Here are some indications that your company’s growth is too rapid:
- Growth Not Based on Solid Ground: Is your decision to expand based more on impulse or on sound financial evaluation, market studies or economic analysis? Oftentimes, the expansions are a result of the owner’s personal desires to take advantage of market opportunities rather than a real understanding of the company’s capabilities and the necessary capital for the project. The undercapitalization of projects can bring you challenges.
- Difficulty in Serving Loans: Loans acquired for expansion are so large that servicing them consumes the company’s earlier established cash flow. In addition, in today’s tight banking market, banks are likely to insist and enforce tight covenants. Failure to meet these covenants can result in the bank calling the loan.
- Poor Accounts Receivable Management: Fast growing companies often experience problems with their account receivable management. Despite a significant increase in sales, collections don’t keep pace with the company’s need for cash. The financial distress caused by the fast growth could bleed the company dry.
- Eroding Customer Service: Customer complaints increase and servicing the growing customer base becomes a problem. Oftentimes, in companies growing quickly, the back-end support systems, delivery and order fulfillment sections fail to catch up.
- Inability to Manage: As the business owners become more involved with trying to administer all of the new operations acquired, many business owners lose focus of the essential business functions. Business owners take on too many hats and as a result perform many of the roles poorly. In a growing company, the business owners need to let go of some control and recruit and retain personnel qualified and capable of handling the growth.
- Inadequate Internal Systems and Procedures: Growing companies must be able to obtain information (internal costs and budget, competition, inventory controls, cash flow, sales growth, among others) in a timely, organized and efficient manner. Systems and procedures that once handled a smaller company may not work effectively any longer.
- Mounting Overhead Costs : Rapid growth could result in increased overhead which could squeeze out profits. With the prospect of lower profitability, getting financing for the business will be much harder and servicing existing debts may be put at risk. Rising overhead costs could also make meeting your payroll more difficult.
