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- The 5 Main Reasons You're Not Growing
The 5 Main Reasons You're Not Growing
+ How to Get Un-Stuck
I’ve worked with over 75 owners, and most don’t realize they’re hurting their business’s growth.
Fortunately, though, they all make the same mistakes when this happens.
Here are the 5 main reasons SMBs get stuck.
Unstable Gross Margins
Poor Bookkeeping
Lax Payment Terms
Keeping Your Books Closed to the Team
Inadequate Financial Planning
This week, I’ll be diving into each of these and discussing what to do instead.
Let’s get into it.
#1. Unstable Gross Margins
If your gross margins are unstable, pause. This is because unstable gross margins can often point to a flaw in your business model.
Here’s what to do.
First, calculate your gross margins.
If you don’t know the formula off the top of your head, don’t worry. Here it is.
Gross Margin = (Revenue - Cost of Goods Sold (COGS)) / Revenue * 100%
Then, identify any patterns and deviations from those patterns over the past year.
Once you’ve done that, review the overall trend for the past 6-12 months.
If there’s natural seasonality at play, either trim what fat you can during off periods or recalibrate your product offering to bring in more cash during slow stretches.
Whether your business is seasonal or not, there are a few steps you can also take to smooth out your margins. These include revisiting your product offerings, renegotiating with suppliers, upselling your existing accounts, and optimizing internal efficiency.
Taking the time to strengthen your margins will give you much more protection against unforeseen circumstances that could harm your business.
#2. Poor Bookkeeping
If you don’t know your numbers, you don’t know your business.
I know I sound like a broken record here, but knowing your numbers inside and out really is that important. There’s no way around it.
Hiring a bookkeeper to get your house in order is a great first step but leaving it at that isn’t going to cut it.
Once you’ve cleaned up your reporting, it’s time to study it until you can clearly articulate your costs, estimate your tax obligations, define then time your inflows and outflows, and identify unnecessary expenditures. More on that here.
I understand the urge to close the books and move on, I do. But giving into that temptation cuts you off from a wealth of knowledge about your business. It also keeps you stuck wasting time and resources on the wrong things.
Specifically, you’ll miss out on the opportunity to price strategically, optimize cash flow, and lean out your operations. You’ll also stop yourself from ever being able to sell or raise capital.
#3. Lax Payment Terms
Most of my clients have set payment terms on what and when they owe.
Yet they’re flexible on when they receive their payments.
Ideally, this would be reversed.
Why?
Because lax payment terms can get out of hand rather quickly. This direct hit to your cash flow can then land you in pretty dangerous territory.
Here’s how to tip the scales back in your favor here.
First and foremost, make sure your invoices go out quickly and in the proper amounts. Best practice is to send them out immediately after you’ve delivered the product or completed the service. Make sure as well that the invoice itself leaves no room for confusion regarding payment terms, due dates, acceptable payment methods, and amounts owed.
Then, follow up on your late payments regularly, escalating your collection efforts as appropriate. This can be as simple as sending out automated reminders or calling customers directly in more severe cases before working with a collection agency.
To avoid late payments in the future, you can also offer early payment discounts and implement a credit policy.
Typical early payment discounts fall in the 1-2% range, but there’s no hard and fast rule here. Just make sure that you can afford whatever discount you offer and that it’s effective at pulling cash forward.
The point of having a credit policy in place is to tailor your credit terms to a customer’s creditworthiness. Doing so will keep you from having to chase late payments indefinitely or write off more bad debt going forward. Your approach doesn’t have to be super elaborate to be effective here. Simply extending credit checks or requiring deposits for new or large accounts will lower your risk significantly.
#4. Keeping Your Books Closed to the Team
This is a big mistake that most privately owned businesses make.
The problem with this is simple. As an owner, it’s up to you to give your team the context they need to make the right decisions for the business.
Here’s what happens when you fail to do that, as told by Brent Beshore:
“If you are at 20% net margin and your salesman provides a 5% discount, that salesman just gave up 25% of your net margin before even delivering on the work.”
And that wasn’t the sales guy’s fault.
He was missing the context he needed to act in the best interests of the firm.
