Steady as she goes

 

‘Steady’ is not a word you’d normally use to describe an entrepreneur.

The more typical image is as flamboyant buccaneers, identifying a customer need, raising capital and using energy and intellect to fulfil that need, managing risks along the way.

Tales abound of erstwhile entrepreneurs starting an enterprise in their parents’ garage, from a laptop in their bedroom or from a run-down shop. Almost overnight they become millionaires, then billionaires and high-profile media personalities.

That happens, of course, but for many business owners the journey to riches is a little more sedate and in some cases, more predictable. The few who do succeed (the statistics say that the majority don’t) and become successful and wealthy often achieve this over years, or decades of steady and predictable growth. 

Through the wonderful power of compounding (known and loved by many investors), 10% growth, year after year, will create a business of scale if carried on for long enough.

Of course, most businesses don’t grow in a straight line. 

They have good years and bad. 

The year 2020 for many businesses will be more about survival than growth. With depleted reserves and additional loans, many may take several years to recover. But recover they can and as long as the longer term trajectory is up, they can get back on their former growth curve.

Let’s look at an example. 

A small shop with turnover of £100k in their first year. Sales growth averaging 10% each year for 20 years would rise to a turnover of over £670k in year 20. That’s growth of nearly 7 times! That excludes inflation. So that is more units sold, more profit (if margins and overheads are managed) and more scale.

Of course, that is a hypothetical and simplistic scenario. 

There’s a truism in business though - that what you plan for, you achieve. Planning for a minimum of 10% growth (in normal times) is eminently achievable for most businesses. The plan needs to have substance - in our example of the shop, in one year growth may come from increasing the range, another year from expanding or reconfiguring the space, adding new employees, moving on-line etc. Growth won’t be linear but if the trend line is a minimum of 10% growth, scale can be achieved by steady, consistent, application.

Getting rich quick can be a compelling and seductive objective for some. The lucky few with extraordinary talent or perfect timing may succeed.

For the majority, steady, persistent application can deliver similar results...but it doesn’t happen overnight.

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Adding capacity

For a growing business, deciding when to add capacity can be a tricky.

Too early and profits and cashflow are adversely affected. Too late and service levels to customers will suffer.

I lean towards adding capacity (in the form of people, space, other resources) sooner rather than later. The boldest businesses have followed this path and for the most visionary it has paid off handsomely. Transport and distribution businesses like railways, airlines and international couriers are good examples. They didn't wait until they had enough customers to justify the investment. They built the infrastructure (in the case of the railroads at significant cost) and the customers followed afterwards.

What about in a small business where access to capital can be difficult and margins are tight? 

I still believe that with a robust plan for future growth, investing early in additional resources is the best approach. If the decision is postponed until the extra resource is urgently needed, this places additional strain on the business and there will be a further delay before the resources are in place due to lead times for recruitment, negotiating leases etc.

For professional service businesses like accountants the extra capacity we need to grow is usually people and space. I still regret to this day that when an adjoining office became available I didn't snap it up but decided it was a little bit too much of a stretch at the time. The landlord said to me, 'Fred, it's a little bit like a farmer where the neighbouring field is up for sale. When it's gone it's gone'. He was right of course.  He ended up letting  it to another tenant who resides happily there to this day. We have had to manage with 'just enough' space and our situation has only eased a little recently as more capacity has become available.

Taking on additional employees ahead of an expected increase in workload can be a challenge. It is also an opportunity however to give them a thorough induction and make sure they are trained and prepared when the rush comes.

If capacity is added early it is critical to ensure that the expected growth occurs to cover the additional costs and to make extra profit in the medium term. That's where the robust growth plan comes in and ensuring that it is delivered.

For a growing business adding capacity just a little bit ahead of the curve makes sense to me. It makes growth more manageable and orderly and I believe will have a more beneficial impact on profits in the longer run.

Getting this right is not a precise science. 

I know from experience that I have rarely regretted taking on capacity too early but I have had regrets and felt the pain where I have waited a little bit too long.

www.base52.co.uk