If you’re like most business owners, growing your business is one of your top priorities, but knowing how to go about it is a constant struggle. The concept of business growth is actually a simple one, but too many times people overcomplicate things.
I took a recent trip to Kenya, during which I taught a group of small business owners how to grow their businesses by presenting a simple illustration on multiplication. Since many of the business owners in the group did not have a good understanding of basic business concepts, I had to keep the language and illustrations as simple as possible.
I recalled a story a friend of mine told me recently. He started his first business when he was 10 years old. What did he do? He sold rocks. Yes, rocks. But these weren’t your ordinary rocks. They were polished.
He lived in a town in Missouri that was frequented by many tourists during the summer months. After the tourist season was over, the stores would sharply discount their inventory. One store would discount their polished rocks by 75%! So instead of selling the rocks for $1.00, they would sell them for just $0.25.
He would buy as many rocks (at $0.25 each) as he could afford and then turn around and sell them for full price ($1.00 each) at school. By doing so, he turned his $0.25 per rock investment into a 300% return!
Based on this model, let me show you the principle of multiplication from the initial purchase of one rock.
Buy a rock at the discounted price of $0.25
Sell it for $1.00. (gross profit is $0.75)
Reinvest that $0.75 to purchase 3 more rocks and live off of the $0.25 that was left over. Let’s call this $0.25 your salary.
Sell those 3 rocks at $1.00 each for a total sales price of $3.00. (gross profit = $2.25)
Again, live off of that $0.25 salary and reinvest the balance of $2.75 to purchase 11 more rocks.
Sell the rocks at $1.00 each, for total sales of $11.00. (gross profit = $8.25)
This time, give yourself a $0.25 raise and keep $0.50 to live off of and reinvest the balance of $10.50 to purchase 42 more rocks.
Once you’ve sold the 42 rocks for $42.00, you’ve now made a gross profit of $31.50!
As you can see, by minimizing expenses and reinvesting the bulk of the money into the business, the inventory grew from 1 rock to 42 in just 4 turns of the inventory, and went from a gross profit of $0.75 to $31.50! You may not be able to purchase your inventory at a 75% discount, like my friend, but you should do your research to find the lowest price you can purchase it without sacrificing quality.
The principle in this illustration applies to any business. The problem with most businesses is that their expenses grow at the same rate or higher than their sales. And instead of reinvesting their profits, they spend it on other things that do not lead to growth.
Take a good look at your income statement and develop a strategy to increase sales and minimize the cost of goods and expenses in order to achieve a substantial profit (at least 10% pre-tax profit). A large portion of your profits should be reinvested into your business in ways that will lead to growth. If you continue this strategy, your business will blossom sooner than you think.