Business owners say activity is increasing, and they are actually talking about growth. That’s a drastic change for firms that have been focused on short-term survival.
As business owners see opportunities for growth, anxiety may cause them to seek any type of growth. But bad growth can be worse than no growth.
Bad growth is focused solely on the top line — revenue — and ignores the bottom line — profits. Top-line sales growth may stroke the ego, but it is no guarantee of more money for your retirement fund. When a company reports sales are up 38 percent from a year ago, the first question should be, “How much has profit has increased as a result of that growth?”
It’s imperative to remain focused on the bottom line. Keep in mind, though, that without top-line sales growth, you’ll never truly grow your bottom line. It requires a combination of the right kind of sales growth and cost management to ensure the bottom line grows as well. Unless sales growth consists of the right products and services to the right customers and markets, at the right prices, you’ll spend valuable resources and money to grow sales for little return.
As an example, a company had won four straight annual growth awards, based on increases in top-line revenue. The owner had everyone focused on acquiring new customers and increasing the revenue line.
The company was rapidly opening new territories and aggressively adding customers. Unfortunately, the bottom line wasn’t keeping pace.
While the business was growing, its computer systems had collected much data. But since the focus was sales, that data was never used to determine why, with increasing sales, it was still not very profitable. By turning the data into valuable information, the owner saw there was a definable difference between good growth and bad growth.
As a result, he’s identified good customers, who create bottom-line growth, and bad customers, who do nothing for the bottom line.
It’s been a long time since the opportunity to grow existed, and it’s important to take full advantage of it. But make sure you’re focused on good growth, not bad, or your bottom line will suffer.
Joel Strom ([email protected]) is the founder of Joel Strom Associates. His firm works with closely held businesses and their ownership, helping them set and achieve their growth objectives while maximizing their profitability and value. Reach him at (216) 831-2663.