BY KEN LUCCI
Have you ever heard the axiom, “Growth for the sake of growth is the ideology of the cancer cell”? It was coined by an environmental activist and author named Edward Abbey, who argued that societies that kept growing out of control were not improving. He contended that all growth and expansion is not necessarily progress, and in many cases, too much growth, especially when it happens too quickly, can endanger the survival of the species. While he was referring to overdevelopment and hyper industrialization, and their impact on the environment, this saying is apropos to ponder when making major strategic decisions in your own business.
When operators engage us to financially review their organizations and we analyze the healthy and unhealthy financial metrics and KPIs, they inevitably ask us whether we think they should grow and/or expand. If the majority of their metrics and KPIs are healthy, especially net profitability, our answer is usually “yes.” However, our response will likely be a resounding “no” if financial aspects of the business are inherently unhealthy and there is a lack of consistent profitability.
Only rarely do owners ask us how they can maintain similar revenue but permanently improve profitability so they can generate more income and work fewer hours themselves. In many cases, based on the existing negative financial metrics and KPIs we have observed, the goal of improving profitability should be accomplished first before growth and expansion is considered. However, it seems many operators equate continuous growth and constant expansion with success, even if it means paying themselves less than they should.
Let’s start by clarifying that growth and expansion are not necessarily synonymous. In business, the terms “grow” and “expand” are often used interchangeably; however, they usually mean contemplating two different strategies.
GROWTH generally refers to increasing a company’s size in revenue and existing market share along with corresponding profitability. Growth can be achieved by increasing sales to existing clients or capturing new clients in the same market. Further, it can be achieved incrementally and organically (increasing sales with your existing infrastructure) or inorganically and quickly (through acquiring a direct competitor or other synergistic business).
As an example, a growth plan might be to add vehicles and drivers to capture more new customers that are similar to existing clients. This plan may also include strategies to find new uses for your existing vehicles by increasing revenue generation from existing assets, such as targeting weddings, private events, or tours when you have previously focused solely on providing service to corporate clients.
There is another kind of growth entirely, which is taking initiatives to improve the overall operational efficiency and profitability of your existing business without adding to top-line revenue. This strategy leads us to the concept of maintaining and improving what you have while putting off major expansion.
EXPANSION is like growth in that it results in adding revenue and clients, and hopefully improves the overall profitability of your existing business. However, it usually refers to major initiatives like increasing the company’s presence in new geographic markets, offering entirely new vehicle types, or novel strategies like adding service offerings or entering new vertical markets.
Expansion is a strategic decision usually aimed at tapping into opportunities and growing the business beyond its current scope. True expansion usually involves much more risk, more capital investment, and adding dedicated resources than would be involved in incremental growth over time.
An example of expansion in the realm of acquisitions would be purchasing a company in a new market, like when a buyer expands the acquired business as a separate brand or branch operation in an area outside their original area. Another example is when ground transportation operators who specialize in sedan and SUV service diversify into motorcoaches. This is considered an expansion because of the large financial commitment required and necessity of hiring drivers with enhanced skill sets (CDL) and generally higher pay rates.
To boil it down, growth is increasing a company’s size by adding to what you have in place now and perhaps doing more with the same resources, while expansion is a significant undertaking by extending the company’s reach and/or scope.
Unlike Edward Abbey, I believe that growth for the sake of growth is what drives capitalism—as long as the decision to grow or expand is supported by financial data that indicate the risk is worth the reward.FOMO as a Misguided Reason for Growth and Expansion Often, many operators want to grow or expand without establishing clear objectives or considering whether their business—or they, themselves—are ready. They do this without creating a plan or quantifying the financial and organizational impacts of their decision.
We see this all the time: an opportunity presents itself and operators jump without assessing impact on their existing company, both financially and operationally. The entrepreneurial spirit kicks in and suddenly they MUST have this piece of business, buy this vehicle, hire this salesperson, buy this company, etc. The competitive nature overwhelms them, so they feel they must seize this opportunity, no matter what, or their competitor could get it and they will miss out. All major growth and expansion should be planned, contemplated, and examined for financial and operational impact. The preparation and complexity of that process should be more in-depth and deliberative based on the degree of risks and potential rewards of the initiative. Before considering substantial growth or expansion, ask yourself these questions and assess the honest responses on your ultimate decision to proceed or not.
1. Is the existing business financially ready?
❱ Is my business consistently profitable now, and are my financial metrics healthy?
❱ Are we making the most gross and net profit based on our current assets and revenue trends?
❱ Will this decision put financial stress on the existing business?
❱ Will this decision deplete borrowing capability or capital reserves (liquidity)?
❱ What are all the initial costs of making the decision?
❱ Exactly when will we recapture our investment and generate a profit from this decision?
❱ Is this the best use of our credit, capital, resources, and existing assets?
❱ Is the ROI realistic or subject to a series of hypotheticals that must align?
❱ What is the worst-case financial outcome and the impact of total failure?
❱ If things go badly, how will this decision negatively impact my existing business?
❱ What, if any, unplanned expenses could arise from this decision?
2. Are we operationally ready for the impact of this decision?
❱ Will making this decision positively or negatively impact my management team?
❱ Does my existing team have the bandwidth to manage this effectively?
❱ Will other duties they have be negatively affected?
❱ Do we need to hire additional staff, resources, or skil sets to assure a positive outcome?
❱ Do we have the processes, procedures, and policies in place to manage this?
❱ Is there an easier way to achieve similar results without stressing my operational resources?
❱ Could this cause a disruption or financial or operational degradation to my existing business?
3. As the owner, am I ready for the results of this decision?
❱ Does this impact my existing duties and responsibilities short or long term?
❱ Do I have the additional bandwidth to manage this effectively?
❱ Do I have the skill sets to assure a positive outcome?
❱ Is this the best use of my time?
❱ What is the impact of making no decision?
4. Who do I know that has gone through this or made a similar decision?
❱ What operator who has been through this can I call for advice?
❱ What advisor with first-hand experience can I consult?
When you ask yourself tough questions like the ones above, and the honest answers skew negative or are unknown, it may be wise to consider improving your existing business both financially and operationally before making major decisions to grow or expand. This is especially the case if your business is not consistently profitable or you do not know whether your current critical financial metrics and KPIs are healthy and what the impact will be by making the decision to grow or expand. It may be prudent to put off major growth decisions until you have more concrete data that lead to positive responses and are sure your financial foundation is solid.
Unlike Edward Abbey, whom I quoted in the intro, I believe that growth for the sake of growth is what drives capitalism—as long as the decision to grow or expand is supported by financial data that indicate the risk is worth the reward and additional profitability is assured along with increased enterprise value.
At the risk of using one too many sayings in one article, “if the juice is not worth the squeeze,” you may be better off delaying the decision and reassessing your existing business. For more ideas on how to improve the financial and operational performance of your business to get ready for growth and expansion watch a free webinar at drivingtransactions.co called Seven Mistakes That Cause Transportation Company Failure. [CD0924]
Ken Lucci is the principal business analyst and founder of DrivingTransactions.com. He can be reached at klucci@drivingyourincome.com.