May 19, 2020

Five Steps to Grow Your Business Beyond the $5 Million Mark

business tips
Greg Crabtree
money matters
Finance
Bizclik Editor
5 min
Five Steps to Grow Your Business Beyond the $5 Million Mark

Written by Greg Crabtree

 
There is a natural no-man’s land for privately owned businesses that are between $1 million and $5 million in revenue. If your business is one of those that is stuck in the “black hole of business,” rest assured that there are reasons for the challenge and hope for your successful escape!
 
The Reason the Black Hole Exists
 
If you started your business from scratch, you not only managed all functions of the business, you were likely the only employee and executed all of the functions of your business, too. As you learned to work “on” your business instead of “in” your business, you climbed your way up to the magical $1 million in revenue and hit the first major transition point. It is here that you most likely had to give up either sales (business development) or operations.
 
Most entrepreneurs are naturally gifted towards sales or operations, but rarely both. The ones gifted in operational knowledge get stuck at $1 million because they have sold to all of the people they know or can easily contact, but they are more likely to be profitable at this point.
 
The ones gifted in sales have blown through the $1 million dollar mark headed towards $5 million but their hair is on fire, they are about out of funding resources, and are most likely losing money with the belief that the next dollar in sales will make them profitable.
 
Both entrepreneurial types need to begin by learning a simple lesson. The operations-gifted entrepreneur needs to find a way to create sales. The sales-gifted entrepreneur needs to get operations under control and exercise financial discipline - not every sale is a good sale.
 
The true challenge for both is that the $1 million sales mark is the first major time in the business cycle when they must hire infrastructure talent in advance of being able to easily afford it.
 
This challenge is made worse by having to truly delegate to this new key hire. They may come with experience, but there is that nagging thought that if they were so experienced, “why were they available?” If they show skill but have limited experience, you are turning over your precious business to someone who may risk your reputation and limited capital.
 
Welcome to the reason why entrepreneurs deserve the profits of their success!
 
The 5 Steps to Break Free of the Black Hole
 
Step 1: Drive to 15% pretax profit by the time you get to $1 million in revenue.
 
It always sounds great to glorify the success stories of the entrepreneurs that threw caution to the wind, grew like crazy and then figured out how to fund it. Unfortunately, you don’t hear the stories of how many more businesses fail by growing fast and unprofitably. Unless an investor or buyer can figure out how to get your fast-growing business profitable, you are of no interest to them, beyond picking up the pieces of your impending bankruptcy.
 
Step 2: Include the owner market-based wages in your calculation of profit.
 
If you get to 15% pretax net income, it is only real if you are paying yourself a market-based wage and are able to meet your living expenses off of your net pay. This means there are no distributions being taken out of the business except for covering the taxes on your business profits (assuming you are an S corporation or an LLC).
 
Step 3: Take no distributions of after-tax profits until you have met your growth goal.
 
The easiest way to measure this is to build your company cash balance to at least 2 months of operating expenses and have nothing drawn on your line of credit. This is what I refer to as your “core capital target.”
 
Step 4: Build your team using the “Salary Cap” concept.
 
Once you have got your business to 15% pretax profit, you can now make the next key hire and allow your profit to drop to no less than 10% pretax profit. You would then hold salaries constant until you are able to drive back to 15% pretax profit.
 
Once back to 15% pretax profit, you add the next one or two key hires and repeat the process.  You may not be able to fund your growth totally from your own cash, but your line of credit balance should generally remain less than 50% of accounts receivable during this process.
 
Step 5: The “Cash Reward:” when growth levels off
 
Once you have a period of 3 to 6 months of level sales and you have maintained 10% to 15% profit during this growth cycle, you will experience the great cash reward as you do not have to reinvest your profits. It is critical to not become a “professional consumer” at this point and develop obligations (new house with big mortgage) or bad spending habits (exotic cars, vacation homes or recurring expensive vacations).
 
Those items are not necessarily bad, but it is easy to fall into spending the early fruits of your labor rather than building a strong foundation to weather the inevitable down cycle of the business market. I am all for enjoying the fruits of success, but too often the enjoyment gets in the way of good judgment.
 
When you can get the “silently successful” entrepreneurs to tell their story, you will find more of them followed a similar path to this than the flashy stories of high risk and high return. Both methods can work, but there are many more business casualties using high growth without profitability. Using this method, you will be much better equipped to have the kind of “backup fuel” needed to achieve escape velocity out of the “black hole of business” and into a new horizon of possibilities!
 
About the Author: Greg Crabtree has worked in the financial industry for more than 30 years. He founded Crabtree, Rowe & Berger, PC, a CPA firm dedicated to helping entrepreneurs build the economic engine of their business. Crabtree leads the business consulting team, helping clients align their financial goals with their profit model and their core business values. He is the author of Simple Numbers, Straight Talk, Big Profits! For more information, please visit: http://www.seeingbeyondnumbers.com/.

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Jun 8, 2021

Six issues at the top of tax and finance leaders’ agenda

Tax
Compliance
financeleaders
Deloitte
Kate Birch
4 min
As businesses accelerate their transformation journeys, tax leaders are under increasing pressure to add strategic value. Deloitte reveals six tax trends

New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.

According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.

And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.

Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.

Trend 1: Businesses seek more strategic counsel from tax

Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.

According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”

Trend 2: Tipping point for resourcing models

Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.

Trend 3: Digital tax administration is moving faster than expected

in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.

"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."

Trend 4: Data simplification and lower-cost resourcing are top priorities

Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.

At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”

Trend 5: Skillsets are shifting

Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.

Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact 

Trend 6: 2020 brought productivity improvements

Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.

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