Spending Wisely: What to Do When Profits Soar

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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When you started your business, you knew the odds were stacked against you. But someone has to beat the odds — why shouldn't it be you? And what do you do when it is you? As the economy rebounds, more and more businesses are going to start seeing profits beyond their current business model. When you're in that position, how can you best put that cash surplus to good use?

It will be tempting to try to ride the wave of your success and put more money into marketing, perhaps in new markets or media that you haven't previously been able to afford. That's actually the last thing you should do. I don't mean don't do it at all — just that there are several other things that need to come first. When you overload any system, it crashes. The same is true of your business. You now have the breathing room and resources to focus on things other than marketing. Invest in the things that will allow your business to continue to grow.

1. Plug the Holes

Your newfound success may be exhilarating, but it also means you're more exposed than ever before. Satisfied customers will be your least expensive and most effective marketing. On the flip side, dissatisfied customers on a large scale can ruin your business beyond repair. Now is the time to take care of those nagging operational issues that you've been putting off. It's also the time to look at your entire value chain process — from suppliers all the way through to customer service — and figure out where any inefficiencies or limits are. Start thinking less in terms of pushing for growth and more in terms of removing the barriers to it.

2. Invest in Scalability

Are you ready for the next stage of your growth? Can your current suppliers meet your growth needs, or do you need to find one who can, or some supplemental suppliers who can, in combination with your current supplier? Are your own production systems capable of meeting your growth projections? Do you have enough office/retail/warehouse space? Are your IT systems suitable for the next stage of your company?

Perhaps most importantly, can you handle the customer service needs that will arise one, two, three, six months after your current sales? I recently met an entrepreneur whose business had boomed after his product was covered on Oprah, but he hadn't scaled his customer service operations. To see just how bad the problem was, he called in himself and was told by the system that his approximate hold time was 14 hours! Needless to say, his business crashed almost as quickly as it had boomed.

3. Invest in Quadrant 2 Projects

In time management, Quadrant 2 is for those tasks which are important but not urgent. This includes production capability activities (covered above), relationship building, recognizing new opportunities, planning, etc. Some of these require only your time, while others cost money. For example, this may be the time to explore participation in industry organizations or executive peer groups, if you haven't already. Do some market research to explore possible new product offerings. Consider hiring a management consulting firm to guide you through this phase of your growth and help you update your business plan. Or work with an executive coach on your personal productivity and leadership skills. These are all short-term expenses that create long-term value.

4. Hire Professional Management

You're an entrepreneur — you've been wearing many different hats, as has most of your team. Now is the time to start letting you and your team focus most of your time on the highest-value activities. It's also probably the time to bring in some new ideas, especially if you and your team haven't run a company at this stage of growth before. Take a skills and experience inventory of your management and figure out where the biggest gaps are — that's where you should consider hiring someone from the outside.

5. Have a Little Fun

You've been working hard and so has your team. Enjoy it a little, else what's all the hard work for? Don't be extravagant, but do something that everybody can enjoy: a company outing, a foosball table or gourmet coffee machine for the break room, let everyone pick new desk chairs, etc. Make sure it's something that either permanently improves the work environment or is a truly distinctive and memorable event.

Your business is a complex system. During the early stages, companies generally drive growth by pushing more into the input of the system, i.e., more leads. While the marketplace is providing the input pressure, now is the time to work on the rest of the system to set up for sustainable growth: fix the leaky pipes, remove any choke points, and keep the moving parts well oiled. Once you've done all that, you can start up the marketing pump again.