I accidently started my business and thought that I needed to sell to grow. While sales is important, if you don’t have a growth plan, you will fail. Today’s blog post will illustrate how preparing for growth is necessary if you want to succeed in business.
I owned an Energy Services Company (ESCo) called Ennovate Corporation. Ennovate stood for Energy Innovation. At first, I did a lot of sales and engineering consulting for other ESCo’s (3-years) on my own. I was in year three of my company when a consultant told me I was not a serious “business owner”. He was right. I tended to react to my customers. When I had a new engineering opportunity, I’d respond with a proposal. I hired employees or contracted with others when I had signed contracts.
With my consultant’s help, I created a growth plan. Ennovate Corporation quickly grew to $10-million in revenue with 30-employees.
If you want to grow your business (as every right-minded business owner will), then there are a few things you need to know about growth that may not be apparent.
Growing is Easier than Coasting
There’s this notion that you can work hard to grow your business to a certain level and then relax while you gain a modest income from the work of others. I won’t call this a “myth”. However, it’s a counter-productive thought.
What is coasting? As a mechanical engineer, I can tell you that no vehicle can coast forever. Let’s say that you are on a level surface and your car is moving at a certain speed. If you stop using the accelerator, the car will eventually slow and come to a stop. Why? Because of the friction of the components inside the car and wind resistance.
Let’s say that you let your foot off the accelerator, and you have a downhill slope that allows your car to go even faster than it was when you took your foot off the accelerator? Now, your car will speed out of control, and you’ll need to apply the brake to slow the car down to a safe speed.
What if there’s just enough slope to overcome the frictional losses of your car so that your car remains at the same speed as when you stopped putting your foot on the accelerator? Well, then you would’ve accomplished what no human on the planet has… a perfect coasting environment.
Let’s go back to your business. If you expect to coast, what’s really happening is that you have decided to manually adjust your business speed to a fixed speed. When sales are excessive, you stop your marketing efforts. After all, you don’t need more business. Right? Then sales drop off and you scramble to sell more to make your next payroll. The problem with trying to maintain the status quo is that the market rarely cooperates. It’s no different than our car example. In the case of the car, you will experience rolling hills… downslopes, upslopes, head winds, tail winds, and all sorts effects that prevent you from going at a constant speed.
In any business, you’ll experience moments of success and moments of failure. When you have found a recipe for success, it’s important to leverage that moment to its fullest. When you experience failure, it’s time to abandon that investment and change directions. Good business leaders understand that it’s their job to objectively see their success and failures to make the best decisions on how to control their accelerator or brake.
Let’s look at an example. Let’s say that you own an ice cream stand. During hot days, there are long lines at your ice cream stands. During cold days, you get only a few customers. You’ve figured out that you will lose money during the cold days because you pay your employees more to staff your ice cream stand than sales will support. During hot days, some people are walking away because the wait time is too long. There are several tactics you can pursue: 1) increase prices on hot days to increase revenues during times of increased demand; 2) close your stand on cold days to avoid losses; 3) offer discounts when it gets cold to encourage higher sales on cold days; or 4) sell hot-chocolate instead of ice cream on cold days.
I can hear what you are saying… “But, Jeff, if you set up a system for cold and hot days, then you could let someone else run your ice cream stands while you COAST!”
Yes… as long as conditions don’t change, and people act exactly the same as they always have, you can coast.
Just like our car example, that’ll NEVER happen.
A competitor will see your success and want in on the action. The demographics of your neighborhood change and you need to set up shop in a better neighborhood. The price of ice cream sky-rockets prompting you to switch to less-expensive desserts.
The reality is that the marketplace is NEVER static and so as long as you’re a business owner, you cannot coast.
If coasting is out of the question, what can you do to reduce your workload?
What I do for my clients is create a business scaling model. A model can simulate what will happen with your business based on various conditions. You certainly can’t anticipate everything, but you can anticipate key influencers of your business.
A scaling model is made up of four primary components: 1) Marketing & Sales; 2) Operations; 3) Staffing; and 4) Finance.
