12/ 23/ 2005
by Jeffrey Moses
During times of growth, a small company experiences an ongoing tug-of-war between building up cash reserves and spending money to build for the future (adding staff, purchasing equipment, expanding facilities, etc.). The proper balance of these usually determines how successful a company will become. If it allocates too much for reserves, it may lose opportunities for competitiveness and long-term expansion. If it allocates too much for expansion, it risks being caught financially short if sales should drop.
Every small-business owner understands that cash-flow management is crucial during down times, but handling of cash flow during times of growth is just as important. In fact, the long-term success of a company perhaps can be measured best by how it handles cash flow and financial projections during periods of rapid expansion.
1. Cash versus growth. Conservative accountants may advise salting away as high a percentage of profits as possible in readily available cash accounts (savings, money markets, CDs, etc.). The recommended amount is usually enough to meet all company expenses for 30 to 60 days. Often, additional reserves are suggested. This may prepare a company for a rainy day, but it could spell long-term disaster. Cash is required to build a growing company’s infrastructure, including computer systems and advanced electronic equipment, marketing, sales staff, etc.
Often, market advantage is obtained by the company that has the most advanced or customized computer systems to handle all aspects of its operations, from recording sales transactions to monitoring customer service to running manufacturing equipment. These systems cost money, but once in place, can serve the company for years and save money every time they are used.
2. Debt. It’s true that much of the above mentioned costs of growth can be financed by debt, ranging from bank loans to private equity funding. The viability of debt depends solely on long-term projections for steadiness of cash flow during the inevitable financial upturns and downturns of a growing company. Too much debt inevitably results in financial pressure as interest and principal payments need to be maintained no matter what the level of revenue. Too little debt can deprive a company of needed cash for growth expenses.
Projections of this type should not be made in a vacuum. Unless you or your partners are experienced in financial management, consult an expert. When projecting for costs of growth and when projecting the ultimate costs of debt, work with accountants and business advisers experienced in small-business management.
3. Taxes. A key to growth is management of tax liability. Certain tax provisions exist that can help minimize a small business’ exposure. You can do much of the research on this by seriously browsing the web. Take the information you gather with you when meeting with a tax expert. This will save you time and money.
Best advice for working with tax consultants:
- Meet with them as early in the tax season as you can. Ideally, December, January or February. This gives them the chance to spend time with you before the rush of March and April.
- Have all your information ready at hand––your income, expenses, deductions and ideas gathered during your web search. Don't send information to your tax advisers piecemeal. This can confuse them and will run up your costs.
- Hire the best tax adviser you can afford. Cut-rate tax advisers may miss ways to reduce your taxes, costing you many times what you would have paid an expert.
