The Next Level: Understanding the Costs of Business Growth

Is it time to take your business to the next level? Find out how to craft a growth plan that takes into account how to go big without going broke.
June 03, 2014

Companies of all types and sizes typically want to grow in one way or another—whether it’s in terms of revenues, profits, number of employees or customers, market share or number of locations. And while not every small-business owner always has aspirations to build the next Google, almost every entrepreneur wants to see progress from one year to the next, even if it’s just in the amount of money you can take home to your families. 

So the critical question is: How much does it cost to grow? And once you figure that out, will the money invested truly yield a return?

Before you can plan for business growth, it's critical to understand how your growth plans will affect your bottom line in the short, medium and long term. Ultimately, growth should be accretive, not dilutive, to your earnings. 

Critical Issues

When determining your future growth, the issues you'll most likely be concerned with are some of the same issues that plagued small-business owners at the turn of the last century, including OSHA health and safety standards, minimum wage standards, personal injury and workman’s compensation claims, and product liability litigation. These long-term issues may never be entirely resolved, but as our economy remains volatile, new legal, financial and organizational issues have begun to emerge, including the protection of our intellectual property, doing business in the global village, building effective social media strategies and a renewed focus on satisfying (and keeping) customers. Take some steps and do homework as to how much those additional issues may cost you. And talk to key advisors and experts before making decisions on any of the above. 

Global competition and rapid technological advancements are creating new business models, such as geographically dispersed workforces, flattened organizational structures and strategic partnering among customers, vendors and suppliers. And companies of all sizes are developing work teams that communicate and collaborate online instead of around a conference table or by the water cooler. The virtual workplace—where there's significantly less human interaction—could lower overhead costs, but is also bringing new challenges in the protection of privacy, confidentiality and copyright laws.

Given these rapidly developing changes in our marketplace, the challenge is, how and when should you grow? Should you grow deep or grow wide? 

And these questions lead to other key issues that can be difficult but critical to address, such as:

  • What strategies should be used to facilitate growth?
  • How do you know whether these strategies are appropriate for your business?
  • How much will these strategies cost to implement? Will all costs be incurred in a lump sum, or over time?

  • Are there problems with your business structure that need resolving before you can implement the growth strategy you've selected? How much will it cost to fill in the holes in your formulation? 
  • How can you build on your strengths and compensate for your weaknesses?
  • How might the growth strategy you've selected present new risks or make you vulnerable?
  • Is this the right time to grow? That is, have you put a proper foundation for growth in place?
  • Is capital available to fuel growth, and at what direct or indirect cost?
  • Are market conditions ripe for growth opportunities on a macro or micro level?

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Setting the Stage for Growth

Before you can prepare your small company for the next stage of growth, you need to analyze its strengths and weaknesses. Looking for what’s working well serves to concentrate your efforts where you have the best chance of success, which can save you time and money. As it's often been said, it is far easier to grow from the core, grow where you're planted and grow into the areas where your roots will naturally expand. And by looking for your strengths, you’ll also spot your weaknesses.

Start your strengths and weaknesses analysis in these seven key areas:

1. Costs and revenues. Examine them carefully for every part of your business. Are revenues rising or falling? How about profit margins? Which divisions or departments stand out? Which protocols or services are more in demand or more profitable than others? Why? Do you enjoy a strong positive cash flow?

2. Personnel. Do certain employees show exceptional skills or produce outstanding results? Where in the company is the strongest management, organization and planning? Do you have the talent on staff to handle your anticipated growth, or would you have to hire new personnel? Do you have a strong “No. 2" in command who can make sure the trains are running on time while you're executing growth strategies? If not, how much do you need to budget to add this key person? Where is your deadwood? How can you prune? Have you built the right cultural foundation to support growth?

3. Operations. Are there areas that seem to be trouble-free, functioning with little supervision but always delivering results? How do your key managers in those areas achieve such consistent results? And can their techniques be used throughout the company to shore up weak spots?

4. Philosophy or mission. Do you have a written statement describing your company’s philosophy or mission? Does it define the essence of your business exactly so you know which kinds of activities fit your company’s goals and which don’t? Are you diluting your resources by engaging in any activities outside your mission? Have you developed a set of core values, and have they been embraced by your employees? 

After you’ve sized up your internal operations, take a long, careful look at your market, your competitors and the current economic climate. This external examination should reveal whether you are in a position to take advantage of current business trends and cycles.

5. Your market. Is your market share—your company’s percentage of estimated total business available—increasing or decreasing? Is your marketing strategy based on careful research or on instinct and hunches? Is your customer or client base shrinking? How loyal are your customers? Really? How much will it cost to strengthen your brand and your customer loyalty? Which areas are most critical to make these investments in?

6. Your competition. Do you know exactly who your competitors are and where they pose the largest threat? Which part of your business is most vulnerable to competition, and which is least vulnerable? Are some parts of your market becoming crowded with competitors?

7. Economic climate. Are changes in economic conditions—interest rates, inflation, housing starts, industry earnings—likely to affect your company? Do you make efforts to stay on top of things so you can anticipate changes in the marketplace, or are you often surprised by developments that affect your company financially?

Your answers to these questions will give you an excellent idea of where your company is strong and where it could improve, as well as which type of growth strategy would work best for your company.

Your company's growth isn't a sure thing, but you can help ensure its success if you understand that building a plan for effective growth management involves: 

  1. Understanding why your company wants or needs to grow and what it will cost you to achieve growth goals;
  2. Clearly defining the objectives that your planned growth will achieve or the problems that growth will solve;
  3. Your management’s understanding of the challenges and risks that rapid growth will pose to the company, especially if the growth process isn't well managed;
  4. Understanding the various phases of growth your company will experience as it evolves toward maturity; and
  5. Implementing a growth management process that's responsive to and reflective of your company’s current stage of growth.

The Future of Business Growth

Business growth in 2014 and beyond requires you as a small-business owner to stay “on your game” at all times. You'll need to understand the differences between activity and results—strategy without execution is a huge waste of money and resources. Entrepreneurial growth is all about mountains and valleys. Attitude, culture, communication and leadership are all still the key variables that will help you achieve the growth you want.

Web 2.0 and social media have driven the democratization of stakeholders and strategy. There's a wider and more transparent voice of customers, vendors, influencers, channel partners and more who will influence how and why you grow and in which direction you move forward. The “ask the audience” syndrome has become a "listen to the audience" mandate. 

As you begin to implement your growth plan, trust your instincts regarding your momentum. Keep a close eye on things to determine if you're moving forward or backward and at what rate and cost, and why. The laws of physics truly apply to building and growing a business: Complacency is the kiss of death. In addition, be honest and realistic about your abilities as a leader. Park your ego at the door, balancing self-confidence with empathy, and learn to truly collaborate and respect the views of others. Have an ability to admit your weakness and recognize and compensate for your blind spots.

Finally, don’t fall in love with your strategy or business model. Values and brands may remain constant, but your strategy and product/service mix must evolve, and you must be willing to adopt a Plan B and have the ability and willingness to listen, keeping ears and eyes close to the ground, in order to make your growth plan work at the cost you can afford.

Andrew J. Sherman is a partner in the Washington, DC, office of Jones Day, with over 2,700 attorneys worldwide. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies, and is an adjunct professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University, where he has taught courses on business growth, capital formation and entrepreneurship for over 23 years. He is also the author of books on the legal and strategic aspects of business growth and capital formation. 

See more in the Move Your Business Forward series.

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