Most businesses aim to grow their business, even if what that growth looks like varies. An expanding company is often associated with success through increased sales and revenue.
Due to the connection between growth and performance, it’s no surprise that owners will tend to push to scale their company. It’s often a central focus, with business plans and value propositions expected to showcase how that venture can grow over time. It’s also a priority for investors and funders, with growth potential a key driver for shareholders.
With growth so frequently associated with improved revenue and return on investment, you may believe that expanding your business is the best way to unlock improved profitability. However, this isn’t always the case.
This blog explores the connection between business growth and profit and what you can do to ensure your profitability is boosted.
- Does growth mean profit?
- What are the potential cash flow barriers following growth?
- How to improve profitability as you grow
Does growth mean profit?
Typically, growing your business will lead to the generation of greater profits. As you expand, it’s expected that you will attract more sales, leading to increased revenue and profit. However, this isn’t always guaranteed.
When scaling your operations or business in some way, you will also naturally end up with more expenses, whether it be the cost of sales, staff salaries, equipment or investing in new processes. Rising costs are okay as long as they are balanced against increasing revenue – but profitability aims to make sure you are bringing in more income than outgoings. This means utilising cost-effective strategies that enable you to keep costs down as much as possible while enhancing revenue.
It’s also essential that any growth strategy you pursue makes sense for your business. This means checking that the demand is there to warrant growth so that you’re confident your sales will increase and cover the growth investment.
By being sensible and calculated in your expansion, you can overcome potential obstacles while focusing on increasing revenue and improving profit.
What are the potential cash flow barriers following growth?
When pursuing growth, there are several potential cash flow barriers you may face. You need to overcome these to improve your profitability and avoid the risk of ending up in a worse financial position. We’ve listed the main issues to be aware of below.
Required investment in equipment, assets and staff. When scaling up, you will likely need more resources to meet increased demand or commitments. This could include additional premises (including sites and offices), company vehicles, machinery, technology and other equipment. There will also likely be the increased expense of staff salaries as you fill new roles in your business.
This all comes at an expense, which can eat into your profit margin – so it’s essential to ensure your costs are balanced through cost-effective processes, a fair pricing model and measures that drive sales to boost profit.
More raw materials or supplies. Another common issue when growing a business is accounting for the increased usage and resulting costs of raw materials or supplies, including energy, and so on.
Economies of scale often play a part here. By buying larger quantities of supplies in bulk, it is possible to access lower prices per unit. In this sense, it can work out cheaper to produce more resulting in increased sales and profits. Remember to shop around between your suppliers to find the best deal for the quantity you need and identify these economies.
Cost of sales mechanisms. A commonly heard phrase is “you need to spend money to make money”. When scaling a business, it’s often true, especially when you aim to improve sales. By investing in sales and marketing strategies, you can enhance brand reputation and target a wider audience while standing a better chance at converting people into customers.
However, setting up the resources and processes for sales requires an investment that many companies neglect (though there are options to help). Your aim should be to create effective protocols that ultimately fuel sales so that, in the long run, you benefit from increased revenue and profits.
How to improve profitability as you grow
Understandably, you want any business growth to result in increased profit. While it’s normal for it to take some time for an impact to emerge, and your expenses will naturally increase, there are steps you can take to create better conditions for profitability and maintain cost balances.
Manage your costs
As we’ve already mentioned, your costs will rise as you scale up. However, these expenses should predominantly be planned and expected. If you are facing unexpectedly high costs or are struggling to balance them against your revenue, it could be a sign that better management is required or that you need to pass on these costs through an adapted pricing model.
Regularly audit your accounts to get a sense of the changes in costs. Over time, there is a possibility that prices will move or suppliers will stop offering you the most competitive deal. When this happens, you need to consider what you can do to bring those costs back under control or, as suggested, the alternative is to pass these costs on to your client.
Similarly, remember to trim away any costs that are surplus to requirement and do not impact productivity. This will help you to minimise your costs base without harming your output resulting in continued profitability.
Don’t grow too fast
A common mistake businesses make when expanding is jumping in headfirst without careful planning. This could lead to costly upfront investment, which does not pay off as increased revenue or profit.
As such, it’s best to spend time crafting your growth plan and ensuring it is financially viable looking at your cashflow implications. By growing carefully and gradually, you can slowly increase your expenses and revenue in tandem, while avoiding any cashflow holes. It will allows you to monitor performance and check that the growth you are pursuing is achievable.
Seek financial support
Expanding a company can be costly, even if it ultimately puts you in a better financial position. Many businesses simply will not have the capital to fund their growth, despite demand being there for it. In these cases, financial support is fundamental in enabling you to reach your goals.
Fortunately, there are solutions to assist companies in this position, including investment and loans.
Speak to a finance broker who can guide you through the process and discuss your options. This will enable you to find the right solution, enabling expansion without straining your cash flow in the present. It will improve your chances of long-term success through a successfully implemented growth strategy.
Monitor your progress
Finally, you need to monitor your progress as you scale to keep tabs on costs and make sure your new processes translate to sales, not losses. This means remaining on top of your accounts, tracking expenses versus revenue and reviewing performance to ensure your growth has the expected results.
By doing this, you can intervene as required if there is any threat to profitability. It will also enable you to understand the financial impact and track how your profit changes over time.
Conclusion
Having a company with a growing presence in the market and high profitability sounds like the dream – but it should not be assumed that expansion always results in profit.
If you want this to be the reality for your business, you need to utilise cost-effective strategies, and the necessary financial support to enable you to grow effectively without harming revenue.
If you need to develop your growth strategy or access the funding to make it happen, we can help. We can take you through the growth finance options and put you in touch with the suitable sources.