Business Credit
3 business scenarios that need money to make money
Most businesses share a common goal no matter what stage they're in: to grow. Business growth, however, is a relative concept. Depending on your industry, goals, and finances, growth might mean opening a second location, increasing profits by 5%, or expanding your product line.
Measuring your business' growth isn't an exact science, but it's crucial to your operation's success. Observing and analyzing different areas of your business shows you what you're doing right and what you can improve upon.
To figure out whether or not your business is growing, start by considering the factors most critical to your operation's success right now. If your business is newer, then social media engagement and website traffic might be better indicators of growth than profits. On the other hand, if your business has a loyal customer base, you could look at cash flow and accounts receivable to measure progress.
Regardless of your business' growth goals, key performance indicators (KPIs) can help. KPIs are quantifiable measurements you can use to track your business' progress in every area, including sales, marketing, finances, and operations.
Here are a few examples of common KPIs:
Tracking and analyzing your KPIs on a regular basis will show you where to focus your efforts, but you should also look to certain areas for signs of growth.
Here are five top indications of business growth:
High inventory turnover is a sign that your products are in demand. If you have to replace items at a rapid rate, you may be landing more sales and expanding your customer base. To calculate your inventory turnover ratio, use the following formula:
Cost of Goods Sold / Average Inventory = Inventory Turnover Ratio
Inventory turnover varies depending on your products and business, so it's a good idea to compare your number to the national averages for your industry. Retail stores, for example, generally have inventory turnover ratios of four or five, while grocery stores have ratios above 10.
An inventory ratio above your industry's national average can signify growing demand for your business. However, if your ratio is substantially higher than the average, it could because you're not stocking enough inventory to keep up with sales.
Watch your turnover rate for a few months. If it's consistently high and you're not under-stocking, consider purchasing more inventory or expanding your product line.
Examining your business' finances, particularly your profits, losses, and revenue, is one of the most accurate ways to measure growth. Profits refer to your net earnings after you pay for expenses and operating costs. Losses refer to any costs that exceed your revenue, which is the amount of money you're bringing in from sales.
To figure out how much you're profiting, start by reviewing your income statement, cash flow statement, and balance sheet. You may want to consult an accountant to help guide you through the process. If you have more profits than losses, your business is likely in good financial health.
Keep in mind, though, that higher profits don't always indicate growth. If, for example, you've maintained the same amount of profits for years - even if those profits exceed your losses - your business may be at a standstill. That's why it's important to look at revenue and sales, too. Rising revenue or sales can be a sign of growth, particularly for newer businesses that are still gaining traction and may not be profitable for a while.
If your team is consistently busy with appointments, projects, or clients, your business is probably in high demand. You may need to hire additional employees just to keep up with the pace of work if:
Even if cash flow is tight, bringing on a new employee can pay dividends long-term. Extra help can give you the time and resources to fulfill more orders, expand your clientele, or say yes to bigger projects.
Cash flow is the amount of money coming into and going out of your business through areas like accounts payable, accounts receivable, expenses, and sales. Positive cash flow is the result of reduced spending, increased revenue or sales, or a combination of the two.
While healthy cash flow doesn't always correlate with business growth, it does suggest your business is in a stable financial position. And good finances are often the foundation of business growth.
If you've noticed an increase in your business' cash flow for several consecutive months - and your spending has remained the same - that's a good indication that your revenue is improving. Positive cash flow also has a cumulative effect. When you free up funds, you have more money to dedicate to growth projects, like remodeling, hiring, or moving to a new location.
Business growth isn't always quantifiable. The general excitement around your business or brand can be a great indicator of your company's forward movement.
High social media engagement, for example, suggests satisfied, loyal customers, while sales from returning customers indicate an ongoing demand for your products or services. If your brick and mortar is growing, customers may plead with you to open a second store. Or, if you have an e-commerce shop, you might get frequent requests to ship your products to new cities or states.
Signs of growth don't just come from customers and clients, though. You might get a call from an investor, see your company featured in an online round-up, or receive a message from another business about collaborating on a campaign.
Measuring your business' growth only gets you so far - you also have to take action. Whether you see a spike in profits or simply witness a growing demand for your business, consider how you can use your newfound knowledge to set your business up for long-term growth. That might mean doubling down on marketing methods with a high ROI, eliminating ineffective products, or changing your sales strategy.
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