They say there’s no reward without risk – but you should still look before you leap. Here are five essentials for managing risk as you implement growth strategies for your business.
At PieLAB Council Capital, we specialise in helping SMEs grow sustainably and build great businesses for the long term. We’ve helped a variety of growing businesses navigate their journey – and while every business is different, we’ve found that these five things are essential for managing risk.
Identify the risks
Every decision you make in business comes with an element of risk, and that’s especially true when it comes to growth. Growing too quickly can be dangerous, but at the same time, avoiding growth opportunities altogether can be just as deadly.
There’s also a tendency for entrepreneurs to focus on growing irrespective of cost, and turning their businesses into cash-eating monsters. Rapid revenue growth while making big losses works for high gross margin scalable businesses, like subscription-based software. This is because the initial cost of developing the software is very high, but the marginal cost of providing the software to an additional customer is very low. Therefore it makes sense to grow rapidly, even if it involves losing money, because the moment you reach break even, most of every extra dollar of revenue becomes profit.
For more conventional businesses, this doesn’t work, and it is often much more sensible to focus on slower sustainable profitable growth.
That’s why growth is all about making risk-adjusted decisions. You have to allocate your resources to get the best possible return, while taking into account the various risks that those decisions expose you to.
You can only do that, of course, if you know what those risks are. These risks will be specific to your business and your growth strategy, but to begin with, think about the most obvious things that could go wrong as you grow, and test and measure growth strategies on a small scale before you allocate millions of dollars to them.
Once you’ve identified the risks, you can analyse their likelihood and potential consequences, start considering your options and putting plans in place for when they come to pass, and make informed decisions about whether or not these risks outweigh the rewards of going ahead with your growth strategy.
Know why you want to grow
It’s only natural that you want to grow your business. But do you understand why you want to grow, and what that looks like for your business?
When business owners talk about growth, there’s a tendency for them to talk about adding new customers to increase top-line revenue – but in reality, what most business owners want are more profits, which doesn’t necessarily mean more sales. The best way to grow your business, then, is to break out of the old ‘growth for growth’s sake’ paradigm, and shift your focus to profitable growth.
If you’re running a supermarket, for instance, and you halve the price of every product on your shelves, you’re probably going to sell a lot of products and take a truckload of business away from Coles and Woolworths – but you’re probably also going to go broke.
Similarly, if you’re spending a million dollars on advertising to attract new customers to your business, and those new customers only spend $750,000 with you, then you’ve increased your revenue at the expense of profitable growth.
There are three key metrics that tend to slide when a company focuses on growing fast, instead of growing sustainably.
- Customer satisfaction. As sales go up and your business gets busier, it’s easy for the quality of your products and services to head in the opposite direction. When that happens, you’ll start to lose your existing customers faster than you can gain new ones.
- Staff turnover. If you’re overworking your staff and setting unreasonable expectations for them, you’ll start to see an increase in your employee churn rate. Not only is that likely to mean your employees won’t be inspired to do their best work, but it means you’ll have to spend more on recruitment, hiring and training.
- Cashflow. If your growth is too rapid, you may find that your expenses begin to exceed your operating capital – and you don’t have sufficient cash to pay your bills on time. That’s a potentially fatal problem to have, no matter how much revenue you’ve got coming in.
Take your ego out of the equation. Sometimes the best way to grow profits is to actually reduce the number of customers you service. For example, if 10 per cent of your customers are causing 60 per cent of your customer service issues, you might in fact increase your profit by removing those customers.
Similarly, for every $1 of costs that you cut in your business, you add $1 to profit, but for every $1 of revenue you add, depending on your profit margin, maybe only 10 cents are being added to your profit. It therefore follows that adding $1 of revenue is far less effective than removing $1 in costs.
So many business owners want to be seen to be growing, without actually taking the right steps to move forward. But ultimately, no matter how eye-popping your revenue is or how many thousands of employees you have on the payroll, those markers are irrelevant if you’re not also growing your profits.
Rather than just aiming to be as large as possible, it’s important to grow your business deliberately, and focus on adding value for your customers, employees and suppliers, so you can increase your profit margin over time.
Know your market
Every time you expand into a new market or add a new product or service to your range, you run the risk that customers won’t be willing to pay for what you’re offering.
Market research is a must – not just when your business is in its infancy, but through every stage of your growth process. You can do this through:
- Primary research. Gather first-hand information about your market, through direct contact, surveys and focus groups.
- Secondary research. Look for market reports, government statistics, and other information and data about your customers, competitors and industry that’s already available.
How does your product or service fit into different segments of the market? Who is willing to buy it, how much are they willing to pay for it, and how often are they willing to do so?
Are you McDonald’s – a high-volume, low-margin business, appealing to families and a lower socioeconomic demographic – or are you Grill’d or Betty’s Burgers; a relatively low-volume, high-margin business appealing to the inner-city professional worker on their lunch break?
These are the things you have to know, before you start spending your money trying to sell your wares to a new market that might not be interested in them.
A great way to manage and mitigate risk is to surround yourself with people who have built and grown businesses before – people who have been through the same process you’re going through now, and can tell you what they did right and what they did wrong, so you don’t have to go in blind and make the same mistakes.
It can be a simple matter of having a conversation with someone who can tell you what they faced when they grew their company, and what the outcomes were. After all, there’s a reason that people who are successful in business can often replicate that success with other businesses – they’ve developed a formula for success, and they’ve learned how to apply it.
Find someone who can help you talk through the difficult decisions you have to make. “We’re thinking about doing A or B – here’s my rationale for doing A instead of B; what do you think?” You don’t need to agree with what they say, but you do need to listen, because that feedback from people who have been around the block a few times can make a massive difference.
That’s the rationale behind what we do at PieLAB Council Capital – our team of mentors, coaches, marketing experts, finance gurus and strategists don’t just invest their capital, we also invest our experience, providing advice, mentoring and support to help people grow their businesses over the long term and develop into great leaders.
Be prepared to reevaluate
One of the reasons why you need to grow with a purpose is so you can evaluate whether or not your strategy is working. Set measurable goals for your growth strategy and determine the return you expect on a month-by-month, or quarter-by-quarter, basis – and if you’re not getting those returns, stop and reflect on why that is.
Too often, businesses will allocate a certain amount of money towards a new initiative, but don’t reflect on its results until all the money has been spent. Ideally, they could have spent a quarter of that money before they realised their strategy wasn’t working, and then pivoted and gone in a different direction.
The key is to analyse why your growth strategy is or isn’t performing to your expectations and determine what you might need to do differently, because there are usually some important lessons you can take from that analysis.
If you take these five keys into account, there’s no guarantee your business won’t be faced with unforeseen risks along the way – but you’ll know you’re as prepared as you can be to face these growing pains as they come, and more importantly, you’ll know what it is that you’re working towards.
Chris Rolls is a serial entrepreneur, investor and self-professed business geek. Chris has built and exited four businesses in four different industries, and three of these businesses (Rental Express, First Class Accounts and Scody Performance Wear) have become some of the largest of their type in Australia. Chris is the Founder and Managing Partner of PieLAB Council Capital, which assists owners of profitable, recurring revenue businesses to grow over the long term with assistance from a panel of experienced CEOs.