How to Safely Control the Pace of Growth to Keep it Steady and Profitable
Managing risk is an important part of being successful in your growth strategy. Sometimes, things happen that are completely unexpected and could not have been reasonably forecasted (like a natural disaster or a new government regulatory demand).
Let’s first understand the two elements of risk:
• Seriousness: This is the gravity of the impact of the event occurring. A minor degree of seriousness might be a wasted day, or a lost customer. A major degree might be a plant shutdown or a horrible review in the media.
• Probability: This is the likelihood of a given risk occurring. Low probability means that it would be unusual or rare, such as twice a year. We’ve all heard of “hundred-year storms” for example. High probability means the event is almost guaranteed to occur, such as a new employee making a mistake or a chronically unhappy customer making a complaint.
That leaves us with four possibilities:
- Low seriousness and low probability: You can probably ignore these risks, such as a major earthquake in New York or snow in June.
- Low seriousness but high probability: You need to have some actions prepared to deal with this. Slipping on ice in the winter isn’t at all unusual. We should take steps to eliminate ice buildup on our driveways and sidewalks, and also have a first aid kit handy.
- High seriousness and low probability: In the US, the rate of 0.18 fatal accidents per one million flights since 2017 is impressive. You still hear the safety announcements on every flight, and over-water aircraft have life jackets and rafts. A large meteor hitting the Earth is an example. One such encounter wiped out the dinosaurs, but it hasn’t happened again in 66 million years.
- High seriousness and high probability: This requires that we try to both prevent the occurrence, but also are prepared to deal with it when it almost inevitably occurs anyway. Bad winter weather will delay or cancel flights. Contagious diseases will inhibit work and family life. Deaths occur in all families and all businesses.
We’ve been talking about two kinds of actions to take regarding the seriousness and probability elements of risk: preventive and contingent.
Preventive actions are intended to reduce the probability of an adverse event occurring: putting up “no smoking” signs, isolating combustible materials, having a fire marshal inspection, and so forth. Contingent actions are intended to mitigate the effects of an adverse event: sprinklers, fire extinguishers, insurance, escape routes and so forth.
Note that effective preventive action prevents injury, loss of life, financial loss, and embarrassment. Contingent action is only effective after the problem has already arisen.
Now that we’ve specified the elements of risk and its prevention and mitigation, let’s look at some specifics related to your business.
One of the main ways to de-risk your growth strategy is to maintain a rate of growth that works for you. You don’t have to try to grow your company by 100% every year. Keep in mind that if you could grow your business profitably 5% a year forever, your company would be a Wall Street superstar!
Thus, gradual and incremental growth can be quite dramatic.
We’ve mentioned earlier not to use other people’s metrics. Look at your financing, your market, your talents, and your resources, then decide what constitutes positive, lower risk, yet acceptable growth. If you exceed that, fine. If you’re doing very well, you can always adjust your growth projections upwards. But if you’re too ambitious, you can’t easily reduce your goals once you’ve already expended the money and resources.
How do you calculate the appropriate rate of growth for your business? There are two ways to make this calculation. One is a simple approach and the other is a little more complicated.
Here’s the simple approach: Based on your existing profitability, calculate how much of these profits you would be able to apply towards your growth strategy. What percentage of these profits do you think you can use? You need to look at your financial situation and make the decision.
You don’t want to use all of your profits, just a portion of them. You don’t want to use so much of your profits for your growth strategy that you make your business unprofitable. This is where many business owners get hung up. You must be able to maintain profitability, while you grow your business at a measured rate.
You’ll need profits to deal with (beyond growth):
• Unexpected events (repairs, legal issues, taxes, and so on)
• Salary, bonuses, expense reimbursement, hiring
• Technology improvements and repairs
• Advertising, media, PR
Thus, you can’t just plow profits back into growth, because the upper stories will collapse if the foundation weakens.
The other approach is a little more complicated: Use a financial projection model. Load up your growth assumptions, and then your financial model will calculate for you what percentage rate of growth would trigger a borrowing need. That percentage would be the highest percentage that your business could grow without having to borrow money. You might need a financial person to help you with this one, and it will have much higher accuracy for you detail-oriented types.
Most growing firms, when successful, aren’t prepared for success, and simply keep trying to grow. If you’re familiar with the board game Monopoly, you know that you can’t simply buy every property on which you land, because you’ll quickly run out of the money you need to pay rent to others when you land on their properties, to buy houses, to pay taxes, and even to get out of jail!
So blindly and constantly investing in more hires, more products, more services, more advertising and so forth doesn’t necessarily get you growth, but can get you mired in debt. And debt, here, is a fork in the road. By choosing profitable growth (with little debt), you stand a better chance of being successful at creating a business that lasts.
