GPA: Growth Plan Assets
June 26, 2010 4 Comments
One of the serious challenges with a bootstrapped startup is determining when to expand. There’s a fine balance between having sufficient reserves in the bank and being aggressive with new hires and initiatives. About four years ago, after struggling with this issue for over a year and experimenting with different ideas, I settled on an approach I’ve been using ever since: growth plan assets (GPA).
The GPA, much like a GPA in college, is a simple number that quickly summarizes the ratio of current assets to average monthly operating costs over the previous 90 days. Here’s how I calculate it:
- Add up current assets including cash in the bank and accounts receivables that are not overdue
- Calculate the average monthly costs to operate the business over the past 90 days (every single penny spent that wasn’t a one-time cost)
- Divide the current assets by average monthly cost to get the GPA
What else? How do you decide when it is time to invest in growth?
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David –
That is interesting and I am intrigued. So how do you use the number generated to make a decision? I would like to know more…
In an early stage venture, one where you are building the company and product and have raised money, there are three numbers I always know (assuming there is debt on the books). The first is when you hit the ZoI – Zone of Insolvency, two when does cash = debt balance and three is OoC – Out of Cash. These are important to know if you are raising capital so that you never hit any of those three before you close more capital.
At operating concern, I normally take 12 month and 30 day running averages of Revenue, GM, Expense, and Net Income. Running averages are great because they smooth out the cyclicality in a business and give you trajectory. If revenue is trending down on the 12 month curve and head count isn’t, or inventory isn’t that a problem. I always want the revenue increasing as well as GM, and the delta between GM and Expense to keep getting greater, hence Net Income is increasing.
Last, I watch inventory closely (Days of Sales On Hand) and Receivables DSO (Days Sales Outstanding).
Thanks Jamie for the great comments. I agree that those are important metrics to follow as well. I should have clarified that the GPA approach assumes a profitable business that is growing organically.
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