growth

Just ask yourself a few questions

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Reminder: If you don’t know where you are going, sure as hell you are not going to get there.

 

Would you drive on a dark night with a blind on your windscreen and no headlights? Would you drive a 100/hr in pea soup fog where visibility was zero and you had no fog lights? Would you go into a forest without a map or compass? If the answer is “no” to these, then the next question is; why would you fly blind in your business without any guidance as to where you are going?

 

Now, there are plenty of businesses that have a plan for where they are going. It’s called a business plan. Many who start off with a business plan forget about it, and many start off without a business plan with the result that they are flying as blind as a motorist in a pea soup fog without fog lights.

 

Unless you are in a business that requires no capital expenditure or recurrent expenditure such as rent, telephone, wages etc and where you are paid in advance for whatever you are selling, you have to incur expenditure before you receive income.

 

Once you are in a situation of having to spend money before you receive income, you are at risk to the extent that the income might not equal or exceed your expenditure.

 

Simple!

 

Damned simple, and yet day-in and day-out, I come across cases where people seem to forget this simple proposition. Just today, Ikea announced that its expansion program had cost it heaps, and with a turnover of hundreds of millions of dollars, it made $1 million profit. That is really cutting it fine. Why was its profit so small? Because it was expanding or, in other words, it was on the growth path.

 

Growth costs money. If you open a new store, you have capital and recurrent expenditure before your first sale and you have to keep afloat until the income exceeds the revenue. That is where a lot of people get into trouble. The income takes too long to catch up with the expenditure. The business doesn’t have any real capital (cash contributed by way of shareholding) and more often than not is funded by banks. When you reach the limit at your bank and can’t borrow anymore, and you are still waiting for the income to catch up, you are caught in a nasty little legal situation called “trading in insolvency”.

 

The seriousness of such a situation can be avoided if people plan their financial expectations and then regularly and religiously check where they are in reality in comparison to where they expected to be according to their financial plan.

 

Often, if people had rigorously and conservatively prepared their business plan, they would avoid getting into difficulties. They might even decide that the venture is too risky.

 

To proceed without such a plan is simply like setting off in the fog, not knowing where you are going. Even if the plan is not all that flash, the next step is to regularly check to see where you are in relation to the plan. If the plan is flawed, you will find out before the proverbial hits the fan and you might be able to correct in mid-course.

 

The frequency with which I see people embarking upon growth as though growth in itself is an end, without any financial plan against which to judge where they are going, is disturbing – as are the occasions on which this adventurous approach to management results in catastrophe.

 

The old saying “if you don’t know where you are going, sure as hell you are not going to get there!” has such validity and yet is so frequently ignored.

 

If you are embarking upon a new venture or simply on a project to grow your business, make sure you aren’t flying blind and that you prepare your own financial map of where you want to go and where you want to be at a certain time.

 

Remember in doing so that in growing a business, income lags expenditure, and if you don’t have enough money in the tin to cover the gap where you are going to be in negative territory, you may end up in unpleasant legal and financial territory.

 

To read Louis Coutts’s newsletter, which goes out once a quarter, go to the Coutts and Connor web site and click on the tab for articles and newsletters. To read more Louis Coutts blogs, click here .

 

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