The challenges of growing a business

Financial management to help unlock business growth

Advising owners on expansion into the next phase of development and profitability.

Following the frantic period of creating a business and having established a viable operation, you'll then likely shift into a phase of growing sales, income and becoming profitable. Unfortunately business growth can come with drawbacks especially if there isn't a sufficient level of financial management in place. Profits may not necessarily grow with turnover and the organisation will become harder to manage.

This is reflected in the diagram below known as the Stages Model (a concept originally developed by Shirlaws). Understanding which business life cycle stage you’re at and the likely feelings you'll experience means you'll be better equipped for the emotional demands that come with running an expanding enterprise.

The stages of a growing business courtesy of Shirlaws

The growth phase will initially feel like ‘good times’ as you reward yourself and enjoy 'payback' from the business in its move towards 'fast growth'. However, maintaining the rate of expansion, servicing customers and fulfilling financial commitments will create time constraints which can result in frustration and stress.

Thankfully help is at hand. We've guided many expanding operations into the next phase of development, by obtaining the necessary systems, personnel and finance so that you can enjoy the rewards as your hard work begins to pay off.

8 Steps to better financial management for growing a business

1. Why you should review the different types of ownership structures

2. Where to focus? Three strategies for achieving and sustaining growth

3. The credit control items required to improve cash flow

4. Can your online accounting software keep up with your expansion?

5. Why you will need a full service payroll

6. What you need from your management accounts

7. The different areas of business tax relief to explore

8. Financing business expansion

 

1. Why you should review the different types of ownership structures

In the start-up phase you will likely have made decisions based on the needs of your business at that particular time. This is understandable given how much there is to do and sort in those early days. Unfortunately your choices then may not have been very forward looking particularly when it came to selecting from the different types of UK business ownership structures to operate out of.

What was functional for the past may no longer work today. You may now be operating out of an inappropriate structure and this can have consequences in terms of the amount of tax you pay, your degree of exposure to risk, filing and administrative requirements and your ability to access finance.

Ultimately you should review your structure because changing it may help you develop and enhance the way you run your business. This in turn could be very conducive to growth and scaling. The structure you choose will determine how exposed the various elements of your organisation are to each others success or otherwise.

2. Where to focus? Strategies for achieving and sustaining growth

Entering the growth phase will require a change in mindset from you as the business owner. When starting out your focus is on product/service development and market fit. However, with your business proven to work, you'll need to concentrate on 3 areas of strategic direction.

You'll have probably taken on employees meaning they will be doing some of the work and servicing customer's needs. So now you'll need to develop a clear strategy to scale up in a sustainable manner. What is your vision and mission? Why does the business exist? How much will you grow over the next 5+ years and what will you action to achieve that expansion? 

A huge part of business is about hiring the right personnel and managing them carefully. As you expand, your business will become increasingly reliant on your workforce. They are the ones who will implement the strategy to generate sales and make customers happy. This means you'll need to dedicate time and attention to hiring the right people who fit within your culture as well as employee retention strategies to keep hold of your best people.

Finally, keep a firm hold on these two financial areas. Your margins will determine if you should alter prices or look to reduce costs. Review your cash position regularly to help you manage investment decisions and payments. This means undertaking cashflow forecasts to anticipate your working capital requirements not just today, but in the future as well.   

3. The credit control items required to improve cash flow

A large part of managing your cash position is by ensuring you have the necessary credit control systems in place to help improve your chances of being paid on time. Whilst there are few certainties in business, you can at least plan and reduce risk. In that sense a credit control system reduces the likelihood of you ending up with several bad debts.

The cashflow cycle and how credit control can boost this for your business

You should design and implement a system to:

  • Conduct checks on the credit worthiness of new customers
  • State credit terms to customers
  • Issue invoices promptly
  • Encourage early and electronic payment
  • Chase up overdue invoices in instances of non payment
  • Establish stopping points where credit facilities have exceeded a set limit
  • Vary limits and offer discount payments depending on customer's credit track record

Overdue debts are an acute problem for SMEs. If you're owed money then you might not have enough cash on deposit to settle bills or even pay employees. It also potentially delays or prevents you from investing in the business to fund expansion.

Many good businesses go into receivership because they run out of cash. Often that's a result of either an inefficient credit control system, or, not having one at all!

4. Can your online accounting software keep up with your growth?

With growth comes more sales and invoices which means running your back office finance function will likely become more sophisticated. Unfortunately there's a risk that the online accounting software, or even spreadsheet solution, that served you so well in the early days is no longer sufficient for your increasingly complex needs. 

