I participated in a panel for the Minnesota Chapter of the National Association of Corporate Directors a Wednesday mornings a few weeks back. The audience was composed of private business owners, attorneys and accountants. Although the panel’s focus was on smart growth for private businesses, the topic is certainly relevant to any business. To keep the focus on private companies I did some research and found that private businesses, particularly family owned businesses, tend to be overcapitalized (i.e. use significantly more equity than debt), often are understaffed, and tend to focus more on the top line than the bottom line. All three of these traits impact growth in significant ways. Finite capital is a problem for any firm but a private company relying on equity is even more challenged. This “equity” is all internally generated and forces firms to make tough choices on how to fund growth. Understaffed businesses will find that their human capital resources are stretched too thin to be able to manage any growth in the business, and will likely not even have the time to adequately evaluate any ideas that could generate growth opportunities. And the final point, the over-reliance on top line growth, is in my mind the most problematic of all. If the mindset is to meet revenue growth projections the decision makers are likely to chase revenue with little analysis of the impact on profitability. This not only causes tension with finite capital but it can also quickly destroy value. To that point I ended my presentation with the following example that showed how conserving capital can add value.

I am on an advisory board for a small construction supply firm. This business has benefited from the stimulus spending and the owner has done a great job streamlining her working capital. She used this growth opportunity in her business to reevaluate her customer base through accounts receivable. Although she now has fewer customers she is more profitable. She was using some of her finite capital to fund customers who did not provide a positive return on her investment. She is now in a much better position to weather any future economic downturns and she has a much better appreciation for how she deploys her capital.  She truly understands her expectation for return on her capital investment.

That is smart growth!