ask SCORE: The Holy Grail of Small Business Success-GROWTH!
The Holy Grail of Small Business Success-GROWTH!
How to Make it Happen
By Richard Walton
Assistant District Director for SCORE
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 good. Some of them are the need to pay back start up loans, pay higher salaries to attract the best people, to add to the products and services that the firm provides, perhaps to buy or build a manufacturing plant or an office facility, or even to provide funds for a future retirement scenario. The magic wand 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 support and patronage. Someone else will receive the benefits of your work in having 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 outsourcing subject to strict quality standards. Another is through an alliance with another 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. 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, by starting at the bottom, the products and services that are produced
and sold at present, and apply the current levels of sales for each and the resulting profit or loss for each item. The next step 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. All overhead will have to be allocated to the existing overhead costs, not just those estimated by cost projections made in advance. This is a key factor in any financial analysis, to compare projections with reality. If the comparison shows that not all costs were accurately estimated. For example, if the total amount of allocated/estimated labor costs was lower than the actual costs incurred, the firm will operate at a loss (unless the deficiency is made up elsewhere, such as a higher allocation of materials costs against actual costs). In any case, the key factor 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 both effective planning and financial information, but that is not all. Scaling requires all operations of the business to be adequately scaled upward, including every process the firm undertakes, including its decision making and HR practices. Financial analytics can provide crucial profit planning information. 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. Your SCORE counselor can help you plan for 'Good Growth'.
Mr. Walton teaches Financial Management, Operations Management, Corporation Finance, and Entrepreneurial Finance at Frostburg State University and is the assistant district director for SCORE, Western Maryland, and is president of ERMACORP, a Hagerstown based Management Consulting Firm. Call 301-462-9850 or him at Richard@ermacorp.com. Find him on Facebook(r) at "Small Business Life Cycle" for inquiries and an exchange of ideas on small business management, issues, resources, and experiences.