March 31, 2017

Grow or Die

So you’re an entrepreneur with dreams of building a small business.

You’ve probably devoted a few soul-sucking years into a giant corporation and now you just want to do interesting work and stop worrying about the corporate ladder. You would be happy with a solid, consistent salary drawn from your own small business.

Well, I have bad news for you.

Over the long term it’s impossible to operate a business that doesn’t focus on growth.

Let’s say you run a business that sells extra-special socks at $10 per pair. Each pair requires $5 of material to make and you hire a couple people to make socks at $20/hr. Let’s say you can generate a salary of $50,000 per year selling 20,000 pairs of socks. Everyone’s happy, right?

Fast-forward 5 years. Because you’re OK with a steady salary, the price of your socks are still $10 per pair and you still sell 20,000 pairs a year. The problem is that the cost of cotton has risen with inflation and each pair now requires $6 of material to make. Worse, your sock makers haven’t received a raise in 5 years – the best sock makers are quitting to join other sock companies that pay better. The remaining sock makers are the least productive. You’re left with a group of sock makers that take longer to make the same number of pairs of socks. So whether you raise salaries or not, your labor costs have increased.

Your rising cost of materials and labor squeezes your profit margins and you are unable to pay yourself $50,000 anymore. What you’re left with over the long-run is a slowly dying business that will end up closing once costs outsize selling price.

Despite the romantic notion of running a simple business that generates a steady income, you must grow just to remain in place. To maintain a $50,000 salary, your little sock business must raise prices and/or sell more pairs of socks just to cover costs that inevitably rise over time.

Grow or die. That’s the growth imperative.

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