Success: Rapid growth

Showing posts with label Rapid growth. Show all posts

How do I know if growth is too fast?

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.

Growing too fast

1. Your business may face a cash flow crunch as it deals with increased demand for your products or services.

The costs of running a fledgling business can be difficult to manage, especially coming on the heels of cash outlay to open the business. At this point, your business may be surviving on credit as you try to grow sales and revenues. As you push for higher sales, expect monthly expenses to grow and possibly exceed your monthly revenues. If your collections are on track, that's not an insurmountable problem. However, a cycle or two of delayed collections could leave your business in that proverbial spot between a rock and hard place.

To keep cash flowing anticipate the cash crunch with a realistic plan that accounts for delays in the collection of receivables. Prepare a back-up plan for raising cash from personal sources or through a pre-approved line of credit from your bank. Diversify your client base if possible. If you depend on one big client as a revenue source, you are leaving your small business vulnerable to the whims of the client.

2. Operational inefficiency because of uncontrolled expansion will cost your company time, money and other resources.

When your business starts growing quickly, you will be forced to improvise to manage increased demand for your products or services. When business buildup happens too fast and too soon, you will not be able to adhere to your perfect business plan where your operational processes flow smoothly. You may be pressured to hire more people sooner than you anticipated, and you may not be skilled in choosing the right people or you may not have the time to redesign your workflow to accommodate increased demand. While higher demand should lead to economies of scale, this may not happen if rapid growth results in any of these problems:

Your new employees are poorly trained
You can't manufacture or buy inventory quickly enough to fill orders
You haven't accurately determined the cost of delivering your products or dealing with customers
Your customer service isn't up-to-par

Manage the ordering system and the order fulfillment process so that you will not end up over-promising to your customers. If possible, talk to owners of other fast growing businesses to see what problems they experienced and so you know what to plan for. Ask advisors at a local Small Business Development Center (SBDC) or SCORE chapter for advice. Their services are free, and they may be able to help you be aware of problems and solutions for your type of business. Remember, too, it is better to turn down customers than risk annoying them if you can't deliver on time or can't deliver quality goods and services.

3. You start receiving a lot of negative feedback due to customer service issues.

A few customer complaints occasionally are part of doing business, but when negative feedback starts to pile up, it is an indication that you are not meeting client expectations. This could be due to lack of personnel to manage client interactions. It could also hint at other issues if your staff is spread too thin and is cutting corners to meet customer demand.

Clients who provide positive feedback are bound to be repeat customers. A host of negative feedback could indicate that you are unable to cope with the market's expectations in terms of the delivery because you are overwhelmed. Make sure to monitor your feedback system regularly, keep an eye on social media mentions of your business, and have a plan in place for handling both positive and negative feedback.

4. Your employees are overworked, putting in long hours and getting ready to jump ship.

A vibrant workplace inspires employees to work their hardest, but when work consumes most of their waking hours, you run the risk of losing your trained and trusted employees. You may find that your business is a revolving door of employees in spite of generous compensation and benefits.

Pay attention to the evolving workplace culture as your business grows. Find the time to discuss quality of life issues during staff meetings. Make sure to address personnel matters as needed, but do it expeditiously.

5. Your ability to lead and manage falters as your work processes come under pressure from increasing demand.

As the business grows, the founders eventually transition to a leadership role, delegating most of the operational decisions and functions to someone else. However, growing too quickly could make you lose your focus on essential functions and take on too many tasks, delivering below-par outcomes that lead to frustration within your company and disappointment for your clients. The problem escalates when internal business systems and procedures are mishandled due to everyone being overworked. Inadequate control over budgeting, inventory management, marketing and sales programs could derail your success as a business.

Outsourcing some functions is a viable method to delegate some non-critical administrative functions. This arrangement can be transitional or permanent, depending on your needs, but it is important to scale your processes to align with your growing business. No one is an expert in everything, so this may be the phase where you bring in the best personnel you can find to help guide your company through the changes required to become a bigger and better business.

Growing too quickly

At first glance, it's a problem we'd all like to have: demand for your business is growing so quickly that you can't meet it. However appealing it may seem, rapid business growth is accompanied by specific dangers and potential liabilities that can capsize a company just as quickly as having too little growth.

Problems With Staff

When a business is growing too rapidly, it significantly increases the demands on each individual employee, and on your team as a whole. This can easily lead to stressed-out employees, low morale, and fighting among the members of your previously unified team. If employees are asked to do more than they are capable of because the demands made of your business are suddenly skyrocketing, some of them may decide to leave, which will only increase the workload of those left behind. Alternatively, you may find yourself doing more hiring than actually running your business, and new hires sometimes initially add confusion to the mix rather than help control it.

Customer Dissatisfaction

It's likely that you were providing a great product or great customer service -- which is what attracted all the business that led to rapid growth in the first place. Unfortunately, you're now seriously understaffed for dealing with all of that business. You may have to start cutting corners if you're going to try to please everyone, but this can lead to inferior service and customer dissatisfaction with your company. A decline in quality of either products or customer service is one of the greatest risks to your company.

