Better Business » Growing your business, what’s involved
All too often, business owners feel they need to grow relentlessly with motivation coming from different sources, maybe peer pressure, lifestyle drivers or opportunity seekers. Whatever the reason, plans need to be thought through carefully, as developing a small business for the wrong reasons or building it on a false premise can quickly end a company.
The benefits of growth seem obvious: more clients, greater revenue, increased profits; these are all eventual goals of expansion. However, achieving this can be surprisingly difficult, largely due to the choices and pitfalls that confront the typical small business owner.
It’s very easy to rush forward, hire more people, take on more debt and chase increasing numbers of clients. This is how many companies grow, but it’s also one of the main reasons why they fail, sometimes spectacularly, leaving a lot of disappointed employees and clients. You should always be sure of what it is you are really looking to achieve. What’s the real intent behind the wish to grow? What’s driving that desire? Each situation is unique to the business and the business owners or board. For smaller businesses, it’s imperative the motivation is well-understood and well-founded, as there’s little room for error in the early stages of a company’s growth.
On the right, there is a chart giving the top 20 reasons why start-ups fail. The first reason ‘no market need’ is a classic mistake: you love your own idea too much and ignore the obvious – nobody is interested.
The second reason is ‘ran out of cash’ and relates to the old adage, ‘Cash is King’. It’s essential to have sufficient cash and cash flow to create, market and supply your products or services, plus it’s equally vital to have set aside a rainy day fund. In the UK, businesses are notoriously bad at paying their bills on time and it’s often the small business that comes off the worst, as they cannot afford to wait too long to receive the money due. Therefore, build up a substantial rainy day fund to give yourself some space to work with. In practice, small business should look to maintain a working capital reserve equivalent to three to four months of monthly expenditure.
The third reason is ‘not (having) the right team’, another classic problem. As you grow, you invariably need to take on more staff, some in key positions of influence. If the mix of personalities and attitudes isn’t right, the company culture will fail to materialise and that affects everyone, including the clients.
In short, there are a huge number of potential hurdles businesses face in achieving sustainable growth and none of them can be taken lightly.
Here are some of the typical scenarios we come across as an accounting firm working with a range of different sized businesses
Many contractors or freelancers see growth as directly correlating with the amount you earn: more clients lead to more income. This is true, but if you prefer to work alone, having more clients may see you spread too thinly and the quality of your service may suffer as a result. A smarter way to increase income without more clients is to increase the value of what you do, so that your clients are prepared to pay more for your services. This may require a little more effort in adjusting your services and market position, but in the long run, it can be highly beneficial.
Before embarking on a growth strategy that involves increasing debt or exposing the company to other risks, the management team needs to explore alternative, safer ways in which a company can grow. For example, see if you can increase the value of what you produce and perhaps shift your market positioning to a higher level. Once the alternatives have been exhausted, the question then becomes one of finance – where will your funding come from? Will this be financed through cash flow from operations, and will your forecasted income from the new growth be enough to maintain the cash flow?
When considering this, you have to account for the unexpected. A good example would be clients not paying on time. As a small business, it’s hard to leverage important clients to get them to pay without the risk of upsetting them. If you are producing a new product, you cannot guarantee that the cash flow will cover the gap between producing the product and receiving customer payments for it.
Alternatively, you could go looking for funding – a bank loan if your credit’s up to scratch, an R&D grant, or even an external investor can all inject much-needed funds into your business, often in return for a share in the business.
To learn more about making your small business attractive to private investors, check out this post titled ‘How to grow your business: Investors’.
For some businesses, growth is a slow and natural process. They may be operating comfortably and the motivation to grow is simply based on the idea that ‘they’re supposed to do so’. For others, though, it’s more a case of seizing the opportunity when it comes, taking advantage of a buoyant and expanding market. In the latter case some risk is unavoidable but acceptable, provided it’s carefully managed.
For a breakthrough, growth involves risk-taking, this post ‘How to grow your business: The benefits of risk’ may make an interesting read.
It’s often said that one of the fastest ways to grow is through acquisition. While often true, this strategy comes with a very significant set of pros and cons. The advantages are numerous, including access to new markets, new resources and potentially a chunk of cash if things go well. This only usually happens if the newly acquired business is able to integrate well with the parent, and in particular if the senior members of each team can work together. The other end of a spectrum is where a company is purchased for assets alone, which while profitable in the short-term, will not necessarily serve to grow the business in the long run. Integration issues aside, financing such a venture has many options open to it, from funding from operations to finding investors or suitable loan providers.
The key point here is that each of these scenarios is unique, therefore the growth strategy is also unique, depending on the situation, as is the business owner and their risk/reward profile. The key takeaway is that the lead up to the decision to grow is just as essential as the growth activity itself. So establish the reasons for growth, set objectives and follow through. If you like what you’ve read, you may find this post on ‘How to grow your business: Long-term planning’ beneficial.
Invest in making sure you understand why you want to grow, the growth options available to your business and whether they are right for you.
Tax Agility is not just a firm of accountants. Our goal is to help our clients grow and making sure they have the right advice and guidance to do so. Why not give us a call to see how we can help your business and remove the burden of your everyday accounting demands.