The bottom line is that without excellent accounting and a knowledgeable CPA, it will be harder to keep your tax liability low. You’ll often hear of R&D tax credits and WOTC tax credits, which can help you grow your business. But if you plan, it’s possible to see more money in your pocket.

There are timing differences between what is allowable to deduct and what taxes are due to help maneuver more cash available to your company ethically. A good accountant will do all this for you, but it is necessary to maintain as much money on hand as possible to have the fuel needed to grow your company.

Outsource back-office functions, including Accounting and Finance.

Running accounting, IT, and HR for a small to mid-size business can be difficult. We recommend you outsource these tasks when your business is in the $1 million to $20 million stages.

You’ve grown your business to such a magnitude that you can no longer do everything as the owner. As companies grow, so does the sophistication with which they tackle their needs. Bookkeeping is essential, but finance and accounting are just as important. We talked about the specialization of accounting, taxes, and all these other factors that come into play. However, one of the biggest things we see is what we call “The Staffing Dilemma.” 

As business owners, you are in a predicament where your business needs the controller position – but because you’re not large enough to use all their expertise, it doesn’t make sense financially. Or maybe you believe that hiring someone to be your bookkeeper would suffice. By outsourcing, small firms can still get the expertise they need without hiring a full-time employee.  It can often even be done through virtual accounting

There is no way around it. Especially when managing overhead, expertise across areas is vital. Make sure to monitor how much cash comes in or goes out of your company at any given time–outsourcing those tasks can help you do so efficiently and cost-effectively.

Cash is imperative, but if you have this significant overhead as a percentage of revenue, it lowers your ability to grow because it takes up investment capital. So any time I talk about this topic, we often think about how much less costly building out the department would be and having access to better resources and expertise.

One great reason to outsource your finance and accounting is reduced turnover. Business owners regularly call us in a panic and say, “my controller just left” or ‘I don’t know what to do.” Outsourcing allows for continuity when someone leaves, so it’s not your problem if you outsource.

Conclusion

Growing a company can be an exciting and rewarding experience, but it may come with its challenges. The key to success is in strengthening your team of experts along the way. And even when I say experts, bringing in the leadership team and the employees, you will want to build people around you who will take your business to new heights.

Using finance and accounting to grow your company is vital, especially as you get started. The sooner you do it with the help of partners and employees already in place, the better. And you’re just going to have the time of your life.  

If you’re growing from $1 million to $20 million, and you’d like to talk more about accounting and finance, we’d love to chat. We’re happy to help, and it’s easy to >>> Contact us.

 

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