Opinions expressed by australiabusinessblog.com contributors are their own.

A booming business is something to celebrate. Despite bleak headlines about the pandemic, rising inflation, shortages and pressure on supply chains, many US companies have not only persevered, but have achieved success. In fact, most companies are growing.

A research by Guidant 2022 Small Business Trends found that 65.3% of businesses are currently profitable and over 50% are focused on expanding their locations and increasing their workforce. The same goes for their mid-sized and larger counterparts – 83% of mid-sized US companies are show optimism also in business performance.

Reporting a healthy operating result is not always easy. After all, increased sales and a profitable business are the product of hard work, whether it be innovative marketing initiatives, solid financial strategies or restructuring – or in some cases a windfall. These companies are to be applauded; however, it is important to avoid complacency.

OG Mandino II, author of the bestselling book “The Greatest Salesman in the World” once said“I will not allow yesterday’s success to lull me into today’s complacency, for this is the great foundation of failure.”

Related: Don’t Be Complacent: 13 Proven Ways to Improve Your Business

Investopedia cites complacency as one of the top six reasons a company fails, and a culture of complacency prevents leadership teams from predicting downturns and other risks that could harm a company.

When a business is doing well, it’s easy for owners and executive teams to become complacent — and the proof is in the stats. A Goldman Sachs survey found that 44% of small businesses: less than three months of cash reserves to weather a recession, and leading financial executives predict a relapse of six months or more — but current preparations may not even be enough to get through it, and most don’t have the right financial strategies to get through it, according to a global Coupa survey.

So what should be done to avoid complacency and ensure a business has a solid foundation when the business is booming?

1. Ensure sustainable growth

While growth is great, unchecked growth can leave a business on shaky ground. Take LuLaRoe for example. Shrouded in scandal, the demise of multi-level marketing fashion company LuLaRoe (which can now be seen in a docuseries) fell victim to its own success. As the company struggled to meet demand, quality declined, shipping problems arose, and lack of sales staff training led to a drop in sales. Too often, leaders’ focus on growth is short-sighted rather than on sustaining it for the long term.

Related: 4 Ways to Achieve Sustainable Growth

2. Maintain cash reserves

A company with cash reserves has a higher chance of surviving a downturn and it is recommended that companies have at least three to six months to persevere through a downturn. To achieve this, it is essential to create and stick to budgets, set monthly goals and monitor cash flow, while eliminating unnecessary expenses.

3. Reinvest in your business

There’s the old mantra, “You have to spend money to make money.” Reinvesting profits in improvements that can improve the business or generate wider awareness presents an opportunity to generate revenue. Business enhancements include training and education of personnel, investments in improved software or technology or, for physical locations, remodeling or improved fixtures and lighting.

Companies can also choose to reinvest profits to drive growth through a marketing initiative that includes tactics such as social media or Google ads that bring in leads and sales. According to an CMO surveycompanies are poised to increase their digital marketing spend in 2022 to stay competitive.

4. Management fees and debts

When business is going well, it provides an opportunity to pay off debt, which reduces the debt-to-equity ratio and leads to a more valuable company. It also increases the creditworthiness of the company. And the interest rate cut saves money. While debt isn’t always bad and can be used as financial leverage, increasing debt and high interest rates are a barrier.

5. Strive for Vertical Integration

Vertical integration allows the company to take ownership of the supply chain for its products. This allows for better control and lower prices, allowing the company to increase future profits. Lately, with supply chains under pressure and in a vicarious position, vertical integration is making a comeback at many companies such as General Motors, Tesla and Amazon. However, vertical integration comes at a price. It can take large capital expenditures to pursue and there is often a steep learning curve when scaling the business into a new industry.

6. Limit risks and ensure a continuity plan

When things are going well, now is the ideal time to take a step back and do a risk assessment to prevent unexpected things at the expense of those hard-earned gains. Few companies are prepared for crises that can derail a company. According to a study by Mercer, only 51% of companies have a continuity plan that provides protocols for when disaster strikes. It is also an ideal time to review insurance policies and identify any gaps or exclusions that could prevent a critical claim from being paid.

Related: Do You Have a Business Continuity Plan?

7. Consider a captive insurance company

One way to achieve vertical integration while managing risk and building cash reserves is to own a captive insurance company. Captives can write broad loss coverage, including policies with few policy exclusions. Captives can also insure gaps in commercial policy.

In terms of risk, this ensures that a company can be protected from potential threats with greater certainty that the claim will be paid. Since the captive is owned by the company or business owner, premiums paid minus claims are retained as profit. Thus, a captive allows a company to integrate vertically by owning its own insurance company. By accumulating profits and providing better protection, a captive insurance company enables a company to survive crises and disasters.

While experiencing success, take the time to celebrate. Reward your team, open that bottle of champagne and thank your clients or customers – but don’t fall prey to complacency. History has taught us that doing business is cyclical and that it is crucial to use the good times to prepare for the unexpected downturn.

Business strategies, entrepreneurial advice, and inspiring stories can all be found in one place. Discover the new Entrepreneurs Bookstore.

LEAVE A REPLY

Please enter your comment!
Please enter your name here