How to Identify Small to Mid-Sized Businesses Likely to Achieve Sustained Growth
There is certainly no shortage of new small to mid-sized businesses out there. In the US alone, there are approximately 7 million small to mid-size enterprises (SMEs). A shocking average of 543,000 new businesses start each month.
Our other piece on The Facts on the State of Entrepreneurship in America goes into survival rates for entrepreneurs and lots of other data such as the number of jobs they create.
As an outsider, it can be really hard to tell who will succeed. To help you identify businesses that are likely to achieve sustained growth, we’re going to help you figure out how to tell the difference between a “growth-driven business” that has what it takes to achieve long-term success versus a “fast-growing business” that could end up crashing and burning in the blink of an eye.
What Does Sustainable Growth Really Mean?
Sustainable growth is the amount of achievable growth a company can maintain without getting into trouble. A sustainable growth rate answers the following question: What is the maximum amount of sales that a business can achieve without requiring more debt or equity financing?
The clearest and most obvious way to know if a company is achieving sustained growth is by calculating its Sustained Growth Rate (SGR). Here’s the math.
Rule: Sales should grow only as fast as your assets.
Example: If sales grow by 10%, then your receivables, inventory, and fixed assets should only grow by 10%.
Key Signs to Look for to Ensure an SME Can Sustain Its Growth
We’ve put together a list of the key attributes to look for in order to spot companies that are likely to achieve sustained growth. When evaluating fast-growing companies, check for these fundamental characteristics to help you identify if they are positioned to last.
1. Do They Seek Outside Help?
“If you ask any successful businessperson, they will always (say they) have had a great mentor at some point along the road.” – Richard Branson
Warren Buffett mentored Bill Gates. Steve Jobs mentored Mark Zuckerberg. Socrates mentored Plato. And the list goes on and on. SMEs (small and medium-sized enterprises) often don’t seek help, and this is one of the key factors to many of their failures. The more a company grows, the more complex it gets.
When you are considering whether a company will succeed, ask, are they systematic about seeking outside help or do they want to do it all themselves? Leaders that are too busy or stubborn to build a sturdy support ecosystem are a surefire sign of dangers ahead. Find out if they have set up an advisory board, found mentors, hired consultants or private equity firms, and/or brought in partners.
Pressure piles on big time for small businesses pursuing sustained growth. Many SMEs fall apart during bursts of extreme growth. The proper amount of momentum must be maintained. No help often means that they won’t last long or that they don’t have the right type of visionary leaders. A company that is filled with experts and supported by a strong network is more likely to experience successful growth cycles.
2. Do They Practice Financial Transparency?
For private companies and SMEs, sharing financial information often does not come naturally. The tendency is to keep everything private and secret when it comes to financial performance. However, a top SME that has mastered sustained growth has a deep understanding of how “open-book management” ensures accountability and improves overall performance.
Open-book management (OBM) is the business practice of creating transparency by sharing financial information with employees. The idea here is that, the more the employees know, the more empowered they become and the more everyone can be held accountable. More engaged employees help move the company in the right direction. Open-book companies also tend to get higher company valuations since it is seen in such a positive light.
A study by the NCEO (National Center for Employee Ownership) showed that highly-participative companies grew 8% to 11% faster than they would have been expected to grow.
Open-book management is not a utopian business model that is reserved just for the big guys. The degree of transparency is another important sign of how it will perform in years to come.
3. How Much Practice Have They had with Growth?
Like all other skills, practice makes perfect. The same goes for the growth process. Whenever a company grows, it is faced with the opportunity to learn new skills that it will need to use to repeat the growth cycle—hopefully, this happens over and over again. In business, they call this process the “virtuous growth cycle.”
A virtuous growth cycle is a recurring cycle of events, the result of each one being to increase the beneficial effect of the next. Why do you need to know about virtuous growth cycles? Because past performance is the best indicator of how they will perform in the future.
