Stewarding Profits
The foundation of building a sustainable business is to make a profit. But how much profit is necessary to sustain a business? How much of that profit should be invested back into the business? How much of the profit should go into the business owner’s pocket? Good stewardship of profits requires carefully planning the answer to each of these questions.
Long-term sustainability of the business depends on achieving proper stewardship of business profits. I know of several business owners who have chosen to take a lower salary than some of their employees. Is that good stewardship? It certainly builds loyalty and frees up cashflow to invest back into the business. Other business owners simply pay themselves enough to sustain their previous lifestyle, but is that a fair way to assess pay? I have seen owners pay themselves inordinate bonuses which leave just a small percentage for their employees. Is that fair? Should the owner consider being fair in comparing their pay or bonus to that of their employees?
I have encountered owners who have stated they will never pay late charges to a vendor, but make it a practice of paying bills within 60 days. These same owners will not hesitate to charge a customer a late charge if they pay a day past 30, or simply offer no terms whatsoever. Is that being a good steward of profits and cashflow?
What about the business owner who refuses to support any local sports team unless they have a child or grandchild on the team, or does not get involved in the local chamber or rotary club because they claim there is no return on the investment of participating? Are these good stewardship of profits?
Stewarding Growth
I’m frequently called in to resolve crises caused by poor growth planning. Business explodes, yet the business is struggling with inadequate cash reserves. There's demand for their product, but the cash bottleneck is killing the business before they can produce it. This is why I encourage the businesses I work with to craft their business plan so the cash shortages that growth often creates are built into their expansion strategy.
We may all love a smooth ride where you barely feel the road; however, most businesses are more likely to be like a driver who alternates between putting on the gas and hitting the brake pedal. Often, business growth feels like you’re lurching toward your goal. As a consequence, you need to recognize where the cashflow pinches are likely to come from and plan for them ahead of time.
Service businesses are particularly challenging to scale up. To meet an increased demand for your service, you hire qualified individuals. Then, whether or not you've collected payment from your customer, you must pay your new hires. Demand drops, and you have to lay off employees — increasing unemployment benefits costs. This is just one scenario where planning ahead can keep your business financially stable.
Even product-focused companies can find themselves in trouble when growth occurs quickly. The existing supply chain may not have the materials to support increased production. Expanding your facilities may create a whole new set of expenses. Often costs of growth, such as moving expenses, are overlooked or minimized. Capital purchases quickly swallow up cash reserves or require financing. No one planned for the loss of your most important customer and, suddenly, manageable debt becomes the bitter threat of bankruptcy.
A product may be easier to scale up in volume if it's technology-based. However, even technology has a volatile side. When software sales' volumes go up, the need to provide support grows as well. Call-center functionality becomes essential, accompanied by equipment fees in addition to employee benefits. Also, you may find yourself in a pinch between income from sales and expenses for employees and training.
It's easy to focus on growing revenue while ignoring the signs that growth is pinching your profits. Unless you have a plan in place to cover changing demands for your product or service, you may find your business is spending more money to make money than it can sustain. Planning for successful growth is easier than most businesses realize. It begins with having an expert evaluate your business model.
Identify How to Grow
• Determine what scale of growth is best for your business.
• Detect flaws in your business model that could become issues if you grow rapidly.
• Perform a company-wide audit to identify anything in management, production, development and especially accounting that will become issues as the company grows. Small concerns rarely shrink with growth.
• Assess how much debt your business can afford to accept without hurting your long-term business viability.
• Develop a plan that anticipates the costs of asset expansion.
Growth should be great news for your company. By planning for it and factoring in the pressure points growth can produce, your business plan can anticipate your needs so the money for expanding your business flows at the times you most need it.
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Check back next week for part three in this series, "Stewardship and Talent."
About the Author
Art Zylstra brings over 35 years' experience stewarding resources and people to small-to-midsize private and nonprofit organizations to help them flourish and grow. With his MBA in organizational leadership and a doctorate in transformational leadership, Art collaborates with key members of the executive team to develop and implement key strategies across an organization, providing leadership and coordination in its administrative, operation, business planning, accounting and budgeting efforts. He is highly motivated by mission and operates with integrity, confidence, professionalism and resourcefulness in a way that allows all stakeholders of the organization to flourish.
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