Do You Have Enough Money to Grow Your Business?
It takes money, to make money. Growing your business can mean increasing revenues, hiring more employees, expanding geographic footprint, opening a new physical location, or launching a new product. In essence, in any of these examples -- or others that you’re thinking of right now -- you are investing in your business with the expectation of receiving a sizable return on that investment.
Perhaps you’re trying to increase revenues, with the goal of increasing your $1.5 million in sales by 33%, year-over-year. In order to do so, you plan to hire 5 sales reps at $30,000 a piece plus 10% commission on any closed deals. You expect that in investing $150,000, you’ll produce $500,000 in sales per annum (5 sales reps x average of $100,000 per annum).
But is $150,000 all you need? What about marketing materials? What about employee benefits? Did you consider the office space and supplies needed to outfit them? How many sales reps can you hire before you need to hire a sales manager or VP of sales? This is the essence of strategic planning.
Business segments and their many factors do not function in silos. Human resources impacts personnel, which impacts execution on key initiatives. Execution impacts revenue. Operations impacts margins, and margins impact profitability. These are just a few dynamic relationships, among the many others that weren’t just mentioned.
So, what do you need to consider when growing your business?
Paint the Picture of Your Goal
What do you want your business to look like? Tell your team a narrative. Paint a picture of what it looks like. “We’re going to be the industry leader in ______”; “We’ll be the biggest employer in ______”; “We’re going to revolutionize the way people ______;”. Then, what does that mean in numbers? Metrics in customers, revenue, and profits are key to applying a financial metric to the vision you have. If your company is going to be the industry leader in cloud computing, you’d look to Microsoft and Amazon. You’d identify their revenues from their cloud units, Azure and AWS, respectively, and find a target for your company to hit.
Reverse Engineer Your Financial Projections
The first step is to create financial projections. Companies don’t magically attain industry-leading revenues. They grow over time, and scale in tranches. Set your sights for 5 years down the road, and break down annual, then quarterly and monthly, revenue targets. Growth will accelerate faster at first, and slow over time in alignment with the law of large numbers.
Consider the Factors Needed to Hit Your Goal
The financial projections you reverse engineered won’t appear out of thin air, and they won’t happen with simply hiring a few salespeople, either. That said, the first thing to consider is your personnel, as human capital is often companies’ highest expense -- and in our opinion -- most valuable resource. In addition to salespeople, you need to consider operations, human resources, finance and accounting, marketing, project management, and various producers, depending on your industry, like designers, developers, engineers, mechanics, and more. Then there’s budgeting capital to hire needed team members, time to interview, and processes to on-board them. Then there’s office space, technology, and other materials and supplies needed to equip them. Every business segment will require an allocation of funds to support it, with each having its own ancillary costs. For instance, marketing will require budgeting for materials and media spend to support sales initiatives.
Create a Budget and Allocation of Funds
After considering the factors needed to hit your goal, it’s time to apply numerical and monetary values on them. This is how you figure out if you have enough money to grow your business. Maybe you don’t, and you go back to your plan to spend less on advertising, or will combine responsibilities from 3 roles into 2. Maybe you decide to increase your budget through bank-funded debt, or reining in capital from investors or private equity firms. Maybe you realize it will take too much investment to reach your revenue targets, and stretch them out from 5 years to 7. We all want to be ambitious, but also need to be feasible and considerate to the many extenuating factors to execution and success.
We’ll discuss how to create an allocation of funds, and consider various fundraising routes, in our next two blogs. Keep an eye out to see how to fund your business’s growth.