Business Growth & Exit Ready Weekly - October 30: Building a Profitable and Valuable Business: A Growth-Driven Blueprint for SMB Owners

Welcome to the Business Growth & Exit Ready weekly newsletter! October 30th, 2024.

This is your weekly dose of resources, strategies for growth, scaling, profit maximisation, and lucrative exits. This week, let's explore Building a Profitable and Valuable Business: A Growth-Driven Blueprint for SMB Owners

This week I wanted to give you some new ways to think about how to have growth and profitability. As you grow you can fall into a trap of chasing revenues over profitability, margins can decline and expenses rise as you scale and your team grows. Profits can plummet.

I have a question for you: Are you a growth-minded business owner?

If you are, then let's get serious about it. It means you need to be strategic, values-driven, and different as a business. Growing and scaling a business takes discipline, freeing yourself from the day-to-day, surrounding yourself with the right people, and thinking strategically.

I hope you get something useful from this week's newsletter.

Rod Fraser

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Quotes of the week:

“Profitability is not about adding more; it’s about amplifying what already works well.” — Greg Crabtree, author of Simple Numbers, Straight Talk, Big Profits, known for his focus on streamlining profitability.

“A truly valuable business is one that thrives independently of the owner’s daily involvement.” — Jim Collins, from his work on Good to Great, emphasizing the importance of building systems that operate without constant owner oversight.

“Cash flow isn’t just about staying afloat; it’s the foundation of your freedom to grow and invest.” — Alan Miltz, co-author of Scaling Up, who emphasizes the power of cash flow management for sustained growth and stability.

“Growth happens when your team is empowered, your systems are streamlined, and your focus is on what matters most.” — Eliyahu M. Goldratt, from The Goal, focusing on optimising systems and empowering teams to drive growth effectively.

Building a Profitable and Valuable Business: A Growth-Driven Blueprint for SMB Owners

In today's dynamic business landscape, small and medium-sized business (SMB) owners are often stretched thin, juggling day-to-day demands while striving for growth and profitability.

To reach the next level, it’s essential to build a business that not only thrives financially but also operates efficiently and strategically, ultimately providing the owner with the freedom to focus on higher-impact activity.

There are five core strategies to help SMB owners optimise for profitability, improve cash flow, and build a valuable, sellable business that affords the freedom to step back and be strategic.

If you want to know a business go to the numbers first, they tell a story and it gives you a reality check of what's working and what's not.

1. Master the Fundamentals of Cash Flow

Cash flow is the heartbeat of any business. Without it, even the most profitable business can struggle. The cash conversion cycle—how long it takes to turn investment back into cash—is a critical area of focus. By optimizing your cash flow, you gain more flexibility to invest in growth or withstand lean times.

Action Steps:

• Analyse the Cash Conversion Cycle: Map out the stages from acquiring inventory or services to receiving customer payments. Identifying bottlenecks in this cycle can help reduce the time it takes to get cash back in your hands.
• Tighten Receivables and Payables: Encourage faster customer payments by offering early payment discounts or flexible options. Negotiate with vendors to extend payment terms where possible, allowing more cash to stay in your business.
• Forecast and Monitor Regularly: Build a cash flow forecast to help predict peaks and valleys. This will provide clarity on when cash might be tight, allowing for proactive measures rather than reactive scrambling. I like building this into a full 12 month rolling forecast.

2. Increase Profit Margins through Focused Efficiency

A business that’s “doing less, better” often outperforms those stretched too thin across multiple priorities. Optimising internal operations, focusing on high-margin activities, and eliminating unprofitable areas are vital steps in this journey.

Action Steps:

• Identify and Eliminate Unprofitable Segments: Regularly evaluate which parts of your business generate the most profit and which ones consistently drain resources. Redirect energy and resources toward activities that contribute positively to your bottom line. Jonathan Byrnes’ insight that 40% of most businesses operate unprofitably underlines the need for regular, profit-focused reviews. He has never found an exception to this. Interesting.
• Implement Standardised Processes: Streamline workflows and remove redundancies. A well-documented, standardized process can not only improve efficiency but also enhance employee satisfaction and reduce training time for new team members.
• Utilise Technology Wisely: Invest in software that automates repetitive tasks, reduces errors, and enhances productivity. For example, a CRM system can streamline customer interactions, while accounting software with cash flow analytics helps track finances in real-time. There are great strides being made in accounting and bookkeeping with AI.

3. Build a Team That Drives Growth and Value

Your team is essential to both scaling and sustaining a valuable business. A strong, cohesive team allows you to step back from daily operations, fostering a business that thrives beyond the owner’s involvement. When we work with a business as their growth partner we put a lot of emphasis on team cohesion, clarity, rhythm, and flow. This only happens through design.

Action Steps:

• Foster Autonomy and Accountability: Give team members the tools and authority to make decisions within their roles. When employees are empowered and trusted, they take greater ownership of their work, driving productivity and freeing you from micromanagement.
• Invest in Training and Development: Developing your team’s skills enhances the quality of work and prepares employees to take on larger roles, setting up a succession plan that’s appealing to potential buyers.
• Align Team Goals with Business Goals: Ensure each team member understands how their work contributes to the overall growth and value of the business. This alignment can increase motivation, reduce turnover, and build a culture that prioritises long-term growth.

4. Focus on Value-Driven Growth

Increasing the value of your business goes beyond profits and sales; it’s about creating a strong, scalable foundation that’s attractive to future buyers or investors. When a business can operate without the owner’s constant involvement, its value and saleability increase substantially. This can only happen with a scalable operating system driven by the team.

