Volume 38, Issue 9, September 2003
Planning to Assure Growth for Your Company
by John McClatchey, Ph.D
Most businesses strive for growth. Some owners even believe the only alternative to growth is decay. I thought it might be interesting to explore the problems and benefits of growth at a time when many companies are taking a breather from it.
Normally, businesses must grow in one of three ways:
• Their customers grow and need more of their products and services;
• They expand their coverage by finding new customers; or
• They expand what they can offer by increasing the number of products or the quantity of services.
Growth of customers is not normally in your control as a vendor, but the wider and deeper your customer base, the more of a chance you have to sell if all things are equal.
Planning for Growth
Most consultants will tell you that a strategy that attempts to capitalize on more than one of these methods is risky. If you want to reach more customers, you shouldn’t be selling products or services that are new to you. Or, by the same reasoning, if you are expanding your offerings you should probably stick with customers you know well. Generally, a strategy that depends on selling new services or products to new customers for its success is very risky.
If you want to find new customers, most of your growth effort will be marketing and sales. If you want to expand geographically, you’ll need new sales people and possibly new advertising. If you want to sell what you currently offer to a new type of customer, your marketing dollars should be spent on educating yourself about the new market.
By contrast, if you want to develop new products or services, you are likely to need new equipment, even if you are just trying to do what you already do more efficiently. Efficiency improvements often are the easiest type of new offering to evaluate. When evaluating new equipment, be sure to account for installation and education of the operators. While new equipment may be more expensive than new sales people, it can usually be sold if your growth strategy doesn’t work, though you won’t be able to sell it for as much as you paid.
The key to choosing a growth strategy is evaluating increased sales and profit. Sales increases can be forecast most accurately if you have noticed a correlation between your sales and publicly available data. The Bureau of Labor statistics’ website (http://stats.bls.gov/ppi/) has a wealth of information. Another way of forecasting is to use trends in your own sales and extrapolate them.
Margin forecasts are really the key to profit forecasting, since margin times sales equals profit. Don’t let excitement over a new product or marketing campaign color your judgment. If you are attempting to expand your customer base, your estimates will probably be more accurate than for new products, because you know the costs for existing products. If you are willing to reduce your margins in order to launch new products or expand your customer base, try to make conservative estimates of what you are willing to do. Make worst-case forecasts to be sure your business will survive if your new product or new marketing effort does not succeed.
The basics of profit analysis are simple. Gross profit margin is the percent of gross profit to sales. Gross profit is sales minus variable costs. If you have gross profit, you are producing money to pay direct fixed costs (also called factory burden), indirect fixed cost (also called G&A or overhead), and, finally, net profit. Make sure you know what increases in variable costs, direct fixed costs, and indirect fixed costs you are going to incur. If you are not going to produce enough increased gross profit to take care of the increases in fixed costs, you won’t make any money.
Net profit margin normally increases as sales increase; this is often called economy of scale or passing the break-even point. Be careful, however, because it’s easy to think new customers or new products will increase your sales more than the facts support. If you get too optimistic, you will reduce the effects of fixed costs on your forecast and mistakenly justify new products or new markets.
John McClatchey Ph.D., is the president of Southern Aluminum Finishing of Atlanta.
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