Growing a business can be a tricky bedfellow.
Not only is it perhaps the most triggering journey to go on – I jokingly say it is personal development with a paycheck – but it is one that no matter how much you “know” no one can really prepare you for what it’s like once you get in the water.
Things like…
using revenue to predict sustainability can be the kiss of death or learning how to build a team when no one taught you how, suddenly becomes the hunger games.
As Tony Robbins says, new level, new devil – and personally I think that in business there might be no better words.
Today the devil I want to talk about is one that I have seen sink or almost sink more businesses than I can count.
So before you take your business to the “next level” here’s your canary in the mine.
Step costs.
Step costs are defined as:
Step costs are expenses that are fixed for a range of activity, but increase or decrease after a threshold level is crossed.
Why this is something critical to think about PROACTIVELY (and why most business owners don’t) is simple: many a businesses have hit rough seas when they didn’t fully think through what the new level was going to take from a team, time, and expense standpoint.
If you are not thinking proactively about step costs and cash flow then you are placing a bet on the house that might make you lose it all.
See revenue, as we know, is a lagging metric which is why profitability and cashflow are so critical to get dialed in BEFORE you take that step up.
But more than that you get to get good at cost projections because those my friend can make or break you.
Let’s look at an example. Let’s say business A is an established brick and mortar business that wants to add $1M to the bottom line by breaking into a new product line and start wholesaling.
Now on the face of it none of those things seem nefarious, but let’s break it down.
First the revenue. What are the step costs that pop up when $1M infuses into the business overnight. (It won’t be overnight but lets for argument sake look at what happens.)
Can fulfillment keep up? Do you need another employee to help? What about your negotiated shipping rates with FedEx/UPS? How about warehousing, will you need more space? COGs…. Landed cost…what about technology upgrades? Can your current software support the influx?
Asking yourself what would break if you added X to your top line or doubled your business is going to tell you a lot about step costs that are hiding in plain site.
Next if we look at the product line we get to think about inventory minimums, supply chain, ordering timelines, shipping, fulfillment, marketing, etc. All things that may have a step cost associated to them.
Now if we look at wholesaling, let’s see what step costs are there. How about impact on cashflow when you have 30 day terms, what about margins and profitability, how about wholesale photography and seller marketing assets, what about a team that is dedicated to wholesale. Do you see how far and wide the rabbit hole might actually go?
Taking your business to the “next level” might sound sexy (sorry for being a cold splash of water) but before you push the launch button, take a beat to make sure that your business can really bear the growth. Growth for growth sake IMO is not smart. Proactive, strategic growth is the name of the game and that starts with as much clarity as you can get around what costs are going to come down the pipe with the new growth.
I know it is all the rage today to have hypersonic growth or be a “unicorn” but I would much rather you be a legacy business that can weather the storms, than a match that flamed out.
I am not saying you have to go extra slow or have it all figured out today… what I am saying is you, your business, and your team will thank you when you have an idea of what is coming and what is needed rather than being blindsided by a rouge wave of expenses that threaten the survival of the business you worked so hard to build.
