We all remember back to our primary and secondary years – required courses were a prerequisite to getting to the courses that had real applicability – major courses. Math, English, History, Science and even Social Studies were areas that we all mustered through. Though much of the information we consumed was difficult to understand their immediate applicability, these were the courses that would create a “foundation” to increase the effectiveness of those more advanced courses.

“Grin and Bear it” became an effective coping mechanism, and united with the iconic “Just Hang In There” poster in my 8th grade Math classroom adorning a cute kitten, we all made it through these required courses.

However, without the completion of these core courses, much of our higher-level accounting, finance, chemistry or even software development courses would have been less effective, and possibly ineffective.

For companies going through growth phases, strategic growth and profitability plans depend on a solid foundation, including a plan focusing on revenue, expense, and appropriate management of resources. Incredible companies have been built and remain extremely profitable because they had 1, 3 and 5 year plans that accounted for these variables and how they would account for the increase of costs that come with the increase of revenue.

High School and College students have built-in guardrails. You can’t get into the higher-level courses without finishing the core courses. Companies in a free-market economy don’t have the same rigor, it is do the pre-work or don’t do the pre-work, it’s up to you.

This brings us to the important question of “how do I create guardrails for my company as I plan to go through growth?” While no one plan is right for all companies, there are a few important areas to focus on:

1. What is our market value proposition? This part of the planning process will allow you to determine where the main source of revenue is created. Planning in this phase will include what the original product or service will be and what other products or services will be part of the value proposition in the future. For example, if the value prop is wealth management, it is important to define what your target market is and how far on either side of the “target” you will accept. If your target market is clients with $5 million in assets, defining an acceptable range of $4 million to $6 million may be a good start. After creating the acceptable market, this helps to determine your associated costs and revenue. If you begin getting too far outside of the target market (in this case less than $4 million or over $6 million), you begin to have different needs from your clients, and ultimately different costs associated.
2. What are our revenue projections? Are they consistent, seasonal or variable? Having a realistic and reasonable view of revenues will be important. Understanding the market that already exists for your product and service and looking at other companies’ historical revenues are a great starting point for this part of the plan. After doing some homework on how other companies’ revenues have varied based on outside factors you will be able to determine which variables are necessary to create solid projections. This process starts by building a revenue projection tool that considers total number of products (services), price point, fixed and variable costs, and anticipated profit margin. Next, add an overlay for projections depending on the variables that impact the revenue of the business. For example, if your product is most impacted by the price of gasoline, use a calculation method to determine how margins will be impacted if gasoline increases or decreases by a certain percentage. For businesses that are seasonal, (eg swim lessons for kids create most of the revenue during the summer) look at which costs are required to be fixed vs. which costs may be made variable.
3. What costs are fixed and which are, or can be, variable? Although the concept of “variable” may be a bit nerve racking for a business owner, it is important to think of variable expenses as a positive for profitability. Too often, business owners think of variable as increased expenses, but variable can also be a powerful tool to increase profits during revenue downturns. One of the most profitable examples of this is Spirit Halloween. The founders of this amazing company realized that MOST of their business was seasonal and happened during the months of August – October. The company has large, fixed expenses (inventory, shipping, marketing, etc), but takes advantage of variable expenses by doing short-term (2-3 month) leases and hires contract employees for only the months where stores are required to be staffed. Spirit has figured out a way to match their most profitable months with their largest expense months, therefore eliminating all variable expenses during the seasons where Halloween is not prevalent. Another example is quarterly reporting in the Financial Services industry.
4. What products and services are supported that are not profitable? Many companies will offer new products and services because they CAN. The more important question is not CAN it be delivered, but instead SHOULD it be offered. To make sure that your company does not get affected by scope creep, create a process to evaluate the efficacy of the product and whether it is supported by the first question above “does it meet our market value proposition”. While new products and services may look profitable, if supporting a new product or service is less profitable than the main product or service, it may be more of a distraction that an additive part of the existing business profitability. In many cases, it is more profitable to double-down investments to attract new clients within the target market than to launch a new product in a target market that is less understood. However, if launching a new product or service is an important strategic initiative to support the businesses’ value proposition, planning for decreased profits for a period of time may be more advisable. To help with this, it is important to look at profitability by product and service line and not just as the larger consolidated profitability. Setting up the accounting and finance systems to be able to look at profitability at this level will allow the company to determine which products and services to continue, invest more, and discontinue.
5. Determine a technology and operations roadmap that scales with the business. At the start of the business or growth cycle, taking some time to evaluate how your technology stack and operational processes will grow and expand is a worthwhile exercise. Thinking about your growth curve and your projected product and service offerings will help in determining your starting point. This exercise should be done with a level of optimism that your core products and services will be successful and will, in turn, lend to offering new products and services as markets and needs change. While it may be difficult, investing time and money in the right systems and operations that will scale with the business is important. Going back and having to reengineer systems and processes that met the needs at the time of inception or growth is extremely expensive and time consuming. Using open-source technology that allows you to easily plug in a new feature or program is an excellent choice. An even better choice is to find “best in class” technology and work within the boundaries of the given products. When companies begin “customizing” the technology, it makes future additions much less effective. Operationally, finding lower cost variable resources that can help with routine and repetitive tasks (on-shore or off-shore) helps to turn employee fixed cost into variable costs. Using variable resources will also have the benefits of reduced benefits, administrative functions, and sunk costs (holiday pay, retirement, etc). Again, planning early for which resource costs can and will be fixed and variable will help to create a solid operational roadmap.

Think back to your high school or college days. Every semester when we registered, there was 3 – 4 core courses that were not negotiable – the core courses. Just like college, treat the 5 topics above with the same rigor, non-negotiable.

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