Posts Tagged ‘margins’

Are You Growing Too Fast?

Wednesday, October 3rd, 2012

We routinely tell business owners that a company can get into trouble when it’s growing just as easily as it can at any other time.

I’ve grown used to the looks of disbelief that come our way. And to the predictable question, “How can growing be a bad thing?”

The answer, of course, is that growth isn’t bad in concept. Like everything else, it’s the execution that is either good or bad; it’s how the owners manage what’s going on.

There was a good example of how things can go wrong – and how badly wrong they can go – in the HBR last month.

A family owned printing company saw sales hit an all-time high just as everything fell apart in 2008. The problem was that the bottom line wasn’t growing and they were eating into their line of credit because cash was tight.

All it takes is a decline in margins caused by price cutting – to drive an increase in sales – and a slowdown in customer payments because credit rules have been relaxed (also to bring on new customers) and cash becomes a problem.

In a mature industry like printing where the products have become commoditized, price cutting becomes a way of life.

It’s also a business in which you have to understand and watch costs carefully. Under-estimating a job can turn it into a loser quickly. And so can making a mistake and having to re-run the job.

How do you avoid getting into trouble while growing?

1. Don’t “buy” new business. Rather than compete on price, find ways to add value. Or offer “de-featured” versions of existing products and services at a lower price point.

2. Get a really good understanding of your operating costs and how they react when sales increase.

3. Keep a tight grip on inventory (if you have one) and Receivables (and most companies have those). Move quickly to get rid of customers that don’t pay on time.

4. Spend time getting to know your cash flow and how it is affected by growth. Remember – cash is king. A profit is good but you can’t take it to the bank. They only accept cash.

5. Don’t rely on your Income Statement to tell you what’s going on. It can tell you what has gone on – but it can’t give you a glimpse of the future. Only a cash flow forecast, your aged receivables, inventory turns and metrics like these will do that.

This is hardly an exhaustive list but it covers most of the basics.

One of the bosses I worked for never let us talk about sales; he insisted we talk about profitable sales. I thought he was nitpicking at the time but, in retrospect, I was young and foolish and he was much more seasoned and savvy.

Guess how we talk about sales now.

If you enjoyed this post you’ll also enjoy 5 Tips To Improve Margins and The Bottom Line…..

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