If you plant a seedling in your back yard; water it every day; and nurture it faithfully, the seedling would naturally grow into a mature tree. If at some point, you decided you did not want your tree to grow, you could start pruning the branches; or stop watering it as much. The nature of a tree is to grow to its full potential. If you start cutting off water or trying to limit the tree’s growth, it is likely that you will kill the tree.
A business is much like a tree in this regard. If you do the right kind of marketing and sales, customers will flock to your company. There are several small business owners that freak out at this stage of their business development. They decide that they want to limit their company’s growth. This decision can be a subconscious or a conscious one. They may stop selling; or stop building new branches; or something to limit their own growth. Or they make statements like, “I never want more than twelve employees.” or “I want to never have revenues of more than $1 Million per year.” or “I need to spend more time with my family.”
On the surface all of these statements seem quite human. After all, no one person ought to be expected to take on the burden of more business than they can handle. Right?
There are two problems with the idea of limiting your own company’s growth: 1) Free-markets demand growth; and 2) You have a management problem.
Free Markets Demand Growth
If you start a business that provides a unique product or service that is not offered by others in your industry, it is natural for clients to start to demand your product or services. This demand can be tempered by increasing your prices; or increasing your supply. If you decide to increase your prices, fewer people will buy your product or service. But you have to ask yourself, “Why did you start your business in the first place?” Wasn’t it because you felt like you could make the world a better place in some way? Why would you now decide it is all about making higher profits; and limiting your impact on the world?
You say, “But if I increase supply, I am increasing my risk in additional investment, and will work harder. Why should I go through this personal headache to give this demanding world what they want?” That’s why you may need to change your perspective… Read on.
You Have a Management Problem
What if I told you, “You can increase your supply and your world impact and reduce your headache?” This statement is so hard for small business owners to believe. When they started their business, it seemed so easy. Maybe they started out on their own and had no employees to manage. Or they had very few employees in their small business. As their company grew, they seem to get busier and busier because their employees are not taking responsibility for their work; and the owner is taking on all of the customer complaints and other problems associated with the increase in work. Why on earth would they grow even larger?
When your company is scrambling to survive, there are certain responsibilities that the owner must do because of cost-control concerns or unique knowledge the owner has and cannot seem to share. However, when a company gets beyond this survival mode, it is time to develop systems and promote managers to take over these responsibilities to start relieving the owner of much of their workload.
Foundations for Growth
There are some common ingredients any company needs to grow. I’d like to cover a few critical ones in this blog post.
Systems & Processes
Most small business owners grow by simply telling their employees what they need to do. In most cases employees take the advice of their owner and modify what they told them in some way. This modification may be good; or it may be bad. As the company grows, each employee will do things their own way. Eventually, the company will be delivering high quality products and/or services in some areas; and low quality products and services in others because everyone is doing the business differently.
If you document the BEST process for doing your business, you can now train new and existing employees on your BEST way of doing the business. This way, your company can grow and provide consistent quality to its customers. If someone joins the company and has a better way to do your business, you can simply modify your process and update the rest of your employees.
A Franchisor is a company that has developed a way of doing their business in every aspect of their business. In fact, they have done so well at their documentation, they can sell their packaged ideas to a rookie business owner. The new franchisee can be successful by simply following the instructions the franchisor has assembled. Small business owners can do this same thing within their own company. They can either form a formal franchise; or they can create operations manuals, training systems, staffing requirements and many other systems and processes that are easy to duplicate by a branch manager.
It is hard work to document all key areas of your business, but it is necessary to in order to promote branch managers within your ranks and have them succeed at the same level as your core company. Many small businesses are surprised when they open up new stores that fail when the original store was doing so well. These owners have failed to capture the keys to success in their original store; and will often duplicate the wrong things in their new store.
Many growing companies think that since their core business is profitable, they can simply double in size and create double the profits. While this may be true in the long-run, growth of any business requires quite a bit of additional cash in the short-run.
Let’s say that your company is earning $2 Million per year in revenue right now with net profit margins of $200,000 per year. And you want to start another branch with a target revenue of $2 Million per year. Your original store took five years to get up to the $2 Million/year mark, but you feel like you can grow your second store’s revenues quicker because you have improved your systems and processes to the point of perfection in your original store.
