When your business is established, you have a strong customer base and are making a profit on the product or service you sell, it is time to think about business growth. First, you have to know how your business is performing in order to identify the areas with growth potential, and based on that you can decide if your business is ready to grow. This decision will depend on the objectives you have set for your business and on your exit strategy.
Business growth is not as obvious and straightforward as it seems. A business can be thriving and making profit, but that doesn’t necessarily mean it will be as successful if it grows. That is why growing a business is a milestone that requires careful planning in order to be achieved, as you have to find the right opportunities and the right time to do it. We designed this step-by-step guide to help you assess how well your business is doing and where you should take it next.
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1. Measure business performance
It is vital to start planning your business growth by measuring current business performance first. In the early stages of a business, you can easily get caught up in the day-to-day activities that running a business requires, and forget the importance of longer-term and more strategic planning. Measuring the progress of your business regularly is not only useful to find how well your business is performing, but also to find if you are making the most of market opportunities, if your business plan requires an update, and, essentially, if your business is moving in the right (and intended) direction.
According to Jess Hagen from the U.S. Bank, 70% of small businesses fail due to not recognizing or ignoring the business areas that are not performing well.
Before you pursue any growth strategies you need to access business performance. You can start by analyzing a few key factors:
- Turnover: total income generated by your business in a specific time period (net sales figure) – if your business can increase its turnover, it will generate larger profit.
- Market share: your business’s sales measured as a percentage of the industry’s total revenues, which represents the portion of the market you control and lets you understand how well your business is doing compared to competitors.
- Profits: the financial benefit gained by your business when the amount of revenue generated exceeds expenses, costs and taxes needed to sustain the business.
- Sales: the total amount your business generates from selling a product or service.
- Staff numbers: all indicators related to your business staff, including number of employees and their productivity.
Determining which factor defines your business performance more accurately will depend on the business type and on the stage the business is at. Usually, a combination of sales and profits is the balanced way to measure performance.
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2. Review business performance
By reviewing your business performance and assessing your core activities and business efficiency you will be able to identify how to take the most from the market position you have established. When reviewing performance you are also reviewing your business plan – in order to grow, you will have to update it with a long-term plan.
This is essential in any business, but more so if you are looking to hire more staff, create more departments, and appoint managers and directors, so you can become distanced from the everyday running of the business. And if you have decided that your company is ready to move forward, you need a clear business strategy in order to set its direction – ask yourself 5 questions in the review process:
- Where should the business be in the next 3-5 years?
- How will the markets the business competes in change in the future?
- How can the business perform better than the competition?
- Which resources are required for the business to succeed?
- Which external factors may affect the business’ ability to compete?
Remember that you don’t have to answer all these questions yourself. You can ask for advice from professional advisers, fellow directors and senior employees to help review business performance.
Core activities
These activities are strategic tasks that improve customer value and drive profits – not including day-to-day administration and management tasks. In order to review how your business is performing, you need to evaluate the products or services you provide to assess if they are successful, if they can be improved, and if you should launch new or complementary products or services.
In order to find the basis on which to improve performance and profitability consider these key factors:
Customer needs. Check if you are matching the products or services you provide to the needs of your customers. If you are unsure about those needs, consider carrying a target market or customer analysis.
Success rate of products or services. Assess which products or services are successful, and which are not. Identify the products or services that offer a high percentage of sales and high profit margins.
Issues with products or services. Once you identify the products or services that are not performing as expected, you need to find out why. List the specific areas where these products or services need to be improved in order to be successful – consider pricing, marketing, customer service, design, packaging etc.
Costs. Review direct costs, overheads and assets to find if there is a way you can lower your current costs – maybe a different method or material. Also consider negotiating better deals with your suppliers or looking for new suppliers.
Business efficiency
Your business might be efficient working in a short-term, reactive way, but this status can change if you grow the business too quickly and without an overall plan. That is why you need to assess all internal factors that have an influence on business performance and understand if any of those can hold back your business growth plan.
Premises
Assess your commitment with the property your business is located in; the pros and cons of your current business location; if you have room to grow in the current premises; the estimated cost of moving your business to a different location, and the benefits of that move.
Facilities
Assess the modernity of your equipment; the capacity of your current facility compared to forecasted demand, the need for major improvements, and your position compared to the competition.
IT
Assess the IT systems you currently have in place; if these systems can be improved to make a difference in the quality of the product or service you provide; if these systems are relevant for the expansion you are planning, and if they can offer flexible working to your employees.
People
Assess if you have the right staff to help you grow your business; if their skills and productivity match the business’s needs; if you have the right development plan in place to train your employees; how the salary and benefits you offer are compared to competitors’, and if your business suffers from high staff turnover.
Professional Skills
Assess if you have the right management team to help you with business growth; if you have staff with skills available in Human Resources, Sales and IT, and if your employees need to be taught new skills or to receive more training.
