Why is the $1 Million in Gross Revenue Important for Small Businesses?

Crossing the $1 Million gross revenue level is a key indicator that a small business is becoming established in its industry, local business sector or a prospective contractor or with larger corporations, public sector organizations. Being an established business is more than hitting financial benchmarks. The owner has matured into an experienced business decision maker who manages about five to ten staff members. The business is operating with processes and practices to sustain itself and take growth steps.

The key benefits to business owners of hitting the $1 million gross revenue level it that corporations frequently prefer this minimum business size to qualify as a contractor. Business bankers are also more receptive to doing business with companies of this size.

It takes an investment in growth planning, ongoing operations improvement and financing to reach this established business milestone. The patterns of success of client businesses who crossed the $1 million milestone are:

  • Commit to working toward the $1 Million milestone.
  • Understand the investment in time and money as benefit to the business long-term.
  • Have realistic time frames to cross and sustain growth beyond $1 Million.
  • Learning from this early revenue growth effort is practice for future growth to achieve long-term goals
  • Do all the homework necessary before you seek funding in any form.

The most frequent errors we have observed with clients as they aim for any growth step are:

  • Selling more product than they can produce
  • Producing more product than they can sell
  • Inadequate planning, funding, and operations to build and sustain a larger company

Once your company is beyond the $1 Million gross revenue level, there is even more to consider in reaching for higher levels of revenue. Mid-Market revenue levels now range from $40 Million to $3 Billion! You can grow your business to generate multi-generational wealth when the processes for planning, operations and funding are well thought-out, fine tuned and managed.

Intangible Value May Be More Than We Think

McKinsey & Company does research for decision makers in policy and business. Once in a while they sneak in an interesting sidebar of research that could actually address some major social and economic issues. In mid-November they issued a research report on the value of the Global Balance Sheet. The major statement from the report was, 68 percent of global net worth is stored in real estate — and the balance is held in such things as infrastructure, machinery, and equipment and, to a much lesser extent, so-called intangibles like intellectual property and patents. (Source: Rise and Rise of the Global Balance Sheet, McKinsey and Company)

Low Interest rates have accelerated the prices of real property. However, the low interest rates increased real estate prices and the wealth gap for low income population segments.

The McKinsey report included a fascinating side bar on accounting for the value of intellectual property (IP) held in companies. They referred to a paper published in 2016 by Ryan Peters and Lucian Taylor which calculated potential increases in value of IP on Balance Sheets for corporations. The McKinsey research paper went on to say that there should be more investment in intellectual property and innovation because people produce products and services. Investing in development of human capital, innovative products, brands and patents adds to the value of companies and the economy over the long-term. Accounting rules that amortize (deduct) the costs of developing valuable IP, intellectual property on Balance Sheets at 20% per year may be excessive.

This shift in looking for value from work by people is important to small and mid-size businesses where the performance and talents of owners are critical to question, What is the value of small and mid-size businesses? Intangible assets are described as human capital (meaning talents), innovative products, brands, patents, software, customer relationships, databases, and distribution systems.

This expanded view of value does open doors for increasing the value of small companies. Business owners can add value to their companies by publishing content, creating distinctive new products and adding whole business lines. The pandemic environment may be wobbly, but keep working on new ideas and innovations.

Here are links to commentary on the research on the value of IP and the Global Balance Sheet
Intangible capital and the investment-q relation – ScienceDirect

Is An Annual Plan Enough?

Around this time of the year, many companies already have their plans and budgets for the next year. This used to be a routine effort. This year’s planning requires more due to the climate of uncertainly and tensions.

The Covid-19 pandemic is an important whack on the side of the head for independent business owners. We need to do way more than just one year. Envision the future as far as you can go to sustain and grow your business. Courageously write down or draw a picture of what could happen that is great, good and hard over the next 3, 5 or 10 or more years for your business activities.

Put on your hard hat and acknowledge the complex conditions that exist in your industry and your community. For example, if you are in the food industry you must tackle:

  • Short food supplies due to drought and fires
  • Shipping delays
  • Labor shortage
  • Consumer preference for takeout dining
  • Consumer pent up demand for socializing in safe groups

How To Get Started:

Start with a list like that above identifying conditions your business must deal with in the next 12 – 18 months. Then ask a lot of questions of peers and google search to look for gaps and problems that you are really good at fixing and filling. Go through the list of challenges again and have write down what the risk means to your business. Also, write down how you can narrow gaps or fix problems. These ideas for solutions that you can confidently act on are future opportunities are potentially future valueWrite your solutions down so they make it into your future plans. Then consider time and resources to address risks and act on opportunities. With that information you can start you planning and just lay it out over time 12 to 18 months.

Given the deep impact and uncertainty of the Covid-19 conditions, owners should look ahead for at least 3 and better 5 years to lay out timing for closing gaps and making major changes. Why look that far ahead. Because, if you have a clear plan and realistic timing and steps to get to your end goal it will be much easier to get essential resources

You can find forecasts of industry trends, market shifts and changes in local business districts that help predict future sales. Your City Economic development officers, local chambers or libraries can direct you to information sources and organizations.

What if you are planning to retire? Then you need to look even further into the future. Retirement planning is essential no matter what your age. If you had to go into your savings to get through the pandemic, then you have to revisit and reflect long-term saving goals as part of business expenses.

Make sure you have an exit plan in case you do decide to close your current business in 2022 or 23 for any reason. Know how to find current selling value your company. Learn what you must do to transfer the business to relatives or employees or a creative merger into another organization.

Make It a Habit to Plan for 2022 and Beyond!

  • One-year plan to guide your immediate operations activities
  • Three-to-five year to plan for operating improvements or growth steps to pursue opportunities you are uniquely qualified to successfully complete
  • Five-to-ten or more years ahead long-term strategies like acquiring commercial property, retirement needs and wants, emergency reserves in case of major economic, social disruptions

The Future of Small and Mid-size Businesses

I am pleased to see more research going on about micro-businesses – The GoDaddy study done with the Milken Institute

Search the link to the Milken data and maps on micro-business density in the Metropolitan Areas. I checked out the City of Oakland. It was interesting to see that high density was concentrated in the Downtown area. My guess is it’s where the larger co-working spaces are located. Quickly, the density of micro businesses fades out the further you go East and West across the City of Oakland.

I am disappointed that these massive studies are, primarily, for influencing policy. It is a lack of rich information and data on the millions of micro-, small- and mid-size businesses in this country. This segment makes a major contribution to GDP yet deep knowledge especially about diverse business enterprises is limited. This lack of knowledge limits design and delivery of innovative and effective learning experiences and solutions.

Current Trends in Small Business Recovery

As we talked deeper about the current trends of the recovery, we focused on the long-term risks to the restaurants. He commented on the strangle hold that the delivery companies have on small businesses. They make it difficult for customers to order directly from the restaurants. The high fees of the delivery companies eat away at the potential for profitability for small restaurants.

Restaurant owners are right to be worried if the consumer preference for take-out ordering and delivery goes on through 2022. More business closures are going to occur or they must make long term improvements in their business models.

As we go into the holidays, this is the time for consumers to make reservations and actually go out for sit down dinners. Keep going to your favorite restaurants and bars after New Year’s because that is the slowest time of the year for this sector. Support your restaurants beyond Restaurant Week.