Still not convinced? The benefits of greater transparency go far beyond better day-to-day decision-making at the employee level.
With greater context to the business, as well as the front-line knowledge they possess, your team can be an incredibly rich source of ideas on how to improve margins, supercharge growth, and streamline operations.
Opening the books to your team also gives them a greater sense of ownership over their roles, promotes a greater sense of overall trust, and lowers turnover.
If you want to start sharing more with your team but aren’t sure how to do so in a way that keeps you protected as an owner, I’ve got you covered. This post covers just that.
#5. Inadequate Financial Planning
Without proper planning, growth becomes coincidental.
Here’s what to do instead so that you can direct your firm’s growth.
Get specific about your 5-year goals.
List the resources you have available to reach them.
Focus on how you’ll use those resources to get the business where you want it to go.
Before you do anything else, get specific about the outcomes you’d like to see in five years. This includes setting financial targets down to the dollar, defining your offerings and distribution channels, and determining how you’ll track progress toward those goals.
Once you’ve done that, it’s time to work backward. Ask yourself, “How will I achieve these goals with the resources that I have at my disposal right now?”
This exercise may reveal some considerable gaps—whether they be in the form of hard assets or internal expertise. That’s okay at this stage. Most of the time though, owners are surprised to find out what they can accomplish with what they’ve got on hand. All that’s missing is some strategic redeployment.
Once you’ve made any called-for changes to how you will use your resources, it’s time to monitor your progress with monthly financial reviews. This post will walk you through the how, what, and why of these meetings if you’re not sure where to start.
While taking the time to plan at this level may seem unnecessary for a small business, it never fails to pay dividends.
Here’s why.
Proper planning leads to better resource allocation, leaner operations, and maximum growth with minimal trial and error involved.
That said, your work isn’t done here until you also have a detailed forecast for the business overall.
Beyond planning for what you want to happen in the business, taking the time to forecast—and reviewing it regularly—also ensures that you have adequate resources to fuel both your growth initiatives and to keep cash coming in the door with business as usual.
A dedicated forecast also better prepares you for pullbacks, downturns, or other unexpected events by forcing you to reflect on past performance, the market overall, and what you can do to build in the right amount of buffer for your business. This bigger-picture view will in turn give you the flexibility to double down on or pause those big growth initiatives as appropriate.
Putting It All Together
Here are your top takeaways from this week’s post.
From working with over 75 SMB owners, I’ve found that businesses tend to get stuck not growing for 1 or a combination of these 5 reasons: unstable gross margins, poor bookkeeping, lax payment terms, keeping books closed to the team, and inadequate financial planning.
If your gross margins are unstable, the best thing you can do is to pause and gather data. The reason for this is that unstable gross margins often point to a flaw in the business model. Review your gross margin trend for the past 6-12 months, note any patterns you see, and identify any deviations from the overall pattern.
If your business is seasonal, you can either trim the fat during slow seasons, offset slower periods by introducing counter-cyclical offerings, or do a combination of these. If your business is not seasonal, try optimizing your product offerings, renegotiating with suppliers, and taking whatever measures you can to increase internal efficiency. This can mean right-sizing your headcount, eliminating waste in your manufacturing process, or reviewing your SG&A.
Poor bookkeeping keeps you stuck by causing you to waste time and resources on the wrong things over and over again. Avoid this by knowing your numbers inside and out. With that knowledge, you’ll be able to lean out operations, price strategically, and stay ahead of your financial obligations.
Lax payment terms are dangerous because they directly compromise your cash flow. To bring them back in line, do the following: Send out accurate and clear invoices immediately after work has been completed, follow up on outstanding accounts and escalate your collection efforts as needed, consider early payment discounts, and institute a credit policy.
The more financial information you give your team—within reason, of course—the better day-to-day decisions they’ll make on the job. They’ll also take more ownership over their roles and be less likely to leave. The extra context combined with their role-specific expertise will also give them lots of great ideas on how to improve the business.
Without adequate financial planning, growth happens by trial and error. Getting clear about your 5-year goals, working backward, and making sure that you’ve checked those plans against a robust overall forecast will keep you and your team from needlessly spinning your wheels.
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‘Til Next Time,
Connor