David Cummings on Startups

GPA: Growth Plan Assets

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David Cummings

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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?

Comments

4 responses to “GPA: Growth Plan Assets”

  1. Jamie Bardin Avatar
    Jamie Bardin

    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).

    Reply
    1. David Cummings Avatar
      David Cummings

      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.

      Reply
  2. Building Your First Startup Team « 10,000 Startup Hours – David Cummings

    […] is especially the case with bootstrapped startups that are customer funded. For us, we followed the GPA (growth plan assets) model and hired our next person when the GPA was high […]

    Reply
  3. Determining When a Startup is Financially Ready for a New Hire « 10,000 Startup Hours – David Cummings

    […] Growth Plan Assets (GPA) – for companies that sell products or services with limited or no recurring revenue, growth plan assets is the ratio of current assets (e.g. money in the bank plus accounts receivable) divided by the average monthly operating costs over the past 90 days (e.g. all expenses in the past 90 days divided by three). The GPA should be in the three or four range (like a good GPA in college) to know that the business is ready to hire (the GPA can be lower as the percent of revenues that are recurring go up). […]

    Reply

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