Basically, every time a business grows and proves that it can perform, it increases the likelihood that it will survive. The more it performs this cycle, the more likely they will be able to continue to do it. Like in sports, you must evaluate past performance. Past performance is the main indicator that signals the likelihood of survival. Look at data such as the amount they have grown and the frequency of the growth.
How long have they maintained sustained growth? How many times did they experience sustained growth? The concept of virtuous cycles is critical for startups or small businesses that need to keep learning how to scale supply and demand.
4. Can They Manage Cash?
It all comes down to money. Sustained growth doesn’t just mean that you can generate cash and profit but that you also know how to manage it. Is the company obsessed with tracking earnings and expenditures? Ask tough questions about their numbers and find out how well they know them. Is their data broken down? Do they have the right systems in place to produce good data? Is it detailed? Is it sorted by customer, location, production, inventory, sales etc…
It can be difficult for SMEs to track deep data as it comes in. They don’t always take the time to put the right people and/or technologies in place to help them see through the crystal ball. But, the ones that work off the data and are totally plugged into the numbers are the ones set to achieve sustained growth.
If you get to the audit stage, you must ensure the general ledgers are updated and that all transactions are recorded. There should be detailed balances of the businesses’ assets, liabilities, equity, expenses, and revenues.
Also, learn more about how their finances are managed. This is another important place where leaders should surround themselves with experts and ensure they know when and where to seek help. The more in control they are of their numbers and their money, the more likely they will succeed 10 years from now. Leaders must know their numbers. That’s the bottom line.
5. How is the Organization Built and Who are the Team Members?
Beware of the “one-person” team. It is easy for SMEs to rely too heavily on one or just a few key people. If these key employees leave, growth can be heavily stunted. That is extremely risky behavior and will reduce the business’ ability to repeat growth cycles. To build a company that can scale, companies need to invest in people. More specifically, the sales department typically requires the most robust team. Is the sales team growing? Do they have the right systems in place to train the team? What does their employee retention rate look like?
Retention rate is one of the most challenging metrics for SMEs. You can get a deeper understanding of the makeup of the team by reviewing LinkedIn and Glassdoor. What is the company’s retention strategy? The pains of hiring are hardest on SMEs because they must replace, hire, and train all over again. It costs them a lot of time and money, and the whole process can be crippling to growth.
It’s all too easy for SMEs to depend on their top performers. After all, studies show that a high performer can deliver 400% more productivity than the average performer. The cost of losing that employee can be steep. Looking for companies with sustained growth? Find companies that have built balanced teams.
6. Client Retention
SMEs with the Jeffrey Gitomer attitude, “Customer satisfaction is worthless. Customer loyalty is priceless,” are best suited for sustained growth. Client retention has a direct impact on the bottom line and it’s critical for sustained growth. We might feel like we’ve heard it all when it comes to customer satisfaction. But, what we don’t hear enough of is the actual direct impact on the bottom line. In this case, the numbers speak for themselves as to the importance of that client relationship.
- Acquiring new customers can cost an organization around five times more than retaining current ones. Yet, the average business in the U.S. loses around 50% of its customer base every five years.
- A 10% increase in customer retention is roughly equivalent to a 30% increase in a company’s value.
- The probability of selling to an existing customer is 60-70%. The probability of selling to a new prospect is 5-20%.
- A typical business will lose 15% of its customers each year.
- A mere 2% increase in customer retention can lower costs by as much as 10%.
Those numbers say it all. Identify companies that know how to retain their customers. What kind of culture does the company have? Does it celebrate a single sale? Or does it celebrate getting a customer? What is their customer retention strategy? Is it process-driven? This can be evaluated by analyzing reviews and monitoring social media metrics and client engagement.
Achieving sustained growth at an affordable rate is crucial. It’s the safest way to grow a business and it shows that you can translate strong work performance into success. Despite what most may think, sustained growth isn’t more common to a particular industry or market over another. Even a business that is booming doesn’t necessarily mean it is operating under healthy circumstances. Take the time to truly understand the business and its inner workings by looking into the key factors mentioned above. This will help you get closer to finding the hidden gems that are operating under the ideal conditions.
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