Choose Your Path to Business Growth
How to find the most favorable strategy to grow your business
Q: Iam currently considering a number of alternatives in growing mybusiness. How can I best decide which way to grow?
A:Most entrepreneurs, from time to time, have available to them morethan one way to grow their businesses. The process of deciding on agrowth strategy is ongoing, and the decisions that result can becritical to the future success of any business.
The search for real business growth, by creating permanentincreases in profit as a direct result of measurable and sustainedincreases in sales volume, may not only be a reaction toopportunities in the marketplace, but also a requirement in orderfor your business to maintain market share. The right decisions canconceivably have a major positive impact on your business'sbottom line, thereby creating real growth. However, if you chooseunwisely, or decide to do nothing when action is clearly warranted,the results can lead to a loss of growth potential, or even aperiod of negative growth (decreased sales and profitability).
As with so many issues in business, your growth decisions shouldbe based on objective financial data, consisting of relevantestimates and projections. Not every growth strategy can beexpected to impact your business in the same manner, and over thesame time period. Your ability to compare growth options is thebest way to make informed decisions.
Think of your decisions in the context of ROI analysis. Eachgrowth opportunity has an investment component, dollars that youwould be required to spend as a part of the process of implementinga specific growth strategy. The corresponding return that you canexpect from your investment in business growth can be representedas the increased profit your business is projected to incur,directly as a result of the sales increases created by yourbusiness's growth strategy.
For example: A retail business is considering growing by addinga new product line. The required investment to add the line is$300,000. This addition is expected to add $200,000 in annualsales, and as a direct result, a corresponding $50,000 increase inannual net profit. Therefore, the anticipated ROI from thisadditional (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 ROIthat is nearly 9 percent less than my business is currently earning(25 percent - 16 percent = 9 percent)?" The correct answer mayappear to be an obvious "no," but there may be otherbusiness reasons that would cause the owner to decide to add thisproduct line, such as the presence of a strong market demand forthe new items.
In any event, once each growth strategy is converted into an ROIpercentage, you can compare dissimilar growth options, and ROI canbe used as a critical financial component in any business growthdecision. Furthermore, just as ROI analysis can be used to evaluatethese additional growth strategies, it also can be used to evaluatebusiness ideas, such as those of entirely new businesses. Andfortunately, ROI analysis can be applied to these new businessideas well before an owner ever decides to invest in that newbusiness.
David Meier received an MBA in Finance from Loyola ofBaltimore, 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. Heis currently the founder and COO of Small Business 411, whichprovides small-business owners with ongoing business coaching andthe knowledge and support required to enable them to become trulysuccessful entrepreneurs. Visit the Small Business 411 site athttp://www.smallbusiness411.com
The opinions expressed in this column are thoseof the author, not of Entrepreneur.com. All answers are intended tobe general in nature, without regard to specific geographical areasor circumstances, and should only be relied upon after consultingan appropriate expert, such as an attorney oraccountant.
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