Growth – and all of its obstacles.

Posted: April 6, 2013 in Up-and-running Business
Tags: ,

If you mention the word “growth” to entrepreneurs well, their eyes light up. I can’t say as I find that amazing since growth is better than the reality that many businesses face. If a small business grows it is by serendipity – luck more than careful planning.

The fact is: most businesses look at growth only in terms of growth in the top-line. Revenue growth is growth to most small business owners. Yes, but does growth in profitability result? Not too often I am afraid. The sad reality is that many businesses “chase revenue.”   A year-over-year increase in revenue by 20% might be accompanied by a decline in gross profit margin and an increase in general overheads by 10-12%. The result is that growth has resulted in larger problems.

Too few business owners take into account the standard cost-volume-profit relationship before making decisions. Revenue increases so, the business pursues incremental revenue more aggressively. Additional staff is required and additional investment in fixed assets as well as (possibly) more facility space. Fixed costs increase; the breakeven point increases and if profit margins are squeezed, lower profit is usually the result as a best case scenario.

I have seen this many times in my career. Growth in revenue only is not the answer. Plan before you grow.

 

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