Partnerships, balance can boost business growth
Putting eggs in multiple baskets improves odds
Jeff WilcoxAugust 14th, 2014
The Inland Northwest economy has come a long way in the last five years, and has been growing steadily, most notably in the last 15 months. As reported in this journal back in December, the total value for permitted construction in Spokane for the first 11 months of 2013 was $442 million, higher than any full year of construction since 2006.
Every day, we see headlines announcing new construction projects and retail developments. From the $51 million Rockwood Retirement Communities expansion to the Kendall Yards mixed-use development, there are positive and reassuring signs all around us.
Small business owners in our region still face understandable concerns and challenges, despite this steady growth and increasing economic confidence. The coming months present many unknowns, including uncertain tax climates and health care transitions, among other things.
However, there are ways a business owner can successfully manage growth in smart, practical manners:
Establish a partnership with a banker and a certified public accountant. The “power of three” rule applies here; a business, a bank and a CPA should work in unison.
It’s important to treat the relationship with these partners as just that—a relationship, requiring trust, openness, communication, honesty and integrity. The seasoned banker can offer specific, financial guidance to a business owner, including how best to position the balance sheet throughout the calendar year.
A CPA can help a business owner position his or her tax liabilities and manage that balance sheet.
While the bank and CPA advisers may have different perspectives, both can and should work harmoniously to help a business succeed. The partnership of three should communicate regularly in an effort to work collaboratively and to look forward in unison. A banker should meet with clients on a regular basis: once a year, twice a year or even monthly, if needed. Once you find the right partners, work as a team and lay the groundwork for a strong relationship. Make this a priority for your business.
Balance growth with debt and equity. Most often, growth drives the need for additional capital. Growth and the need for capital comes with risk, as companies can get caught with heavy costs, especially if the growth strategy doesn’t go according to plan.
Every business owner operates differently. If an owner requires additional capital to grow a business, it’s important to analyze the true cost of capital, particularly as it pertains to debt and equity. In a best-case scenario, there should be a healthy balance of each.
Equity is considered a high cost of capital and often times is not available to the extent that a business owner would like, but there are no fixed costs or debt service associated with it.
Debt financing, on the other hand, can be cheaper and is often a more viable option due to limitations on access to equity, but it comes with added requirements and restrictions.
Too much debt can result in a loss of flexibility due to an unsustainable leverage structure, particularly if projected results aren’t achieved.
This is where meeting with both your banker and CPA will come in handy, as both parties can take a look at your situation and offer a well-rounded perspective. Finding the optimal balance of debt and equity will keep the growth of your business, on a steady track.
Don’t put all your eggs in one basket. Depending on the industry, growth is often driven by one or two concentrated opportunities related to sales or customers. Business owners need to be cautious of over-concentration related to these opportunities, and the risks associated with putting too many eggs in one or a few baskets. Multiple revenue sources should always remain top-of-mind.
From a banker’s perspective, we advise clients to keep conversations realistic with buyers, as a way to protect themselves, their business and their assets.
For example, suppose one customer comprises 40 percent of a company’s revenue, and this year that customer is expecting sales to increase dramatically, which in turn will ratchet the revenue concentration percentage even higher.
But what happens in 2015 or 2016 if this company that is such a significant portion of the business’ revenue stream pulls back or doesn’t grow as planned? It might seem obvious, but it can be easy to overlook a situation like this and not be forward-thinking. Be prepared to weigh your risks and determine the best fit.
Growth opportunity is reason for excitement and optimism. We are seeing steady economic improvement across our region.
Washington state is on a positive trajectory with increases in job growth, lowered unemployment rates, and overall optimism in business. With these positive signs, a major concern facing business owners today is maintaining healthy growth and keeping their momentum going.
The right financial institutions are ready to lend money and help businesses expand, become stronger and keep these concerns at bay. By working together, we can continue to bring jobs and prosperity to our local communities in the long term, and keep the recession in our rear-view mirror.
Jeff Wilcox is Vice President & Team Lead, Spokane Commercial Banking for Columbia Bank.