If You Want to Grow, Forecasting Is Your Best Friend

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You know you want to grow your business, but how do you figure out the best time to invest in growth? Can you predict how the economy is going to grow or shrink? Or, is there something that’s going to prevent your entire industry from growing?

In an interview with Sabrina Parsons, the CEO of Palo Alto Software, I find out exactly what you should be doing to successfully plan for growth.

Stop hoping for a miracle—it’s really all about strategy.

Can you tell us more about how a business owner can figure out whether or not it’s a good time to invest in growth?

In the big picture, you have to be tuning into current events because that’s going to give you a lot of information about where the economy is going.

For example, if you are in a business that requires a lot of gas, this might be a good time to grow. Gas is really cheap. Fuel prices have really come down and you could take advantage of that. Those lower costs could give you better margins or could give you money to invest in the business.

You always have to think about macroeconomics—the U.S. economy and the world economy—because that gives you some sense of “can I grow right now?”

But, you also have to think about what’s going on in your industry—sometimes there are economic factors within an industry that can be a great opportunity for growth. If for example, you’re a manufacturer and you use raw goods, it’s important to know what’s going on with those raw goods: Is paper cheap? Is it not? What’s going on with that chemical you use to treat your widgets? Has it gone up in price? Has it gone down in price? Has it become commoditized?

Figuring out whether or not it’s a good time to grow comes down to planning strategically and taking the time to understand what you’ve done as well as and what your opportunities are. After all, there may be opportunities for growth within a local market that have nothing to do with the big-picture economic climate. For example, your biggest competitor just shut down and you’re the only one in town. Now, you’ve got a big opportunity to grow.

One of the most useful tools I use to determine if I can grow is financial forecasting. Running different financial scenarios helps you figure out if you’ve got an opportunity on your hands. For example, what happens now that fuel prices have gone down by X percentage? How does that really affect your cost structure? Is there enough money for you to actually re-invest?

What mistakes do entrepreneurs often make when they’re trying to grow?

The biggest mistake entrepreneurs make is not understanding how much cash they need to grow. Growth is cash intensive.

There are very few businesses that can grow without having access to cash or capital, even service businesses. In order to grow, service businesses usually need to hire more people. You usually need to hire them and train them before they start producing. Even a service business is probably going to have to invest in order to grow.

Also, anybody who has inventory understands that inventory costs a lot of money. Not a lot of entrepreneurs totally get how it can put them out of business.

Imagine that you get a Walmart order you’ve been dying to get. They’re going to order 50,000 widgets and you’re going to have to get those widgets produced and send them to Walmart, usually shipping on your dime. If you’re lucky, Walmart will pay you in 90 days. That’s a huge cash outlay which can put your business completely out of business if you haven’t planned correctly.

And that is the number one mistake businesses make: not understanding the cash flow implications of growth.

Given how much goes into planning for growth, should business owners be thinking about it at the beginning stages at all?

Yes, absolutely. But they should understand what the capital requirements are going to be. They need to do a cash flow forecast. Then they can see, “Oh okay. I can deal with that. My business can get a $100,000 credit line,” or, “Oh crap. I don’t have access to that much money. Maybe I need to pare my growth plan down.”

Running forecasts and then looking at your cash flow forecast will help you understand whether you need to slow down your growth, or whether you can actually speed your growth up.

What you may have to do is plan for the growth. You may have to say, “Okay, I’ve done my strategic forecast. I don’t have access to all the cash I need to grow the business, so, for the next six months, I’m going to plan to put money away so I have the cash I need to grow,” or, “For the next six months, I’m going to make sure my books and my finances look perfect and that I pay all my vendors and increase my credit score so that six months from now, I can apply for a line of credit. Then I can plan for growth.”

If you’re going to grow, you’ve got to forecast and look at different scenarios. You have to know what it takes to grow. Are you ready to grow aggressively right now, or do you need to plan for slow growth?

At Palo Alto Software, we’ve grown while being profitable and cash flow positive. It means growth has been slower than it might have been if somebody invested $5 million. But the growth is still there. It has just been very purposeful and very careful, especially in the beginning when we first launched our latest product, LivePlan.

How did you and the team at Palo Alto Software plan for growth?

When we launched LivePlan, we put a plan together. Using as much information as we had, we guessed what was going to happen and then did small tests to see if our assumptions were correct so that we didn’t risk the entire business.

We said, “Okay. We currently sell this Windows product. It’s an okay business model but we want to change to this new business model—a subscription model. What does that change do to our cash? What does that do to the company and the revenue?”

It was very purposeful and there was a lot of testing and a lot of time spent validating ideas before we completely switched business models.

We transitioned slowly. In fact, we’re still transitioning. You can still buy our legacy product, Business Plan Pro, but at this point, 90 percent of our revenue comes from LivePlan. That has happened over the last four and a half years and very carefully and purposefully, always looking at strategic forecasts and then at plan versus actual: How did we do compared to our plan? Did we hit our metrics? If we didn’t, why? Are there places we can optimize our cost structure? Are there places we can optimize our conversions and customer targeting?

It’s important for us to always be very careful and diligent and to keep an eye on what we plan, what we did, and how we performed in the previous year so that we always have a big picture context of what our numbers mean to us.

What advice would you give growth-minded small business owners? What would you tell them to ask themselves?

Firstly, “Do I have enough money in the bank? If I don’t, do I have access to financing so that I can get money?” Growth is going to take capital.

Secondly, “Do I have the right managers on board as I grow?” As a business owner, one of the biggest pain points can be a lack of time. In order to grow, you need to be able to delegate. Say that you’re opening a second restaurant; you focus all your attention on the new restaurant. Meanwhile, the original restaurant that was doing fantastically just falls apart because it turns out that you needed to be there one hundred percent of the time in order for it to be successful. The only way to solve this problem is to have good managers on your team to keep everything running smoothly so you can focus on other things.

And finally, why do you want to grow? Do you want to grow because you want to build an empire and own it? Do you want to grow because that’s the only way you can see to bring in more revenue and because you want to put money aside to send your kids to college, or for retirement?

It’s important to really understand what your personal goals and objectives are because growth is going to take a lot of work and blood, sweat, and tears so it’s important to have a very clear idea of what you’re trying to accomplish. If your goal is to sell the business, you have to know what it’s going to take to do that. Maybe in your industry, you can only sell your business if it’s reached a certain revenue benchmark. In that case, that’s what the goal is.

A lot of the time, business owners are just growing to grow. There’s so much involved in growth that knowing why you want to grow and what you want to get out of it is a really important exercise.

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Posted in Growth & Metrics