To my fellow Business Owners,
There are several things you should know when your company is growing or beginning a stage of growth. First, it’s not easy! Growth can create a lot of headaches and challenges related to people, processes, financing, and profitability. It can be painful and maybe that’s why many owners are completely happy in the $1M-$5M revenue range.
I’ve pulled together four things to keep in mind if you’re wanting to grow your business.
1. Focus Growth on Most Profitable Products/Projects/Divisions/Services/Customers – Would you rather be a $5M in revenue company bringing 20% to operating income (making $1M operating income) or would your rather be a $10M in revenue company bringing 10% to operating income (still making $1M operating income)? I would much rather manage a $5M in revenue business than a $10M in revenue business if I was making the same amount of money.
The first thing you need to do to understand your most profitable lines of business is to create financial statements by product, division, customer, or service. Once you have a good handle on your most profitable lines of business, then incentivize your sales staff in those areas. Sounds pretty simple, huh? I can help you with it.
2. Growth Sucks Cash – Verne Harnish, in his book Scaling Up says “Growth sucks cash. This is the first law of entrepreneurial gravity. And nothing ages a CEO and his or her team faster than being short of cash. Yet many growth company leaders pay more attention to revenue and profit than they do to cash when it comes to structuring deals with suppliers, customers, employees (think bonus plans), or investors/banks. And when they receive their monthly financial statements, the cash flow statement is either non-existent or ignored.”
Please keep cash top of mind while you’re growing. It’s fairly simple to project and monitor this on a monthly basis.
3. Monitor Your Growth – Create a monthly or weekly dashboard report (Excel is fine), that shows the top 3-5 key drivers of the business. The dashboard should monitor your numbers in percentages rather than dollars! It should include measures of profitability, projections for the next 3-6 months, and working capital. Monitoring your growth through a dashboard will allow you to make quicker management corrections.
4. Understand Your Capacity – In service-based companies, people (wages) are the number one expense to the company. Sometimes wages are 60%-70% of revenue! Construction and manufacturing industries are a little more complicated when it comes to capacity. On a very basic level, if you understood your wages by department as a percentage of revenue, then you’re one step ahead of most business owners. For example, if you are a marketing/advertising agency and you knew your non-admin staff were always 50% of revenue over the years. Then, it rose to 60% of revenue suddenly. At first glance, it appears you have capacity to take on new work. Or, let’s say it dropped to 40% of revenue. Now it appears you may want to add an employee because your staff may be feeling over-utilized. You will want to research the reason for any increase or decrease in the percentage of wages to revenue.
Depending on how employees are logging their time and your billing procedures, you may want to understand capacity through the lens of utilization and realization. These are terms mostly used in professional services industries. Here’s a very quick overview:
If an employee usually logs 40 hours of work per week and 20 of those hours were coded directly to client work, then that employee is 50% utilized. That’s a simple way to look at utilization. BUT, what if you incentivized your employees to be 100% utilized? And, somehow all your employees were coding 40 hours a week to clients. You’re probably already one step ahead of me here, but this is where realization comes into the picture. If an employee coded 40 hours of time to a client but you know you can only bill 20 hours of that time, then the employee is 50% realized. This is why professional service companies are always monitoring both utilization and realization on their employees. Now, there is always context and a subjective realm when discussing numbers, especially when discussing utilization. Employee’s compensation, personal leave, or amount of work available are all variables.
Going from $5M in revenue to $10M in revenue will require both patience and courage. Just remember the grass isn’t always greener at $10M if you don’t focus on the right things and manage them well.
All the best,
Justin