Numbers on a spreadsheet

How do you measure growth in your business? – view from Eddie Hooker

There is no doubt that a business cannot survive in today’s marketplace without having to grow and adapt to the current business climate. There is, however, some debate as to the best methods of measuring ‘growth’ in your business and its resultant success.

 

Measurements of growth

In order to understand and successfully ‘grow’ your business, you need to set the parameters for that growth.

Let’s start with the formal definition of growth within a business. Traditionally business growth is measured either by increasing the top line revenue (more sales!) or increasing the bottom line profitability (better efficiency!). Pretty crude but ultimately true. Most businesses track this performance via monthly accounts or progress towards a laid down business plan.

Ultimately there is no one measure of success and it depends on the type of business that you run. A charity or trade body, for example, is less interested in growing profit and instead will gauge success in terms of how many people it has helped or supported on a year by year basis or its’ profile within the market.

Many small or sole proprietor businesses measure their growth metrics in personal terms such as how much free time the owner can obtain (holidays!) or what personal earnings the owner can receive from the business.

All these factors help to measure and assess growth and success in your business. I wouldn’t put the emphasis of one measure over the other but growth measurements should align with your ambitions for the business.

 

Financial metrics – what your shareholders want to know

Let’s firstly look at the most widely accepted marker of growth – money.

Profit (income less expenses) will likely feature highly in your business model as a marker of growth and success. For example, shareholders will expect a return on their initial investment – dividends – which can only be derived from the profits made by the business. In publicly quoted companies, shareholder return is the sole driver for the success of the business especially if the shareholders are investors or pension funds. Shareholders can also be capital investors that have invested in the expectation of future returns when the business is ultimately sold. Most businesses are valued on a multiple of annual profits made by the business. Track record of increasing profits year on year can dramatically increase the sale value of a business especially if the top line revenue is growing at the same pace.

A word of warning however. Choose your shareholders/investors carefully. Realising maximum profits from a business at the detriment of investment and resourcing of a business can be a dangerous cocktail. Over the years I have seen many businesses go to the wall because shareholders want increasing returns and starve the business of vital investment or infrastructure thus alienating staff and customers alike. Profits quickly dry up when new business or client retention suffers or the business has no money to change direction when the market changes.

In my own businesses, we have a strong philosophy of growing our balance sheet (available cash/assets in the business) year on year. We have a dividend policy that does not allow all profits of the business to be distributed in any one year thus allowing us to take advantage of opportunities that require cash when they present themselves. Remember, cash flow is king in any business. You may be generating profits on paper but if you have no cash then you can’t pay the bills! As I continually say in all my blogs, a good solid and prudent finance director is probably the most important senior appointment you will ever make.

But for many reading this blog, the game is changing, especially in the tech world, where valuations on businesses (both on paper and in terms of businesses changing hands) are no longer just about revenue generation and growing profits.

Contrary to the negativity over the world economy and fears over Brexit, there is more money available for investment in start-up businesses than ever before. Take the UK property market, a space I am very active in, as an example. Over the past few years, I have seen new business models springing up with eye-watering valuations and they are yet to sell a single product! These often inflated valuations are calculated by the amount of investment obtained from private individuals and institutions so a new metric of growth is being determined by the share value of the business. How sustainable these start-ups will be remains to be seen, especially when you consider that 9 out of 10 new businesses in the UK fail within the first three years of operation. Can the new start-ups thrive as investment dries up and traditional revenues can’t catch up with operational and development costs?

 

Vanity metrics – what the public wants to know

Other measures of growth fall into the category that I like to call vanity metrics. What do you shout about and what makes the business look appealing in the eyes of consumers?

Some businesses or sectors may gauge growth by measuring a specific number of units sold or individual records of data. Data is becoming more and more valuable. For example, reporting on your percentage growth in terms of members or the percentage of the market that you control interests customers and gets people excited about the business. The typical data set focuses on the number of users or a specific type of action.