Marketing and sales set the pace for the rest of your components. Marketing will attract prospective customers; and sales converts interested prospects into paying customers.
Operations is delivering high quality products and services to your customers in a timely manner.
Staffing is the growth challenge that catches most small business owners off-guard. As you grow, you hire more people. The more people you hire, the more necessary it is to hire or promote managers to manage or lead these people. A good rule of thumb is 6 to 10 people per manager. You’ll often pay your managers more than workers and so this facet of growth will require additional cash. These additional people need additional resources… like a more office space, vehicles, computers, furniture… Again, all of this will cost you cash.
This brings up the fourth component of finance. Each industry has slightly different cashflow models. However, once you’ve completed the first three components of the business scaling model, you can now tweak your prices, wages that you pay your people, bonuses or sales commissions, lease rates you can pay your landlord, productivity expectations of your employees, and all sorts of decisions.
What if reality is different than your plan?
I guarantee you that reality WILL be different than your plan. Remember… growth or downsizing is set by your marketplace. Yes, there are some things you can do to increase sales or profits. However, for the most part, your growth will be determined by your industry’s marketplace. When you create a growth plan, you can aptly react to market conditions with confidence.
You will know when to hire additional staff and what staff to hire. You will know when to ask for investment capital, how much to ask for and what return on investment you can promise your investors. You will know what size of facility you need to accommodate your growth. Likewise, you’ll know how to downsize if that’s the direction you need to take.
Why not worry about growth when the time comes?
Most small business owners try to market and sell what they can and assume that they’ll be able to deal with growth when the time comes. This is probably why “running out of cash” is one of the leading reasons why small businesses fail.
Small businesses set prices based on their small-business model. When they grow and need to upscale their facility and management staff, they have set low price expectations by their customers and cannot grow their enterprise beyond a certain point. Most of these poor growth model businesses will skimp on quality or try to get by without managers. This creates more work on their part and eventually causes incurable personal health problems or business failure.
Investors are often called in to bail out such business owners. As you can imagine, serious investors won’t touch such a business. Why would they fund a losing business model?
The next option is to raise your prices as you grow your business. While this can work to some extent, it’s difficult to convince your customers to pay more as you grow. If you plan your growth, except for inflationary pressure, there will be no need to increase or decrease your prices.
How about your employees?
Small business owners who don’t think about growth of their business completely ignore growth expectations of their employees. Most people who get hired for a job want to know that there’s advancement opportunity. This is one of the biggest reasons that high-talent employees don’t seek employment with small businesses. A large corporation seems to have endless opportunities for career advancement, while small, growth resistant businesses offer a dead-end job. When you have a plan for growth, your employees will be incentivized to help you grow so that they can gain advancement. If you have no plan, then you will attract the kinds of unambitious employees that will guarantee you go nowhere fast. If you happen to attract good employees, they will leave as soon as they realize they’re stuck in a dead-end job.
The SIMPLE Solution
As I mentioned, I do business scaling or growth plans for my clients. If you want to do this on your own, it’s really quite simple. Just multiply your revenue by a certain factor. You may have plans to grow different revenue sources than what you have today. Then envision what your company will look like at such a size. Think about how many managers you will need. What will you pay your people? What kind of facility will everyone work in? Where will it be located? What other costs will be associated with providing employees of your large company with the tools they need? What commissions will you pay your salespeople? What bonuses will you offer key employees? What vehicles or other equipment will you need? It’s really like you’re creating a business plan with a much large company.
Figure out what your prices will be for the products and services you offer. Create a profit and loss statement for your large company.
Now, break down your growth to that large company into phases. What positions will you create first as your organization grows?
Will your company be able to fund its own growth, or will you need investment capital along the way? What reward will investors gain by owning part of your company? Or What interest will they make if they give you a loan?
The best question… How can you grow without taking on ALL of the burden for growth?
Each industry has its own nuances, but these questions should help you create a scaling plan in a matter of a few days. If you need help, shoot me an e-mail at email@example.com and I can help you. The first hour is a freebie.