On Accounts – Going for growth

Philippa O’Mara explains the principles behind business growth, and which levers are most effective.

There’s a great deal of talk at the moment about the economy growing and businesses with it.  Understanding the principles behind business growth is important, whether you are trying to grow, planning how to grow faster, or even trying to keep control of growth. Good growth is always the best growth, after all.

Let’s define growth as ‘increasing profit’. If you’re looking to grow profit then there’re only two options: increase revenue or decrease costs. Growth is only good if the business maintains its gross profit, otherwise sales may be growing while the business runs out of cash.

Let’s deal with decreasing costs first. There are certainly gains to be made in reducing the direct costs of production or delivery and I’ll talk about these later. When it comes to operating expenses, though, focusing solely on decreasing costs to grow your business is a bit of a dead-end street. Unless you use the money you’ve saved to promote your business (and thus increase revenue) your sales stay the same and there’s a limit to how much you can improve your profit.

There’re heaps more options to work with if you turn your attention to growing revenue instead. It is important to understand what we call the Sales Growth Equation:

Number of customers x Number of times they buy x Transaction value = Sales revenue

So logically, if you increase any one of the variables your sales revenue will increase. Bingo! But these variables are still the result of activity. We have to drill deeper to find the leverage points for each variable as follows:

#1 Number of customers – work on increasing retention, generating leads, improving conversion rates.
#2 Transaction frequency – work on getting the customer to buy more often.
#3 Transaction value – work on increasing volume purchased and price paid.

Each of these leverage points will have numerous strategies and tactics that could be employed depending on your business. They may range from advertising, social media, sales offers, asking for referrals or better selling techniques.

The only other way to increase profit is to work on the processes required to make and sell a product or deliver a service, thereby making production or service delivery at its best cost. This isn’t necessarily about cutting costs but more about developing processes that are followed every time a product is made and sold, or a service delivered.

In other words, improving productivity or efficiency. It’s a topic all of its own!

It’s also important to keep gross profit in mind. It’s one thing to get more customers but if you end up having to reduce the price for a product or service to get them then you’re just working harder for the same money. Better to choose strategies that maintain gross profit while keeping growth under control.

Multi-pronged approach

Business owners often approach growth by improving only one area at a time. If you addressed all areas at once, even in a gradual marketing push, your business would benefit from a far greater, multiplied effect that would improve your business and get the very best out of your customers.

Certain areas will be more effective for growth in different industries. For example, if you’re a house builder, there is limited short term opportunity to increase the transaction frequency of a customer; but working on improving the process for building, such as reducing wastage, will have greater effect on gross profit.

There will be numerous strategies you can apply for your specific industry, business structure and model, but remember there’re only four ways to grow your business:

• Increase the number of customers (of the type you want).
• Increase the transaction frequency (how often they buy).
• Increase the average value of each transaction (would you like fries with that?).
• Increase the effectiveness of each business process by systematising each one.

Successful business owners understand both the theory behind how to grow their businesses and which levers are most effective. Maybe it’s time to take a deep dive into your growth levers.

Philippa O’Mara is director of Engine Room Chartered Accountants. www.engineroomca.co.nz