Businesses Must Grow or Die

written by MO.com Subject Matter Resource Ruth King

All businesses must grow or they will eventually die. Why? Business costs go up each year. Suppliers demand more for their products, employees want raises, gasoline prices increase. If you continue to sell to the same customers at the same prices your company will become less profitable year after year and eventually go out of business.

Your company must become more productive; raise your prices, or both to survive. If you choose to grow at the rate of inflation, that’s okay. Growth is serving the same number of customers and simply raising prices. The company is stagnant with respect to the bottom line profits.

Another way to look at this: your company must be more productive the same percentage as the rate of inflation. If inflation increased one percent, your company must be one percent more productive to stay even.

Your company will lose some customers through no fault of its own. People move, die, change jobs, a relative of a customer goes into your type of business. There are many reasons that you have no control over. You will lose the business even though you did nothing wrong.

You will choose not to do business with customers. They don’t pay their bill, you never satisfy them, or a variety of other reasons. In these cases you chose to lose a customer.

What about those you lose from indifference? If you haven’t contacted them within the past 18 months they’ve forgotten about your company. These customer losses you can do something about. A newsletter, a telephone call, social media contact in another way often brings them back.

If you feel that you can’t raise prices you must cut costs and increase productivity to stay in business.

Watch out. Many companies who have “downsized” are finding the only way that they truly can be profitable is to grow…not retrench. Aim for being as productive as possible. There will eventually be a limiting point. You can only squeeze so much out of your employees before they really cannot do more. However, you can improve if you see a lot of wasted time.

Look at productivity. How many billable hours or revenue producing hours do you have as compared to the total number of hours you pay each employee? If you’re paying for 8 hours and only billing customers for 4 hours, you have a productivity problem. Focus on it, ask for ideas from your employees, implement them and you will fix it.

If you can’t raise your prices and your employees are productive, the only other option is cutting material costs and overhead costs.

A business owner walked around the company’s shop picking up materials that were laying around. He then held a meeting and asked who wanted to make an extra $20? Everyone raised his hand. The owner showed them the wasted materials. They got the point.

Another business owner found that by increasing the size of the metal and wood he purchased he could get more product out of a single sheet. This cut his costs by over 25%.

Cutting costs can be as simple as reducing waste.

A final thought: The fastest growing companies can grow themselves out of business fast. Why? They run out of cash.

To determine how much your company can safely grow, determine the sales increase you plan. For example, if the company plans to increase sales by $100,000 next year, the rule of thumb says that you will have to invest an additional $10,000 cash in your business next year. If you don’t have the cash, grow only at the rate of inflation.

Why do you need this cash? To cover the extra overhead expenses that you will have; to cover the additional accounts receivable you will have to cover the additional inventory that you will have, and to cover all of those things that you didn’t think about when you grew your business by $100,000.

Safe growth is essential for business survival. Make sure you have to cash to continue to grow and survive.