Having success is only part of the equation. The other part is knowing what to do with that success.
We learned about how anticipating too much success can kill your business. Hiring before you need to, buying equipment you don’t need, etc. So, that means that you should keep your overhead as low as possible right? Wait until you are desperate to spend money on your business? Of course not!
Not anticipating success can also be a killer. There are a lot of reasons for this. For one if you don’t anticipate success, and what that means to you, you will never actually be successful, because you will work forever. That’s why you have to Have a Number. If you don’t anticipate success you can outgrow yourself. How do you anticipate success? Great question. Knowing where you are is the first step. Having a plan for where you are going is another. (have I said make a budget recently?)
But thinking about how things will need to change as you grow is the best way to ensure you stay successful. And deciding what those trigger points for change will be is a critical part of this thinking process.
There is a great business book out now called What Got You Here Won’t Get You There. I have not read it yet, but it is next on the Guru list, so expect a more in depth review later.
I think the title says a lot though. If you are a one-woman operation making $100,000 a year and you want to have a business making $500,000 a year I promise that how you run at $100k will not and cannot work at $500k. And you can forget about making a million bucks. Remember the inventory example from part one? Where all the profit was sucked back into the business? Or the over-worked knowledge worker who got so much new work they couldn’t pay the bills?
Success, or more correctly, growth, has a profound impact on a business. You need a different strategy to run a growth company than you do to run a mature company. You need different tactics to run a business with 1 employee, 10 employees or 100 employees. Just because what you did got you to this level of success does not mean it will get you anywhere beyond that. Doing things the way you have will only get you to where you are.
The last company to make buggy whips was probably really good at making them.
Success can breed complacency. This is the greatest threat success creates for your business.
All the technical things can go wrong: over-investment, under-investment, poor capital structure or budgets, bad management and poor hiring. But if you are not complacent they can be fixed.
“…Cause at the top will be the same place you hang from…”
Last week we talked about how success can kill your business. It can do it in lots of ways: quality or customer service suffering, profit margins suffer, opportunities missed.
How do you avoid this? It is actually very simple to do.
You need information and the ability to understand it. Last week we talked about growth and inventory. But your business is more than just the direct costs. You need overhead too. You need people, phones, office space. You need computers, software, and desks. But overhead, typically, is fixed. This means that, while sales can grow in a straight line (10% a month). Overhead usually grows in steps. What does that mean? It means you can’t hire 1/8 of a person. Maybe you have customer service people for your business. And each one can handle 100 orders a month. That means that the month that you have 101 orders, you have to start looking at hiring another person. But how long will it take you to actually fill up that second customer service person’s time? How long will it take you to go from 101 orders to 200 orders? And once you do, how long before you have the exact same problem with 201 and 300 orders?
And remember, it is MUCH easier to hire someone, than to fire them. Business owners tend to hire late and fire late.
What if one month your sales jumped from your normal 120 orders to 190 orders? Would you panic and hire another person? What if it turned out to be a fluke and your sales dropped and you didn’t really need another person anymore? Now you have to fire them. But it’s Christmas time! They are a really nice person! etc. etc.
You see how this turns in to you making less money very quickly.
With accurate information and reasoned decision making, you could have avoided this whole problem. You might have brought in temporary labor, you might have just paid overtime to your one employee and pushed through the busy time. Or maybe your sales really did jump and you need to hire more people! Without knowing what is actually going on, you can’t make a good decision.
This example could apply to any of a hundred things: a new office, a new computer, a more expensive printer, faster software, etc.
You need to think before you make an investment. You need to know you are making an investment and understand why it is a good one, before you do it.
But what happens if you wait too long to make that investment? Tune in next time when we talk about how not expecting and constantly understating growth can also kill your business.
Do you remember that dynamic new business that used to be in the news and then wasn’t?
Then you have experienced the curse of success. The curse of success can take many forms. In this series of posts, I am going to look at the various ways in which success can hurt your business.
Success, growth, profit, they are exciting things! But if your business isn’t equipped to handle them, they can do more harm than good. You can grow yourself to death, by growing so fast that you don’t have the capital to fund the growth. Quality can suffer. Customer service can suffer. And those are the obvious ones! You can build operational procedures that aren’t as stellar as they should be; even if they get the job done. You can hire people who you wouldn’t normally hire because you are desperate for bodies. Even more dangerous, you can accept cost and overhead structures that are predicated upon growth and, once that growth stops, can be a HUGE drag on your cash flow.
How do you avoid this? It is actually very simple to do.
You need information and the ability to understand it. Understand what your growth rate is and what kind of money you need to fund it. For example:
You make widgets. You sell 100 widgets a month and your sales are growing at 10% a month. This means you will sell 110 widgets next month, 121 the following month and 133 the next month and so on. You sell widgets for $100. You buy them for $75. You sell on net 30 terms (this means payment is due within 30 days of when you ship). You buy your widgets from someplace overseas and it takes 45 days for them to be made and shipped here to you. That means, you spent $7,500 buying the widgets you sold in Month 1. Which is great, because now you have $10,000 coming in. But at the start of Month 2, you still need more widgets, and you have only collected part of last month’s widget sales. You need another $8,250 to buy widgets to sell in Month 2. Which means, even though you thought you made $2,500 last month in profit, half of that profit is immediately sucked back into the business. But you did make profit of $2,750 in Month 2 ($100 – $75 * 110)! Go you! But wait. We are expecting to sell 121 widgets in Month 3. Which means I need to buy $9,075 worth of widgets. That’s an additional $1,575 on top of my initial investment in inventory of $7,500. (121*$75 minus $7,500). Which represents 57% of last month’s profit ($1,575/ $2,750).
Confused yet? Thought so. Here is the point. You made a $7,500 investment in inventory to start this business. But each month, as sales grow, you need a larger and larger investment in inventory. In Month 2 it was 50% of the profit from Month 1 sales. In Month 3, you needed 57% of Month 2′s profit to fund your inventory. See where this is headed? Eventually, you get to a situation where you need more than 100% of your profit to fund next month’s sales. That means your profitable growing business is danger of going broke.
Now you understand the expression: “Only two things grow for the sake of growth, businesses and tumors”
Now, if you had accurate information on your business and were watching for these types of problems, you could catch this early on, and adjust. No problem, crisis averted back to making money! But if you didn’t see it coming (until too late) you could be in a real tough spot.
“But wait Andrew, I don’t make widgets. I sell my services! I don’t even have inventory! This doesn’t apply to me”
Yes it does. What about this: You take a job that will take two weeks to complete and get a 50% deposit. How do you pay your bills in week two, if you only got paid up front for the first week? And you could argue that you do have an inventory of billable time, which is a finite resource, that could run into these kinds of problems as well.
So, make a budget. And a business budget includes projections of growth and sales. Just make sure that, when you project those sales, you understand what you will need from an investment standpoint to make those sales.
Stay tuned for Part 2, where we talk about cost structures!
I wrote a guest post for the incomparable Michael Schechter who writes over at A Better Mess . It is a fantastic site and I was lucky to have been allowed to put one of my rants up there!
Because Michael gave me the opportunity I put together, what I think, is one of my better posts, so go over there and check it out: Actually Making Money.
And learn about why I think business is so simple and how to focus your mind on the simple things that make you money.