Growth problems – continued!

Posted: June 14, 2013 in Business Financial Statements, Family Businesses, Up-and-running Business

It contend that growth in revenue should not be a mystery. At its most basic level: (a) there is a need for your product or service (b) your business fills that need and (c) there is an available and ample market. That’s the ideal of course.

Since most small businesses don’t plan then a new set of parameters apply: (a) new business is discovered by the market (b) the market is not well investigated and (c) the market is razor thin.  Unfortunately, management thinks the growth will be continuous and growth is “on spec.”

I have been around many small businesses that have grown in the correct manner and many that haven’t. Here are a couple of examples where growth has occurred correctly:

  1. A towing business that wins a municipal police contract for exclusivity in the removal stalled or damaged vehicles from busy roads. Instead of investing heavily in new equipment and personnel – brokers (aka independent contractors) meet this need. If business expands this expansion is done via variable costs. The broker and their vehicle doesn’t cost the business a dime if times are slow.
  2. A trucking business that successfully gets a new trucking route. The trucking firm many have to buy or lease 6-10 new trailers but they contract out most of the route to brokers who have a $100-$125K investment in their own tractor. The cost of servicing heavy trucks is enormous. These service costs falls squarely on the shoulders of the owner/operator.

I’ve been around several businesses that haven’t grown correctly. Most have been in the white collar service industry. Revenue expands quickly and new staff (salaried) are hired to meet the needs imposed by increased volume. There hasn’t been sufficient due diligence performed to warrant the hiring of new staff.

The issue that most small business owners have problems with is the idea of “scale.” Quite simply, I define scale as: the ability of a business to grow using variable cost inputs rather than ramping up fixed costs to meet a perceived demand that may not be permanent.

We see good examples of scalability in the IT business where business growth is handled using contractors who have billable hours/days targets.

You can “grow yourself out of business.” More to follow…………


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