Planning for Small Business Growth: Strategies to Hit the Next Level
HOLYOKE — After creating your business plan, raising capital, and opening your doors, your next task is to make a profit. But once the money is coming in and your operation is sustaining itself, you want to start thinking about growth. How do you achieve growth? The answer is to plan for it, and it is never too early to start, said Jay Seyler, vice president of Business Banking at PeoplesBank. Learning and utilizing one or all three of these growth strategies will help your business take the leap to the next level. (For a video presentation, click here.)
Strategy #1: Building a Solid Foundation
Your doors are open, customers are coming in, and you are starting to feel good about your venture. Now is the time to look under the hood. “Before a business can grow, it needs to have a solid foundation,” Seyler said. ”Owners must ensure operational efficiency and their ability to compete in the market before they invest in growth.” If that foundation isn’t solid, their investment is at risk. Here are two things to work on if you’re thinking about organic growth:
A) Make IT Count. One common lapse of growing companies is overlooking information-technology (IT) systems. As sales orders grow and product range increases, properly implemented IT systems can enable more efficient management of sales pipelines and production planning. Owners should assess whether it’s beneficial to bring someone on staff to handle IT, or outsource to a company that specializes in this area and essentially acts as your organization’s IT department.
B) Mind Your Margins. Even if sales are good, it may not mean margins are growing. “Many times, margins still fall due to higher costs from the increased demand for materials and labor,” Seyler said. Cost-containment exercises are essential in improving margins. “It’s not always easy to know where to make changes first, so if you’re embarking on your first cost-containment exercise, it’s a good idea to work with a professional, such as a trusted accountant.”
Strategy #2: Buying Growth
Another way to fast-track growth is acquisition. Whether it’s to increase market share, gain economies of scale by acquiring a supplier, or entering a new market segment, acquisition can quickly change the growth potential for your business. If you’re interested in an acquisition, here’s what to work on:
A) Build the Right Team. Acquiring a business is a complex and potentially difficult process that requires many professional skills, from business identification to value assessment and negotiation. Sometimes it can help to assemble a team of advisors to aid in the process. It will make for a cleaner transition and allow the business owner to also remain focused on their own business. Assembling this team may require a certain level of funds to pay for their services. This should be factored into any cost analysis or growth planning the owner is preparing.
B) Do Your Due Diligence. “Any business considering an acquisition must conduct due diligence on their prospective targets to assess the risks and opportunities of a proposed transaction,” Seyler said. Proper due diligence will spot conflicts of interest, evaluate the merits of the deal, identify potential negotiation issues, and help you make the final decision.
C) Craft a Post Plan. While post-merger integration work is often complex, it doesn’t need to be daunting. The first 100 days are the most important period in terms of integrating your two organizations. Craft a communications plan to share your vision, manage expectations, and motivate employees to embrace the culture.
Strategy #3: Growing Through Diversification
Tight competition in your market may mean it’s time to think about new geographic markets, product areas, or industry sectors. “More businesses are looking to diversification as a core business strategy,” Seyler said. “Planning and preparation are essential in addressing knowledge gaps and mitigating the risks that entry into new markets or product areas can present.”
A) Select the Right Market. Companies thinking about expansion need to answer serious questions to ensure the move and, specifically, the location match the goals of the organization. Two very important questions to ask are: “where can I find reliable data to compare alternative sites?” and “how can I establish any new operations in the quickest and most cost-effective way?” Once you have those, you can objectively analyze and score the financial and non-financial elements against the specific factors to make the best decision.
B) Assess the Risks. “In terms of risk assessment, think short- and long-term,” Seyler said. “Many business owners seeking long-term growth often overlook how much goes into the initial investment. A company may have the appropriate amount of cash available to fund the initial investment. If a certain level of borrowing is needed, this is also a possibility; however, the owner should maintain a disciplined approach toward borrowing during a growth period to avoid a strain on cash flow. No matter how good the long-term opportunity may appear, if it puts a serious bind on your current business, it’s probably not the right move.”
Building a solid foundation, buying a competitor or supplier, and diversifying markets or products are all excellent strategies for taking a business to the next level. To pay dividends, however, they need as much or more planning than when you started your business. When you make the right decision, you don’t just put yourself in a position to make more profit, you position yourself to truly make the leap into something bigger.