Moving from start-up to scale-up presents new challenges in terms of managing growth and risk. In particular, it requires money. Without a sustainable source – or sources – of funding to fuel that growth, the business could be left floundering. Indeed, many businesses have gone under when transitioning into a scale-up phase, as the financial strain proves too great. So before you look to scale up, it’s important to put some thought into financial planning and to formulate a strategy for raising finance. 

It might seem obvious, but the starting point is knowing whether the business is scalable. “Scaling isn’t just about doing more, it’s about replicating the success you have,” says Paul van der Walt, a fractional CFO with a passion for guiding high-growth start-ups on the journey from seed funding to Series B, the second round of funding for a start-up. 

It goes without saying that a solid grasp of finance and cash-flow planning is critical to working out how much money you need and when you’ll need it. This will help identify the right financing options for you. “Growth often involves a lot more cash upfront than you might expect, so it’s around planning for growth in a realistic way,” van der Walt says. 

Steve Conibear, UK Network Director at the British Business Bank, says that given the range of funding options available to growing businesses, it’s important to understand what investors or lenders are seeking, and the eligibility criteria for the type of finance they provide. Finance providers will expect to see a comprehensive business plan that shows the future direction of the business, including your product strategy, key goals and objectives, sales forecasts, target customers and pricing strategy, he says.

Whether it’s investing in headcount, purchasing equipment or boosting marketing spend, scenario planning is a useful way to help you to understand possible funding requirements for different rates of growth or across different markets. 

Similarly, profitability planning analysis is an important tool in the quest for growth, says Dequan Walker, CFO and Strategic Growth Leader at Marsh International Affinity. “Analysing resource constraints allows you to understand which products and services generate the most profit, and that allows for a much more effective allocation of resources.”

It also helps inform decisions on pricing and operational changes, by offering critical insights into the financial performance of your business. “This type of analysis helps you to identify high-cost areas and inefficiencies and allows business owners to implement cost-saving measures that can help with the bottom line,” Walker adds. 

As well as providing a business performance benchmark, profitability analysis can also boost investor and lender confidence. “If a business can demonstrate a clear understanding of profitability, it shows that you have a good handle on your business and you can pivot in difficult situations,” he says.

Providers of debt finance will want to know that they stand a good chance of getting their money back. Although financial projections in the form of cash flow forecasts, balance sheet projections and future-looking key performance indicators are useful, lenders and investors will typically pay more attention to your current financials, so make sure you have details of profit and loss and income statements to hand. 

Meanwhile, equity investors looking to achieve a return on their investment will want to know how the business fits in the competitive landscape. They’ll also look at the founding team much more closely than a lender would, Conibear says. “Investors, particularly angel investors and less so VCs, may be taking a seat on the board so it’s important they can get on with those founders of the business.”

Financing risk factors

Lenders want to see a business with growth potential. Being aware of these risks and having strategies to mitigate them puts your business in a much better position to grow and scale.

Credit risk – personal and business credit history can significantly impact your ability to obtain funding, Walker says. “A poor credit score may lead to higher interest rates or even denial of funding. Pay attention to your ability to repay and how you address your debt.” 

Market risk – changes in market condition, competition and changing customer demand impacts your profitability and your ability to repay loans. 

Operational risks – you must stay on top of internal processes. Operational risk can impact a lenders’ confidence to provide you with the funding you need. 

Financial risk – be aware of your existing level of debt. Negative cash flow increases the risk of defaulting on a payment. Interest rate fluctuations can impact repayments. 

Reputational risk – a downturn in sales due to negative publicity and poor customer reviews can impact your ability to source funding in the future and, therefore, your ability to scale. 

• The Business Finance Guide produced by ICAEW’s Corporate Finance Faculty and the British Business Bank provides entrepreneurs, SMEs and growing businesses with information on the finance options that are available to them