HOW TO MAKE IT HAPPEN
What’s not to like about growth? Every small businessman or woman I have ever met wants to see their business grow and for a number of reasons, all of them good. A few of them are: the need to pay back start up loans, pay higher salaries to attract the best people, increase the number and quality of the products and services that the firm provides, buy or build a manufacturing plant or an office facility, or even to provide funds for a future retirement scenario. The magic wand that will make it happen is growth!
But I suggest we think again. Why? Because not all growth is good. Some growth can strangle a business, even lead it to insolvency. We need to know what growth is good, and what is not good, and how to tell the difference. In this short article, I will try to provide a framework for doing just that.
THE FIRST STEP FOR GOOD GROWTH: PLANNING
Growth should never be accidental or unplanned. The firm that is not ready for growth and suddenly experiences an unplanned rush of orders is in double danger. First, not being able to satisfy its customers will lead to dissatisfaction and ultimate withdrawal of their support and patronage. Someone else will receive the benefits of your work in developing a sought after product, but not having enough of it to satisfy a surge in demand. The second danger is being able to satisfy the demand for the product, but not at a profit. This could signal the end of your firm if you operate at a loss as the firm grows, only to see eventual inability to pay your bills and the necessity to close down the business.
Planning is what will make the difference. In this case, planning is two fold. First, planning to scale up operations to meet the increased demand, and second, utilizing the tools of financial analysis to assess the relationship of costs and prices, both now and in the coming growth phase in order to establish and maintain profitability.
THE SECOND STEP FOR GOOD GROWTH: SCALING
Scaling is the process of increasing supply to meet demand and doing so with a dual focus upon quantity and quality. There is nothing to be gained by building capacity for quantity alone, without reference to quality. Quality is the key word, and the two must operate in tandem. Scaling up production is done in several ways. One is by temporary contracted outsourcing subject to strict quality standards and delivery schedules. Another is through a long term alliance with a firm that can produce supplemental quantities of the required new production while you put in place the infrastructure (equipment, personnel, production space, and capital) to permanently increase capacity. A key feature of this alliance would be mutual long term benefits to both firms, such as sharing technical expertise and other resources. Staging the increase in these steps enables you to monitor progress of both your capacity (supply) and changes in the market (demand) to assure yourself that conditions favor permanent increase and growth. Of course the key is to maintain and even improve quality of all operations, whether outsourced or in house production. And by all operations, we mean supporting activities as well, purchasing (supply chain management), credit, and internal record keeping, sales management, logistics, and internal processes (billing, record keeping, accounts receivable and payable controls, and above all else: cash management.
THE THIRD STEP FOR GOOD GROWTH: FINANCIAL ANALYSIS AND PROJECTION
Every organization should be able to identify its costs, selling prices, and current levels of profit and/or loss. No growth plan should allow unprofitable operations to be scaled up if the firm is not operating profitably. The best way to do this is to do both a bottom up and top down analysis. Starting the analysis at the bottom involves the products and services that are produced and sold at present, and applying the estimated cost and current sales volume for each and the resulting profit or loss for each item. Remember, this is the estimated profit and or loss for each item. The next step (top down analysis) is to utilize your accounting service provider to create a total company Profit and Loss Statement for the same period in which the individual profit/loss for each product was calculated. Obviously the total sales should be the same, both from bottom up and top down analytics.
But the costs may not be. Actual overhead expenses will have to be allocated to the estimated overhead costs for each product. Comparing estimated (projected) costs with actual results is a key factor in any financial analysis. Comparisons often show that some costs are underestimated (resulting in a loss) and others were overestimated (resulting in a profit). For example, if the total amount of estimated labor costs was lower than the actual costs incurred, the firm may operate at a loss. The key issue is to develop accurate costs and profitable selling prices for all products and services, both at the current level of operations, and for the newer expanded operating level (future expansion cost structure).
THE FOURTH STEP FOR GOOD GROWTH: IMPLEMENTING THE PLAN
The foundations for good growth are collectively, effective planning, scaling operations and financial analysis, but that is not all. Planning involves continuous monitoring of events one the plan is set in motion to ensure effective implementation. Scaling requires all operations of the business to be adequately scaled upward, including every process the firm undertakes. For examples its decision making processes, order handling, customer information and HR practices. Financial analytics can provide crucial profit planning information through comparison of estimated costs with actual costs and adjusting selling prices where necessary to produce a profit. Operations, including production need to be carried out with a dual focus on the quantity required and the quality that provides a competitive advantage to the firm in the marketplace. All of these will be affected by growth, and if we get bigger, and not better, it will lead to a potentially disastrous outcome.
Growth is good, but only when handled properly. The firm does have to get bigger, and also better. And getting better first helps you get bigger profitably and sustain profitable growth overtime. Your SCORE counselor can help you plan for ‘Good Growth’.