SATURDAY, APRIL 27, 2024
Sunil Dias
All businesses want growth. They aspire to become bigger, better and more renowned. Even if your mission is to make a difference to society, growth is a critical enabler. The larger you grow, the more your resources and connections. Your mission might be to provide gainful employment to many people. The larger you grow, the more employment you can provide. Sure, there are other ways to meet your mission. But the single largest determinant of the difference you can make, is the size of your business.
While every business wants to grow, it’s often difficult to quantify that growth. What is a good growth percentage? What revenue should I be targeting? There’s no one answer. There’s no specific key result area which you can use across business. Yet there are some high-level indicators you could use to check the goodness of your growth. This article looks at 5 indicators that your business is growing well.
Indicator 1: Greater than competition
Growth should be above that of your industry, or at least at par. Growth of an industry or sector is difficult to estimate. In such cases, use proxies. For instance, growth in the number of employees retained by your direct competition. Or their offtake from common suppliers can also be a good comparator. The numbers you get from proxies may be quite different from yours. That can be either due to the proxy not being representative of your industry. Or that you’re much behind (or ahead!) of competition. Or that the data you’ve gathered is not accurate. Try to be sure of which one it is, before using it as a basis of assessing your growth.
Good growth is better than GDP growth. For instance, some companies use the rule of 3. These companies feel that their growth should be at least 3 times the GDP growth. Anything more and you have beaten market expectations. Anything less and you have underperformed the market. You can slice and dice the GDP numbers to see which are the most comparable to your industry.
Indicator 2: A Happy ecosystem
Growth should keep you and everyone else happy - or at least not sad. Why? If everyone’s happy, it indicates a sustainable eco-system. If suppliers are not happy with payment timelines, chances are they’ll drag their feet on the next order. If a customer feels cheated, they’ll move to other available alternatives. If employees have increased work pressure with increased growth, their performance will dip. Ditto if their growth in the organisation is out of sync with business growth. Long story short, it pays to keep everyone happy with your growth for it to be sustainable.
One warning - differentiate between inertia and happiness. Everyone being happy shouldn’t be at the cost of future growth. Many companies showed excellent growth, with all stakeholders happy. The ground then opened beneath their feet. They were too content with the current situation. Nokia is a great example. They moved from a fast-growing company with happy employees to next to nothing in a short period.
Indicator 3: Consistent Growth
Consistency is important. There shouldn’t be troughs or peaks within and across years, other than explained seasonality. Inconsistency is bad. You swing between under-staffing (hunting for employees) to over-staffing (underutilised employees). You swing between periods where suppliers want to dump stock on you. And periods where you want stock but suppliers can’t / won’t provide you. Rollercoasters are fun, but not for your business.
Inconsistency can also impact the king of your business- CASH. Cashflow management is difficult when they keep swinging from positive to negative. Working capital requirements increase and impact your profitability.
Consistent growth is also important if you are looking for external investment. Consistent growth is an important metric for investors. If revenues and profits are up, quarter on quarter and year on year you’re doing things right.
Indicator 4: Profitable Growth
Profitability should not take a beating at the altar of growth. Selling at the cost of margins is an easy game to get into, but very difficult to get out of. Selling at an unprofitable price forces you to cut back on important product or service attributes. For instance, if you’re not making a profit on your sale might force you to cut back on customer service. Unless you were pricing at a premium and are reducing the premium due to the product/service life cycle, don’t use price as a lever to spur growth.
Some of the ecommerce businesses are examples of how not to do it. Growing at the speed of light and losing money at a similar rate! The combined losses of just 5 of the largest Indian Internet businesses was more than a billion dollars in FY 2019. And there's no concrete plan to stop the bleeding.
You could argue that valuations of some of these loss-making companies are phenomenal. But those are the exceptions rather than the norm. Private equity bought into Flipkart assuming future sale to a larger player. And they found one in Walmart. So, unless you are looking at playing the valuations game (or have very deep pockets!), a golden rule is to never lose money on a sale.
Indicator 5: Knowing why you grew
It’s easy to celebrate good growth. And why not? Great results need great celebrations. Yet, it’s critical to understand and analyse reasons for growth. If we don’t know why we grew, the growth is not sustainable. We need to understand why customers bought from us, why they paid us what they did for our goods or services and why they didn’t buy from competition.
It is also crucial to analyse flat or negative growth. This normally happens at a superficial level and often results in a blame-game. Coronavirus, sales personnel not selling, GST implementation etc. Yet, try to go beyond the surface while analysing poor growth. For instance, competition from new entrants, wrong pricing, better product attributes from competition. All valid reasons for low/negative growth. Separate controllable and uncontrollable factors. And plan and put in place interventions for the controllable factors.
Regular reviews can help you understand your growth better. Compare growth figures to the same period the previous year. Don’t review your business only at the end of the year. You’ll be late in spotting issues. Spotting either low growth or flat growth in advance can give you the opportunity to change course.
Summary
Some businesses take a conscious decision to grow slowly. Slow growth allows for a personalised experience for customers and (possibly) better quality of life for the promoters. If you are happy growing slowly, that’s the way it should be. Nothing beats a happy and contented existence! Yet, be wary that it’s not a symptom of inertia or conservatism. Some big names have gone under by not moving fast enough and responding to market needs. Not planning and executing every day is the biggest risk.
