Business bankers share 5 financial steps to take before scaling.
Even though small business growth is a significant driver of the U.S. economy, scaling remains a common challenge. According to the U.S. Small Business Administration, companies with fewer than 500 employees account for 43.5% of gross domestic product and create more than 60% of net new jobs. Yet despite their impact, growth beyond the early stages remains elusive for many.
In 2021, government data shows small businesses that were less than two years old averaged just six employees, while firms over 20 years old averaged 58 workers. As they work to provide capital and other financial support, bankers often have a front-row seat to the growth challenges small businesses face. “You get to a point where you have to do something different,” said Hank Koehly, small business banking sales manager for Commerce Bank in Kansas City. “That might be hiring different staff, buying a different machine or buying more vehicles. We’re right there, trying to grow with them.”
Koehly and his colleague, Debi Enders, a small business banking sales manager based in St. Louis, recently shared what they’ve seen work best among clients aiming for growth. While every business is different, they found that the most successful business leaders in Commerce Bank’s portfolio prioritize five things as part of their scaling strategy.
1. Set clear growth targets.
Scaling starts with a clear understanding of the market. Business leaders need to know their customers and the competitive landscape so they can establish realistic targets for where and how they will grow. This could include geographic expansions, new product lines, capturing a greater share of wallet, or acquiring other businesses.
“You need to have a game plan,” Koehly said. “Where I see businesses most often get in trouble is they grow too fast. They can’t keep up with the cash flow or get the staffing they need to ramp up and fulfill orders. A methodical, thought-out process is very helpful.”
Leaders also should include revenue diversification as part of their growth targets to reduce risk, Enders said.
“We have some people become confident because they’ve landed some really good accounts,” she said. “Maybe they sell to Amazon, Walmart and somebody else. Those are big, solid accounts, so they want to keep growing and borrowing to expand their workforce. But if even one of those giants decides not to renew their contract, their business would be hurting.”
2. Evaluate your financials.
The business’s current financials are the foundation for any growth plan. Too often, Enders said, small business owners outsource key financial decisions to their accountant without having a full understanding of the implications. For example, she often meets with owners who have worked with an accountant to prioritize tax reduction to such an extent the business shows minimal income.
“There’s no business income to use as a repayment source for loans,” she said. “You need someone who is having a conversation with you about your plan over the next three to five years. If you plan on borrowing, we need to make sure you’re positioned to do so.”
3. Ensure the business has enough capital to support the expansion.
Once growth targets are in place, business leaders can determine where they’ll need to increase spending. Property and equipment purchases are common in scaling strategies, and businesses often use financing to cover increased expenses during the growth phase, Enders said. “Most growing small businesses need a working capital line of credit,” she said. “Regardless of the type of industry they are in, they have taxes and payroll and other things, but often, expenses come in prior to the revenue.
A consultative relationship with a business banker can help leaders line up the capital they’ll need. Bankers typically like to see at least six months of liquidity to support monthly expenses and $1.25 of business-generated cash flow for each dollar borrowed, Enders and Koehly explained.
4. Be efficient with existing resources.
Before deploying new capital toward an expansion plan, business leaders should review their current resources and processes to make sure they are as efficient as possible. That way, they can avoid scaling inefficiencies along with the business.
In his work with small business owners, Koehly said he often finds opportunities to use technology to automate back-office systems.
“We still run into people who write hundreds of checks a year, when they could be doing that electronically,” he said, noting that these same systems can help businesses accelerate their receivables. “A lot of folks aren’t getting paid on time. Some aren’t even great at tracking it.”
5. Develop the next generation of leaders.
Koehly and Enders said scaling often exposes leadership bottlenecks within organizations. They’ve both seen small business owners who struggled with empowering others to make decisions, as well as owners who would like to scale and exit their business but lack a succession plan.
“Especially among Baby Boomers, that’s the No. 1 issue I’m seeing,” Koehly said. “They just don’t have a plan of how they’re going to exit.”
Starting the leadership transition three to five years ahead of time will set both parties up for success.
Few small businesses successfully scale into large enterprises. The businesses that thrive through growth do so by combining a clear plan with bankable financials, the right capital, operational efficiency, and an intentional leadership pipeline. The key, Enders said, is to embrace the opportunities with action.
“As the leadership author John C. Maxwell says, ‘Change is inevitable. Growth is optional,” she said. “Changes are coming and continuous in business. How you keep up with them is your choice.”
