When your business is growing it is an exciting time, but there’s a catch 22 where many businesses can fail because they don’t do things right when they are growing.
Ironically, growth can actually be the beginning of the end for many businesses.
But it shouldn’t be. In fact, we believe having a vision for your business is critical to success. Often, that vision includes growth, because growing your business means you can both make more money, and serve more customers. That’s why we offer our CFO Growth Package.
Right now in Western Australia the economy is booming. The unemployment rate just dropped to 5.1%, and business confident is high.
These are typical conditions for business growth – make sure you get it right.
1) Watch your gross profit margin
You need to keep making money even when you are growing.
Depending on the industry, it’s possible your net profit margin will be affected during periods of growth.
What’s the difference between net profit and gross profit? Read our article here if you’d like the answer to that question.
Your gross profit margin will be an indicator of how efficient the production side of your business is.
When you are growing you do not want to become more inefficient. Your gross profit margin will be the canary in the coal mine during periods of growth.
Make sure you track your gross profit margin during periods of growth.
2) Plan cash flow to make growth sustainable
Another canary in the coal mine during periods of business growth is cash flow issues.
Cash flow planning is an absolute essential for periods of business growth.
Now, cash flow planning can be a challenge during periods of growth because sometimes your revenue can be harder to predict when sales are increasing. But you have to make the most informed judgement you can.
When you are planning your cash flow budget during periods of growth, just make the most informed decisions you can.
What really matters is that you do plan it – don’t just throw your hands up in the air because revenue is harder to predict in a growth period, and don’t risk being too optimistic because the mood is good. Be realistic and plan your cash flow.
3) Figure out exactly how much growth is too much
You need to actually know the numbers of how much growth you can handle.
For business owners who want to growth their business, there’s often an attitude of “the more growth the better.”
That is especially true for many businesses in Western Australia right now, because we have had periods of poor economic growth for a number of years. Now that many businesses are now experiencing decent growth, there could be a tendency to just want to make as many new sales as possible.
But of course, there is an upper limit to how much growth can actually be achieved with the recourses available to a business. The formal phrase for this in business is the ‘Sustainable Growth Rate’ of a business.
But in practical terms, it’s worth figuring out recourses required to make x amount of new sales, and the upper limit of recourse available to the business. That will tell you how much you can safely growth.
Factor in things like hiring new staff, training new staff, sales time, new client onboarding etc.
Once you have figured that number out, see if you can hit it! Good luck!
If you’d like help with growing your business, check out our CFO Growth Package.