There is nothing linear about growth. We like to think of it that way when we do our planning; we look out over the next five years and think about how we can push the growth rate from 5% a year, where it is now, to 10% a year, or higher. No matter how “clean” we want to make it, however, growth is a messy thing – and there is a geometry to it that is a long way from being a straight line. The irony, too, is that it can take a long time to build the growth trend you are looking for – and then things can get out of control in a heartbeat!
Any business normally has to go through a “base building” period before realizing the strong growth that it is looking for. Whether that base building comes in the form of up front planning prior to realizing any revenue, or the trial and error period normally associated with finding out what the market really wants, it takes time to lay the groundwork for solid growth.
It’s important to think through exactly where growth is going to come from, so that you can plan for it properly. You can get incremental growth from your existing customer base – in fact, far too many businesses leave money on the table by not focusing on selling more to existing customers. If you are looking for blockbuster growth, however – let’s say something on the order of 25% a year, or more – your business is obviously going to need some combination of new customers, additional products, or new markets.
So, the issue will ultimately come down to how much of the growth will come from higher dollar sales to current customers, versus increasing the number of customers that you have. The planning for these two growth trends couldn’t be more different. When you grow by selling more to your current customer base, you can more easily leverage the existing infrastructure that you have; when you grow by increasing your customer base, additional infrastructure normally has to be added at some point.
It’s simplistic, for example, to think that you can go from 1% of the market to 2% of the market and keep the same margins. Perhaps margins will be higher, maybe they will be lower – but, they are almost always different. When significant growth is realized, the basic relationships of the business change. You change the product mix, or you hire more people who are not as efficient, or you pay relatively less for materials because you are buying in bulk, or have to advertise more to get the additional business, etc., etc. Nothing is the same – not thinking every facet of growth through very carefully can be perilous.
Just think about the impact that growth will have on the cash flow of your business. Your cash conversion cycle will lengthen; this cycle is the timing difference between when a business has to pay its debts and when it will collect the cash it is owed to make those payments. Before you can build more of something, or provide additional services, your business goes through an expansion of its resources – it has to buy additional inventory, spend more time in the field with customers, possibly hire and train more people, etc. to prepare for the increased activity. Then, after the sale occurs, it goes through an expansion of its receivables and has to wait to cash in on the sale it has made. So, as you move to the next higher level of activity, you have to lay the money out up front and will need the cash on hand to do it.
One of the traps that many businesses fall into is “growth for growth’s sake,” instead of profitable growth. I suppose there is something about being the “biggest;” but, ask General Motors today how satisfying it is to be “big.” Getting bigger may give you bragging rights, but it doesn’t, by itself, put any money in your pocket. In fact, it can make your situation far more precarious, when you stress your organization to grow. Your resources become stretched, your infrastructure changes, your people have to do things differently; if you don’t have the additional return to match the higher risk you are taking on, you may be left without the ability to adapt quickly enough to the changes you are putting your business through.
Growth is what every business strives to achieve. But, managing growth will never be the same as managing the status quo. Large and / or fast growth creates a need for change; things are naturally different, chaotic, confusing, and sometimes inefficient and difficult to control. People will be unsettled by the change that growth produces. There can be a perception of “winners and losers.” The best way to insure its success is to plan for growth carefully – and never take for granted that your business is strong enough to pull it off without some problems along the way.
Jim Deyo is the President of Business Advisor Online, an internet based service that provides small businesses with the ideas they need to grow and the resources they require to make the right decisions. As a former Sr. Vice President with a major banking institution, Jim worked extensively with small and medium sized companies and has over 30 years experience in commercial and consumer lending, accounting, finance, marketing, and strategic planning. Visit the website at http://www.businessadvisoronline.com and sign up for a six week free trial of the service, or e-mail Jim at email@example.com.
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