Many business owners believe that selling more is the best way to make more money. The reality is that revenue does not equal profit, and you want to make sure that you are not only increasing revenue, but also increasing your profit while growing your business.
Business owners need to be cautious when growing their businesses because not all growth is created equal, especially for product-based businesses where the demand for cash is high early on. Cash usually only comes in once the sale is made at the end of the sales cycle.
You want to make sure you have a solid financial foundation before you start growing your business. Having a solid financial foundation means that you have a competitive net profit margin in your industry and that you have built up a good cash reserve that will help you with cash demands.
You also want to create a business financial plan before you start to grow your business. A business financial plan gives you a roadmap to achieve your financial goals. A business financial plan allows you to be proactive in planning and anticipating any issues or problems that may arise when growing your business.
Five tips to keep in mind when planning the growth of your business:
1. Create a business finance plan
Planning your one year projections will help you understand when you will need to hire new people and expand your team. You will plan how income will grow and expenses will increase. Planning allows you to control costs and maintain or improve net profit margins.
2. Consider expanding your business
As you grow your business, your needs will also expand. You’ll have to think about capacity. Will you need to expand office space to accommodate the growth of your team? Will your suppliers have the ability to keep up with demand? How will you logistically accommodate the new growth? It is vital to take these factors into account.
3. Consider new team members
Know when you will need to add new team members and if you can afford it. You can consider part-time, full-time, or contract workers and see what fits your budget best.
4. Keep net profit margin constant or increase over time
You want to keep an eye on your net profit margin as you grow your business. The net profit margin must remain constant or increase over time. If your net profit margin drops, that’s a red flag, meaning your business needs more effort to make a profit.
5. Cash disbursement plan
Since growth will put a demand on cash outlay, will you have enough cash to cover the increased demand or will you need to seek financing for your expansion? It would be best if you had all your bases covered and knew what you’re taking on before you start expanding.
The bottom line is that not all business expansions go well. Considering that 82 percent of businesses fail due to poor financial management, you’ll want to make sure you’re managing your finances well. There are many moving parts of your business to consider, and there will be more cash flow stress as you expand and more challenges as you grow your business. The best plan is to be proactive instead of reactive.