Ask Andi: Is there a way to predict small business sales ups and downs? Or is it something I just have to live with? Last year’s numbers revealed a swing in sales. Some of that fluctuation was seasonal, and some of it came out of nowhere. Previous years saw great fluctuations as well. Is this normal?
This week’s question about small business sales ups and downs comes from a software developer. The two owners, a senior and junior partner, take their business very seriously. They are committed to growing the business. One partner has 2 children in college; the other partner has 2 children in grade school. They both know that the success of their business will secure their children’s education, and pay for their own retirements one day. Figuring out how to make the most out of the potential of their business, has real financial payoff for both of them.
Small business swing in sales
Now, let’s get back to their question about swings in sales. Let’s take a look at what peak and valley growth does to a business, and why you want to avoid it. Then I’ll explain how businesses get into peak and valley growth. Next week, I’ll talk about what you can do to achieve a more positive outcome.
Most privately-held businesses do see peaks and valleys, some years up, some down. It’s like the old saying, two steps forward, one step back. Unfortunately, there is tremendous waste associated with this kind of growth pattern. Our readers, and anyone else who has seen similar trends in their business, have reason to be concerned about the ups and downs. They cost you a lot of money.
Sometimes the up and downtrend in sales masks an even bigger problem, that the business has hit a growth wall. The business bounces up and down in a fixed sales bandwidth. It looks like some years are up and some are down, when in fact the business is just holding its own, not really making any significant growth progress.
What really happens to the business in up and down cycles As many business owners know firsthand, it is costly to scale back a business as revenues fall. Sliding down from a peak costs you, as the business uses up reserves, or takes on debt, to cover the cost of operating at the peak level, while margins slip due to loss of income. As business drops, you may have to let good people go. If you don’t cut expenses fast enough, you use up savings to cover the shortfall between income and expenses. You pass on opportunities to expand, while your competitors pass you by.
Downward slope on an up and down growth curve
As you scale down, you may miss opportunities if you don’t have enough resources. You cannot afford to invest in cost savings opportunities if you don’t have enough money. Sound familiar? That’s the downward slope on an up and down growth curve.
Turn things around once you are on a downward slope. Driving the business up out of a valley uses more resources. At the bottom of the valley, most likely your business operates at a low-profit level. Or even worse, at below break-even. You have to use up savings, or take on debt, to make it through the slim profit margins. While you invest extra effort to build up sales momentum. Once sales pick up, you have to scale up your delivery, to meet the new demand. Play catch up with new technologies. Hire and train new people. Figure out if they are the right fit for the business.
Why do businesses get into up and down cycles? One common problem is they either take on too little or too much growth at one time. In our software developers’ case? They started into their latest up and down cycle by taking on a 43% growth leap in one year.
They took on more than they could handle. Had to digest it. Took their eye off the sales and marketing. Used most of their energy to hang onto what they had sold. That meant that the next year was down, and the year after that was flat. Now they are starting to dig their way out. This type of growth has cost them profit and used up reserves.
Persistence will be key to managing challenges
Other business owners live by the old adage of, getting by is good enough. They make some money for a couple of years, and live off the reserves for the next couple of years while they coast. As reserves drop, they go out to find more business and pick the business back up. They build up reserves again for a couple of years, and then it’s back to coasting. They accept it as truth that the business was meant to operate with ups and downs.
Finally, there are business owners who accept what they hear. In bad market cycles, they hear things like: it’s a down year, everybody is off, there’s nothing you can do about it. They wait for things to turn around. Or, they don’t know what else to do, so they wait and hope that things will get better. In good market cycles, they hear things like, things are picking up, businesses are making more money this year, the stock market is up, and they believe it, and go with the flow. Unfortunately, the entire destiny of the business depends on what happens elsewhere in the marketplace. The business has no real ability to determine its own future. And so the owner learns to live with the ups and downs.
Just because most businesses tend to grow in an up and down pattern, doesn’t make it right, or the best way to go. In fact, living with an up and down pattern wastes time, money, and effort, and costs the business significant future potential. Next week will take a look at a more profitable growth theory, which we call the Optimum Growth Model.