This explains why some businesses are successfully raising huge amounts of investment at enormous valuations as they are showing that their model is scaling. For example, the growing online estate agency model plays a different game to their traditional counterparts. Rather than their value emanating from money generated by the business via sales, they assess growth by the increasing number of listings and properties within their ecosystem. This type of business will look to grow and scale now and drive profit from those metrics later in the business’ lifecycle but makes you look immediately popular in the industry.

One of my businesses is Total Landlord Insurance. For the Google search term ‘Landlord Insurance’ we consistently rank number one and that is without having to engage in ‘paid for’ google advertising. This is a great measure of growth and stature within the online insurance industry. We still need to convert the quotes that are generated from this success but the investment we make in keeping us at number one continues to push the business year on year and shows that we are doing the right things. That same business won an award for “Best Landlord Insurance Provider” at the Insurance Choice Awards this year – voted for by our customers. Ensuring you have a strong customer focus helps you grow your profile in the industry to levels you could only once dream of.

 

Internal structural metrics – what YOU want to know

The last, and often overlooked, growth measure is the internal structure of your business. This refers to everything from infrastructure, to staff, to product innovation. It’s the growth no one talks about but it’s the one that sets the business apart from others and propels you as an industry leader. It’s very important not to overlook the value of measuring growth in this area of your business.

When you’ve grown to a business with a sizable number of staff, you need infrastructure. You’ll have to build an HR team, an accounts team, a legal team and an IT team. You’ll need a large enough office with enough open space to stimulate conversation and debate, and don’t forget the coffee machines! These all add up and cost money without initially generating further revenue, but still symbolises growth.

Can you imagine if I moved all our staff back to the tiny office we started in? Your staff want to know that you are progressing and have the ambition to grow. You need this infrastructure in order to build growth but you’ve achieved growth because you can afford the infrastructure! With my businesses, I have always tried to invest in the right infrastructure in advance to cope with growth rather than wait for the growth and then try and manage it. It’s a difficult line to tread but get it right and you will find yourself in a position to take advantage of future opportunities.

I also like to measure growth through the medium of innovation. As I said in my last blog, don’t get complacent and let your business stagnate. A successful business anticipates and adapts in a market and I am constantly pushing for new and exciting ideas to help drive the business forward. An important marker of growth, in my opinion, is how you adapt and how your people adapt. Don’t be afraid to employ a better individual or let someone go who is not performing. To grow you sometimes have to make the hard decisions. But by making these decisions it shows that you and your business has grown.

Another debate I regularly encounter surrounds whether we should be building in-house teams or outsourcing. Do I want to have a bespoke and extensive marketing team to call upon at every working hour or would we be better paying the more expensive hourly rate but avoid the infrastructure, management and HR costs of hiring more staff? Personally, I quite like having everything in-house because I like to be in control – however, could the business be more profitable if we outsourced more? It is difficult to know which is a true marker of growth and highlights how identifying and measuring growth is not always straightforward or clear-cut.

This is a debate for all types of entrepreneurs and something only you can really answer.

 

What does growth really mean for your business?

Growth and its measurement really depends on how the business is set up. What works for one business is unlikely to work identically for another. It is also important to set out the time frames for growth.

The benefit of a privately owned business, such as mine, is that the shareholders and Directors tasked with growing the business can take a longer-term view to growth. They can commit to forego taking profit dividends in one year and invest in research and development to build foundations for increased profits in later years. Whereas publicly listed businesses often have quarterly or even monthly reviews where missed profit targets, even if due to investment, could have a huge negative effect on their share price and investor confidence.

When all is said and done, growing a business means it is getting bigger. But real growth is about the long term. You earn more from your customers in the long term. Keep them happy and they pay far more in the longer term. Invest in your people and infrastructure and you will earn far more from them in the long term.

As I mentioned in my first blog, make sure you know your market. Whatever barometer of growth you choose – be that profit, customers, units sold, data collected etc – the number needs to be getting bigger.

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