Guide: How we measure growth

Achieving most businesses goals, whether financial or not, generally requires a much greater level of sales than you have today (which should translate into increased profits and exit value later). “Growth” effectively means sales growth, especially on this program which focuses on ramping up sales and not the internal operational levers which control profit margins. That said, throughout the program we will be asking you to be clear on your profit goals as well since, for most business owners, there is no point in pursuing growth without profit.

Sales is Vanity. Profit is Sanity.


GROWTH AND SALES

As just covered, when we speak about growth, we are referring to sales first and foremost. The sales diagram below illustrates the vast difference between slightly growing (e.g. +10% or x1.1 per year), doubling in size (e.g. +100% or x2 per year), or exponentially increasing in size (e.g. +1,000%, or x11 per year).

Most owners would love their businesses to grow at 100%, let alone 1,000%, per year, but as we know it takes a lot of great intellect, timing, and hard work to pull that off. As we also know cash is king, and under any rapid growth, cash flow is put under immense strain which we explain next.


GROWTH AND CASH FLOW

A lack of cash will stop you growing, especially if you are attempting to pursue Quantum or venture growth rates as shown by the 100% and 1,000% sales growth rates in the previous diagram.

Unlike the previous diagram though, the cash flow of a rapid growth business goes in the opposite direction of sales. As a general rule, the faster you grow, the more cash flow negative you will become.

The five key cash flow factors

The examples earlier are hypothetical but the cash flow principles remain the same regardless of the numbers used. In summary, it is much easier to grow a business rapidly when the following five factors are favourable.

By now you will be gaining a much greater appreciation of the importance of both profitability (factors 1 and 2 above) and cash flow (3,4, and 5 above), on growth. These are some of the key metrics we will also get you to do in the homework that follows.


GROWTH AND PROFITABILITY

You may have seen a graph similar to the one below which explains a common step-change in costs as your business continues to grow.

The more profitable your business, the easier it becomes to self-fund your own growth. Unfortunately, it is common to start making profits and then experience a big leap
in costs again which puts you back in the red. The key here is having a clear understanding of your financial projections and being comfortable with the profitability journey you are on.

As a business owner, you should always know your average monthly sales, gross profit, and expenses to ensure you can meet your payments and achieve the profitability you desire.


ROI (RETURN ON INVESTMENT)

As explained in the Overview booklet, as the owner you must demand and expect an ROI from your business equal to, or greater than, what you could get elsewhere. To use an example from a tough industry, traditionally the average ROI in tourism has been only a little more than 2% in some years. This means that, on average, business owners in that industry would have been financially better off putting their money in a bank and earning 4% interest instead (and with it doing a whole lot less work for that 4% too, and with a lot less stress!).

You’ll see some useful ROI and other balance sheet ratios come through in the homework report.


CREATING A NUMBERS CULTURE

This importance of achieving great numbers is why we’ve placed such big emphasis in the first lot of homework on the financial ratios and measurements of your business. If these are strong, you’ll be in a stronger position to pursue rapid growth opportunities.

If these are weak, you may need your Journey Manager’s help to address them first so that you have a strong growth foundation in place.

As mentioned in the Program Overview you just read, knowing your numbers is crucial to obtain an objective view and take “action with confidence” in your day to day business decisions. Every business, even not-for-profits, must have a numbers and cost culture to be successful.

There are five key principals to achieving a numbers focused culture:

1. Accuracy

Good accounting processes, especially cost accounting and monthly management reports, are essential because:

A If you can’t measure it, you can’t manage it.
B If the data can’t be trusted, staff will stop using it.

2. Simplicity

In an age of “big data”, if you try to measure everything, you’ll end up overwhelmed. It is essential to highlight the big 3-5 metrics for the business, and let each team measure the more specific KPI’s that feed into this. The big 3-5 almost always include: sales, gross profit, net profit, and a cash flow measure of some sort e.g. debtor days.

3. Real-time

Other terms: automation, speed

If someone is having to spend days or weeks manually manipulating data reports using Excel then you need to find a better way. Real-time data is always best and is easily achievable in all leading software platforms nowadays.

4. Powerful visuals

There are many ways to achieve this, and all should
be used e.g. numbers discussed in team meeting announcements, business and individual KPI’s on the wall, dashboards as you log into software, e-mails from the leader. Remember too; a picture paints a thousand words, so get creative.

5. Led from the top

People follow the leader, so if the leadership team is not big on numbers then chances are the staff won’t be either. Words and gut feelings are important, but to achieve your financial goals the leadership team must become numbers-focused and instil this throughout your team.

As a business owner or senior team member, the financials are your vital statistics on the health of the business, or your specific area. Often, and especially in tough times, it becomes easier to turn a blind eye and just keep working harder in the false hope/expectation that you will turn them around. As hard as it is at these times, it is essential to have the honesty, humility, and courage to confront the facts so that you can be an effective and astute commercial leader. Otherwise, all you will do is continue to throw good money after bad.

Bitnami