Last week I was having a discussion with the Owner’s son of a family owned business. The son recently joined the business after receiving his MBA. The business runs quite well on a day to day basis, so at this point the son is charged with strategic planning and growing the business for the future. He proudly tells me that the business has made a decent profit and generated some excess cash the last few years, in spite of the economic climate.
So he asks me, “Tim, what is the most prudent use of cash to expand our business?” Well, I’m just a CFO and not a fortune teller, so there is no way to predict with certainty what the most prudent use of cash will be in the future. So not knowing the future, I go into a discussion on Variable vs. Fixed Costs. The first stage of any business expansion should always focus on increasing Variable Costs. Fixed Costs should only be added to the business after the new business strategies have been proven and the Company has achieved the next level.
Examples of expanding your business through Variable Costs:
- Hire a new salesperson or two; make a significant portion of their compensation performance based.
- Create a more lucrative sales compensation program for existing salespeople. Pay a big bonus if sales exceed 125% of last year, or give away a trip as an incentive.
- Instead of an incentive for your salespeople, offer the same incentive to your customer. A certain percent rebate for sales over 125% of last year, or give the trip to the customer.
- Rent an additional truck a day or two a week and start delivering into a new territory.
- If you are cramped for space, rent additional space on a month to month basis.
- Invest in Social Media or E Commerce. There are hundreds of Companies out there that will take on these types of projects on a contract basis.
Examples of expanding your business through Fixed Costs:
- Since business has been good for the last couple of years, expand to a new location. Or open another location across town.
- Better yet, since the real estate market is down, buy a building.
- Decide that it’s finally time to replace that old machine or forklift and go to the bank to get a 5 – 10 year loan to pay for it.
- Print several thousand copies of a new catalog or sales brochures.
- Invest in new product lines that increase inventory carrying costs and sample costs.
By prudently investing additional Variable Costs in your business, you can always abort the project in 6 – 12 months if business expansion goals are not being met. Or in some cases, if additional sales are not achieved the money will never be spent. On the other hand, if you jump in and expand your business using Fixed Costs, you are stuck with those costs for several years if you made the wrong business decision.
If you would like assistance in prudently expanding your business please contact me.