It’s easy for a business to fall in love with a healthy, growing economy, like what we’ve been experiencing for the past nine years. But steady economic growth also creates a danger of overlooking the real reason why your business is growing. I recently facilitated a heated debate with an executive team of a fast-growth business. One of the partners shocked the room by stating, “Let’s face it, we’ve just been lucky the past few years. We’re in a great economy and we’re not performing as well as we should be.” It was an honest and sobering assessment that made the executive team realize that their recent growth was really the result of ‘a rising tide lifting all boats.’
When things are going consistently well in your business, it’s important to step back and honestly assess your situation. Put aside your ego and really understand what’s fueling your success. I’ve seen companies fail quickly because the leadership team didn’t prepare for the eventual downturn in the economy. Here are four questions to ask yourself to make sure your business is healthy, not just lucky.
1. Is your organic growth outpacing the industry?
The first measure of a healthy organization is that your organic growth is outpacing the industry. And if you’ve recently completed an acquisition to grow market share or gain strategic positions, make sure that the acquisition isn’t hiding any systemic issues with your core operations. I’ve seen companies report year-over-year revenue growth on the P&L, only to later admit that their revenue was flat without the acquisitions. It’s important to understand the organic growth of your core business. And always measure the impact of acquisitions to see if they really provided the return on investment that you expected.
2. Are you increasing your bottom line?
In a healthy economy, the majority of businesses should be able to increase their bottom line – net profit. If the market is consistently growing and your organization fails to exceed your industry’s average profit margins, it may be a sign of serious problems. I’ve seen many organizations use a healthy economy to invest in equipment upgrades, hire expensive team members, or add new product lines, but similar to acquisitions mentioned above, the organization failed to measure their return on these investments. In the end, they were using the profits from their core business to “try” new initiatives when they should have been reinvesting in their core business. To avoid this mistake, track new investments on separate line items in your P&L to make it easy to measure the return of your investments. If the investment didn’t make a positive impact to your bottom line, it may have been a poor decision or a sign of internal execution problems.
3. Are your processes getting better, faster, or cheaper?
When things are going well in an organization, it’s easy to sit back and enjoy the ride. Regardless of how well you’re currently doing, every organization should consistently improve their processes, team members and products or services. An example from the sports world is the Golden State Warriors. After recently completing the best season in NBA history, they used the offseason to make a blockbuster deal to add Kevin Durant to their team. Kevin is arguably the best player in basketball. It would have been easy to rest on their laurels as the NBA World Champions, but the leadership team knew that the competition would be coming after the Warriors even harder next year. A healthy organization monitors key metrics on all aspects of the business and consistently completes internal initiatives to become better, faster or cheaper.
4. Are you consistently building cash reserves and paying off debt?
It’s common in a growing economy to chase the next big opportunity. When there are endless sales leads and new opportunities at every corner, it can be hard to restrain your spending. But remember that what goes up, must come down – including the economy. A healthy organization has at least two months of core operating capital in the bank with no short-term debt. It’s okay to have long-term debt that matches the lifetime value of hard assets like buildings and equipment. But when times are good, you should prepare for the eventual downturn in the economy. In fact, a slow economy can be the best time to deploy capital to acquire new equipment and competitors.
Organizations that consistently deliver on these four areas – exceeding industry growth rates, consistently increase the bottom line, regularly improving the core business engine, and building cash reserves – are the organizations that are truly healthy and ready for a downturn in the economy. It’s more common than you think to be lucky in a great economy. But the truly “great” organizations thrive in both good and bad economies. Where does your company stand?
Rob Simons is a business coach at Simons.Coach – a Texas-based company that helps organizations build a culture of purpose, alignment, and accountability by implementing the Rockefeller Habits. Rob can be reached at email@example.com or 210-845-2782.