Another business problem – growth!

Posted: June 13, 2013 in Family Businesses, Up-and-running Business
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The title of this post seems strange but upon closer examination – not so. Growth is the objective of any business. It is better than declining business or flat volume right? I guess the first question I would ask an entrepreneur whose business has grown rapidly is: “how did the growth come about?” Was it planned or based on a seized opportunity?

The main problem I have with growth is the predictable  growth in costs and their unforeseen impact on profit. Small business owners are impulsive. They don’t need a committee to approve expansion plans. They simply plunge forward. The moment revenue starts to grow the major concerns are:

  • The business doesn’t have enough office or operational space so larger leased premises are sought.
  • New staff are a priority so, one or two new staff are sought.

It has been my experience that costs (fixed) rise lock-step with increased revenue. I forgot to mention that the new space will always require “fit-ups” (aka leasehold improvements) to get the space ready for occupancy. So, another fixed cost is added to our bullet list – amortization of leaseholds.

The owner of the small business confidently boasts that revenue has risen by 20% over the previous year. Fixed costs probably have risen by the same percentage.  Possibly the move might have been accretive to profits in the first year but what are the risks?

A business that continues to grow may be able to keep a step ahead of problems but they will catch up if not understood and planned for in advance.

Since small businesses rarely plan the previous statement is moot. I’ll discuss some more growth issues in the next posts.

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