Here's a growth dilemma/example you will likely encounter as you grow your business.
You built your company pretty much from scratch and you hit the $5 million mark in revenues. But getting to the next level is proving very difficult.
In order to grow revenues, you launched an expansion effort nine months ago that isn't bearing fruit yet. New customers are not coming on the way you had hoped. And it is costing more than you had planned.
Lots of thoughts and questions are going through your mind.
- Maybe the person leading this effort isn't the right person to bring our product to a new market.
- Maybe it's just going to take a little longer to establish our presence with potential customers.
- What about the $125k we have already spent developing this market? Should we just abandon that?
- We put one of our best people on the project. What do we do with him or her if we make a change or kill the plan?
- How are we going to grow revenues if we pull the plug on this plan/project?
- Should we prepare an ROI analysis to determine what we should do?
- And, and, and…
Think Big Picture First
I like to look at questions like these at a strategic level first, before diving into the nitty-gritty detail.
The larger question to consider is "When is the right time, financially speaking, to spend/risk money to try to grow revenues"?
The answer depends on how profitable you are… before the expansion plan.
If your revenues are $5 million and your pre-tax profit is anywhere from $0 to $300,000, then you have a problem in your business model. You are hardly making any money. Expanding into a new market with basically the same business model probably isn't a good idea.
Spending the money to expand into a new market when you already have a profitability problem will increase risk, drive profitability even lower in the beginning, and you won't have fixed the underlying problem in your business model. You'll just have a bigger problem to deal with later (the problem of not making enough money relative to sales and/or gross profit).
On the other hand, if your revenues are $5 million and your pre-tax profit is over $500,000 then you have a profitable business model. You are doing something right! J You have built an engine that works and expanding that model makes sense.
You can use a portion of your existing profits to try to expand and attract new customers.
The next big question is how much of your profits to use (or risk) to pursue the growth opportunity. The answer depends on a host of factors, but I'd say it is probably in the $100,000 or less range. Maybe more if the opportunity is big but the risk is low.
Become Profitable… Then Grow
It's wise to make sure you are nicely profitable before trying to expand into new markets or new territories.
It forces you to make the hard decisions while you are still small enough to make them happen.
That way you have a business model that can be scaled up.
If your current expansion effort is struggling, maybe it's time to retreat and re-focus your time and attention on becoming more profitable with your existing structure. Then re-visit your growth plans when you are in a better position to go after new markets in a more low risk fashion.
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