If your original store is spending $1,800,000 in order to make $2,000,000; then you will need to have almost $1,800,000 in cash in order to start your new store. The reason for this large amount of cash is that you will need to pay almost the same in costs to run your new store; but will not have sufficient revenues to offset these costs. Especially, when you consider the time delay in client payments for your products and services. In addition to operating expenses, it is often necessary to invest in new capital equipment for your new location.
Depending on your business, this cash requirement may be a short term loan or a line of credit. Either way, you need to make sure you can get cash to make sure you don’t run out when you are trying to grow.
Small business owners often have a problem with promoting responsible employees and properly mentoring those employees to become managers within their company. In order to grow, it is necessary that the small business owner empowers employees to take on management responsibilities and holds those managers accountable for delivering results. This organizational growth can go wrong in the following ways:
Micro-Management: The owner promotes employees into the role of manager; but never trusts them to do the right thing. They don’t allow their new managers to use their own management style and instead force managers to mimic the owner’s management style. The new managers become demoralized, and either quit or become a yes-man to the owner. In either case, the ultimate management burden falls back on the company owner.
Passive Management: The owner promotes their new manager and then allows their new manager to do whatever they want. They never really check in with their new manager to help, guide or mentor. Depending on the personality of this new manager, they will either succeed because they may have been more skilled than the original business owner at running the business; and possibly start their own business. Or they will fail and think it’s okay because the original owner doesn’t seem to care.
Co-Management: In order to save money, most small business owners will continue to manage the core store while they promote one of their best employees to manage a new location. This creates a co-management situation where the new manager is still subordinate to the owner; but the owner is filling the same role as their new manager at a different branch. The owner is now in a role of continuing to be a store manager; and also manage their new store manager. I’m not saying that this situation cannot work, but it often doesn’t work. The reason it fails is that the owner doesn’t have any more time to manage their newly hired manager than they did before this change. In a growth scenario like this, it is advisable that the owner consider promoting or hiring two managers: one for the core location; and one for the new location. The owner will then change their role into a CEO rather than a Co-Store-Manager.
The organization can grow in several different ways. It can increase its management staff with dividing into departments. It can duplicate branch locations in other areas. It can franchise and sell branch locations to franchisees in different locations. In any case, a good rule of thumb to remember is that each six employees needs either a foreman or manager of some kind. If you want to break this rule, you can create awesome processes and systems that are very easy to follow to reduce management work load.
As we have discussed, it is common for a company to increase the number of managers as it grows. The natural question that most small business owners ask, “Won’t the increase in managers who are not actually doing valuable work for our clients increase the price of doing business for our clients?” The answer to this question is Yes & No.
Let’s say I have five workers who are doing direct work for clients and I charge roughly $100 per hour for this work. And I have a sales person, an administrative person and a manager who are not directly billed to clients. This means that my company is earning $500 per hour to pay eight people. If I then try to grow to ten direct-cost workers, and hire an additional two managers for this growth, I will earn $1,000 per hour to pay 12-staff. I will either need to give pay cuts to my workers; or charge my clients a higher price to pay for the added manager.
There are two reasons that this growth should not cause a price increase. First, you should not need an additional administrative person as you grow… and you may not need an additional sales person depending on how you drive this growth. Secondly, managers need to create better productivity from their teams than these team members would achieve on their own; or you really don’t need these managers at all. If done right, managers should improve business efficiency and actually allow you to reduce prices to clients. In any case, you need to plan for any changes to client prices when you consider added staff required to grow your company… up or down.
You Will Either Grow or Shrink
Just like the tree at the at the start of this post, companies will either shrink or grow. It is very rare that a company will find itself in a static place for any length of time. If a small business owner decides they don’t want to grow, they have surely consigned their company to a slow but sure death.
I help my clients navigate these difficult growth decisions. If you are interested in talking with me about how I can help, I’d be glad to help you with your plans. Please fill out the contact form below, if you want to talk.
Note from the Author
My name is Jeff Schuster. I am a certified Life and Business Coach serving small business owners, corporate executives and others who want to transition from “expert” to “entrepreneur”. I have been a small business owner for most of my 30-years in the workplace. I grew an energy efficiency and renewable energy engineering and construction company from nothing to over $10-million/year and sold it in 2013. I now help other business owners make amazing progress toward their own dreams of business ownership independence and success.