People tend to hold misconceptions about the benefits of business growth that, if not overcome early, can end up seriously damaging a business’s long-term viability. Here are some common myths and how to avoid getting caught up by them.
1. Bigger is better!
When people think about business growth, they often focus on sales. If you look at industry benchmarks though, you’ll find businesses in higher sales brackets aren’t always the most profitable. We see businesses with modest turnover that achieve good profits. As soon as a business grows, overheads can get out of hand and the extra sales get eaten up and profit is worse than before. The question is what do you want to grow and why? Sales growth without corresponding increase in profit is a waste of time and causes headaches for business owners.
There is an old saying:
“Sales are vanity, Profit is sanity, and Cash is king!”
To achieve growth in profit and sales, you need a plan to keep things on track. A budget is a great way to do this.
- Set sales targets with marketing and sales plans to support them.
- Set cost targets – you may be able to get better pricing when purchasing volumes increase and achieve better gross profit.
- Set overhead targets – consider extra resources required to deliver increased sales and have operations plans to support growth.
- Report on Profit and Loss monthly with a comparison to budget, so that you can quickly see if things are off track and fix them immediately.
2. Growth will solve cash flow problems
This is probably the biggest and most dangerous myth of all! Why? When you make a sale you need cash to fund that sale i.e. you need to pay for:
- Goods or work on projects
- Overheads to run business
- Credit for customers paying on terms
- Stock waiting to be sold
If you need cash to fund sales, it follows that the more sales you make the more cash you’ll need. Growth without considering this fact brings many businesses undone. They go ahead and agree to big contracts or sales without considering funding to achieve growth.
- Prepare a detailed cash flow projection including extra sales and corresponding cash flow requirements.
- Consider how you’ll fund extra cash required:
- Speed up collections from customers on terms.
- Ask customers for deposits
- Seek longer credit terms from suppliers or time payments to suppliers to be after receipts from customers.
- Borrow from a lender e.g. Bank
- Equity – sell shares to provide extra capital
3. Staff will love it
Growth creates great opportunities for staff to progress their careers. If resources aren’t properly considered though and plans put in place to handle growth, it can cause more headaches for the business owner by creating unhappy staff, who have pressure and stress.
- Plan for growth and factor in what resources will be required
- Communicate with staff and involve them in growth plans. This is a great way to get ‘buy in’ and get them excited about plans.
- Set targets (KPIs) with staff to ensure you aren’t taking on extra resources without achieving targets and profit.
- Provide incentives to achieve growth targets. Money isn’t the only incentive – recognition can be a good motivator.
4. Build it and they will come
We see it often – massive fit-outs of business premises, fortunes spent on new equipment etc. Business owners get excited about creating a fantastic product or service, but forget to tell the market! Sales don’t grow quickly enough to fund the extra costs outlaid and cash flow squeeze becomes an issue. Marketing is often not the strong point of business owners and they don’t have the funds to employ a marketing person.
- Budget for sales required to cover costs of fit-outs, extra equipment etc. Workout a ‘break-even’ point and make this your targeted sales to cover costs.
- Have a marketing plan and let your market know of your new product or service.
- Employ outsourced marketing help if you can’t afford to employ someone. Marketing is not a ‘cost’ it is an investment in building your brand.
5. I can cope!
Business owners often fall into ‘The Founder Trap’ (a term coined by author of the E Myth Michael Gerber). It’s when a business owner thinks they are the only person that can do things and doesn’t trust anyone else to help. The problem with this attitude is that other aspects of your life suffer e.g. your sanity, your health, your home life etc. When you start off in business it’s obvious that you have to be ‘jack/jill of all trades’ and do anything. When you decide to grow though, you need to take a completely different view of things. You need to become a business manager and not just a ‘doer’.
- Build a picture of what your business will look like when it has grown.
- Prepare an ‘Organisational Chart’ setting out all the tasks that need to be performed and who will do them.
- Write up job descriptions for the people who will be involved.
- Consider what systems will be needed to create efficiencies.
- Gain skills or outside help in HR management. Employing people doesn’t make your life easier – it’s a whole new skill you need to master.
CFO On-Call works with business owners to achieve successful growth. For details visit www.CFOonCall.com.au