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?
David Cummings on Startups 
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.