Picture your business as a three-leg stool with operations, marketing, and finance as the supporting legs.
Now, picture yourself sitting atop that stool. If the legs are the same length, the stool is balanced, and you can easily shift your position. However, when one leg is too short, the stool becomes unstable and hard to manage.
Here are some examples of business unbalance. A business expands facilities and production capacity with borrowed money, but fails to add marketing effort. Sales remain static. A shortage of cash occurs as higher facility overhead costs chew up working capital. The company begins to miss purchase discounts and margin diminish.
Another company with highly aggressive marketing outpaces operational capacity and available working capital. Hurried processing causes high rework and quality suffers. Good customers leave and are replaced by less desirable accounts at lower prices. Profits drop, down-sizing occurs, and related cost reductions only make the situation worse. At this point, no one wants to reduce sales to the prior level. Unplanned growth can be dangerous to a company’s long-term health.
Focused, practical planning is a key to maintaining the balance and profitability of your business. The desire to increase sales needs to incorporate the level of financial and operations resources available to support the planned growth.
Lines of credit and affordable loans to cover seasonal working capital needs should not be taken for granted. A highly leveraged company may find the banker stone deaf to a plea for new financing, even when the need for cash is to support profitable growth. This is particularly true if the business is out of balance and financial ratios are lopsided.
Does this mean that growth is an impossible dream? Certainly not! Naturally, growth is easier for companies with available capacity. These companies are better able to generate the added capital needed for greater sales through retained earnings. And high capacity utilization usually equals greater profitability.
Companies that are short of cash, capacity, or sales should first regain their balance and control of cash flow before attempting expansion. Good business planning helps managers maintain the critical balance between marketing, operations, finance, and administration.
Remember, fundamentally there are only three areas to attack to increase operating profits and lower break-even points. 1) Increase profitable sales, 2) Improve margins, and 3) Reduce fixed costs.
An almost infinite variety of combinations exist within these basic moves. However, accurate, up-to-date information, and careful planning really are essential for planned, profitable growth.
Each company has unique goals, challenges, and opportunities. There are no “pat answers” regarding strategies or tactics. My on-site business planning assignments with business owners emphasize the need to maintain balance and plan future actions. My assignments also highlight the value of an objective outside perspective to analyze the business situation and plan a company’s future.
Dick Morgan is President of Morgan Marketing Solutions, Inc. and serves on the national board of directors of the Institute of Management Consultants. www.rpmorgan.mcni.com.