A Google search for “business growth cycle” returns many frameworks with four stages, the first two of which are basically “launch,” and “growth.” The transition between the two – when a company’s business model is ready for expansion – is the sweet spot to bring in specialized finance and accounting support (beyond tax prep and payroll … those services are worth every penny from day one).
Two factors that make the transition a back office inflection point are (1) the increased need for quality output from back office processes, and (2) the dramatically increased opportunity cost of someone like a founder handling those functions. Simply put, that person needs to be out selling.
Quality of Output
Most companies at an early stage do not need much information managed for them. The most important metric is “how much cash is in the account today?” There are so few clients that the founder or founders’ group knows exactly who owes the firm money. A founder will also know what their employees are doing by personal interaction – there aren’t a lot a people around here yet – and consistently updated plans are somewhat of a luxury.
But as a company firms up its business model and figures out what works, it moves into the growth stage. Now the needs change. A new financier may come along – debt or equity – and with it comes reporting requirements, such as ratios to satisfy loan covenants, detailed financials for an angel investor of a venture capital firm, or other metrics that require some specific finance or accounting acumen. Further, the company tends to hire more people at that stage, expand its product line, and perhaps even enter new geographic markets. All these elements add time and complexity to the back office work. Consider the complexities of giving and getting consistent, metrics-based performance feedback to a workforce of several dozen or more, or the ability to set up business in a new state (Registrations! Tax authorities!).
Once a company enters this stage, it is time to bring in some specific skills and experience that will ensure that the back office meets these challenges efficiently and effectively without slowing the business down. An outsourced model can be a great bridge and is preferable to hiring in-house because the outsourced model brings to bear a team of experienced experts with different specializations. That combination of breadth and depth is a valuable bridge to the hybrid model, then the in-house model.
Founder’s Opportunity Cost
When a company’s model is ready to scale, it is time for the founder or founders’ team to focus each minute on expansion. Those demands become all-consuming, so it now makes economic sense to spend resources on support because the return is direct: any minute spent on accounting or finance is a minute of revenue opportunity lost. Not only that, but once the product or service is ready to go, who wants to spend time on energy-draining activities that aren’t a direct part of the company’s mission (besides us at SNS, of course)?
This is important to consider before embarking on the growth phase, because that phase normally requires a new round of investment. The cash should be baked into that investment round, so the company can get its processes and systems firmed up at the beginning, rather than being stuck in the cycle of reactive work that will leave back office responsibilities in the hands of people who need to be focused on expansion, slowing the entire company down.
The shift from DIY to bringing in support can be awkward to make. A founder may be used to doing things “their way”, and whether the shift is to in-house or outsourced, some responsibility must be delegated. The mentality also takes confidence: on the surface it feels strange to consider spending on something like accounting, finance, or data to be correlated with sales. But look below the surface and it makes sense: the company has transitioned to the point at which the sales pitch is proven and compelling, and it is time to get as many “fish in the boat” as possible. The window will not be open forever, so offloading back office responsibilities to skilled professionals will make a meaningful difference.