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.