I think we are all familiar with this famous fable. Seems a goose would lay a golden egg every day. Gold is very dense and an egg of gold would weigh? Let’s be conservative and say a pound, that is approximately $28,000 per day amounting to over $10 Million per year. But after a while, that income stream was not enough. So the owners decided to cut open the goose and take out all of the gold. But we all know what happened next, there was no gold and the goose died. Sad day for the goose! Awful day for the goose’s owners!
Yet in business, we are often tempted to do just that. Kill the business rather than being content with sustainable, profitable growth.
Anatomy of a Failure
No one sets out to kill the business. In fact, frequently it starts with a successful product or service and the desire to grow faster and larger. This may include an increase in the geographic foot print, entering new or foreign markets, or moving the production off shore.
DO NOT GET ME WRONG! Growth and increased profits are a good thing. Growth is not the problem, but poor planning, execution and management is!
It Takes Capital to Grow
One area needing to be evaluated and monitored is capital. It takes capital to grow a business. Depending on the margins and other variable, it may take a lot of capital to grow a specific business. But how much? Here is how to start:
Part of launching new initiatives is to develop a plan. Be realistic about the goals and timing of revenues and always do a worst case contingency plan if things do not happen as fast as projected, which is often the case!
2) Run the Numbers
Now you need to forecast the Income Statement, Balance Sheet and Cash Flow Statement. This may be more complex than you think if you don’t understand the mechanics and interplay of these three statements. The key is the income statement. Cash flows can be estimated on that if need be. Don’t forget to take into account any required buildup of inventory and delay in collecting receivables. Most of all, be realistic.
3) Tactical Planning
Now develop a tactical plan. Who is accountable for what action and by when? The time constraint is a key component of accountability. Identify the deliverable and determine up front what you do if it is not achieved as planned. Failure to deliver may well be the difference between success and failure. And some failures can be catastrophic!
4) Now rerun the numbers
Update the model, do some sensitivity analysis and decide if the amount of capital required can be generated by this endeavor or is available from other sources either internally or externally from a bank or investor.
Don’t Kill the Goose!
Ultimately the key is not taking on more risk than you can afford to lose. Don’t allow the company to be in the position of running out of cash, EVER! Slow down if you need to. Don’t take on too much too quick by opening multiple fronts without the management infrastructure and money to do so. Protect your core business and take calculated risks. Assure your goose lives to see the next day so that you can still gather your next golden egg tomorrow!
This is the first of a planned series of Business Fables, based on Aesop’s Fables. Keep an eye out for the next fable and I think you will see a theme developing.