Seek to grow your business on profit – not loans

By: Adam Ewart

Date: 17 March 2011

The last two years have been tough. My business, Karacha.com is based in Bangor in Northern Ireland. It sells musical instruments, online and through my shop. Up until a few years ago, sales peaked around customers pay days. Now, people are much more cautious with their money.

Many of my customers now prefer to rent instruments rather than buy them. Our rental business has tripled, because parents are not racing out to buy ‘wee Johnny’ a saxophone until they know it’s more than a fad. Increased caution is to be expected, but it does not necessarily need to result in businesses closing.

In fact, despite the recession, many small businesses we supply have grown. And we’ve had more applications for trade accounts over the past two years than we did before the crunch.

The reason why many independent smaller shops have weathered the storm, I believe, is they are inherently run completely differently than large business. In a well-run small business, the owner has a good knowledge of all areas of the business. The larger a business becomes, the more cracks can appear in the foundations, cracks that can go unattended until it’s too late.

Certainly, in my sector, many businesses that failed were asking for it. Too many people believe the way to grow a business is to add as many locations as quickly as possible. Personally, my aim has always been to secure the biggest net profit on the lowest possible turnover. In other words – maximise my margins, not my turnover.

But in my sector (and in others, I’m sure) the focus hasn’t been on margin, more the drive to grow at all costs, with the misconception that with scale will naturally come profitability. This is why as soon as the recession hit, the smallest dip in turnover was enough to bring down some of the biggest chains.

I saw it firsthand several weeks ago. A company that held stock belonging to Karacha.com went into administration, entirely out of the blue. They had just moved into bigger and better premises and hired new staff to grow the business. All well and good, but they were balanced on such a knife-edge that the loss of the smallest amount of business resulted in them going bust.

In August I was being regaled with their success story. In October I found myself at their warehouse at 5am on a Saturday morning overseeing a considerable amount of our stock being moved by lorry before the administrators turned up.

If your business is worth a £100,000 loan, you or your business should probably be investing the same amount yourself. In the years leading up to the crunch, businesses were opening new premises and expanding too quickly without having a sound bottom line. Consequently, when the banks would no longer play the game, many businesses failed.

The general lesson from what I’ve seen over the last year is that small businesses should aim high, but don’t overstretch yourself or try to run before you can walk. You should seek to grow your business on profit – not on loans.

Adam Ewart, Karacha

startupdonutbannerbutton728x90