We are beginning a 4-part series, focused on safeguarding your business to withstand economic changes; both positive and negative. We will give you tactics to consider depending on how the overall economy is directly impacting you and the performance of your business. We’ll begin our series with five opportunities to contemplate during times of growth.
In March 2019, the NFIB Small Business Optimism Index increased to a historically strong level. Of the small business owners surveyed, 23% said the next 3 months was a good time to expand their businesses. If you are one of these business owners and the current market has been good for you, then here are 5 tips to help you capitalize on your success.
1. IDENTIFY & INVEST IN ALTERNATE PRODUCT LINES
As a small business, you are always striving to find ways to differentiate yourself from the competition. During good times, it can be an opportunity to expand and diversify your business offerings. To start, you need to do an analysis of your company’s competitive position in the market(s) that it currently does business. There are common tools available for this type of exercise. The first is a SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) and the other is a Brand Positioning Statement. The time, analysis and results of either a SWOT Analysis or a Brand Positioning Statement will provide clarity and identify key strategic initiatives (e.g. price increases, new product lines, new lines of business, re-positioning of the brand, acquisitions, etc.) that can further differentiate your company from its competition, strengthen your competitive advantage and drive growth as a result.
Key Takeaway: Perform a SWOT Analysis and/or create a Brand Positioning Statement
2. OPPORTUNITIES TO INCREASE PRICING
If you or your management team believes that the company is in a strong enough competitive position and has solid relationships with its customers, then you should review all opportunities to increase prices for products and services. Traditionally, this can be accomplished at a strategic level through a review of the company’s pricing strategy (e.g. cost-plus pricing, skimming, market-based pricing, penetration pricing, value-based pricing or premium pricing) and tactically through analysis of how individual sales are priced.
This is also an opportunity to analyze your current customers to see how the relationships can be expanded, whether they are the “right” customers while also determining what clients you might lose with a price increase. For most businesses, a 15% increase in your prices allows you to lose over 40% of your customers without losing any profitability. Read more about that here: The Easiest Sale: Upselling Tips
Key Takeaway: Review both company pricing strategy as well as deal-level pricing execution to identify opportunities to increase prices. Annual pricing increases tied to internal cost increases or deeper customer relationships/scope of work are also common triggers to spur regular pricing reviews.
3. INVEST IN KEY HIRES
For almost any business, human capital is a critical driver of growth and sustainability. With this in mind, you’ll want to find ways to invest in key employees to encourage business growth while also reducing your risk of losing these key people. Investing in your people is a great way to protect the future of your business. The alternative is potentially losing a key person which means lost dollars (according to Gallup, replacing an employee can cost 150% of his or her annual salary), lost productivity, and lowered morale. When companies are in growth mode and financial resources are more plentiful, making key hires and/or taking steps to reduce the risk of losing existing employees is an important area of focus. Some possible ways to retain and attract key talent include understanding what drives and incentives your people, creating deferred compensation plans, increasing benefits and perks along with looking at opportunities to increase their position and level of responsibility.
Key Takeaway: Work closely with an HR partner to assess your existing teams, the need for key hires as well as assess the risk and impact of losing existing employees. Build individualized strategies (using both financial and non-financial means) to both attract new hires as well as retain existing employees where the risk of loss is high.
4. INVEST IN SOCIAL MEDIA
Branding in today’s world should include the use of social media as a marketing channel. According to Pew Research, 70% of today’s consumers use social media, citing 75% of Facebook users visiting a targeted site daily. When social media is done correctly, it is a direct approach targeted to your consumer and much more pointed compared to past approaches with blanketing direct mail campaigns. This method not only generates brand awareness, but also establishes your position in the marketplace and creates trust with your customers in a targeted way. As these marketing dollars can add up very quickly, measurement of your Return on Investment (ROI) and overall efficacy is key. Targeting the right audience, in the right demographic, and through effective media channels (Instagram, Facebook, Twitter, LinkedIn, blogs, etc.) should show its returns quickly.
Key Takeaway: Consider hiring a Marketing Manager (in-house or an outside consultant) which will allow you to manage the cost and receive immediate results and data to understand which channel provides the best ROI.
5. INVEST IN CAPEX
As your business is growing, it’s a great time to look at future business needs and to capitalize on those investments. Investing in CapEx has its (non-cash) advantages through tax savings. Based on your tax and income strategy, capital equipment can have an accelerated depreciation in the first year and continue through its useful life. Depending on your tax planning strategy, investing in CapEx can pay (non-cash) dividends immediately. When you invest in a capital (or fixed) asset, you are allowed to depreciate that asset, with an expense, over different time lines – five, seven, ten years or more using IRS guidelines. Depreciation expense is reflected on your Income Statement, which lowers your taxable income (loss), therefore leading to a lower tax liability through its useful life. In addition, there are some special programs, such as Section 179 of the IRS guidelines, that allow for accelerated depreciation to promote small and new business.
Key Takeaway: Work with your tax professional on a plan that is best suited for you. Multi-year tax planning is required so as not to overextend yourself with capital expenditures or burden future cash flows and/or debt (or equity).
There are many different ways to take advantage of growth opportunities as a small business. Take note of these key takeaways so you have the potential to grow your business and achieve your goals.
Visit this link to read Part II and the rest of our Boom or Bust series.