Growing the volume of your business is natural, it’s expected and it’s rewarded. The problem is, it takes planning, cash and expertise to keep revenue growth from killing an otherwise successful electrical contracting business. In fact, growing sales revenue too fast is one of the primary reasons businesses fail.
Several factors pressure you to grow sales. First is the “bigger is better” view of lenders and industry publications that laud “fastest-growing” companies but don’t acknowledge the “stable-sales-but-increased-profit” strategy, which is saner and safer. Have you ever read an article touting the “100 most-profitable companies that found their ideal revenue levels?” You never will, because the belief that growth equals success is deeply ingrained in even the most cautious entrepreneur.
Second, growth means promotional opportunities to reward loyal employees. If the company doesn’t grow, there won’t be room at the upper levels for valued employees to advance through the ranks. Remember that today’s workforce defines success differently, and individuals may be more motivated by the ability to redesign their own jobs and influence the direction of the company than by traditional systems of reward and promotion.
Allowing excellent employees to stay in jobs they do well may be more efficient than promoting them beyond comfort or competence levels.
Third, your company wants every project, right? Wrong. Will that new customer or project provide a good return on the investment of your resources, or be the one that causes your financial ruin? The old adage is true—you are only one or two projects away from disaster at any time in your corporate life. Bigger is not always better; nearly one quarter of the Fortune 1000 companies will not exist in five years.
Sales growth is not directly related to overhead levels. Overhead will, at some point, grow out of proportion to sales, and investments in overhead come in large chunks—a bigger building, new computer system or additional project manager. Once overhead grows, it’s hard to reduce, and revenue levels are not guaranteed.
Analyze your projects and client relationships. If they are predictable and profitable, why risk the business on new customers and expensive learning curves to gain market share? Check your greed at the door and be deliberate about diluting your resources on new business. You are always one or two bad projects away from financial ruin.
With the workforce deteriorating, disintegrating, or at least becoming more demanding, the real limiting factor is people. Getting new business doesn’t mean you’ll have the people to complete it within your quality standards.
Growth takes cash. More projects are underfunded, and more customers than ever before are investing your rightfully earned payments for their own benefit; that means your initial cash investment on each new project is larger. Do you have the cash reserves to be the “banker” on a new business? Any formula relating growth to cash flow will give you a formal and reliable assessment of your financial risk. Generally, larger profits and more reasonable overhead, as well as efficient production (proportional direct costs), produce better cash flow over time. Most companies, however, cannot finance rapid growth from internal cash production. If you don’t like taking on debt, you won’t be able to grow revenue very quickly. One rule of thumb states that, if you want to grow sales between 15 and 20 percent, and can borrow money at 10 to 12 percent, then you should take the deal and borrow the money.
So what’s the secret to growth? Analyze each new business opportunity before you expend resources to bid the work. Target the most profitable customers, rather than those with the largest projects. Build long-term relationships and expect to be treated fairly. If you’re the banker for your customers, then accept increased levels of debt for your own company. Raise your target profit and find the volume at which you achieve that profit level. Make deliberate choices, minimize risk and uncertainty, and take the time to plan. Manage growth carefully and you won’t become a growth casualty. You might even enjoy a bonus when you get off the growth treadmill—time to savor your success.
NORBERG is a management consultant, a former subcontractor and past president of two national construction associations. She can be e-mailed at email@example.com.