9 Key Questions to Ask to Assess a New Growth Company

Working with a new growth company can be an extremely rewarding yet daunting experience, all at once. On the one hand, you get to bring your expertise to a new environment and help a budding company blossom into financial success.

On the other hand, what awaits you on the inside, once the excitement wears off, is often a jungle that may prove difficult, as well as hazardous, to navigate without the right information.

From cash flow to debt, many things need to go right for a company to do well in the modern business landscape.

So, how can you hit the ground running and determine whether a company is healthy or performing well?

In this mini-guide, we will share with you 9 key questions that span various aspects of a company's financial health to help you evaluate your new company's financial well-being, as well as some tips for planning accordingly if you encounter any problems.

To make it even easier, we've also created a PDF cheatsheet that you can refer to should you wish to use this list as a checklist of sorts. Access that here👉🏼 Health Assessment Checklist

Without further ado, let us dive into each question, its meaning, and some takeaways for each kind of analysis.

Question #1: What are our current cash position and burn rate?

One of the biggest problems fast-growing companies face is cash flow, both in terms of management and tracking. In particular, growth companies often struggle with keeping their burn rate under control, as rapid expansion may lead to cash outflows that exceed inflows.

Start by analyzing and understanding the state of cash flow in the business. Look for information that tells you how much cash is coming into and leaving the business at any given time, and how quickly the company is burning through its cash.

Is the cash position relatively steady over a given period of time, or does it fluctuate wildly? Is the company's cash burn rate too high? If so, why?

If you notice any problems, take some time to investigate their causes and develop a plan to help the business manage its cash flow properly.

This is a necessary step to helping the company transition into sustainable growth, and stay operational in the meantime.

Question #2: What is the current gross margin, and how is it trending?

Gross margin, calculated as (sales revenue - COGS)/(sales revenue), gives you insight into costs, pricing, and gross profitability. Analyze the current gross margin and compare it against historical and competitive benchmarks to see if there are any concerning trends to worry about.

Is the gross margin of the company low compared to industry standards? Has it been decreasing from previous time periods?

If you notice such trends, you can investigate potential root problems such as rising COGS, sales inefficiencies, unprofitable product or service lines, and over-the-top discounting to pinpoint what might be causing the shrinking margins and prevent future problems.

Question #3: What is the current accounts receivable (AR) aging, and how long does it take to collect payments?

If the company allows for any sort of purchase on credit, this is an essential analysis that can shed insight into potential cash flow problems or discrepancies between the cash flow statement and P&L.

Conduct a receivable aging analysis and determine if the company has any problems with slow collection times or bad receivables.

A healthy cash conversion cycle is key for growth companies to maintain their growth.

If you notice that the company consistently makes high sales but struggles to convert the sales to cash, you may want to implement strategies to help bridge the gap between Revenue and Cash, or consider changing the sales model altogether to allow the company to collect its cash upfront.

Question #4: What are our biggest costs and how well are they managed?

While significant importance ought to be placed on growing top-line sales revenue, cost management must not go overlooked, as it is key to maintaining profitability.

Understand the company's key costs and look for ways to minimize or optimize areas that may be suffering from inefficiencies.

For instance, is the company's biggest cost labor? If so, is the company overstaffed and incurring more payroll costs than necessary?

Conduct an efficiency analysis of each major aspect of the business as far as costs are concerned and develop a plan to help reduce the costs' effects.

Consider tactics like automation, outsourcing, or even introducing a cap on how far costs can rise to help mitigate or maintain costs.

Question #5: What is the company’s current capital structure, and are there any upcoming fundraising or capital needs?

No discussion about cash management or growth planning is complete without the topic of funding, particularly since the company's capital structure can have far-reaching effects across the cash flow statement, balance sheet, and P&L.

How is the company financed? Is it mostly through owner contributions or through debt?

Has the company undergone previous rounds of funding, and are there any obligations from these previous rounds that are straining cash flow in the present?

Consider also whether the company is facing any upcoming fundraising or capital needs. Is the company in need of more money to finance a new product line, expand its marketing efforts, or employ more staff or machinery?

Plan through the various possibilities the company may have to finance its growth, as well as potential future problems or strains the possibilities may bring (for example, high interest payments on some loans or performance pressure from investors).

💡 Download the PDF version here 👉🏼 Health Assessment Checklist

Question #6: How much debt do we have and on what payment terms?

Understanding the company's existing debt obligations and agreements is extremely important, as you want to make sure that they are manageable in relation to cash flow and growth plans.

• Is the company able to sustain its payments?
• Does it even have a clear repayment plan?

If you notice that the business is facing problems with its creditor repayment, consider options such as renegotiation or implementing cash flow management techniques that redirect more effort into debt repayment to avoid long-run problems.

Consider any lessons you learn now for future rounds of debt financing so that you may secure terms more favorable to the company.

Question #7: Are there outstanding or impending tax liabilities or compliance issues?

Particularly if the growth company has been expanding rapidly and into many new markets, there may be potential tax liability or compliance issues.

For example, the company may have neglected to consider local payroll or labor laws, leading to problems with tax remittance or compliance with social legislation.

Even if there are no current issues, however, be vigilant of potential upcoming problems, as such liabilities can lead to fines and unexpected cash outflows that negatively impact the company's financial stability.

Consult local and international experts for advice on any compliance issues and consider implementing precautionary measures, such as preparing a tax reserve in case of any unexpected errors or troubles with the authorities.

This is especially helpful if your growth company is planning to expand to new jurisdictions.

Question #8: What risks do we face from an operational or market perspective, and are we mitigating them financially?

Growth companies, particularly those looking to expand, are often exposed to operational and market risks.

In general, as global markets become more volatile, it is important to implement some degree of financial protection for the company.

Understand the most common risks for your company's industry and location and, if none are present, create contingencies or measures to address these risks. Incorporating these measures into the company's financial planning is key to long-term stability.

For instance, suppose the company conducts business with clients and suppliers in multiple currencies that may be subject to fluctuations due to geopolitical conditions.

Consider creating buffer reserves to absorb the impacts of unfavorable changes in currency exchange rates and mitigate the financial impact of these changes on the company.

Question #9: How is financial data managed, and how accurate are our forecasts?

Growth companies often struggle with reliable projections due to limited data and lack of expert management and analysis, or simply stakeholder engagement if the stakeholders do not place priority on forecasting and projections.

However, this can negatively affect the company's ability to achieve growth targets and control costs.

Understand the gap between previous forecasts and actual performance to help adjust the company's financial strategy. Consider implementing measures such as building an in-house team of analysts or outsourcing to trusted experts to help ensure the accuracy, validity, and usefulness of financial reports.

Conclusion

Armed with these nine questions , you can get a deeper picture of your company's health and key areas for improvement.

Take some time to diligently review the company's financials and see what you find. Does the business pass all the tests? That's fantastic!

With no immediate threats, you can focus on long-term planning and expansion.

Does the business have all the problems we mentioned above? Figure out which ones are most pressing and work on solving them one by one (we often recommend tackling cash flow and cash flow-related issues first, as cash flow is the lifeline of the business).

📄Download the cheatsheet and get to work: Health Assessment Checklist

Let us know in the comments 👇 if you found this helpful, or if you have any other questions, you might add to a growth company's health assessment.

P.S. If you are looking for a trusted partner to help you and your company with all your financial analysis and planning needs, look no further. At Rhodium , we are committed to ensuring the highest quality work for our clients and are committed to your success. Send us a DM today to see how we can work together to help your company thrive.