For fractional CFO Matthew Grimsdale FCA, producing a financial plan for a growth-stage or scale-up business is “an incredible reflective exercise”.

In his assessment, it requires the owner to set an ambitious, 360-degree strategic vision in the context of the company’s everyday realities. That means considering major opportunities – which will likely represent the reason the owner went into business in the first place – alongside significant financial risks.

“It’s about approaching the whole exercise with a level head,” Grimsdale says. “There’s a balance between optimism and pessimism. For example, if you’re going for market share and revenue, rapid expansion is fantastic. But it can overstretch a company’s financial systems and processes and the resources it has in place.”

In addition, Grimsdale points out, it can be quite difficult for an owner to produce a financial plan for scaling when they may not fully understand or appreciate how complex the business may become, or what sorts of challenges that could present along the way.

Build in caution

Grimsdale notes that the most dangerous pitfall owners could stumble into is overestimating how quickly revenue growth will occur.

“In the past couple of years, one issue I’ve seen among the majority of my B2B clients is procurement cycles lengthening, thanks to the complexities around signing off contracts,” he says. “Overestimating when you’re going to get the revenue growth that will set you on the scaling path will give you a skewed picture of your cash requirements – ultimately leaving it to yourself and your investors to support the business.”

As such, Grimsdale recommends maintaining a “healthy dose” of pessimism: a more cautious approach will ensure that if sales lag behind expectations, your fixed costs won’t catch up, erode margin and spawn a cash shortage.

Owners may assume that the company’s growth cadence as a scale-up will be similar to the start-up phase. This is a risk. Grimsdale warns that growth tends to stall or plateau at points along the scale-up journey. As such, no owner can guarantee that their business will grow as rapidly as it did during the start-up phase and become a large player in just a few short years.

“Both of those pitfalls tie in with the risk of undercapitalisation,” Grimsdale notes. “Any type of scaling, especially if you try to ‘blitz scale’, creates a cash drain on the business. But managing that properly is quite a liberating exercise.”

Grimsdale explains that a gym group he works with was looking at the upfront capital requirements of opening new locations. Initially, it focused on smaller, 750sq ft sites that were reasonably affordable. However, with Grimsdale’s help, the business realised that it would be selling itself short. “We found that if we went with more expensive 2,500sq ft sites, we would generate more revenue at an earlier stage and benefit from economies of scale.”

Other pitfalls that Grimsdale flags up are a loss of discipline around cost control as the business grows, and underestimating the complexity of expanding to new jurisdictions with unfamiliar legal systems, planning laws and cultures.

Create rolling forecasts

In terms of which key attributes a financial plan for scaling should have, Grimsdale stresses that first of all, its forecasting element must be dynamic and rolling, rather than static.

“If there are icebergs ahead, or if things aren’t panning out exactly as you envisaged on Day Zero, forecasting that’s pinned to the performance of the business enables you to adapt very quickly,” he says. “It’s about having a plan that lives. All too often, you’ll go into a business and find that the document’s sitting in OneDrive and doesn’t have a life of its own.”

Test your resilience

The next attribute is sensitivity analysis. That requires owners to critically assess the resilience of their business model under a range of different scenarios. For example, what happens if revenue for a crucial period is 50% lower than desired, or if primary revenue streams come online six months later than planned?

“Sensitivity parameters enable you to prepare in advance for how you might adjust your capital requirements if things don’t go as hoped,” Grimsdale says. “They can be particularly useful for addressing impacts from the sorts of economic conditions we’re seeing now.”

Plan for financing

Third, the plan must include provisions for how owners plan to match initial capitalisation with their growth ambitions, in light of certain contingencies. “Let’s say you do sensitivity analysis and conclude you’ll need an extra £100,000 to kick things off,” Grimsdale explains. “In the matching exercise, you’ll have already documented where best to locate that finance – whether through equity, seed funding or friends and family.”

Plan for new talent and tech

Next, the plan must support a programme for bringing in fresh talent and investing in technology as the business grows.

Set ‘North star’ goals

Finally, it must set out a series of ‘North Star goals’ that the company aims to achieve every quarter – plus a headline goal for the year. “Financial planning can get very bogged down in detail,” Grimsdale warns. “North Star goals give you very simple, clearly defined markers to sprint towards, which you can communicate to the entire team – from sales and operational support to the CEO and CFO.”

For example, he adds: “The gym group I mentioned has a goal of hitting 25 locations by the end of the year. Everyone in the business is aligned around that.”