Stick or twist? Wait for growth or take the hit on costs
What to look out for
- Red Risk of alienating new and existing customers if they place orders which you’re not ready to meet
- Amber Challenge of knowing if increased demand can be sustained without increased infrastructure costs
- Green Funding infrastructure growth ahead of increased sales will be repaid with more orderly and efficient expansion
Many business owners face the dilemma of go for growth with the accompanying costs or delay until an income stream starts to increase? You might want to read this . . .
More staff and increased costs mean my business will make a loss until my sales grow
One of the challenges that most businesses face through various phases of growth. In reality, if those additional resources are essential to make this growth happen, then the question is really “do I want to grow, or am I happy to stand still?” Many business owners seem to assume an expectation that growth should continue to take place, but your business may already be providing you with a comfortable lifestyle, in which case, do you really want the hassle of more employees, more customers etc? I’ve met some very successful business owners who have consciously made the decision not to expand further and are entirely happy with their lot.
Can I afford to grow my business?
If you have the desire and the opportunity to expand then there is really no option, you have to spend the money. It’s unlikely that there will be one, single additional cost involved, so you need to understand the component parts and then decide if it is all necessary at the outset? Can part of the growth be delayed e.g. until the income stream starts to increase? If so, great, but you also need to examine if you have sufficient working capital to realistically withstand that loss-making period. If not, then you really ought to consider putting your plans on hold.
What message will you send by delaying orders?
Presumably this lack of upfront investment is going to delay your ability to fulfil your orders? I would therefore suggest that you take a very careful look at your customer base and your relationship with your customers. If you accept orders but then delay deliveries to either new or existing customers, what will be the impact? Will your customers find this acceptable or take their business elsewhere? If this is likely to be the case, you will have to handle the situation very carefully, or better still, invest first! Also, be confident that growth in demand is long, rather than short term.
Can the growth be sustained?
Sometimes the additional cost is e.g. administrative, rather than a direct cost, and a significant consideration here is whether the growth is going to be sustained? If you are confident, then for the sake of ongoing efficiency, helping new staff settle in and so on, it might be worth biting the bullet and taking the long-term view of absorbing cost early, but not without understanding the implications on your working capital. A good example here might be invoicing: if you grow your customer base, then more orders need to be invoiced. If you don’t employ someone else to do that, you save on salaries but it takes longer to get paid. Which is the most damaging to your business?
Why pay now when you can pay later?
Yes, think long-term about your cash resources and plan accordingly. For example, if you need to buy new machinery to grow then pay for it accordingly, such as with asset finance, rather than paying out up front and then running out of cash before the income stream steps up. It will always be much easier to raise funding when things are going well and before it becomes essential and you are desperate. You’ll also sleep much more soundly!
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