Action Steps:

• Document Key Processes and Procedures: A well-documented business shows potential buyers that it operates independently, with defined processes in place. This minimises risk and adds value.
• Develop Recurring Revenue Streams: Predictable, recurring revenue increases business stability and attractiveness to buyers. Consider subscription models, retainer contracts, or long-term service agreements. Customer intimacy and being relational strengthen these streams.
• Position the Business as a Standalone Asset: Focus on building a brand and customer base that exists independently of the owner. This can involve establishing strong, multi-touch marketing systems, diversifying customer channels, and building relationships that transcend the owner.

5. Give Yourself Space to Be Strategic

The ultimate goal is to work on the business rather than in it, transitioning from a hands-on operator to a visionary leader. By setting aside time for high-level strategy, you can focus on opportunities for growth, innovation, and partnerships that drive long-term value.

Action Steps:

• Set Aside Time for Strategic Thinking & Planning: Dedicate time each week, month and quarter to focus on strategy, review KPIs, brainstorm growth opportunities, or analyse market trends. This time is essential for making impactful, proactive decisions rather than reactive adjustments. Use a 90-day rhythm that includes the whole team so they can drive the business.
• Prioritise High-Value Tasks: By focusing on high-impact activities and delegating or automating lower-value tasks, you’ll ensure your energy is spent where it matters most. As CPA Greg Crabtree points out, optimising profitability often involves saying “no” to low-margin activities.
• Seek Outside Expertise: Work with advisors, coaches, or mentors who can offer an outside perspective and help with strategic thinking and planning. This is especially useful for navigating transitions, such as preparing for an exit, where the insights of specialists like management accountants or legal experts in M&A are invaluable.

Building a Business That’s Profitable, Valuable, and Ready for the Next Chapter

Implementing these strategies requires a commitment to change, but the rewards are profound. A business with optimised cash flow, streamlined processes, a capable team, and an owner focused on strategic growth is not only profitable—it’s resilient, valuable, and ready for sale when the time is right. By building this type of business, you not only create a financial asset but also give yourself the freedom to breathe, make strategic moves, and enjoy the journey toward greater profitability and business success.

So, take the first step. Start with a cash flow analysis, identify where you are profitable, and focus on efficiency. Build a team you trust, foster recurring revenue, and document your processes. The freedom you gain and the value you build will be well worth the effort.

References:

1. Goldratt, E. M.?(2004).?The Goal: A Process of Ongoing Improvement. North River Press. A foundational book on process improvement and efficiency, focusing on the Theory of Constraints and strategic operations management.
2. Collins, J.?(2001).?Good to Great: Why Some Companies Make the Leap… and Others Don’t. HarperBusiness. Insights into building a self-sustaining business that thrives independently of the owner, emphasizing leadership and disciplined processes.
3. Crabtree, G.?(2011).?Simple Numbers, Straight Talk, Big Profits!?Greenleaf Book Group Press. A practical approach to profitability for SMBs, focusing on clear financial metrics and how small changes can drive profitability.
4. Byrnes, J. L. S.?(2010).?Islands of Profit in a Sea of Red Ink: Why 40% of Your Business is Unprofitable and How to Fix It. Portfolio. Explores profitability analysis, identifying unprofitable segments, and making data-driven decisions to boost overall business value.
5. Miltz, A. & Harnish, V.?(2014).?Scaling Up: How a Few Companies Make It… and Why the Rest Don’t. Gazelles, Inc. This book focuses on scaling businesses effectively, with sections dedicated to cash flow management, team building, and profitability optimization.
6. SmartCompany.?(2023).?2023 Reader Survey. SmartCompany. Recent insights into the main challenges for SMB owners, highlighting the growth challenge for over 90% of respondents.
7. Smart Exit Report. William Buck (accounting firm). An analysis of exit preparedness among business owners, noting that only a small percentage are successfully prepared for exit.

Recommended Reading:

The Goal: A Process of Ongoing Improvement by Eliyahu M. Goldratt:

The Goal is a business novel that follows Alex Rogo, a manager tasked with turning around a struggling manufacturing plant. Through the guidance of his mentor, Jonah, Alex learns to rethink traditional business processes and focus on continuous improvement. The book introduces key principles from the Theory of Constraints (TOC), which emphasizes identifying and addressing bottlenecks in operations to achieve optimal productivity.

Key Concepts:

1. The Theory of Constraints (TOC): Goldratt teaches that every system has a constraint or bottleneck that limits its performance. Identifying and managing this bottleneck is crucial to improving output and achieving overall goals.
2. The Five Focusing Steps: TOC outlines a five-step process for improvement:
3. The Importance of Flow Over Efficiency: Goldratt argues that focusing solely on individual efficiencies doesn’t always lead to optimal outcomes. Instead, a business should focus on the smooth flow of work through the entire system, removing bottlenecks that slow down operations.
4. Continuous Improvement: Rather than settling for temporary gains, the book emphasizes ongoing improvement as a process, encouraging managers to adapt and refine their strategies as the business environment evolves.

Goldratt’s storytelling approach makes complex concepts accessible, transforming operations and productivity lessons into an engaging narrative. The Goal has become a cornerstone for business leaders seeking to streamline operations, maximize productivity, and drive sustained profitability by focusing on process improvement and strategic thinking.

Eli' work was pivotal in focussing on the bottleneck or the biggest constraint first. Quite often just like a gestalt, it would pop everything downstream. The One Thing follows this theory too.

Rod Fraser - Business Growth Mentor + Investor - Business Growth Strategies Pty Ltd

We partner with management accountants, commercial lawyers, and other professionals to help a business owner grow, scale, and build a profitable and sellable business.

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Check out our last two newsletters from Business Growth & Exit Ready

October 23: Breaking Through the Plateau: High-Impact Strategies to Reignite Growth in Your SMB

Here is our last article: The Power of a Skilled Management Accountant: Driving Profitability and Value for a Saleable Business