So your business just reached a major milestone and you hit $1 million in revenue…now what? According to Greg Crabtree, a finance and small business expert, hitting the $1 million mark by no means ensures that the future growth of a company will be simple and smooth. In fact, Crabtree said that hitting $1 million in revenue may just be the start of a big challenge for small businesses.
"There is a natural no-man’s land for privately owned businesses that are between $1 million and $5 million in revenue," Crabtree, author of "Simple Numbers, Straight Talk, Big Profits!" (Greenleaf Book Group Press, 2011) said. "If your business is one of those that is stuck in the 'black hole of business,' rest assure there are reasons for the challenge and hope for your successful escape!"
Escaping this black hole can be as simple as bridging the sales and operations sides of your business. To accomplish this and continue future growth, Crabtree has the five steps that your business can follow to break through any revenue wall that may exist. They include:
- Step 1: Drive to 15 percent 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," Crabtree said. "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 percent 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," Crabtree said. "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 two months of operating expenses and have nothing drawn on your line of credit," Crabtree said. "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 percent pretax profit, you can now make the next key hire and allow your profit to drop to no less than 10 percent pretax profit," Crabtree said. "You would then hold salaries constant until you are able to drive back to 15 percent pretax profit. Once back to 15 percent 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 percent of accounts receivable during this process."
- Step 5: The “Cash Reward:” when growth levels off.
"Once you have a period of three to six months of level sales and you have maintained 10 to 15 percent profit during this growth cycle, you will experience the great cash reward as you do not have to reinvest your profits," Crabtree said. "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."
Reach BusinessNewsDaily staff writer David Mielach at Dmielach@techmedianetwork.com. Follow him on Twitter @D_M89.