Some friends, all small business owners, got together over the weekend. As people tend to do at these get-togethers, the discussion soon turned to business. And one of the more interesting topics covered was how to grow a small business in a mature niche.
In other words, not how to grow a small business in an exploding market. And not how to grow a small business in a venture with embarrassingly fat profit margins. But how to grow a small business in a more typical and perhaps mature industry. The sort of small business that’s profitable and a great deal for the owner—but not so profitable that giant upside opportunities justify taking on big risks or bringing in outside investors.
People had a bunch of interesting ideas to share. But four ideas in particular jumped out at me as more than just the usual, true-but-superficial ideas of trying to increase your prices and then the number of customers and products. So I thought I’d share these perhaps slightly outside of the box ideas.
Grow Your Small Business through Reinvested Profits
A first idea, which seems unremarkable on its face, looked smarter and smarter as people discussed it.
Before you even start growing your operation, you do need capital to support your growth. You can of course get that capital from a variety of sources: the bank, personal funds, reinvested profits, outside investors, and so on.
But the consensus seemed to be that you wanted to grow through reinvested profits. Growing through reinvested profits meant by definition you were sure to be growing a profitable business. And growing through reinvested profits meant you didn’t have some perhaps well-meaning but unknowledgeable outsider influencing decisions.
People emphasized, too, that you wanted to be reinvesting real, already earned profits and not anticipated profits. In other words, you didn’t want to do what many big, fast-growth companies do… which is reinvest hoped-for profits.
Starbucks, reportedly, did this with their business plan at least in the days before the Great Recession. The firm might commit to open a new location in year 3 using the profits they hoped to earn in year 2 on a store they were planning to build and open later on in year 1.
Don’t get me wrong. I’m impressed the management team was able to sequence their site development and location openings in this manner. If you’re a Starbucks shareholder, absolutely, you want Starbucks to grow their business as fast as they can.
But for small businesses, group consensus was, you and I want to go slower. First, because slower works more safely when you have those tighter profit margins typical in a small business. That makes sense, right? You and I just don’t have as much financial cushioning to deal with setbacks or stalls if profit margins are tight and we have to personally pay for any mistakes.
And then, second, let’s admit it. In our small businesses, we have neither the management infrastructure nor sophisticated information systems to support a business plan with hundreds of moving parts that need to fit and work together just right.
But that’s okay. We don’t need that infrastructure or those systems if we’re careful and go slow.
Grow Only through Fat Margin Services or Products
Another useful thought from the discussion: People with lots of business experience noted that many of the products and services that small businesses sell aren’t really profitable or aren’t very profitable.
Some products and services get added to a firm’s menu of offerings because an important customer really wants the item. Or because an employee wants to provide the item. Or maybe because the item is really cool or truly useful to people. And sometimes vendors even indirectly push a small firm to bump their capacity (by leasing more space or buying more powerful and more expensive equipment) which also pushes small firms to grow revenues if only to pay for expenses.
But the thinking of the group is, with tight margin small businesses, a firm needs to be truly careful to grow primarily (or ideally “only”) through the addition of fat margin services and products.
As an accountant, I see this second idea as really good and very common-sensed. You and I will find that growing a business with profitable services and products greatly eases the liquidity and working capital requirements of the growth. (This is particularly important in a low profit margin or normal profit margin business.) And then though it is easy to focus on revenues, we’ll find that the discipline of focusing on profits makes us engineer better products and services.
Grow with Right-fit Customers and Clients
A related idea to this notion of growing a business with new fat margin services and products… Once this point was made and discussed, people also pointed out the importance of adding the right type of customers and clients.
Now obviously, one can grow revenues by adding any old product or service and any customers or clients willing to pay their invoices. But adding profitable customers and clients sometimes requires more effort. Customers and clients who buy your or my most profitable products and services, and with typical customer or client service burdens, make for right-fit relationships.
And then this weird observation. Even if you and I are, superficially, in the same business, your “right-fit” customers or clients may be different from my “right-fit” customers and clients. You may, for example, have arranged your operation to very efficiently handle clients or customers who look and act a certain way. But these clients may be a poor fit for my shop.
A general guess: I wonder if we don’t serve best customers and clients similar to those we already efficiently serve with fat margin, high quality products and services.
Grow Opportunistically and in Spurts
Near the end of the discussion about how to grow a small business, a fourth interesting idea popped up. People seemed to think you often grow a small business not steadily but rather in spurts.
A small business, for example, can’t simply open up five or ten new locations each year, thereby producing predictable arithmetic growth.
More commonly, a small business gets to grow because the firm suddenly gets access to a new resource that bumps their capacity. Or a firm suddenly sees a new customer or client need it can help fill. Or a great new player joins the team and brings new contacts or skills and these support a step up in revenues.
Big businesses, I think, often seem to munch away at large markets which they steadily capture over years and years.
Small businesses, by definition, don’t. Small businesses uncover a $500,000 or $5,000,000 opportunity, quickly capture some big percentage of the market, and then wait patiently and watch closely for the next opportunity to become visible through the fog.
A Final Comment
You might read the preceding paragraphs and conclude small business opportunities simply don’t deliver enough profit and upside to merit your interest. But if that’s what you’re thinking, I respectfully disagree. Small businesses can provide you and your family with great financial outcomes. But the smaller scale of these operations and the leaner financial and management structures mean you and I need to be realistic.
All that said, keep in mind that if you steadily grow your business by, say, 12% year for a half a dozen years, you’ll double your revenues. If you double your revenues, you’ll usually more than double your profits. You might for example, triple or quadruple or quintuple your profits.
If that occurs, you’ll find yourself quietly enjoying a rather excellent financial outcome.
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