If you ask a dozen executives if their goals for their companies include long-term growth, you would probably get a unanimous “Yes” from the group. If you then asked them to define what long-term growth looks like at their companies, you might get a dozen different answers. In order to prepare a business for long-term growth, the first step is to understand what exactly needs to grow.
What Long-term Growth Isn’t
To figure out what we’re going to measure for long-term growth, let’s eliminate a few growth measures that don’t always align well with long-term growth strategies.
- Growth by acquisition: There’s an argument to be made that growth by acquisition isn’t really growth at all. To the extent that an acquisition does represent growth to a business, it is typically an immediate jump in market share and gross revenues. However, if the acquired business doesn’t align with the profitability model and culture of your business, experience suggests these jumps aren’t sustainable in terms of long-term growth.
- Growth in top-line revenue: Among that hypothetical group of 12 executives we mentioned at the start, you might get more than one who says that long-term growth is a consistent increase in gross revenue over a projected time period. Gross revenue growth can certainly feed into a long-term growth trend. However, if the business is not operating efficiently, it can still shrink in the long term even while the top line number increases.
A Key Performance Indicator for Long-term Growth
In order to plan for long-term growth, many businesses shift away from the gross revenue number and look more closely at profitability. Market analysts have stressed the top-line number in recent years, and that focus has led to a practice of incenting managers toward high-volume sales instead of high-profit transactions. The high-volume approach encourages the sales force to discount products and services for customers. It can result in a race to the bottom that leaves a business with a heavy workload that may just barely cover its costs.
Looking at net profit as the key performance indicator for long-term growth leads to a more streamlined sales process with consistent pricing that the sales force cannot override. The sales pipeline may not be as full as it would be under a gross revenue model, but each project or product sold will generate more profit for the business.
Know Your Strengths
If your business shifts from a gross revenue focus to a profitability focus, be prepared for an initial negative reaction from some customers. It’s not uncommon for a customer to quote lower prices from a competitor and threaten to take their order elsewhere. You need to understand the differentiators that set your business apart and be able to explain them. It could be the quality of your product or your reputation for great customer service that makes a difference. If you can respond to the “I’m going elsewhere” sentiment with a statement like, “I understand your decision, but here are some things to watch out for if you’re not working with us,” it’s quite possible that your client might come back after a misadventure with your competitor.
Don’t Forget Fixed Costs
Fixed costs may not be as easy to manage as sales margins, but it pays to review them with a fresh set of eyes every few years. Many CFOs have gotten into the habit of shopping insurance costs annually with great results. It can also pay to challenge assumptions about the way you do business. If your sales force is working entirely from mobile phones, are you spending more than you need to on landlines? If more employees are working from home or at customer locations, can you cut back on office space? Questions like these can uncover some significant savings.
In It for the Long Haul
Whether you’re looking to increase margins on sales or cut costs, the important thing to remember about long-term growth is the “long-term” part. You need to focus on steadily increasing profitability over a course of years, not just taking advantage of current trends because everyone else is doing it. Managing with the bottom line in mind will keep your business on track for success now and in the future.
