Optimism about the year ahead hit a three-year high in Hiscox's 2015 edition of the DNA of an Entrepreneur, and for good reason. Growth--that holy grail of business owners everywhere--is on the upswing, especially in the U.S.
About two-thirds of businesses surveyed experienced growth in the past year, and a quarter of firms reported double-digit sales increases. U.S. companies performed above the norm, with more than seven in 10 notching sales increases.
Growth is good, of course, but it's a means, not an end; the ultimate goal is a self-sustaining, profitable enterprise. Growth provides a pathway toward that goal, but the decisions business owners make about what to do with their expanding revenue streams may determine how bumpy or smooth it will be.
Managing your budget: In fact, unless managed effectively, rapid growth "could quickly turn into a nightmare," warns Mehmet Sengulen, a partner in UHY Advisors, a multi-office CPA firm. One reason is that, in their zeal to contain costs, many small and mid-sized businesses don't devote enough resources to budgeting and forecasting, and thus fail to invest in the company in the ways that are needed to keep pace with fast growth.
Re-investing Additional Revenue: In order to make sure additional revenue is directed to areas where it can do the most good in supporting the company's long-term goals, he suggests, owners should concentrate on the following:
- Establish a formal budget, and make sure forecasts are reasonable and achievable. Review the skill sets of those preparing the budget, and solicit input from the company's outside accountants.
- Increased revenue means increased demand on the labor force. Make sure all costs associated with adding employee--salaries, training, benefits/perks, additional management--are reflected in the formal budget.
- Sustaining increased revenues requires a secure supply of the raw materials needed to produce the business's finished products or services. Establishing and maintaining strong relationships with key suppliers is critical. It's important to include price increases and/or supplier incentives in your budgeting and financial processes to minimize the likelihood of future business disruptions.
- Careful analysis of cash flow needs is essential to a successful budget process. As the top line grows, cash resources often get tied up in inventory and accounts receivable. Depending on speed of inventory turns and collection times for AR, a business may experience a cash crunch in times of rapid expansion. It's important to allow for this possibility in budgeting and forecasting.
- Not all revenue growth is good. For example, the prospect of landing a very large customer with multiple locations might seem attractive because of the significant additional revenue it represents. However, such contracts often require special concessions such as discounted pricing, generous return policies, extended payment terms, or levels of service that your company is not yet able to provide. That can result in thinner profit margins and additional strains on cash flow.
As growth generates more revenue, making wise decisions about how to deploy it becomes a delicate balancing act, says Bjorn Reynolds, founder and CEO of SafeGuard World International, a provider of global payroll and employee management services. "A business owner must look to increase the value of all stakeholder--investing resources in a way that will please investors, employees, and customers," he says. As he notes, a table may have three strong legs, but if it's missing the fourth it may well tip over.
Adapting to Growth: Joseph Luzinski, senior managing director with the Miami office of Development Specialists, Inc., a management consulting and financial advisory services firm, notes that another risk of fast growth is potential loss of focus. "Most businesses are started with the simple premise of a good idea that is profitable," he say--and in many cases that idea is the brainchild of the company founder, who will do whatever it takes to bring the initial idea to fruition.
That almost always means wearing many hats, and in the early days of a company it's not uncommon for the founder to handle everything from product development to sales and marketing to accounting and HR. At the same time, new priorities enter the mix, such as the need to improve financial and accounting system, and protect the business with liability insurance and other forms of risk management.
As the company grows, however, each of those areas becomes a full-time job, yet many company founders have a hard time delegating single tasks, let alone entire functions. "Once the business gets some legs and grows, business owners have to look in the mirror and assess their skill set to decide if they want to keep the business small enough to be totally hands-on, or if they want to become leaders and rely on others to manage the business and grow it," Luzinski says.
Yes, seeing the line on the sales chart soar to the upper right corner is great, but you should view it as a call to action rather than as a sign of triumph.