The success of a company cannot and should not be measured in terms of explosive growth. There are many examples of companies that experienced unfettered expansion, only to suddenly find themselves out of business.
Much like the driver of a racecar speeding down the track, if you do not steer or strategically apply the brakes to your company, you may find yourself in serious trouble. Before jumping into full-blown expansion mode, consider the following three issues.
Stick to your core business or embark on a new venture?
Risk-taking is what makes American entrepreneurship great. None of the technologies, services or commonplace luxuries we enjoy today would have materialized without an individual or group of innovators willing to take those risks. In fact, many great companies originated with the founders risking virtually everything because they believed in their vision.
However, if you stray too far from your core competencies or try to become too diversified, you set yourself up for failure. Not all diversification is dangerous, but before investing valuable resources, evaluate your knowledge of the marketplace, product or service and the related business strategies necessary to succeed in today’s competitive environment.
By sticking to your core business, you can create a market niche or develop expertise that will separate you from your competition. Instead of being a mile wide and an inch deep, you will be a foot wide and a mile deep — providing an improved product or service to your customers or clients. Expanding by increasing your abilities in the profitable aspects of your business is money well spent.
Lease vs. purchase
When companies decide to expand their productive capabilities, either in terms of productive assets or facilities, the question always arises — should we lease or purchase?
Companies flush with cash many times rush off to purchase either productive assets or additional facilities without performing a cost-benefit analysis. While ownership provides many rights and privileges beyond those enjoyed under a lease, leasing terms are becoming more attractive, especially for those whom lessors deem to be a low financial risk.
Consult with your professional advisers before making any decisions. And perform a cost-benefit analysis with your accountant and discuss favorable leasing terms with your corporate counsel.
A few examples of cost-benefit considerations include:
- Comparative impacts on cash flows
- Impact on balance sheet (debt covenants, financial obligations)
- Obsolescence factor (Will more suitable or productive assets or facilities become available in the future?)
- Cost of buildout or retrofitting assets to your specific needs
- Level of rights and privileges granted under lease (freedom of use and enjoyment) vs. outright ownership
- Is the cost of the lease, the interest component, greater or less than you can earn if you were to invest the company’s cash in other growth generators?
Consultant vs. employee
In terms of labor, consultants are generally more expensive when you measure their per unit cost (hourly or weekly). However, they generally provide highly focused expertise to meet the task at hand without the obligations that accompany employees (benefits, emotional aspects of hiring/termination, etc.). Much like the facilities analysis, it is recommended that you perform a cost-benefit analysis on your staffing solutions.
Consider the following:
- Level of talent and experience available to perform the role (recruiting)
- Need for the skills (growing or diminishing over time)
- Timeframe in which the skills are required (How soon must they start?)
- Amount of training required
- Financial obligations to attract the talent
Many companies offer internships or co-op opportunities to university students. Students are starving for experience and tend to be more flexible.
Part-time personnel can provide a win-win situation that may enable a company to save in recruiting expense once the student graduates, because he or she is already familiar with and enthusiastic about your company.
Managing the growth of your firm should not hinder the company’s performance. Rather, it should enhance it. By investing your resources wisely and considering the risks and rewards (costs and benefits), your company has more opportunity for success. Karen Fortune ([email protected]) is a senior manager with Tauber & Balser P.C. in the Forensic Accounting & Litigation Services Group. With more than 12 years of professional experience in both public and private accounting, she possesses extensive experience in financial reporting, auditing and corporate restructurings. She assists attorneys and their clients in cases involving damages, contract disputes and application of Generally Accepted Accounting Principles (GAAP). Reach her at (404) 814-4968.
