Amazon wasn’t even profitable until 2015. Fueled by the bold vision of its CEO, Jeff Bezos, the company spent a lot in its early days to build a future where the company could dominate.
Today, it appears the vision has been fulfilled. The company’s continually explosive top-line growth has finally led to a very profitable bottom line.
Still, in the early days, Amazon had to justify its spending to investors and even other team members, who had concerns about high operating losses and financial sustainability. This is a common conflict many businesses have to continually address.
Within any organization with a budget, there’s bound to be issues between expenses, revenues, and profits and losses. Here’s how companies can prudently balance business development and investment with expenses:
Understand there is no one-size-fits-all approach
As noted in a guide published by the US Small Business Administration, “managing the finances of a growing business requires persistence and balance.” There is no one right approach, not only because each business’ needs, goals, and situation are unique, but also because we live in a world of uncertainty.
After all, macroeconomic forces can alter business plans. Internal decisions about how to use resources can also change with the times.
With that said, companies should unite teams around a common goal: growth and development. The strategy, and how fast it accelerates the business, depends on the proper balancing of opposing forces, one in which financial leverage, sales growth, operating expenses, and profit margins must be considered.
Within any organization, visions may not align. This is where companies must compromise and find direction.
Establish a clear development strategy
Jamie MacDonald, a business development expert, recommends leadership take an objective look at their company’s current situation, analyzing strengths and weaknesses and financial health. Input from all facets of the business, from the budget-minded CFO to the growth-oriented CMO to the efficiency-focused COO, is necessary to ensure the needs of the organization are effectively balanced.
For instance, a business could perform SWOT analysis (strengths, weaknesses, opportunities, and threats). This can help uncover growth opportunities that would otherwise go unnoticed.
Once you locate problems to fix and potential growth areas, it’s time to identify strategic objectives. This means laying out high-level goals for all areas of business. Then, break this down into short-term plans that describe what teams need to do to achieve these goals. Next, establish ways to manage performance and adapt and improve as business development is ongoing.
Of course, this is easier said than done. As Peter Bregman, CEO of a global management consultancy, notes, there is always a tendency for leaders to think about their “own arrows — their piece of the company,” rather than the company as a whole.
Bregman says there isn’t an issue with crafting a unified strategy. What’s necessary is to remember the “big arrow” — the direction in which leadership hopes to take the company. Strategies across every department should keep the big arrow in mind. The key is consistently emphasizing this overarching strategy. This will make decisions around financial leverage, operating expenses, growth strategies, and more much easier.
Stay on top of finances
Prudent CFOs and accountants remain crucial to ensuring growth is sustainable. A staggering 82% of businesses that fail do so because of poor cash flow management, according to a US Bank study.
Clearly, any business development strategy must keep cash flow in mind.
For example, financial leverage is only a good idea if the return on investment exceeds the cost of debt, or the influx of capital leads to greater bottom line growth. If sales growth can’t rise quicker than expenses and debt, then the business will not be in position for success. Though it’s worked eventually for some companies, top-line growth at the expense of the bottom line can be dangerous. Without profitability, funding for business operations and development becomes more difficult to obtain and manage.
One way businesses can obtain help and guidance is through their investors. Business development companies like Saratoga, for instance, not only invest in developing companies, but also provide strategic advice and managerial assistance.
When considering growth strategies, businesses should think of both the top line and bottom line, and how the two should feed off one another. There is no need to highlight one above the other, as both are important to long-term success.
A company must attempt to simultaneously earn more revenue while continually optimizing business processes to lower operating costs. Set goals that detail how an increase of X percent in revenue should lead to an increase in X percent in profit. This will put the company on a path greater market share and positive cash flow. This is how businesses can set themselves up for long-term success.
Remember the direction ahead
Intelligent handling of finances, savvy business strategizing, and thorough execution of plans requires leadership maintain focus on the vision. With solid communication and transparency, conflicts between expenses, profits, investments, and debt can be solved, and the business can successfully forge ahead.