Success should not come as a surprise. It’s something you’ve planned for. You have the right people in place with good processes and execution.
However, sales growth can happen rapidly. Sometimes it can get out of control and even become unmanageable. When that happens, it can hurt your clients, your employees and your business reputation.
Here are a couple of things to consider so your pace of sales and growth don’t get out of control. There’s a fallacy many business owners belive. Growth is good, but rapid growth is better. The truth is too much of a good thing can be a very bad thing. Many business owners are caught off guard by rapid sales growth. They choose to borrow money to support that growth which adds interest expense and cuts in to profitability. The money they borrow also adds leverage to the balance sheet, which if not managed properly, can create significant issues for the business.
As in most instances, failing to plan is planning to fail. Any manager should know their tipping point, when more sales switches from a good thing to a bad thing. Here are some things to consider:
- Have a plan and work it. Analyze your sales forecasts and revise them as you see sales increase.
- If you see a tipping point coming reallocate sales resources and processes to keep growth manageable.
- Growth will come at a price. It will change the way you operate, it will often change your employee culture and create new management challenges.
- It may take you outside your comfort zone and do the same with your management team and employees.
Many managers use the Sustainable Growth Rate as a tool for growth. The premise is how much sales growth can I sustain without increasing the leverage of my business. To calculate it, you take your Return on Equity (ROE) and multiply it by 1- your distribution/dividend rate.
So, is your ROE is 25% and you distribute 25% of the profits, then you sustain a growth rate of 18.75% (25% x 1-25% or 75% ) 25% x 75% =18.75%
You might be thinking I’d like to grow more than that. Well, you have a few choices.
- Take on a little debt. Just don’t get crazy. Most banks are comfortable lending up to a leverage ratio (total debt/total net worth) of 3-1 debt to equity.
- Increase your profitability. If you can raise prices/volume or cut expenses, you increase your profitability which should increase your ROE in the short term.
- Reduce your distribution/dividend policy. If you take a large amount out of the company in distributions, consider reducing it. The more you leave in the company the more you have to finance your growth.
Many companies are facing growth challenges in the current economy. Formulate a plan, watch out for your tipping point and consider some strategies to increase your ROE and reduce your distribution policy to enhance your growth opportunities.