Growing Pains at Growing Businesses
Getting a business to grow can be hard enough. Managing that growth successfully can be even harder. Recently, members of our business group discussed some of the challenges they face as their businesses expand.
Since we first met Jessica Johnson, her company, Johnson Security Bureau, has expanded from 60 to about 70 employees. Ms. Johnson says she expects to hire 10 to 20 more by the end of the year. She attributes much of her company’s growth to her participation in the Goldman Sachs 10,000 Small Businesses program, which helped her single out better prospects and win new contracts.
For Ms. Johnson, understanding the impact of adding more employees has been a concern. “It’s one thing to increase the number of people, but we also have to create the infrastructure to support them,” she said. For example, the security business’s general liability costs are based on an estimate of its annual billable hours, which increase along with its number of employees. Each year, Johnson Security’s general liability insurer employs a third party to conduct an audit comparing estimated hours and actual hours. “Because of our dramatic growth, the audit will result in a significant increase in costs for the coming year and an assessment to cover the difference for the past year,” Ms. Johnson said.
Additionally, Ms. Johnson said, the company’s recent growth attracted the attention of the New York State Department of Labor. She said the agency deemed that growth “unrealistic” and wanted to be sure the company was classifying its employees as W-2 workers, not 1099 contractors. The audit went well, Ms. Johnson said, although Johnson Security was fined for categorizing one of its guards as an independent contractor (he had worked just four hours and is now classified as a W-2 worker). Ms. Johnson said the agency representative was awed by the number of jobs the company had created.
One group member, Alexandra Mayzler, who owns Thinking Caps Tutoring, said the issue of an employee’s status can be a “gray area.” While 1099 employees are common in the tutoring business, she plays it safe — all of her tutors are classified W-2.
“They’re coming down so hard on that right now,” said another group member, Carissa Reiniger, who owns Silver Lining Limited. She said Silver Lining, which provides an online tool that helps small businesses set and reach financial goals, recently opened a call center staffed with part-time workers. She had hoped to hire independent contractors but ultimately opted for W-2 employees. “Six of my friends’ companies have been audited specifically around 1099s,” she said.
At the moment, however, Ms. Reiniger is more concerned with managing Silver Lining’s finances. Several issues have plagued her since soon after she founded the company in 2005 — and made some big mistakes.
Back then, she said, “I had no start-up capital, no experience, and no real idea what I was doing.” Still, Ms. Reiniger said the company grew quickly and sales rose from $29,000 in 2005 to $1.1 million in 2007 — when cash flow became an issue. “It was literally, money in, money out,” she said. Silver Lining never had a line of credit. Instead, Ms. Reiniger said, “I had a credit card with a $17,000 limit.” She said Silver Lining’s small-business clients had their own cash flow issues, which didn’t help matters.
By late 2006, Ms. Reiniger said, Silver Lining’s financial woes prompted her to start “calling people and making ridiculous deals.” For example, she would request a loan of, say, $50,000 and promise to pay it back in 60 days — at a 20 percent interest rate.
“Who were you making these calls to?” asked a group member, Susan Parker, who owns BariJay, a dress manufacturer.
Family and friends, mostly, Ms. Reiniger said — “anyone who would take them.” She said she entered a dangerous cycle — borrowing a sum from one person and paying it back, with interest, with a loan from someone else.
Ms. Reiniger said that from 2006 until 2008 she completely ignored the reality of her situation. “Admitting that I didn’t have a grasp on our finances and that I was going into debt every month was not going to support my image,” she said, adding that the company had a “rock star” reputation. But while Silver Lining’s annual revenues were $1 million, the company was spending more than that.
It got to the point where Ms. Reiniger said she couldn’t bear to look at the company’s QuickBooks records. Ms. Mayzler asked who was managing them. That was another problem. At the time, Ms. Reiniger said, Silver Lining had 25 employees, including a vice president who was “in theory” responsible. “But the reality was that she wasn’t trained to do it, so she was trying to do what she could do with limited information,” Ms. Reiniger said.
By early 2008, Ms. Reiniger said she was forced to acknowledge that Silver Lining was $410,000 in debt. “We owed a lot of people a lot of money,” she said.
In coming posts, we’ll hear more about Ms. Reiniger’s debt problems, and we’ll explore the challenges of establishing processes as a business grows — an issue that is preoccupying Ms. Mayzler.