Don't you believe it ... Growth is good

Beware: growth is often the last way to improve your business. Here's why ...

Last Updated: 31 Aug 2010

Growth can dilute quality and disperse efforts. Sometimes, it happens this way: you start a line of business and enjoy early success, but the going gets tough. Rather than persevere and push the business to its full potential, you start again with some other line. This happened to a consultancy I know - by the time it had reached turnover of £3m it was in four different businesses, while some of its competitors were doing £15m in just one (the most attractive). Soon, the whole mess becomes unmanageable and collapses under its own complexity.

You may grow the wrong part of the business. All firms have some highly profitable customers or products, and others that barely break even. Few businesses can tell which are which. Sod's law guarantees that you will focus on growing the least profitable elements.

Pressure to grow can lead to ill-considered acquisitions. The big problem with acquisitions is that they enable you to add lots of revenue and profit to the profit-and-loss account, where they are very visible, while the costs of these takeovers are hidden in the balance sheet in ways that only accountants understand.

For an illustration of these last two perils, look at the history of Cable & Wireless. It grew rapidly by acquisition, but in 2006 realised that 80% of its customers were unprofitable and therefore had to be dumped. So what's the alternative? Know your existing business inside out; grow profits, not revenues; grow what you have until it really can't grow any more; and avoid acquisitions.

Alastair Dryburgh is head of Akenhurst Consultants -

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