Tuesday, February 6, 2018
Author:  Doug McCann
Forthcoming Book:  "So You're A Nice Guy and Want To Be In Business"

Steady As It GrowsSteady As It Grows

Any business in a growth mode may be deemed to be in a good place. Growth in sales, expansion and employing more people all seem like the ideal scenario! However it's only ideal if the growth is sustainable. Just because a business model is performing well does not ensure that the same model will work on a larger scale. There are many contributing factors and elements impacting growth; some negative and some positive.

Expansion comes with a cost. It could be higher rental rates, higher energy costs, relocation expenses, new building construction, increased marketing costs and so on. In a retail operation, more inventory is necessary. A higher number of employees is likely, and although more jobs is welcome news in any community, your business may not be able to afford an increased work force. Expansion in malls leads to higher costs as a result of increased square footage multiplying common area costs like maintenance, utilities, property taxes, association fees and such. Without a solid business plan and cash flow projection, you may very well find that revenues may no longer be adequate to cover expenses and generate profits.

A little research into the topic of business growing too fast brings to light two interesting terms: success and sustainability! The latter of these implies a well grounded, healthy operation in which revenues are adequate to cover costs and drive a profit. Many would consider this success, and at the risk of oversimplifying such status, I would suggest that in every reasonable way, this is success. However, nothing stays the same. Markets, demographics, consumer demand, life style can all change. Therefore striving for sustainability means not resting on company laurels but always paying attention to your market. Your marketing targets and advertising strategies may need to be altered. Growth or expansion may not be what you need but rather a process of reinventing your business and its product line or services.

Out-of-control growth and expansion could have a human element related cost. Customer loyalty may well have been a key factor for your success. Customers like dealing with the person at the top! As a customer, he or she relishes a close connection, feels important and enjoys the personal touch and service. This relationship between owner and customer can dissolve over time as the owner becomes more involved with administration rather than being on the front line. Customer loyalty can also break down very quickly if an employee is not trained properly, does not pay attention to customer service or does not present a significant degree of dedication. It has been determined that the number one reason a business loses a customer is based on a result of a bad experience with an employee.

In your business you specialize in your product or service, but what about accounting?  With business expansion you are counting on increased revenues, but the cost of doing business becomes more complex.  A great cash flow situation may imply the business is on healthy ground, but overall, the company may find itself losing money in a longer term scenario.  Investing in a good accountant who can analyze sales, costs, projections and cash flow is money well spent.

Records and Tapes RetailI would like to share with you my own retail experience selling records, tapes and accessories.  When I mention records and tapes it goes without saying that I am dating myself, but that's what I did back in the early 1980's in Parry Sound.  I had my own store in the local mall.  Back in that day malls were still enjoying a great deal of prosperity and rent was premium.  For the most part, each store tenant would be indebted for the minimal amount of rent, generally based on square footage.  However the total annual amount of 'square footage' rent paid would be used in a formula to set a maximum annual gross revenue ceiling.  In effect, the tenant's annual rent was based on square footage, or on percentage of annual gross sales, whichever was the greatest.  If the tenant's sales surpassed the ceiling, he or she would then be required to pay a percentage of the gross overage in what was often referred to as percentage rent.  It would seem logical that a larger store and more inventory should result in higher sales.  With more square footage the percentage rent was less, and sometimes nil due to having a much higher ceiling.  However whatever amount of percentage rent may have been saved could very well have been overshadowed by the increase in other expenses referred to in the rental contract.  Common area costs, maintenance, property taxes and so on are multiplied by the increased square footage.  A few thousand square feet can greatly increase such costs.  It seemed reasonable to pay for square footage rather than percentage rent.  Increased floor space would offer more retail opportunities.  However, keeping in mind that profit margins on music were conservative and so a higher volume of stock would need to be purchased, and better yet, sold!  If slim profit margins is one major contributing factor, the second would be consumer or market demand.  If there is no possible way to increase retail sales, then moving into a larger store would be all for nothing.  In fact the store could be in trouble, especially if the business borrowed capital to renovate and purchase additional inventory and not able to service the debt.

Record and Tape Retail Store of the eightiesAs an independent operator, this business was tough.  I had only been open for some five months in a smaller store in the mall when a larger and central store in the mall became available.  With the business growing, the extra floor space and increased exposure seemed difficult to turn down.  In hindsight remaining in the smaller location would have been prudent to give the operation more time to grow, build on customer good will, earn more capital and give the store a chance to grow on a much stronger foundation.  It's human nature to jump to the conclusion that a good opportunity may never pass our way again.  I think it's safe to say that opportunities do come and go, and come around again, especially if we exercise patience.  The store did build a good customer base and was easy to sell to a growing wholesaler looking for retail opportunities.
  
McCann Records And Tapes (1982)More often than not, slow, steady and easy, indeed, wins the race!

As always, I welcome your feedback!