Rapid and outstanding growth can be intoxicating for business owners. A start-up business experiencing rocketing sales can cause envious glances from others, who may wonder what they are doing wrong. Why is their own business growth so mediocre?
Well, it’s important not to get swept along by it. Sustainable business growth is more important than simply rapid growth.
If you fast forward two or three years, a sustainable business will still be experiencing growth while some of those rapidly-growing start-ups will have fallen by the wayside.
Why? Because not all growth is good growth.
The importance of sustainable business growth
We see many businesses pursuing a non-sustainable growth strategy. It’s great while it lasts, but the consequences, if not managed wisely, can be dangerous or even fatal for the future of the business.
As an organisation grows its revenue and increases the level of activity needed to drive that revenue growth, it also increases the need for working capital.
The inability to fund growth by having adequate working capital will have a disastrous consequence for a high growth business. It may even result in insolvency or bankruptcy unless it is managed well.
In short, a singled-minded focus on growing revenue can kill a business, irrespective of how profitable it might be.
All too often business owners ask, “so where’s all the money gone?”, even though their business has made a profit.
Sustainable business growth: balancing profit & solvency
At the risk of over-generalising, if a business doubles in size (with all other things being equal) it will need twice the amount of working capital to support it. Any less than this is unsustainable.
If funds are not available to finance that growth, the business risks failure because it is unable to meet its creditors’ demands for payment, even though the business may be very profitable.
One of the most challenging aspects of managing a business is balancing profit growth objectives with solvency.
Your present success can often prevent you from achieving even greater success. It can even lay the groundwork for the ultimate demise of your business.
Even if you don’t continue to question your own success and how you could do things better, you can be absolutely certain your competitors will.
Warning signs that your business could be failing…
Signs of impending disaster for a high-growth business may include:
- Attracting many of the ‘wrong type’ of customers
- Having no clarity of purpose – what is the business really trying to achieve?
- Unprofitable customers –high sales value but costing you more than you charge them
- Subsequent faults in products or services that require fixing at your own cost
- Not converting a customer into a recurring customer – high acquisition costs
- Each product or service requiring a tailored approach for each customer
- Products rapidly becoming obsolete or out of style
- Lack of available cash and working capital to fund expansion
- Ignoring new entrants to the market and alternative products
- Failure to innovate and improve
- Business owners working in the business and not on it
How to achieve profitable growth that is sustainable…
Good growth is profitable growth that is sustainable.
The objective is to create a business that efficiently utilises resources and generates revenue at a lower resource cost that its competitors…
Grows within the limits imposed by its cash reserves. That is, sustainable growth.
So, what actions can you take to achieve sustainable business growth?
- Increase the number of the right type of customers for your business
- Create recurring revenue customers who purchase repeatedly from you
- Price your product for profit
- Become more efficient in providing the product or service by systemising and improving manufacturing processes or supply chains
- Working on your business
- Identifying and attaining an adequate level of working capital to fund growth
Remember: growth that is not sustainable can quickly get out of control and spell disaster for your business.
Aim for sustainable business growth by getting advice from the qualified and experienced business advisers. Contact us for more information.