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).
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.