How Fast Is Too Fast?
Our telecom company started out in 1994 as a dial-up Internet service provider, but we've evolved into a wholesale supplier of broadband services to other ISPs. It's a low-margin business. Although we compete with a number of larger companies, we've been growing at a rate of 30 percent to 40 percent a year, financing our growth out of cash flow. We don't have many assets we can borrow against, and we don't want to use other people's money. I am concerned about growing beyond our available cash and am thinking of raising prices as a way to slow down our growth. My question is, How do you determine a healthy growth rate for a company like ours?
President, Visionary Communications
If you're selling a commoditized product in an ultracompetitive market, raising prices will no doubt slow your growth rate. It could also cripple your business. It's smart to be a premium provider and charge more for great service. But I told Brian Worthen he would probably undermine his company if he set prices more than 5 percent to 10 percent above the going rate.
Instead, I suggested he change the way he views his problem, which is the result of the company's slim gross margins. Accordingly, he might consider trying to boost margins by coming up with new products or services. Beyond that, he needs to ask himself some important questions: "What do I want out of this business? Do I intend to sell it? Do I want faster growth? More income? Do I want a lifestyle business?" Because Brian may not be able to achieve his goals with the company he has. There are limits to what you can do in a business with thin gross margins. I discovered that when I had my delivery business. But then I started an adjunct business in document storage, which had very high margins. That became my main business, and I sold it for more than $100 million. Brian may want to try doing something similar.
As for the question Brian asked at the end of his email, there is a simple answer: You can grow only as fast as your resources allow. If you don't want to raise capital from outside sources, your growth rate will depend on the amount of cash you generate internally. In deciding whether to take on new business, you have to be certain that you will still be able to pay your bills even if everything goes wrong. I know of plenty of profitable companies that went belly up because they didn't have enough cash flow to sustain themselves.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.