Achieving Business Growth and ensuring it translates into Profit Growth


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Achieving Business Growth and ensuring it translates into Profit Growth

Growth is a common objective for most business owners, however it is not always easy to achieve, and even if achieved but not managed well, it can cause a business to fail.  

Growth usually requires a business to make some proactive changes and undertake specific activities designed to achieve the growth. It may also require the business to make investment into resources (in the form of both time and money) to achieve result. The old adage rings true, if you fail to plan you plan to fail.

If you are looking to grow or are presented with an opportunity for growth that you would like to take advantage of, there are two key elements of growth management that all businesses should employ.   It is the development of a strategic plan, which includes sales and marketing, as well as having and practising good quality forecasting that provides visibility on the business cash flow.

Strategic Plan

A strategic plan will outline the best way for the business to deliver the growth.  It will also determine the who, the how and the when of what actions are required to deliver the growth.  The plan should also provide the mechanisms to track and monitor the growth and provide levels of accountability on those responsible for delivering the growth.  As well as the sales and marketing requirements, an effective strategic plan also considers the business operations, HR and finance needed to achieve the growth and to then effectively manage the growth.

Once sales growth is achieved, in either a planned or unplanned fashion, a number of issues can arise with the three most common ones being as follows:

  • An increase in sales does not always equal an increase in profit and or cash available to the business. For example the increase in turnover may be achieved by taking on a larger client but in order to secure the client, margins are reduced and payment terms extended. This action whilst increasing turnover, can deplete cash reserves. Increased sales also means increased cash outflow, however if there is also a reduced GP margin and longer terms given it means a slowdown in cash inflows.
  • Growth can also result in increased company overheads, such as the need for new equipment, a new system, larger premises or additional staff, all these further erodes the net profit margin. Overhead costs tend to increase in steps rather than via a gradual linear line and growth can trigger a large jump in costs that may outstrip the turnover increase which cut into the net profit margins.
  • The growth of the business can also mean it becomes too large for the founder/manager to be across every aspect of the business, which challenges both the management capabilities and the culture of an organisation. As a result, the business can lose its competitive advantage or unique value proposition that allowed the business to grow in the first place.
  • Management information systems are imperative as a business grows, but often one of the last investment to be made.

Forecasting

Strategic plans accompanied with forecasts that consider the current business model including the current operational and management capacity can then incorporate both the Capex and Opex costs required to deliver the growth plans. This will provide a business with several significant advantages.

The aim is for there to be no surprises.  This forecasting provides real clarity as to how the growth will impact your GP and NP margins and allow the business to plan accordingly. If for example the business has visibility on the cash requirements, it can plan for the additional debt or equity required to fund the growth at the right times.  If that additional cash needs to come from debt, the likelihood a lender will provide additional working capital facilities is greatly increased if the business has good visibility and plans are in place to manage the growth.  The strategic plan and the forecasting become tools that enable the lenders to provide the required funding.

Sometimes having visibility means a business can make the hard but ultimately wise decision on when not to grow. This should be the case when additional resources such as cash or management skills are not actually available. This hard decision can in certain circumstances ultimately save a business from failure and protect the existing business.

In summary, growth is not easy to achieve and is not always the remedy for all business problems. For a business to achieve it, it will need to make certain investments upfront and be prepared to make changes in the business. The first investment should be into the creation of a solid strategic plan and the subsequent preparation of detailed forecasting. These two actions will not only greatly increase the chances of achieving the business growth goals but also de-risk the growth so that the revenue growth can be translated into profit growth.

If you would like advice on how to start planning for your own business growth, please call Brendan Ryan at the dVT Group on 02 9633 3333 or via email brendan@dvtgroup.com.au  for a FREE consultation.