Increase business profits without taking on debt

Increase profits without debt

Many modern IT and computer business owners feel they are under pressure to continually grow their business, to increase  turnover year on year. Governments, banks, finance houses, equity investors. Borrow, invest, grow. If you're not continually taking on more clients, more staff, generating more income, you're a failure and will end up sleeping in the park. That's the old cliche. but is it always the truth?

In my view, no. The obsession with top line - turnover - at the expense of profit is a fundamental error. Borrowing extra funds at a high interest rate, taking on staff or clients for the sake of 'growth' might well be a worthwhile strategy in certain circumstances. If you're looking to float your business, for example. For most though, taking on debt without a thorough, workable plan for boosting profitability is a problem. Not just for individual businesses and owners, in terms of debt and more work for no benefit. It might even help explain some of the UK's productivity issues.

Productivity is a measure of economic performance that compares the amount of goods and services produced (output) with the amount of inputs used to produce. Inputs include workers time and wages.

'UK productivity is lower than in France, Germany and United States – and almost all of this gap is due to a lack of investment in capital and skills, new analysis from the London School of Economics and Political Science shows.'

From the LSE

If you're running a business that doesn't have a constant flow of work to keep staff busy long term but is simply trying to grow by increasing headcount, hoping the increased business will follow organically, will not be as productive as it could be. As a simple example, a business consisting of two people making £50k profit is twice as productive as the same business employing 4 people.

'Of course', the banks will say, 'that's a temporary situation'. Well, it is IF you have a realistic plan to bring in enough business to keep 4 people busy long term. If not, and you have a temporary spike in demand, you might well be better off taking on temporary staff or using sub contractors. Look to share costs and collaborate with other businesses.

Rather than taking on debt, increasing headcount and marketing spend, you might be better off concentrating on taking steps to improve productivity. Some investment may still be required  in terms of ensuring equipment is up to scratch and that your staff are well trained for their roles but social and cultural issues can have a huge impact. Most people know all about 'presenteeism' and the pressure to appear occupied, even when there's nothing productive to be done. Take a step back and look at how your business works day to day.

The key is to remember that you're running your business, not the other way around. If you decide to expand, make sure you have a  plan to enhance your profitability. That is the key. Concentrate on the bottom line, not the top. Don't fall into the growth-for-the-sake-of-it trap.


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