If you’re in business, one of the most important questions that you must be asking yourself is “what is the best way to grow your business?” How can you take what you have, expand on it but keep your costs as low as possible?
Fortunately, history has given us plenty of good examples of how NOT to do this. Perhaps the best of these happened in 2001 – when thousands of companies went under in the dot com bubble.
But how did so many go so far wrong?
In those days, start-ups (with little or no income) and existing companies (with dreams of expanding their business online) were renting the biggest and best offices. They were signing huge print advertising contracts, paying ridiculous sums for banner ads and taking enormous salaries.
When sales were lower than expected and the cash to keep paying all those expenses dried up, these businesses had no way of easily adjusting their monthly expenditures because they were primarily FIXED, not variable. Their only option was to declare themselves bankrupt and close down.
Compare this situation with Amazon.com which started in a suburban garage with old doors on sawhorses for desks. By keeping fixed costs down, they were able to stay in business long enough to start generating a profit. They are now a huge company (with real offices) making huge profits.
So how does all of this apply to your company?
No matter how big your current business is, the aim is to grow your business while keeping your fixed costs as low as possible as a percentage of sales. And there are many practical ways to do this.
Begin by creating a simple excel spreadsheet of your current revenue and expenses each month. Ensure that you have correctly separated the fixed and variable costs of doing business. Roughly speaking, the breakdown should look something like this:
– Cost of Sales (includes cost of goods and wages for subcontractors)
= Gross Profit
– Fixed costs (includes rent, wages, marketing, telephone and utilities etc.)
= Net Profit
Based on your current financial results, set your monthly revenue targets for the next 12 months and estimate the cost of goods sold. For example, if you currently generate $20,000/month in sales with a 60% gross profit margin, you might like to grow your business by 25%? Therefore, you would use a projected sales target of $25,000 each month with Cost of goods sold at around $10,000 as a starting point. This would leave you with a gross profit each month of $15,000. If your sales fluctuate each month due to seasonal variations, manually adjust your forecast to reflect these ups and downs so that you will have a more realistic picture of your financial performance.
Now here is where most business owners will go wrong…
Most business owners will make the mistake of assuming that fixed costs are fixed – the owner will just blindly start to place the existing amounts for rent, marketing, wages, telephone etc. into the financial projections. Fixed costs are referred to as fixed because they are fixed at a point in time. This does not mean however, that they are fixed forever and cannot be altered. In fact, when you are preparing a business plan and financial projections to grow your business, you should consider almost every aspect of your business as “up for debate and re-adjustment”.
That is one reason why you need a decent business plans – you can use it to re-evaluate and plan for the future so that you can improve and grow your business. Without a concrete plan, in all likelihood, you will continue to get the exact same results that you got last year.
Where you will get the most value in this exercise is by going back over each cost (fixed or variable) to identify opportunities to improve your gross and net profit margins. Cutting costs may be possible and advisable in some areas of your business. However, cutting costs [in isolation] is not usually an effective strategy to grow a business. In order to grow and improve your bottom line, you will need to ask yourself the question – “how can I grow my business without expanding costs”?
Here are some effective ways to do just that:
1. Think of ways to partner with others to expand your reach and sales without actually having to open another location or hire more full time employees. You may already have underutilized capacity to increase your sales right now.
2. Introduce products or services that complement the ones that you currently have and contribute more to the bottom line of your business.
3. Re-negotiate the terms or prices you have with your suppliers to increase your gross profit margin.
4. Selling online is a very cost effective way to increase your reach without increasing fixed costs.
5. If you manufacture goods, you could identify ways to increase production simply by tidying up, rearranging the layout of machines and planning more cleverly (to reduce work in progress and downtime). Often mistakes and rework can be costly to your business and surprisingly, they can be prevented by taking time during the business planning process to brainstorm solutions. Making better use of time is another fantastic way to increase production with minimal impact on fixed costs.
Surprisingly, 95% of business owners never take the time to create a business plan and forecast of revenues and expenses. Of the 5% that do, only a small portion refer back and measure their progress against their key performance targets. That is the number one reason why so many businesses either don’t make much profit, or worse, go under, each year.
A business plan doesn’t have to be 50 pages in length and take 200 hours to complete. It just has to be realistic and useful. To do this properly, follow my basic outline for projected revenues and expenses above. It should only take 48 hours of your time. 48 hours, in exchange for more sales, more profit and peace of mind, is a small price to pay.