If a company doesn’t grow every year, it’s only a matter of time before it declines or closes. But how much should a business grow each year? That’s the question we’ll try to answer today.
When we explained the differences between the American and Spanish business mindsets, we said that a Spanish entrepreneur was likely to open a first business, succeed with it and then stay put until either sinking it or becoming a permanent slave to it.
Explaining some of these points in a single article can be tricky, but we’ll give it a try.
How do you work out how much a business should grow each year?
Analyze a business as you would a stock
If we plot sales and profits on a chart every month, we should get an upward trend. As with stocks, there may be slight corrections, but over the long term the trend must be upward. And just as with stocks, there may come a point where our business runs into strong or permanent resistance, which means that no matter what we do, it can’t grow any further.
That happens with certain businesses, such as a restaurant, a massage parlor or an internet café: if we calculate the maximum earnings with a full house 24 hours a day, we have already reached the ceiling, at least at that location, so it would be time to consider opening another one. But let’s take things one step at a time.
Although there are no exact percentages, it is often said that in its early days a business should grow by at least 20% a month for the first 8 months to be profitable. After that, it should grow 20% a quarter for the next 2 years and 20% a year for the following 5 years. Clearly, this equation can vary depending on the type of business.
To avoid problems, sales must never fall
Temporarily, because of new investments or new hires, we may find our debt going up and our profits going down, but sales must keep rising. This is a perfectly normal divergence in business, but it’s one that can’t go on for long, because if debt grows and stays high, our profits could be doomed no matter how much we increase our sales.
(Read: 5 ways to grow your business)
To sum up this point: our expenses may rise temporarily and our profit fall, we may even post losses for 6 months in a row, and in principle that wouldn’t be worrying as long as our sales have increased.
Sales are our raw material
With raw material, we can get decisions right or wrong, but something can always be done to improve the situation, such as cutting fixed costs or keeping a closer eye on variable costs. If there are no sales, though, there’s nothing we can do except consider closing.
When to make decisions
If, on that sales chart we drew, there comes a point where for 2 years we fail to grow or increase our profits, then, depending on the type of company we have, we should ask ourselves whether we can diversify or enter new markets.
When a business reaches its ceiling, that’s the moment for the owner to run the numbers and find out whether its profits allow them to hire someone to run it for them while they consider opening new branches or stores. In fact, a well-set-up business should work without needing your own labor.
(Read: Donald Trump: the mindset of an entrepreneur)
If the business doesn’t make enough profit to hire someone else to manage it, it’s probably time to consider selling the company now that it is at least profitable. What you would have created in that situation isn’t a company but a job, and if you stay in it, it’s only a matter of time before you get tired, burn out or some competitor appears and gradually eats into your profits.
Once you have a profitable business, it’s easy to get financing to open another branch, and that is the recommended path to growth.
Whatever the size of your business, it should work exactly the same way as large companies such as Zara or McDonald’s, whose founders are neither serving burgers in thousands of restaurants nor handling clothing returns.
If Zara had fallen into the hands of someone with a poor entrepreneurial mindset, today it would be a small or large Galician clothing store struggling with the crisis, where a certain Amancio Ortega, owner of that little shop, would open up in the morning and lock up at night.
Further reading
- Common mistakes Spanish business owners make
- The Chinese entrepreneur’s 10 commandments
- The 10 commandments for guaranteed business failure
- 10 reasons small businesses fail early on
Featured image: Unknown author, Public domain, via Wikimedia Commons.
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