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The Weekly Insight
The Business Growth Trap
Before assuming business growth is the answer, a little research can save you from working hard for no additional profitability.
The instinctual solution for many business owners is growth. But growth can be a trap that drowns you under an increased workload with smaller margins. The perceived instinctual drive toward growth can be the very thing that kills a company. Bigger isn’t always better. Growth does not always equal profit.
Growth often feels like success. An example is when a business owner lands a big deal, a big customer, or has high growth and thinks they have higher returns. In this case, the owner answers the question “Am I increasing my profitability?” with “Am I growing sales?”
Of course, there are many benefits to growth. Some of them are:
- More income can be earned on fixed costs, which increases profits
- Excess capacity can be put to profitable work
- New markets and customers provide revenue diversification and reduce risk
Growth also brings challenges, which many owners fail to anticipate. They include:
- Cash Flow Pressure: Your cash outflows often go up before you start receiving cash on the new sales.
- Reduced Margins: The push for growth often causes margins to get squeezed to increase sales through lower prices.
- Increased Costs: The increased sales often stretch your staff and equipment beyond their capacity. Your profits will be much less than you first thought if you have to add staff or equipment.
Let’s put all this together now. Growth may increase profits or it may decrease them. You don’t know without marginal profitability analysis. Don’t trust instinct. Do the work to make sure growth is the right strategy for you.