HOW TO DETERMINE YOUR GROWTH RATE
Many have said it before: businesses need to grow or die but most grow too fast, too slow, or simply for growth’s sake. As we navigate through the COVID-19 pandemic, how do you determine the right rate of growth for your business? We advise you to consider three things:
Your Life Goals
The happiest and most successful entrepreneurs have integrated their life and business goals. They have carefully considered where they want to be in the long term, and integrated and aligned where they want their businesses to be. These goals should be working together—not against each other.
Your Stage of Life
The growth rate of your business is impacted by what stage of life you are in. Are you a single entrepreneur? Married with children? Recently divorced or widowed?
A single entrepreneur may be able to burn the midnight oil growing a business because they don’t have family demands, but they also develop really bad work-life habits that are hard to undo. A married entrepreneur may dial back slightly, but when kids come along it’s a whole new ball game. Please read our blog, “Growth with Purpose: Evolution of Family Life” for more details on how your stage of life can impact the growth of your business.
Your Financial Resources
When a business first starts out, they have a “scarcity mentality” with how they deploy their capital, hire people, pay people and the kind risk they take. The companies that do well over time deploy their capital wisely and take calculated risks. Once they have cash in the business, sometimes they get a little sloppy on how they deploy their capital and how they spend it. They take risks they wouldn’t have taken before, because now they have an “abundance mentality.”
We often advise our clients that unless you have a very clear, terrific rate of return opportunity, get the money off your business balance sheet and onto your personal balance sheet. This will allow you to diversify your liquidity risk, strengthen your future, and continue to operate your business as efficiently as possible.
How do you actually grow at the right rate?
Once you understand your life goals, stage of life and financial resources, you need to have a strategically aligned business plan. It is surprising how few businesses actually have a written business plan. Business plans aren’t always right, but they are a roadmap or path. And a reminder of what business owners are trying to do financially in their business and their personal life. This is the cornerstone to understanding how much risk you should take as a business owner and how to grow the business.
You will also need to understand the cash flow needs of your business today and in the future. How you grow your business is driven by how you grow your cash.
So many entrepreneurs manage their business on hope: Hoping to close a new deal, hoping to land the new client, hoping they sell to a big company. Having cash flow and having profit are two different things. Understand the difference.
To grow at the right rate, business owners also need to align their leadership team compensation with growth rates. Many companies don’t do this. They pay their leadership teams in an arbitrary fashion—whatever it takes to hire someone in, to recruit them over, or follow an industry standard. If you have a strategically aligned business plan, understand where you are trying to go with your business, and you know where your cash flow is, you can align your leadership team compensation with less stress on your business.