Grow, Grow, GROW!!! Business owners hear it constantly.
You’re always thinking about how you can grow your SME business.
But there are serious questions you need to ask in order to nurture the right SME growth strategy to suit your business…. or you may end up counting other costs.
The questions are not simple to answer and there is no single template to follow. Your growth strategy needs to be tailored to your own business.
Below we consider the two main questions you should be asking before embarking on a period of growth – and also break these considerations down into their key factors.
How to grow your SME: Striking the right balance
The key for any SME business owner is in striking the right balance between having enough money to live on and not having their business dominate their lifestyle.
In the pursuit of growth, SME owners often sink in large hours and even forego their own salary. But if their business fails, they may have nothing to show for their efforts. And in fact, they can lose their investment completely, leaving them worse off.
They’ve essentially paid to go to work!
While growth has some obvious benefits, blindly pursuing it is dangerous. Growth strategy is important.
For instance, you can lower prices to increase sales – i.e. sacrifice profit for growth – but this just leads to more work for less return. And unfortunately, adding 5 – 10% to last year’s figures and hoping to hit them also rarely works.
So which two questions should underpin your strategy to grow your SME?
WHY are you growing?
This great video from Rob Pitt of Hanrick Curran Chartered Accountants provides some simple but enlightening perspective.
Rather than focusing on the top line and hoping you make enough profit, Rob starts with the bottom line – the amount that the business owners take home.
When you know how much is required to provide the lifestyle that you and your family would like, you know the after tax net profit your business needs to make. You can then work back up through tax, expenses, and variable costs to determine the turnover required to suit your life.
Thinking through this process can also help identify opportunities to increase profits without higher turnover or the need for more resources.
Working in this way, you can identify how much your business needs to grow in order to earn you the income that would allow you to live comfortably. When you know that, you can then focus on the areas of your business to achieve your targets.
HOW are you going to grow?
Once growth targets have been established for your business, consider how you’re going to get there.
Growth is usually seen as all positive. However, it carries substantial risks. In fact, a number of high profile companies (particularly in the construction and retail industries) have pursued aggressive growth strategies only to end up in insolvency and liquidation.
Businesses often operate at or near their existing capacity. So when they grow, it may require expansion of premises, capabilities, staff and equipment to accommodate the growth.
These will generally need to be paid for -or long-term agreements entered into- before the benefits flow to the bottom line.
Your growth strategy should therefore be tailored to your business. You need to be able to answer these questions before actively pursuing growth:
- Can we continue delivering the same quality product or service to customers – both existing and new?
Note that letting quality slip due to increased quantities can damage your business through increased customer complaints or lost customers.
- Where will we need to increase capacity in our organisation?
Identifying the capabilities, staff, and facilities required to deliver growth targets ahead of time will help avoid surprises to cashflow or compromised quality.
- How will we fund the growth?
Not having appropriate capital structures in place can lead to tight cashflow and inappropriate funding to fill gaps e.g. credit cards.
It’s also important to consider whether the business can fund its own growth – or will it require directors to put their own personal assets on the line?
- What are the risks with the growth strategy we’re pursuing, and how will we mitigate them?
Common questions here include:
- Can we deliver what we’re offering AND maintain quality?
- Will we make a profit?
- Will the business grow with one or two large clients or projects? What happens if those clients don’t pay, or have extended payment terms?
- Will we be overcommitted and therefore unable to meet the needs of existing customers?
- How will we control costs if we’re expanding our operations?
- Could our personal circumstances affect the plan?
- What happens if we incur further costs, but don’t achieve the expected turnover?
Finally: Check and monitor growth
Any strategy you use to grow your SME needs to be monitored for progress.
As you’re growing, watch closely for changes in the financials of your organisation – particularly in your profit margins and expense ratios. Avoid the temptation to grow too rapidly. Don’t set and forget – adjust your strategy as necessary.
Cactus Consulting works with company directors to overcome challenges and help SME businesses grow. We work with accountants and consultants to assist SMEs to operate sustainably and profitably.
If you have questions or would like to start a conversation about overcoming obstacles to growing your business, get in touch at 1300 4 222 887 or ask a question now in our livechat window.