What is “Good” Growth for Your Small Business?
What is “Good” Growth for your small business, and how do you achieve it? First, let’s define “Good”. Not all growth is good, in fact some can be down right destructive. In order to be considered good, growth first needs to be PROFITABLE. Why do more work for the same (or God forbid, less) profit? Second, growth must be sustainable. Let’s define sustainable growth as recurring (not a one shot increase) and growth that you can handle operationally and financially.
As we discuss in greater detail in the Eight Levers of Cash Flow, growth in profit (cash flow) from only a set number of places. As it relates to sales, you can increase volume or you can increase prices. Simple enough. What you DON’T want to do is increase volume by DECREASING prices. You may be able to do this in the short term, but most businesses are not setup to be the “low cost” provider. If that IS your strategy, then you can increase volume by decreasing prices, but you will need to cut your related costs at least as much. Much easier is to increase revenue by increasing volume (marketing/sales) or by increasing prices (read more about the role of pricing in cash flow here.)
Every business has a certain capacity. In very rare cases can you grow a business in a straight line. At some point, you will have to increase some fixed cost. Think of the limitations in your business, things like space, equipment, people. Indentify the limiting resource(s) and make a plan to grow to that next level. As an example, if you have a space limitation, how much can you grow before you will need more space? If you use machinery, how much more can you make before you have to add another machine? This should be your initial growth target. Once you reach that point, you will need to do some additional planning, since expanding your capacity will likely be a financial investment.
The second limitation on sustainability is finances. Even if growth is profitable, and doesn’t require investment in additional capacity, it can cost money to do it. For instance, does your business deal with inventory or extend credit to customers? Then an increase in sales will take cash. You can read more about that in these articles (Inventory/Accounts Receivable). Make sure you have the cash to accommodate the growth.
As an aside, if your growth plan involves additional marketing, make sure you have clearly identified the cost of acquisition of the new customers. You can then measure that cost against the lifetime value of the customer to determine if your marketing plan makes sense. Many times business owners marketing strategy is “spray and pray”, bouncing around from one marketing idea to another without ever determining what is working and what is cost effective.
Most businesses can sustain 10% annual growth without major problems. Growth in excess of 20% annually is exceptional, and only a few companies can make that happen year over year. I can almost guaranty, however, that there is growth potential in your business. Develop a good strategy plan, and make it happen!