The factors that enable a business to grow

Almost all businesses begin as start-ups with only a handful of customers. While there are many lifestyle businesses out there, happy to tread water and provide the owner with a desired quality of life, the majority will measure success by their growth: both financial and operational.

In this article, we consider some of the factors that enable businesses to grow, and also to scale successfully as the two are not always synonymous.

There are many strategies for companies to increase their top line and profitability, and even a cursory review of successful businesses will demonstrate that there is no one model that works for everyone. There are generally several possible growth strategies that can straightforwardly apply to a given business – but the same cannot necessarily be said for scaling strategies.

Growth versus scale

Broadly, growth is where revenue and costs increase in step with each other: selling more products or hiring more consultants to provide hourly services. Profit does grow with turnover under this model, but it can take a long time to do so. Scaling a business requires a change in model: pushing a rapid increase in turnover with one hand while controlling costs with the other, for instance by selling a pre-existing software solution to more customers with low marginal cost. In this scenario, as both revenue and margin are increasing, the growth in profit is significantly accelerated.

Which strategy is the best fit depends on your end goal for the business. For lifestyle businesses, a steady increase in profitability through the growth strategy allows a good balance between quality of life and a sustainable business. However, where the aim is ultimately to exit the business, demonstrating a scalable business model is a key way to attract potential buyers, particularly in private equity.

The traditional view is that certain sectors are more amenable to a scalable business model. Investors looks for predictable, recurring revenues, a subscription-based model and high customer retention rates. Growth is driven by expenditure that is focussed on sales and marketing, not labour intensive, and not highly dependent on investment in plant and machinery.

It remains true that certain sectors are not an easy fit for scaling strategies – manufacturing jumps out as an obvious example. However, technology continues to disrupt traditional sectors, opening up opportunities to capitalise on artificial intelligence, big data and increased consumer willingness to engage with subscription models. Twenty years ago, how many of us would have said the sale of DVDs would be ripe for scaling? But now the explosion of video-on-demand services shows how technology and innovation can influence evolving strategies.

Growth strategies

Growth strategies are many and varied, and so you should seek to adopt one suited to your business.

At a local level, reputation and word of mouth are powerful ways of attracting loyal customers, while companies with a wider geographic reach are likely to need to devote more resources to sales and marketing. However, it is important not to cast the net too wide, as targeted marketing activities are likely to be more productive in building a strong customer base. Expanding into new geographic regions is a well-trodden path for growth; the increase in remote working and e-commerce potentially makes that more straightforward than historically. Businesses can also look to grow through expanding existing product or service lines or vertical integration up or down the supply chain.

Organic growth can provide a steady increase in profit, and is typically lower risk than alternatives, but step changes in growth can be achieved through acquisition. Caution should be urged here; carefully targeted acquisitions can create real value for a business, but poorly thought through purchases can be highly disruptive to both businesses. It is always important to undertake an appropriate level of due diligence, and to have a reason for a purchase which goes beyond growing revenue. For example, are you looking to expand your geographic reach, or add a new service line to your offering that customers will value?

Regardless of the strategy, a business needs to be clear on its desired destination before trying to define how it will get there. Clear communication is key; all employees and management need to be aware of the business’ values, objectives and strategy so that they can buy in and work towards those goals.

Building the foundations for growth

With any growth, and particularly when scaling, existing weaknesses in the business will magnify as it expands. For example, gaps in the official sales process – filled in by employee goodwill when a company is small – can cause your reputation for customer service to drop rapidly as you grow. Similar weaknesses can crop up in many areas: debt collection, approval processes for purchases or stock management are common ones that become more apparent as a business grows.

It is always easier to get the fundamentals in place before you start to grow, allowing you to focus on expansion rather than continually firefighting.

A key part of this is appointing appropriate management, who can take responsibility for business as usual while you oversee the expansion. Bringing them on board at an early stage builds loyalty with your organisation and allows them to understand your processes before they become too big to readily visualise. Clearly, appropriate incentive schemes are necessary to attract this sort of long term buy-in to the business.

External support from professional advisors can boost your internal management team, particularly in areas where you do not have personal experience, and do not need to employ someone with that skillset on a day-to-day basis. Having trusted advisers you can turn to, when appropriate, can help to identify the optimal solution for a given issue and, again, free up your time to focus on the big picture.

Systems and controls need to be robust before expansion begins, ideally automated with minimal reliance on key individuals to ‘future-proof’ the business against a rapid increase in the volume of transactions. Investment in IT infrastructure and software is likely to be required, both on the operational and financial side, but also investment in the back-office teams that keep the business running smoothly – finance, IT and HR are all part of the systems. Both people and the software need to be able to communicate easily, and there are a wide range of off the shelf products that will help you to do that, even if the teams are all working remotely.

Funding

The above does require investment in terms of both time and money. While some businesses may be able to extract sufficient cash from their working capital to fund growth, many will need to seek external funding.

Appropriate use of an overdraft or invoice discounting may enable a business to fund working capital, which is particularly useful when adopting organic growth. But a more long-term solution is often appropriate to achieve a step change in growth. Banks, alternative finance providers and private equity all have their place, and which is the most appropriate for a given business will depend on the requirements of the business and, crucially, the support required by the business founder to achieve their goals.

If you have any questions on the points raised in this article, please get in touch.