Unsure if this applies to you? There are 5 tell tale signs you've outgrown your current accounting software and need to find a new product:

  • You're struggling with record keeping and keeping a tab of all your invoices as legally required by HMRC
  • If you're spending a lot of time entering data and generating reports that should be created at the press of a button
  • You're struggling to access your real time financial position including your cash position because your numbers in your software/spreadsheet don't match up to the back account
  • Sharing financial information with key stakeholders and your advisor is either inconvenient or virtually impossible
  • You're unsure of how and where your data is backed up, let alone how you'd access it if there was an IT issue

5. Why you will need a full service payroll

Taking on more employees will mean your UK payroll will become harder to administer. The reason being the rules and regulations with regards to payroll are quite complex. Just the process of administering and claiming statutory maternity pay or, offering an employer childcare voucher sheme, can be intricate and time consuming. For that reason outsourcing to a full service payroll bureau is likely to be preferable. Consider the following:

Setting up the payroll

Once you take on employees you'll need to notify HMRC that you're an employer. This is for Pay As You Earn (PAYE) purposes and will likely also require you to purchase software to run your payroll. 

Applying tax codes

Each of your employees will have a tax code that allocates their earnings into a particular bracket. It's absolutely vital to check that your staff have provided the correct code so they don't pay too much or too little in tax. Get it wrong and it's an admin hassle to rectify the issue.

National insurance (NI)

Part of your payroll responsibilities will include paying NI contributions on your employees income and benefits. It's also your task as the employer to collect your employees' income tax deductions and class 1 NI contributions.  

 

Real time information (RTI) reporting 

RTI requires that you submit a PAYE statement every time your employees are paid in a pay period. This ensures HMRC are be better informed about employee salaries which in turn allows for more accurate tax collection compared to the previous system of year end reporting.

Auto enrolment

As an employer, you have an obligation to auto enrol qualifying employees in a pension plan that is compliant under the Pension Regulator Rules and guidelines. It works whereby both employer and employee make a contribution. As an employer you can cover both if you so choose. If you have one employee or more then you are legally required to take part and you'll be given something called a staging date by The Pension Regulator to commence the process.

6. What you need from your management accounts

Your management accounts will be a key element in understanding how well your business is doing on a regular basis. Whilst not mandatory they're vital to providing you with intelligence to make better informed strategic and investment decisions. The question then is what should they contain, what do you need them to report on?

It's a difficult question because the answer will likely depend on the industry or sector you operate in and furthermore, no-one will know your business as well as you. So, there isn't necessarily a right or wrong way of going about reporting. That said typically they will contain specific financial information that is compared to:

  • Key performance indicators
  • Historical trading
  • Forecasts

7. The different areas of business tax relief to explore

Growing your business will require a significant amount of time, effort and investment. What you may not realise is that some of your investment projects could qualify for different forms of UK business tax relief. Here are 4 for you to consider and explore:

R&D tax relief

Research and development is defined as projects that seek to achieve an advance in overall knowledge or capability, for a field of science or technology that helps to resolve scientific or technological uncertainties. Check with your accountant carefully if you qualify because these activities could lead to a reduction in your corporation tax liability, or a cash refund in the form of R&D tax credits if your business is loss making. 

The patent box

The patent box works whereby income generated from a patented product, or if the product contains a patented part, is identified and a reduced rate of corporation tax at 10% is applied to the profits associated with it. Determining the income associated with a patent can be very complicated and requires good accounting systems and controls in place to do so accurately. 

SEIS & EIS

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are tax schemes designed around funding for early stage businesses. SEIS applies to businesses less than two years old while EIS is for larger organisations. They work whereby risk for investors is reduced in the form of income tax relief, of up to 50% for SEIS and 30% for EIS, of the money invested. You can find out more on these investments in, how to compare the benefits of EIS and SEIS.   

Infographic as to whether it's an SEIS or EIS investment

Enterprise Management Incentives

With growth will come greater competition, not just over your product or service but for your employees as well. Competitors may try to poach your best staff and tempt them with salary levels and incentives that you may struggle to match. Enterprise Management Incentives (EMI) share options can help you retain your best people. They work whereby you select employees to be future shareholders and potentially set targets or a date with a view to them obtaining a stake in the business. 

8. Financing business expansion

Many businesses will work through the early start-up stages on finite resources. The growth phase however, will require additional capital to maintain the rate of expansion. This finance could be for a number of things including:

  • Larger premises
  • Taking on employees
  • Developing your sales and marketing functions
  • Purchasing equipment

The key is to prepare for this by understanding the different financing options available be it short term or long term funding. For example you may be looking to take on investors as their funding may come with mentoring and a book of useful contacts. The consideration might then be between angel investors or Venture Capital funding depending on your size and circumstances.

By working closely with an accountant you trust, you'll be able to decipher which finance options are relevant to your needs and how much funding you're going to need. You may even then be able to make use of their network of contacts for introductions to the right sources of finance.

Financial management tips for sustainable growth

Please note that the names and characters used in the examples mentioned above are hypothetical. Please also be aware that information provided on this page is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this website.