We go into business for all sorts of reasons – to be our own boss, redundancy, a bright idea, turning a hobby into a business, and so on. Very few start people with a strategic approach to their business.
Once in business we “grow” the business through trial and error, making expensive mistakes along the way. But “growing your business” is an overused term. Growing sales, profits, team, market share, business value or lifestyle may require different strategies.
There are three main SME types:
Self Employed (Micro Business)
The simplest way of being in business is working for yourself, whether as a sole trader or a company. As sales and demand for products and services increase the self-employed often hire staff to assist. A “Self employed” person may have 2, or even 5, staff to leverage their time but essentially the owner is still the business and little income is earned unless the owner is working IN the business.
Being self-employed can be an ideal structure for the highly skilled, especially if those skills are non-transferable – for example a brain surgeon or a barrister. The self-employment option is also preferred by those not wanting the hassles of managing staff, or those who want to balance family/lifestyle with income earning activities.
The self-employed business growth strategy is to maximise productive time and revenue, minimise costs and downtime, treat the business as a cash generating machine and invest surplus cash into passive investments (that earn income while you sleep).
When you have sufficient passive income you can choose to stop working, and you may be able to sell your stock/customer list for a small amount, but the sale price will be woefully inadequate to fully fund your retirement.
The Business Owner (Small Business)
Successful self-employed people may evolve to become business owners with between 5 and 15 staff. Having more staff allows revenue to grow, as does business complexity.
Business owners wear many hats – sales, marketing, production, systems, leadership, HR, IT, finance etc. Being a business owner can be stressful because while business owners leverage their time, they have so many more responsibilities to cover.
Unfortunately, the complexity of small business can cause overwhelm, and some business owners scale back reverting to self-employment once again. Or they sell the business as is, for a low price multiple (the business is very reliant on them and therefore less valuable from a purchaser’s perspective). Or they go broke because they did not develop the necessary cashflow management and business planning skills to continually feed a cash hungry growing business to success tipping point.
The business owners’ growth strategy is to work ON the business to build a strong brand, processes and systems, ensure adequate capital and cashflow for growth, as well as nurture a high performing team and business culture. If successful then revenue / profits / cashflow will grow, and the business will remain manageable with trained staff and excellent systems covering all vital areas of the business from sales to HR to cashflow and risk management.
The Business Investor (Larger SME)
Successful business owners who grow and scale their business to 15 or more staff create a much more valuable business that is no longer reliant on them.
The business investor’s growth strategy is to continue to grow revenue, profitability, and invest in systems to the point where the business successfully runs under management supported by high performing teams. The business owner earns director’s fees and dividends, and perhaps a salary if they choose to continue to work in the business (either full or part time).
Since the business can successfully run under management the business value multiple will be high and the business owner could sell all or part of the business for a substantial sum. Alternatively, the business owner may retain ownership and earn passive dividend income. We recommend business investors reduce risk by diversifying their other investments.
Which Strategy is “Best”?
If you are an Elon Musk, Bill Gates or Steve Jobs you’ll be driven and not stop until the business becomes a global success story.
But for those looking for their most suitable growth strategy we recommend either:
- Being self employed with support staff and treating the business as a cash cow to build significant passive investments outside of the business, OR
- Grow the business aggressively through the business owner stage as quickly as possible to avoid burn out and reach the business investor stage where scale allows the business to run smoothly under management.
Summary
Being self employed is often seen as the poor cousin of business ownership. However, the stress of being a business owner employing 5-15 staff without strong systems and processes in place, or without the necessary business management skills can be stressful and bad for mental health.
Understand yourself, your resources, skills, and motivation – then be intentional about your business growth strategy. Thinking strategically about growth will help you avoid costly mistakes and make for a happier and more successful you.
Find out how Ann helps her clients by checking out her website below:
Ann Cooper-Smith
Q2 Ltd
Chartered Accountants and Business Strategists
