This past June, Manny Skevofilax published a book entitled Ultimate Profit Management: Maximizing Profitability as You Grow Your Business, which details how small businesses can achieve reasonable, prudent growth while avoiding debt. He explains the readily available tools entrepreneurs can use to ensure that their businesses do not turn unprofitable as they grow them. He posits that it makes sense to resist the lure of the high-growth, no-profit strategy and instead embrace the approach of steady growth with profits.
When I spoke with Manny this month, I asked him: "How do you define prudent growth and how can small businesses avoid crushing debt?” Here is his full answer:
In my opinion, “prudent growth” is defined as growth that increases the net income of a business. “Prudent growth” is usually accomplished slowly, with new revenue acquired at your business’s appropriate margin, in conjunction with the judicious use of debt. In simpler terms, you do your best to increase the profit of your business without increasing the debt much. For example, some businesses bring in new revenue (“growth”) that isn’t profitable for one reason or another. If the business incurred marketing expenses to bring on this unprofitable revenue, how are these marketing expenses going to be paid? Since there was no profit made from this revenue, there is no money to pay these marketing expenses. The money needs to come from somewhere and it usually comes from taking on debt. This scenario describes how a business can grow its revenue and make less profit overall.
If this scenario continues, a business will have poor cash flow and more debt than it can repay. Sometimes, this scenario causes a business to turn unprofitable which can further aggravate its poor financial situation. Therefore, it is important to make sure that you are growing your business profitably and that you are taking on debt for the right reason. If you see the need for short-term debt for a sound business reason, then determine what cash flow expectations or enhancements will occur to repay it in the short term. Otherwise, your debt continues accumulating, as do the interest payments, and your flexibility is continually reduced.
To avoid crushing debt, use a portion of the profits that you earn to reinvest in your business for growth. Use a bank line of credit to finance the carry of your accounts receivable and inventory. You grow best when you’re in a strong position, not when you have your hat in your hand in line at the bank. The takeaway here is to use borrowed funds judiciously!
What are your thoughts regarding Manny Skevofilax's perspective? What are your experiences with growing a small business?