There is no rule of thumb regarding costs for growing a business. It always depends on where you start, but accept this maxim: like building a house, growing a business will always cost you more than you think! Of course, with great planning it could come in on expectations, but that would be GREAT planning, putting you in the minority!

One starting point to prepare for the costs of growth is that there are businesses that actually make profits by simply looking at where businesses waste money. Many of these outfits will not charge you if they can’t find cost reductions, but when they do they will take a percentage cut.

Four key costs
It’s often argued by business experts that there are three big costs for a growing business – wages, rent and marketing. You should throw in tax as well, which can easily take 30% from your profit.

The point about all four costs that you need to commit to your mental programming is that they can all get out of control, but they are all reducible. Ultimately, it’s down to your management.

In tracking down the costs of growth, let’s start at the beginning. For starters, you might decide to change your business structure from sole trader or partnership, which most start-ups kick off as, to become a company.

Accounting fees for the establishment of a company are approximately $1000 (plus GST). The accounting bill for a small company ranges from $1500 to $3500 (plus GST), with a medium company ranging from $3500 to $10,000 (plus GST).

Other cost considerations
This following example of a cost that many people may not have thought about should make any aspiring growth entrepreneurs start listing the costs of growth.
Wages, rent and marketing aside, consider the following:
o Recruitment – when my company looks for staff, the recruiter’s fee can be in excess of $17,000!
o Business insurance – contents, business interruption, professional indemnity, public liability
o Worker’s compensation
o Marketing
o Leasing costs
o Interest on overdrafts and credit cards
o Repairs to motor vehicles and equipment
o IT costs
o Superannuation – which adds 9% to your wage bill
o Postage, stationery and office supplies
o Telephone, including mobile phone bills
o Travel
o Catering
o Professional consultancy fees
o Bookkeeping and accounting fees
o Donations.

As you can see, the list can be as long as the proverbial arm, and in most cases, a US basketballer’s arm! This is what I call Switzer’s List (apologies to Steven Spielberg’s film of a similar name) and is the most powerful reason why businesses on the way up have to have a business plan.

The business plan is more than just a projected profit and loss (P&L) statement, but its overall work gives a clue to what future P&Ls will look like. It predicts revenue, shows how you will generate it and seeks to find the costs that will need to be covered to make it happen.

Dealing with demand
A colleague who has been running his business hard in the fast lane had pumped up his revenue near $2m in a fairly short time and his accountant pointed out that his costs were close to $1m for the year. He made the observation: “If we can save 10% on our costs, we can find $100,000 the easy way! It could come from more targeted advertising and more economical use of resources.”

This was a most logical observation as the company’s founder had always been a revenue man and has rarely focused on his cost curve. This is typical of newcomers to the fast growth path, but it’s a lesson to think about earlier rather than later.

However, a word of warning – don’t play Scrooge and burn existing customers. Some companies will cop a loss – and therefore a cost – in the short-term, giving into a troublesome customer to keep them for the long-term.
Always focus on the lifetime value of a customer, who turns up year after year. Sometimes there’s a cost to buy such loyalty and the stream of income that comes from such customers.

Michael Schaper, Dean of Murdoch University Business School, says when your business is growing, the needs of the business change, often dramatically.

“Most small business owners don’t have any idea about how to deal with the extra demands being put on their resources,” he warns. “Some growth will create a need for more spending. If extra stock, larger premises, new tools or additional staff are needed, then money has to be found to pay for them. New loans may need to be taken out in the case of long term asset purchase or else additional working capital needs to be found for short-term needs.”

Some businesses will already have retained earnings that they can draw upon, while others may have to set up or extend their overdraft facilities. “However, businesses that don’t have enough cash flow to service the debt will find themselves in trouble, whilst others may find that they don’t have a suitable track record or security to obtain a loan and so stagnate from a lack of capital,” he points out.

He says businesses that sell goods on credit can often face severe cash flow problems when additional sales take off. They can find their list of debtors rapidly accumulating, which may be a problem if adequate account collection mechanisms are not in place.

Cost control
My mate’s business went through a stage where he had bills of $120,000 to pay, but he had ‘good’ clients who owed him more than $300,000! The irony is that you can stand years of not being in profit, but try three months of negative cash flow and you will see how important managing your cash is for a fast growing operation.
On cash management, the following tips should well and truly be taken on board:
o Set your credit terms – the industry standard could be the starting point. Make sure you politely, but firmly, let everyone know what your terms are
o Work on your debtors to pay promptly – a follow-up method and even a discount for quick payment can work
o Pay your creditors as slowly as you can without burning relationships
o Plan by saving cash for slow periods such as Christmas for white collar firms
o Know your financial products and their terms and use them to your advantage
o Don’t annoy the Australian Taxation Office as their penalties can hurt
o Don’t double dip into business revenue for home spending purposes.

My recommendation is that you become a financial nut. Create profit and revenue goals for the year and check them every month to see if you are on target. Make predictions on your costs for the year and check them monthly too. This keeps you in control and it means you know what’s going on and what you have to do if you don’t like what you see!

By Peter Switzer, published on 26/02/2009

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