Episode 50: Growth costs limit your growth

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Do growth costs really limit your growth? Check out my latest episode.

Welcome to the Business Numbers podcast. I’m your host, Ben McAdam. I’m a profits coach, virtual CFO, and entrepreneur, and I’ve created this podcast to help you grow your business profits and understand your business numbers without judgement, and without burying you in a whole bunch of jargon that you don’t need. Just actionable tips and case studies to help you grow your business. For show notes, go to the website businessnumberspodcast.com. 

This episode is inspired by a rockstar client who doubled his MRR, monthly recurring revenue, doubled his MRR in seven months and is now almost a seven figure business. What I’m going to talk about today is how growth costs limit your growth.

The first thing I want to talk about is that growing businesses normally feel stressful. Exciting, but stressful. And I’m sharing this because it’s surprised a couple of clients in the last six months and I thought maybe I should let you know. 

Here’s what that stress of growth looked like for one client. There were new fires that kept coming up in the business, new fires to put out. One of them, for example, was the team would hit capacity and he’d have to hire fast. And then that some new team members didn’t work out, and so they had to be replaced, and the team was still at capacity for a little bit longer. And that created various fires of like team members potentially getting too close to burnout or not being as effective in their jobs.

So the stress of growth, the lesson here, the takeaway, the action item for how to deal with the stress of growth is to be mentally prepared for the fact that it’s probably gonna be stressful if you grow as fast as you want. Be mentally prepared for it so you don’t stop or slow down your growth anymore than necessary. Necessary meaning, for example, taking on new clients or new customers when there’s going to be big problems getting them what they paid for, if your team’s too much at capacity to do a good job or to do a job quickly for your new client. Or maybe if you’re selling a physical product, there’s some problems in your supply chain, or your delivery, or your third party logistics provider isn’t working out, and you’re not going to get the product to the customer. Maybe you might slow things down.

But otherwise don’t stop, don’t slow down growth when it gets stressful, thinking that something’s wrong because that’s just what rapid growth feels like a lot of the time.

So apart from the stress, there are other costs of growth that will limit your growth.

The cost of acquiring a customer. Well growth is more customers, more revenue, right? So the cost of acquiring a customer is a cost of growth and the initial costs of onboarding or fulfilling that first sale, that’s a cost of growth. New customers, all the costs associated with new customers- so the marketing cost of acquiring them and the cost of doing the thing that they paid you for. And you need to fund these costs. And when I say fund that could mean using cash savings or borrowings, like credit card, overdraft, line of credit, redraw on your home equity, a SBA loan, etc, or it could be investments. Savings, borrowings, or investments- somehow you’re going to have to pay for all those new customers that you want to come in. And the faster you want to grow, the more funds are going to be required because it takes some time for that new customer to pay back the cost of acquiring them and the initial costs of fulfilling first sale.

So let’s say it costs you, we’ll use a simple example, a thousand dollars. Every time a new customer signs up, it costs you a thousand dollars, and that’s some combination of the cost of acquiring them, maybe $500 to acquire them and $500 for that initial sale or whatever setup onboarding things you do when a client signs up. So let’s say it costs you a thousand dollars when a client signs up and you have $5,000 sitting in a bank account. Well, that means that you can, you know, ignoring all the costs, keeping this simple, you could have five new customers sign up and then you’re stuck. You can’t have any more customers sign up because you can’t afford for that to happen. You can’t have any new customers sign up until those funds are replenished by these customers that have just signed up.

Now, depending on what your margins are like and the way that your costs are timed, which is a topic for another day, it might be that the moment that they pay you you’re good. You get that thousand dollars of cost back plus a little extra, or it could be that it takes a month, two months, three months, maybe it’s their second sale, or the second upgrade, or something in twelve months’ time when you finally start making some of this money back. And if that’s the case, well, you’re limited to signing up five clients and then you’ve got to wait until that money comes back. You cannot grow faster than that because you can’t afford to. And if you want to grow faster than say five clients a month, then you need to have more than $5,000 of savings available in order to fund that growth. 

So here’s the limiting factor. The title of this episode, growth costs limit your growth. Here’s the real limit. Apart from your ability to handle the stress of growth I mentioned earlier, the limit is if you don’t have the funds or you can’t get them to pay for these costs of new customers, new clients, then you can’t grow as fast as you want. You’ll be limited by the amount of funds that you have. So you won’t be able to grow as fast as you want, or you won’t be able to grow as fast as the opportunity in your market would allow you to. Maybe you’ve got a fantastic offer that really beats the competition, or you’ve got some way that, really regardless of what your cost of acquisition is, maybe you’ve got some way to acquire a customer that makes it so easy for you to sign them up. And you’ve got this system where it’s like, you know, all you’ve got to do is pour money into this system and you can sign up more clients. Well, if you don’t have money to pour into the system, the system can’t work.

The action item here, the lesson, is that the faster you can recoup these costs after a client signs up or a customer buys, the less cash is required for growth because you get that money back again, and you can immediately redeploy it faster to get another customer and you don’t need as much money.

So if you want to sign up five clients a month and you’ve got enough cash to find five clients only, then if it takes you three months to get that five grand back from these clients, then you can sign five clients now and then you gotta wait three months until you can sign up another five. Whereas if you’ve got good enough margins to enable you to get that money back within a month, well then instead of signing up five clients every three months, you can sign up five clients every month with the same amount of money.

So the solution isn’t necessarily always pouring more money. And that’s kind of my point is that you will have to pour more money in or work on recouping those costs faster, work on improving your margins so that you can cover the costs of growth and you can grow faster. 

I hope this makes sense. Hope it was helpful.

As always, if you have any questions for me, reach out via the podcast website, businessnumberspodcast.com or social media. You can see me on Facebook, Business Numbers Podcast has a page, and if you’re interested in more there are more episodes of the podcast, or you can find a lot of helpful articles on my website profitscollective.com.

Thanks for listening to the Business Numbers podcast. Subscribe in iTunes, Stitcher, or on our website, businessnumberspodcast.com. Also on the website is a free basic concept webinar and a contact form for submitting questions that you’d like me to answer on a future episode.

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