Growth – from what base?

Posted: June 16, 2013 in Family Businesses, Up-and-running Business
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The whole issue of business growth is a compelling topic. Growth is the objective of most entrepreneurs with whom I have come into contact. Growth in volume that is……..

This topic deals with growth from the perspective of a business that has: (a) employees (b) external leased space and (c) fixed assets deployed in the generation of revenue. It might appear that “more is better.” How so?

The above business should have a business model and the pricing of their goods or services should be based on:

  • Current production or service levels
  • Understanding of the profitability of the current production levels on a per unit basis.
  • Have a budget or forecast that details the incremental costs and resulting impact on profitability and cash flow.
  • Has the management in place to manage the growth.

This doesn’t sound too difficult in theory.  In too many cases, there isn’t any impact analysis of growth alternatives. Some considerations include:

  1. What will the “delta” be for incremental customers? In other words how many more clients/customers will be required to recoup the incremental costs?
  2. Do you know what the fixed cash burn rate of your business is now? What will the new fixed cash burn rate be after additional fixed costs are incurred? It might surprise you.
  3. What will the new revenue breakeven point be? It could be surprising as well.
  4. How much additional financing be required to support increased trade receivables or inventories?
  5. Is your market that solid that you can harvest additional revenue from the investment you will make?

These are issues that most small business owners don’t even consider. They consider their potential market a vast, untapped and eagerly awaiting market.

Nothing could be further from the truth.

 

 

 

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