How Big Should My Business Grow?

Not everyone wants to grow their business to a huge size. But how big is “big enough?“  You might want your business to grow large enough to . . .

1. Pay yourself well, all that you need and deserve

2. Bring in consistent revenue and cash flow, and smooth out the boom and bust revenue cycle.

3. Allow yourself the work style you want, including time off

4. Assure your business strength, flexibility, and resilience to thrive in your marketplace

5. Build an asset you can sell eventually.

Let’s say a bit more about each of these:

1. Pay yourself well. Many small business owners suffer from the “pay yourself last” syndrome, i.e., because of cash flow uncertainties, they pay all other obligations before cutting themselves a check. Our next ezine—“Pay Yourself First”—will show you how to calculate how large your business must be to pay you your desired regular paycheck, so I’m putting that one off for now. 

2. Bring in consistent revenue--especially for consultants, real estate agents, contractors, or anyone else whose revenue comes in chunks and can experience big swings. How do you deal with the boom or bust cycle? 

a. First, you must calculate your average needed monthly revenue, the monthly nut for your business, including operating costs, overhead, your pay, plus reserves. Then …

b. The size of your typical peak, i.e., the big chunks of revenue that come in, whether consulting fees, commissions, etc. 

c. The distance between the peaks or payoffs, in months.

d. The degree of variability or uncertainty between the peaks, which determines the size of financial cushion you must have. 

You must have at least as much above the average as you have below the average. The peaks above the line must exceed the troughs. And you must have the discipline to set aside a reserve during the peak revenue periods to get you through the troughs—with a sizable cushion for uncertainty. 

Find a way to smooth your cash flow and get out of the boom-and-bust roller coaster cycle. Perhaps more smaller jobs in between the huge ones. Or counter-cyclical work, so that the peaks of one type cancel out the troughs of the other. 
But to do this, you face two major hurdles:

-- During the peaks, you think it will always stay at that level, and you spend it, rather than building up a reserve or paying back debt from your prior trough. 

-- When you are headed down into a revenue trough, you don’t know how long it will last. You panic. You may never get another job! 

The greater the uncertainty in your revenue, the lower your fixed costs or overhead should be. If you don’t know when your next checks are coming in, you don’t want to have large ongoing financial obligations. 

3. Give yourself your desired work style and time off. You know you are not as big as you need to be if you can’t afford to hire the support you need. 

How big must your business be for you to hire the support needed to allow you to focus on what you most want to do, and where you make your greatest contribution to the business? 

For a very small business, this may mean hiring a part-time office assistant or bookkeeper that works a few hours each week or month. 
For a larger business, it may mean hiring a manager or director of operations—someone to handle day-to-day operations. This frees you up to focus on things most important for you to do. 

To justify hiring this person, your profit (not just your revenue, but your gross profit after covering your direct costs) must increase enough to more than pay their salary. This can happen by the extra profitable work they do for you, by money they save you by controlling costs, or by freeing you up to bring in more profitable work. 

For example, suppose you hire a manager at $50,000 a year, and your gross margin is 40%. With the manager to oversee day-to-day operations, suppose you are able to bring in an extra $200,000 in sales a year. An obvious benefit to you, because the break-even revenue for the manager is Salary/Gross Margin = $50k/.40 = $125,000. And you could use part of the surplus generated to buy more time off for yourself. And you’d feel safe taking that vacation, since you have a capable manager in place. 

This is a key benefit of growing your business. 

4. Maintain strength and resilience. If you are a mouse, elephants can step on you. If you are too small, you cannot respond quickly to opportunities and challenges in the marketplace, or weather tough times. How big must your business be to respond? This is closely related to numbers 2 and 3 above. 

If your business lives hand to mouth, you don’t have the capital (or the creditworthiness) to jump on opportunities or protect yourself from threats. If you’re working nose to the grindstone, and can’t afford to hire needed support, you can’t even see opportunities and threats in time to respond. 

Grow a bit larger, and you can build up a financial cushion, and get help to free you up to focus on these strategic opportunities. Seeing things coming is the best way to turn a threat into an opportunity. 

5. Build up an asset to sell. Owners of small businesses are often shocked at how little others are willing to pay for their business. People with professional practices or small service businesses often conclude that there is no sales value at all, and that when they are done, they must just close up shop and ride into the sunset. 

Selling prices for businesses are often calculated as a multiple of annual gross revenue. If the business is all you, but you have a good customer list, reputation, and location, your multiplier may be 1, i.e., selling price of 1 x Annual Revenue. But if in addition, you have several good people who will stay with the business, the multiplier may go up to 3. 

It can be well worth your while, if you intend to sell your business someday, to build it to the point where you have several strong people who contribute to your profitability, so that all the expertise does not reside in your head. This raises your selling price in two ways:

-- You have a larger business with higher revenue

-- The sales multiplier increases. 

If building your business around several good people allows you to triple your revenue (while retaining your profit margin), and raises your multiplier from 1 to 3, then the selling price could increase 3 x 3 or 9 times more than if it is just you! 

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This gives you several ways of thinking about “right sizing” your business. These are minimums, of course. You may want to grow much larger. 

This is too big a topic to cover well in an ezine. I’ll soon have an e-book with much more on this topic, including equations and graphs to help you calculate these things for yourself.

Yes, you can do it! Many small business owners resist making the effort to grow. They think they will have to work way too hard. However, those able to get past this thinking usually find that, with the right help, after they reach a certain size, running the business actually becomes easier. 

I’m in the business of helping people make this transition from small to growing.