Many businessmen dream of reaching their vision one day. But how many people do you think actually plan the way of achieving that vision through continuous growth? Considering the relatively higher business failure rate, it is obvious that not many of them do it. Many businesses run out of cash just when the cash becomes essential to facilitate business growth and then die down to fierce competition later on.
So today the effective growth always comes back to the amount of cash that is available in the business. How, when and in what you invest your profits, are the core drivers of growth. Most importantly, unless you facilitate growth you won’t survive for long since your competitors will definitely overtake you.
Some businesses have a plan for reinvesting profits to help the company grow, either by buying equipment, building facilities, or funding new hires etc. This continuous reinvesting of profits is necessary to insure continuous growth of your business, and in turn, the continuous increasing profits which follows.
Ansoff’s Product/Market Growth Matrix, provides a way of analyzing different growth strategies available to a company.
In market penetration strategy, Ansoff argues the company tries to penetrate the existing market while the market development involves going for new markets. But in both cases the company offers the same existing products. The best strategy in both these options is to continually evaluate and upgrade the scope of your marketing. This usually means spending more on your advertising and other marketing techniques.
Another key approach to grow your business according to Ansoff, is via product development. This is associated with continually developing new products which makes your competitors always lagging behind you. However developing innovative products involves a significant investment in Research & Development expenditure which should ideally financed by the profit reinvestments.
Any company exercising diversification, always carry a significant risk as the new business can go anywhere as a result of the new business not being your core competence. It is needless to say that any form of diversification will cause a heavy increase in capital expenditure as well as working capital.
So it’s quite apparent that you need cash to fuel any form of growth in your business. The most easiest way of financing this may be through reinvesting profits. However you need to ensure that any expenditure made on behalf of a growth strategy will result in the same in the future.
For instance, a one off sales rise throughout a short stint may give the wrong signal to the managers who in turn over-invest expecting continuous growth which will not materialize in future. If so you might suddenly find you have a large premises with ample unused areas due to in sufficient demand.
As the bottom line I would like to emphasize that reinvesting profits smartly is of utmost importance when growing a business successfully. However you need to know how best to reinvest to achieve your vision not to realize you have over-invested halfway.
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