Many small business owners ask the question, “How fast can I grow my small business?” The simple answer to this question is, “It depends on how much capital you have.” I will use the example of a boot-strapped Service Company.
You start your business with $10,000. You buy a desk, a chair, and a computer. You land two new clients which means that you are making enough money to pay your overhead, pay yourself, and still have a little money left over. Congratulations, you are on your way! You land two more clients. Then, you find that you can’t handle all of the work by yourself anymore and you need to hire some help. You hire some help. You are still able to pay your overhead, pay yourself, pay your help, and still have some money left over. Your small business is growing and you are managing your growth in the most perfect way possible!
Well, as you probably may have learned, business is not perfect. Unexpected things happen along the way that throw the best-laid plans off track. For example, you have four clients and an employee and you are doing just fine. But, in an instant, one of your clients goes away! Now, you are not making enough money to pay your overhead and pay yourself and your employee. It’s the loss of that one client that caused your business to start losing money. Instead of your business creating new money every month like it did in prior months, now your business needs new money in order to survive.
Now, the mad scramble begins to find a new client to replace the old one that just left. The pressure on you is great because you have overhead and payroll to pay each month. You figure that it will take at least one month to find a new client, so you will use the cash that you have on hand for payroll and pay your overhead using your credit card. One month passes and you don’t land that new client you needed. So, you pay for your overhead by using your credit card again. You mumble to yourself, “this is no way to live.”
Now, your credit card is maxed out and you are feeling tremendous pressure to land a new client. This example is how most small businesses fail because of lack of capital. So, how did you solve the problem? You did what every successful entrepreneur does. You went out and borrowed money from friends and family or you got a new credit card or you got that new client finally. Countless entrepreneurs face this struggle time and time again. The key to success is to keep your overhead as low as you possibly can, so you can live to fight another day.
Well, you say, that’s no fun! I need my $3,000 Mac computer, my $1,000 office chair, my $5,000 per month office space, my $1,000 per month Range Rover lease payment, my $3,000 per month home mortgage, my office snacks and sodas, and a healthy travel and entertainment budget. No, you really don’t. By expanding your overhead at a faster rate than your sales are growing, you are putting yourself in a position of weakness. You are not leaving yourself any type of cushion in your growing business. As a matter of fact, you have now become the biggest threat facing your business. It’s ok, you say, my pipeline looks good and I will land some more new clients next month.
You must avoid the natural tendency to start spending money that you don’t have. One thing is certain: you know exactly how much your expenses are in any given month. The thing that is uncertain is how much revenue you will generate in any given month. By keeping your overhead as low as possible, you can reinvest your profits into growing your business. Otherwise, you will be on the never-ending chase for finding more money.
Remember, running a business successfully does not need to be complicated. Keep it simple!
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Manny Skevofilax is a consultant and speaker that helps his clients successfully navigate the challenges of growing their businesses profitably. Since 2003, Manny helps businesses enhance their results by using his experience in strategic planning, financial statement analysis, operations, organizational development, and team-building. His consulting firm, PORTAL CFO Consulting, Inc., has attracted clients from diverse industries in the United States and abroad.
Manny can be reached at 410-808-3441 or via email at manny@portalcfo.com.