When Your Business Booms, Prepare for Increased Costs
Mon, 06/23/2014 - 1:31pm | by jennaleesmith1
Tidal Petroleum Inc. was recently quoted as saying “Global demand will always grow while supply will become more costly to produce.”
Sure, they were talking about oil, but they might as well have been talking about shoes, books, cupcakes, consultancies, or any type of business product or service. There's a particular time in your business, maybe between one to three years in, when you start to get a foothold in the community and demand starts to grow. Surprise! Supply simultaneously becomes more costly to produce.
This type of "sink-or-swim" moment can decimate new businesses. Take, for example, the company behind The Old Reader. This service, which went into effect after Google Reader discontinued, catapulted out of existence after it became popular. The company and employees literally could not manage the costs of supply, even though they had an extremely large global demand.
Now, imagine that you're running a cupcake store that sells approximately 100 cupcakes per day. You can afford to make 100 cupcakes per day and still turn a profit. Then, suddenly, business booms and you need to produce and sell 1,000 cupcakes per day. How are you going to handle the costs? Sure, the extra revenue will pay for the extra costs of flour and frosting, but you're probably going to have to hire additional staff, for starters, which brings with it a host of other expenses like benefits and payroll tax. It's those kinds of expansions that can wipe out a business just as it's starting to get a foothold.
Here are some tips to handle the increased cost of supplies:
1. Raise your rates
Often, the best way to handle increased demands is simply to raise your rates. This works especially well for overbooked consultants, who can choose whether to handle fewer clients for the same amount of money, or more clients for increased profits. Even our cupcakery example can benefit from a little extra dough; raise the cost of cupcakes by 50 cents each, and 1,000 cupcakes brings in an extra $500 every day. That's enough to hire on another staff member.
2. Resist the urge to expand everything
If your storefront is tiny, keep it that way. If you only sell three kinds of homemade ice cream, don't invest in a fourth. If you offer home organizing services, don't suddenly expand into home decorating services. Businesses that have just started to grow often jump at the idea of achieving all their dreams - huckleberry ice cream! - but don't fall into that trap. Remember that the cost of supply is going to rise as well, so stay the course and don't introduce any new products until you've got an idea of what your new profit margins and budgets are.
3. Take out a business loan
If you have to make your cupcake store bigger, or expand your shoe warehouse, or even hire new employees, it's time to take out a business loan. It's best if you have a history of good credit with a local bank, so make sure to establish a business credit card early on and always pay it off. Talk to your loan officer about your increased revenue and related overhead costs, and come up with terms that make sense for your business, allowing you to grow while not falling behind on loan payments.
A sudden burst of business growth is one of the best things that can happen to your business. After all, it means people like you - you're doing something right! Just be aware that any increased growth comes with increased costs, and don't let a flurry of demand sink your fledgling business.
How have you handled periods of rapid growth? Have you found that your supply and overhead costs increase as your business grows? Let us know in the comments.