Finding the “Right” Growth

Growth in general is highly sought after in business. Unfortunately, it has also become a term thrown around much too loosely, and without context, growth, in and of itself, can hurt businesses at times much more than it helps. At Fintrepid Solutions, a phrase we repeat often is “growth breaks things”. We have seen it time and time again. We are proponents of intentional growth, where deliberate thought has gone into the goal itself and why it matters, and equally important, what it will take to get there, including potential pitfalls along the way. So the aim then becomes, how do you find the right growth for your business? Here are some considerations to contemplate.

Defining it – What does growth mean? Is it growing market share? Revenue? Margin? Profit? Something else? These are all very different goals that have different requirements for success. The CEO and leadership team need to have clarity around this. The answer could be to grow revenue by 15% and hold profit margins. It could be to keep revenue flat and grow gross margins. Both could be great answers, but simple growth overall can be unclear and problematic.

Intentionality – As referenced above, the key is to understand what the goal is and more importantly why it matters. A company can grow revenue by 10% but see profits stay flat. Is that successful growth? The answer is again maybe. Perhaps the company needs to grow to be competitive in the marketplace just to maintain its position or to achieve the same buying power. On the flip side, if there is not an ancillary benefit beyond what shows up in the financial statements, this kind of growth may not be desirable as the business may have added more people, more volume, more complexity, and more headaches to achieve the same net result. What is the desired growth goal and why? Start there.

Current Assessment – A very stark look at current reality is essential. Where are you now? What led to growth historically? What has hindered growth? Evaluate the good and the bad, the great choices and the mistakes. These answers can provide great context for what is ahead. What can be leveraged further and what is needed once that goal is clearly defined? Too many companies have simply compounded or repeated past mistakes by not evaluating the journey thus far in establishing future growth goals. All dreams have some basis in reality. The same applies in business.

Resources & Capacity – This is often overlooked in evaluating growth. Growth is stepped. As the diagram below shows, while revenue growth for example might be a line, the capacity, and resources that a business has will fluctuate over time. Growth is a constant toggle between capacity and investment. Often business owners think of capacity in a manufacturing setting, but this could be any combination of people, equipment, or just general infrastructure. Capacity is a key issue to understand in all businesses. Each time an investment in resources is made, the businesses capacity should grow, that spend can then slow while the capacity is absorbed. This process then continues on the next step. In the diagram, there are three companies, A, B and C. Company A may find itself in a situation where its revenue growth is unstable as it is outstripping the resources to support it, possibly leading to systems issues, an overtaxed workforce or quality control concerns. Company C is growing revenue too slowly for the investments made and is investing resources while capacity likely still exists. Company B is in a place of greater stability, utilizing capacity effectively over time and investing in line with growth.

Cash, cash, cash – Cash is the lifeblood of any business, the gasoline in the fuel tank. Driving too far and too fast can cause the car to stop suddenly. Growth typically uses large amounts of cash, so even if the net profit in a business is increasing, the cash position can be getting even worse. Larger orders from vendors may be needed, terms from new customers may be less favorable, more money can be tied up in people – cash often comes down to timing. We have seen companies grow themselves out of business as a result of cash shortfalls. Understand the impact of the growth goals on cash before getting too far down the road to ensure there is enough fuel to get there.

The trickle-down effects – What does the desired growth mean financially? What does 20% revenue growth mean for gross margins? Will they be consistent? Is there an opportunity to get better pricing from vendors due to volume and margins could improve? Perhaps an investment in a sales team is needed now to hit the 20% in the following year, meaning profit will potentially decline in the coming year before growing in year 2. Understanding the interplay unique to each business with revenue, gross margins, EBITDA, net profit and free cash flow will ensure alignment in the growth plan.

The market – A final gutcheck is looking at the broader market. Is the competitive landscape so intense that growth could be hindered, or is it wide open? Is there an opportunity to modify a product to increase margins? Or could larger sales opportunities be more profitable. Could growth land the business on the radar of larger competition? We have seen many instances where growing businesses have faced downward pricing pressure over time as competitors begin to take them on more seriously. Understanding the broader headwinds or tailwinds can and often should alter growth planning as well.

Growth is exciting. It is part of the entrepreneurial DNA. The right growth leads to sustainability and increased value. The wrong growth has caused businesses to severely stumble and even fail. Being thoughtful, intentional, and clear can make all the difference.

 

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