I recently wrote about determining why you want to grow your business. In this article, I want to go a little deeper into the idea of changing to grow. As I stated before, what brought you initial success in your business will not grow you to the next level. I have had it explained to me as, “What got you here, won’t get you there.”
When we were a new business, we were like everyone else. A dollar is a dollar, and any sale is a good one! I remember one such client that at the time was huge for us, and I was super excited to land it. It turned into a nightmare. I will not go into the reasons here, but the end result was they left after 6 months. Thankfully!
We had essentially one person tied up serving this client, and I am pretty sure we were losing money on them. At best, we were breaking even. You simply cannot grow that way. Why would you want to? You are just creating a bunch of work, people to manage, and business risk, all with no profit. That does not sound like a great business model.
To grow from “Start-Up” to “Grow-Up”, you have to focus on margin, specifically gross margin. When you start a business, essentially all of your expenses are fixed, so taking on revenue, however slim the profit is, covers those expenses. That is an acceptable strategy when you are trying to prove the concept and make payroll, but it absolutely will NOT work at the next level.
Let me explain why. It is all about margin. If you have $10k in monthly expenses when you start, you need $10k in revenue to break even. Simple enough. You bring in $12k in revenue, then you have a $2k profit for the month. Now let us say that in order to grow beyond $12k, you have to hire another employee that costs $5k per month, so your total expenses are $15k per month.
If you do not look at how much you are making in gross margin (i.e. revenue less direct costs) then you are potentially stuck in a never-ending cycle of adding revenue just to break even. In the above case, let us assume that your gross margin is 40%, so $4k of the $10k in expenses are involved in directly serving the customer (e.g. maybe an employee). You do not need to add just $5k in new revenue to cover the cost of the new employee, but $12.5k in revenue (i.e. 5k divided by 40%).
Wait, what? Referring back to my experience, if it was taking one employee to serve that one client, that means to grow I needed to add another employee. If I did not look at my gross margin, and added another client like that one, I would just be spinning my wheels. I would be adding employees, clients, and overhead, but not profit. Yuck!
If you add $12.5k in revenue to cover the $5k employee, you have maintained your gross margin of 40%. THAT is scalable. I have heard from way to many entrepreneurs who have said, “I was more profitable when I was smaller.” Why? They added the wrong customers/clients. They added the wrong revenue. It is too easy to fall into “the grow at any cost” mentality. Do NOT do it! Grow the right way.
As my dear colleague Alan Miltz puts it, “Revenue is vanity, profit is sanity, and cash is king.”