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3. Review financial position
Financial planning is an essential step for business growth, so you need to review your financial position before planning long-term, especially if the growth of your business requires funding. Developing and implementing the right financial systems is essential to achieve (or maintain) business success. When you are reviewing your finances, consider:
Cash flow. The balance of all the money flowing in and out of your business. Cash flow should be carefully monitored and controlled, especially if your business is in a startup stage.
Working capital. The amount of money available for day-to-day business operations, which translates to the different between your current assets and your current liabilities. Compare your working capital to the industry norm.
Cost base. All the costs involved in producing a product or offering a service, which should be constantly reviewed to make sure they cover the sale price.
Borrowing. Current lines of credit or loans, which should be assessed regularly to find if better or cheaper forms of finance can be used.
Growth. Financial growth should accompany business growth, but first you have to review the business’s financial growth so far, and assess if your business is in the position to successfully adapt to further growth.
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4. Analyze financial performance
Doing a regular financial performance analysis of your business is a also a great opportunity to keep your business plan updated with the latest forecasts and projections for the future.
In order to get a full understanding of the current profitability and financial soundness of your business, you should analyze and interpret its financial statements – these are the written records detailing all financial activities and conditions of your business. These statements comprise 3 different elements to cover the different financial aspects of your business, so you can rely on their data to analyze performance and make realistic growth predictions.
Key elements to analyze:
Balance sheet
Using this element, you will be able to analyze how much money (assets) your business has, how much it owes (liabilities), and what is left when you net the two together (net worth). From the balance sheet you can learn business debt, the percentage of tangible assets, average time it takes to sell inventory, average time it takes for customers to pay their bills, product return rates, and where profits are being spent.
Income statement
This element works as a profit or loss statement. It is a report used to show investors and managers the business earnings over a specific period of time, so they can understand how the business is performing on an economic basis. This statement should not be considered alone when analyzing the financial performance of a business, as it is limited by the use of estimations, which will not account for future unpredicted expenses.
However, it is still a key element that provides insight on expense management, interest, and taxes paid. And it can be used to examine different profit margins, while comparing the business’s profits to its competitors’.
Cash flow statement
This element summarizes the amount of cash that enters and leaves the business, while looking at cash from operating, investing and financing activities. You can use a cash flow statement to understand how the businesses is managing its cash position, while analyzing how well cash is being generated to pay debt and fund expenses (liquidity). By learning where cash is coming from and where it is being spent, you can determine if the business is running on a solid financial ground.
5. Analyze competition performance
If you have been running your business for a while, you might think you know your competitors all too well by now. However, since timing is critical when it comes to business growth, it is essential to update your initial competitor analysis by conducting a new one.
Harvard Business Review compares competitor analysis to equipping for battle: “Effective marketing must involve a thorough analysis of the overall competitive arena and the competitors that battle within it. Competitive analysis determines whether firms decide to fight head-on with like products or maneuver a sneak attack with differentiation.”
Depending on your business type and the market it operates in, you might find that since you first setup your business some competitors launched and improved their products or services to be ahead of the curve, others failed to succeed and are no longer competing with your business, and a few new businesses have entered the competition since.
Analyzing how well your competitors are performing will give you insight on:
- Who they are
- What they offer
- What their prices are
- How they sell their products or services
- Who their customers are
- What their competitive advantages and disadvantages are
With this information you can easily identify where your business stands compared to competitors, and find the exact areas where your business needs to develop and grow in order to continue competing (and succeeding) in the market. The weaknesses you find in your competitors should be your strengths, so once you identify those you will know exactly where your opportunities for business growth lie.
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6. Understand business growth types
Once you have consolidated the existing performance of your business and analyzed the current performance of competitors, you are in the position to understand the different business growth types and how they fit with your current business status and future expansion goals.
Organic business growth
This type of growth is the most common and effective, and is expected to happen year after year, as investors will want to see that the company they have invested in is capable of increasing its organic sales yearly. Organic business growth can become unsustainable in the long run, but is ideal to set startup businesses for future success.
Growing a business organically is basically growing it from within, by increasing the production of more products or services. Therefore, it can also involve investment in physical space, as the business might need to expand in order to accommodate its growing manufacturing needs. The additional production and space will meet a growing need among consumers, preventing inventory shortage. And you can also pursue this type of growth with promotions, new product lines and improved customer service.
Strategic business growth
This type of growth is an option only when the business has reached the peak stage of organic growth. A strategic business growth focuses on long-term business growth – the business can’t grow organically anymore, so it needs to expand to other markets, and this can be done through advertising or the creation of additional products or services.
The profits generated during organic business growth should be invested in strategic business growth, as the business will not experience an accelerated increase in sales in this growth stage, but rather a gradual growth.
