What is Business Growth? When growing your firm should you be Profit or growth led? This caused some debate in various LinkedIn and other discussion groups recently. Here’s a summary of some of them (and some more thoughts).
You’re running your own small firm, should you go for growth – or target profitability? To me it sounds simple, but it centres around “what is business growth”
The case for growth
“Get to a critical mass and then you’ll be OK” seems to be the general argument for this. You’ve probably seen this in many large businesses, with substantial financial backing. Maybe their aim is (or possibly their need) is to carve out a market for themselves before refocusing on profit.
The problem with this seems to be that according to Harvard Business School 75% of such start ups fail to return the investment.
The case for profit
This may sound less exciting, but a sustainable growth which is producing a steady growth in the firm’s cash reserves, probably has more disciplined processes to manage cash flow and profit. Such firms may grow more slowly, (frustratingly so at times) but then, what is business growth?
Take a moment, think about businesses you’ve heard of, especially technical ones. I’m sure you can think of some that went for rapid growth and succeeded. It’s easy to get seduced at this point, beware the availability heuristic (I’ve always loved that phrase). The availability heuristic is where big events get talked about and remembered, perhaps even getting endlessly discussed by your and your peers. Such things stick in our memory (without us realising), and we end up thinking they happen more often than they really do.
I’m writing this while getting ready to fly off on holiday, and thinking about the availability heuristic. Many people have asked me if it’s safe to go to Egypt right now. The perception is that of a dangerous holiday, because of the all the recent news reports. Is it more dangerous than the streets of London, where problems may occur more regularly? The result: many think my holiday is too risky.
When you think about what is business growth and how to get it, think carefully about planning and managing performance. If you’d like a free download on planning and performance in your firm, it's free and waiting for you to download right now. Click here for instant access (email address required).
What is business growth in a small firm
But really? Perhaps you’ve wondering if this has any application, in a small firm? Maybe you’re right, maybe sometimes there’s too much ego? Certainly from some of the debates, you’d wonder.
What causes more failures than anything else? Cash, or rather a lack of it.
You may well be arguing for a profit led growth, but are you still missing the point? Do you have the right cash management procedures in place for your firm? Before you ask, yes I have dealt with several accountancy practices that say things like “we have a cash flow problem” (did you read “how to improve cash flow?“).
Three questions for a profit led strategy.
Is it better to pursue profit, or go for growth? A focus on growth carries risks. Growth can soak up cash, however good your cash flow management is. If you are a growth-obsessed, you can run out of money.
Growth is good, and some would argue its essential, although a growing bottom line is a better display of long-term sustainability. Here are three questions to ensure you can answer when you think about what is business growth – in the context of your firm.
- How do you know you’re charging enough for each transaction to cover the costs related to doing the work (how many hours does it really take you to do that client’s accounts?)
- How many transactions do you need to do, in order to cover the fixed costs of running your firm? More importantly, how will you ensure that you get that many (Click here to read about the tactical marketing plan)?
- How do you manage your cash flow cycle so you keep the maximum amount of cash available at any one time (don’t forget “WIP” as well as debtors)?
Cash flow (and profit?) dips
From time to time it’s OK to be losing cash from your firm! Oops, I’ll rephrase, individual transactions are profitable (and you have enough of them) but you’re investing in your long term infrastructure. A Law firm that is profitable and moving premises, whilst investing in new systems might be a good example of this.
However, that’s totally different from a Law firm without control over its transactional costs, cash flow or fixed costs. Firms like this maybe capable of short term growth, but long term viability is a different matter.
Your firm might be lucky, but then again..
Friday night card games
Some years ago I’d sometimes play cards on a Friday night; sometimes I’d have a great night – but the overall trend was a steadily negative one. If you want to have growth in your firm, ensure that you aren’t relying on Friday night luck.
What tips would you share on managing your costs and your cash?