Q: I
am currently considering a number of alternatives in growing my
business. How can I best decide which way to grow?
A:
Most entrepreneurs, from time to time, have available to them more
than one way to grow their businesses. The process of deciding on a
growth strategy is ongoing, and the decisions that result can be
critical to the future success of any business.
The search for real business growth, by creating permanent
increases in profit as a direct result of measurable and sustained
increases in sales volume, may not only be a reaction to
opportunities in the marketplace, but also a requirement in order
for your business to maintain market share. The right decisions can
conceivably have a major positive impact on your business's
bottom line, thereby creating real growth. However, if you choose
unwisely, or decide to do nothing when action is clearly warranted,
the results can lead to a loss of growth potential, or even a
period of negative growth (decreased sales and profitability).
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As with so many issues in business, your growth decisions should
be based on objective financial data, consisting of relevant
estimates and projections. Not every growth strategy can be
expected to impact your business in the same manner, and over the
same time period. Your ability to compare growth options is the
best way to make informed decisions.
Think of your decisions in the context of ROI analysis. Each
growth opportunity has an investment component, dollars that you
would be required to spend as a part of the process of implementing
a specific growth strategy. The corresponding return that you can
expect from your investment in business growth can be represented
as the increased profit your business is projected to incur,
directly as a result of the sales increases created by your
business's growth strategy.
For example: A retail business is considering growing by adding
a new product line. The required investment to add the line is
$300,000. This addition is expected to add $200,000 in annual
sales, and as a direct result, a corresponding $50,000 increase in
annual net profit. Therefore, the anticipated ROI from this
additional (product) line is in excess of 16 percent
($50,000/$300,000).
If the business is currently enjoying an overall 25 percent ROI,
the question the owner must answer is, "Should I invest
$300,000 in the addition of the new product line to earn an ROI
that is nearly 9 percent less than my business is currently earning
(25 percent - 16 percent = 9 percent)?" The correct answer may
appear to be an obvious "no," but there may be other
business reasons that would cause the owner to decide to add this
product line, such as the presence of a strong market demand for
the new items.
In any event, once each growth strategy is converted into an ROI
percentage, you can compare dissimilar growth options, and ROI can
be used as a critical financial component in any business growth
decision. Furthermore, just as ROI analysis can be used to evaluate
these additional growth strategies, it also can be used to evaluate
business ideas, such as those of entirely new businesses. And
fortunately, ROI analysis can be applied to these new business
ideas well before an owner ever decides to invest in that new
business.
David Meier received an MBA in Finance from Loyola of
Baltimore, and spent much of the 1970s teaching business courses;
later, he created a consulting group, and for the next two decades,
provided accounting and tax services to small-business owners. He
is currently the founder and COO of Small Business 411, which
provides small-business owners with ongoing business coaching and
the knowledge and support required to enable them to become truly
successful entrepreneurs. Visit the Small Business 411 site at
http://www.smallbusiness411.com
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.