Partnership/Merger/Acquisition business growth
Growing a business by acquiring, merging or partnering with another business can be beneficial when it comes to market expansion. Even though this type of growth has its risks, as you will be bringing in another business to support the growth of your own, it has the most potential to succeed. If the partnership, merger or acquisition is carefully planned and well executed, it can help your business enter a new market, increase its production rate, and gain the customer loyalty previously cultivated by the other business.
This type of growth is appropriate for small-, mid- and large-sized businesses. It is the right path to choose when acquiring another business, or partnering or merging with a business proves to be more beneficial than solely expanding your own.
Internal business growth
Growing the business internally focuses on using the current resources and developing them, so their improvement can support business growth. Instead of investing in outward production, this type of growth requires implementing practical changes to the way the business is internally conducted – this might be a challenge to business owners, managers and employees.
Through internal business growth you can maximize resources without spending a significant amount of capital. The ideal outcome is to have the business grow to a stage where it is producing while using less resources, and regaining the amount spent maximizing processes.
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7. Choose business growth strategies
According to a 2017 report from Dun & Bradstreet and Pepperdine Graziadio Business School, 90% of small and mid-sized businesses were expecting to grow in 2018.
Cultivating a strong growth strategy (or strategies) is essential to successfully grow a business, so you need to carefully analyze all the strategies available in order to make an educated choice that can benefit both your business as a whole (including finances, products or services, and staff) and your loyal customer base.
Penetrate the existing market. Market existing products within the same market your business has been selling in by increasing market share. You can do it by lowering prices, for example, in order to become more competitive.
Expand your market reach. Use market expansion as a growth strategy by selling current products in a new market. One of the reasons to consider this strategy can be a high level of competition in the current market which leaves no space for business growth.
Innovate your products or services. Discover and promote new uses for your products or services in order to increase sales and attract new customers. If your business offers an updated product or service, it can get ahead of competitors in the current market.
Focus on a niche market. Find a narrowly defined group of customers and conquer that niche with a specific product or service that meets their needs, which are currently not being met by your competitors.
Diversify your products or services. Diversification comprises selling new products or services to new markets. While it can be a risky strategy to follow, it can also be profitable if you carefully plan it. Market research is an essential first step for this strategy to be successful.
Grow your customer base. Generating new business is one of the pillars of successful business growth. Focus on current and potential customers by understanding their needs in order to meet them, improving customer service, offering benefits to loyal customers, being in touch with them via social media, and building brand awareness through your local community.
Franchise your business. If your business is successful and you can develop a system that allows others to duplicate its success, franchising is a growth strategy you can adopt.
Export your products or services. Expanding into international markets can be a powerful growth strategy for your business. It requires time and resources to be successfully carried out, but it has great potential to boost business profits if you develop a well-thought-out export marketing plan.
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8. Finance business growth
Realizing your business growth plans requires financing. It is important to understand that financial planning is at the core of successful business growth, so you will need to assess the amount of investment needed and when you will be in a position to repay the capital. It is also essential to draw up detailed financial forecasts regarding cash flow, sales and working capital in order to guarantee the business is at a favorable and stable financial position that allows growth.
There are several financing options available to businesses looking to increase sales, hire more staff, expand into new premises or take advantage of new growth opportunities.
Bank loan
Bank loans are the traditional lending way to finance business growth. You can choose between different types of loans and between different banks – research banks that are well known for supporting scale-up businesses for better odds of getting your loan request accepted. Remember when you choose to fund business growth through a bank loan you have to think long-term.
Venture capital
Venture capital is when a group of private investors finances a business based on its long-term growth potential, in exchange for partial ownership. Even though these investors can usually also provide valuable guidance on financial and human resource management, they are often very particular on how the business operates.
Angel investment
Angel investors are high net worth individuals who specialize in investing in growing businesses, in return for an ownership stake. The benefit of funding your business growth via angel investment is that the investor will always bring more than just money to the table – angel investors are business experts with the knowledge and contacts necessary to scale your business growth. On the other hand, angel investors are generally interested in a management position that entitles them to run your business.
Crowdfunding
You can try to attract public loans or investment through crowdfunding. This takes place in an online platform where you setup a page with your business growth proposition and the amount of funding you need. There are different models of fundraising: donation-based, rewards-based, loan-based, or equity investment-based. Funding the growth of your business through crowdfunding is a good idea, especially if you are unable to fund it through other means.
Family and friends
The ones closer to you will want to see you succeed, so asking family and friends to finance your business growth is a smart approach. They are unlikely to demand ridiculous interest rates or a structured payment plan, which can allow you to repay the money lent once you have generated enough profit to pay back the capital.
Business growth is a process that requires thorough planning. Having a larger business will give you access to economies of scale, and more likely build up your customer base as customers often rely on large businesses rather than small as they feel more secure. And a large business turnover can also mean a greater potential for profit.
Identify the opportunities for your business to grow and start planning your growth venture now!