I wrote a 3-year business plan for our company at the beginning of 2013 and one of the most important decisions I made at that time was to reduce our margins. When I wrote the plan we were a highly profitable company. In fact, we were too profitable.
Perhaps that last statement takes you by surprise. Let me explain.
Every business person knows to make money you have to “invest” money. This investment is what fuels growth. Many business people long for the day when they will not have to invest and the business will grow on its own. But, it won’t.
Our business enjoyed a compound annual growth rate (CAGR) of 35% annually over the first 10 years. We invested heavily in our growth over that time and after becoming profitable in year 3 our profits grew steadily, outstripping our top line growth by the end of the decade. Then growth slowed.
Our growth rate in our 11th through 13th year in business fell to eight to nine percent. That’s not bad, but certainly not what we were used to. The good news was we were making a lot of money! So, who can complain? But I knew something was terribly wrong.
No business ever “arrives” at the place where continued success is guaranteed. The minute you begin to think that, and take your foot off the accelerator, you immediately begin to slow, and eventually, go backwards. The ultimate result of this is going out of business if you let it go on long enough. I knew our slowing growth was due to a lack of commitment to the business demonstrated by taking more and more money from the business, and our failure to invest those resources back into the company.
I decided in 2013 to dramatically increase investment in the business. I did that by resolving to cut our profits in half.
When you invest money in your company, it is like blowing on the embers of a seemingly dead fire. Flames don’t immediately begin again. But, as you add more resources to the business, like logs to the fire, it grows hotter and eventually you are growing again the way you were. This is what happened to our company.
In 2013 our growth rate increased to 16% as we began fanning the flames. In 2014 our growth rate increased again. Last year, 2015, was our best year in business with a 46% increase in revenue. The fire is burning again. But what about profitability? Did the investment pay off?
Yes, it did. Our profits in dollar terms have grown by 250% in three years (after making the necessary growth investments). We did this by deliberately investing 50% of what we were taking out of the business three years ago back into the company. So, the profit percentage is way down, but the dollars are way up!
Our business is not unusual. This is every business’s story including yours. What’s your situation? Are you still growing the way you once did? If not, you must refuel the fire. And if you want to grow continuously, you must never stop!
http://oaaonline.net/wp-content/uploads/2016/02/logo-blog-1.png00OAA Adminhttp://oaaonline.net/wp-content/uploads/2016/02/logo-blog-1.pngOAA Admin2016-04-05 21:01:472016-04-05 21:18:51Why I Cut My Profit Margins by 50% (On Purpose)