Diminishing Profits

If demand begins to increase exponentially, you may find yourself in a situation where your profits are actually shrinking, as the outgoing cost of meeting demand begins to outpace your cash flow. You may find that you need to pay employees overtime to keep up with demand, or stock ever greater amounts of inventory at substantial cost. This can lead to an expensive spiral of constantly needing to borrow money just to keep up -- a situation in which an unforeseen expense can potentially bankrupt your company.

Job Satisfaction Decreases or Disappears

You may have started your own business so that you could set your own hours, be your own boss, and provide a product or service that you could be proud of. One of the attendant risks of fast growth is that your level of job satisfaction could significantly decrease. If you are consistently losing valued employees or valued customers and always struggling to make ends meet, your job could become a constant crisis management scenario that you dread walking into every day.

Growing too quickly?

For each group, it was a matter of how the businesses managed their growth, and these seven business saboteurs are more times than not the culprit of a downfall.

1. Cash flow crunch. The ebb and flow of cash in, cash out gets more complicated as you grow. It doesn’t take much growth before your monthly expenses exceed your operating credit, and suddenly one bad sales month takes on a whole new meaning.

2. Operational clumsiness. It’s unlikely that you have had a chance (or the need) to implement any of those fancy-sounding operational acronyms that essentially mean running your business as smoothly and as efficiently as possible, because in the old days, doing things slowly didn’t matter.

3. Customer service failures. This is where your popularity becomes a double-edged sword. On the one hand, high demand creates a buzz, further driving demand. The flip-side is that keeping up with that demand is difficult, especially when facing rapid growth.

4. A success spending spree. It’s tempting to see the orders come in as a sign that it’s time to spend. It’s true that growth requires adding team members and infrastructure, but don’t take it as a license to go on a spend-a-thon.

5. Human resource risks. Change makes people worry, especially when that change puts the business at risk. It doesn’t take many months of barely meeting payroll before even your right-hand man is dusting off his resume.

6. Decision-making changes. Growth means stepping back from the day-to-day operations into a leadership role (and that isn’t a bad thing); however, it does disconnect management from the nitty-gritty details that may affect business decision-making.

7. Leadership shortfalls. Any leadership faults become painfully obvious when a company starts to grow. Just as awkward processes only matter when the company needs to scale up, the same holds true for leadership skills.

Rapid growth often means taking on more debt

Companies that grow quickly often take on a lot of debt to fuel their growth, and for good reason. When you’re growing quickly and have the opportunity to expand your business, it makes sense to ride the wave and seize the opportunity.

Rapid growth, however, often comes to a rapid end. When you borrow heavily to let your business grow faster, it’s easy to run into debt issues when your growth slows down and your business’s quarterly profit stays at a steadier level.

Borrowing in order to fund your business’s growth isn’t always a bad thing. Taking out loans on the assumption that rapid growth will be continual, however, can lead your business into risky territory.

A single bad month, a single missed customer payment or a single setback is often all it takes to cause your business to miss a payment on its debt, trigger a series of events that can lead to its eventual insolvency.

If your business has the chance to grow rapidly by taking on debt, make sure you take a conservative approach to borrowing. Holding back on your loan might cost you growth, but it offers your business stability that rapid growth can’t provide.

Growing fast could mean changing your product

Not all companies are built to be big. If your company offers a personalised service or a handmade product, for example, rapid growth probably isn’t compatible with your product and your business model.

If your business model isn’t scalable beyond a certain point, growing your business often means compromising or changing your product. This can, in turn, reduce your product’s value and negatively affect demand and customer satisfaction.

Imagine if an exclusive Swiss watch brand like Rolex quadrupled its production in order to sell more watches. Since the value of its product is based on its exclusivity and quality, increasing sales might negatively affect its customer perception.

If your business model doesn’t allow for rapid growth, don’t compromise it in order to increase your sales. While this approach works in the short term, it usually has an immensely negative long-term effect on your business.

When you’re growing, it’s easy to ignore bad news

Many entrepreneurs make the mistake of valuing revenue growth above any other metric. This has a predictable result – growth of revenue, but not of profit – that is quite difficult to see when your company appears to be growing every month.

When your company is growing every month, it’s easy to spend more time focusing on vanity metrics like total revenue, all the while assuming everything is okay, than actually looking at the nuts and bolts of your business.

From growing liabilities to holes in your business model that weren’t so apparent at a slower growth rate, growing rapidly often results in your structural issues that can seriously harm your business growing in the background without you aware.

When these issues affect your business’s solvency, the results can be disastrous. As your business grows, keep a close eye on all of its metrics – not just total revenue – so that you’re fully aware of your business’s financial status and solvency.

Paper growth can often lead to cash flow problems

There’s nothing more valuable for a growing business than cash. When you’re doing more business, closing more deals and generating more income every week, it’s easy to mistake growth of accounts receivable for real, cash-based growth.

If your company isn’t collecting the cash it’s due, there’s a real risk of it running into a cash crisis while it grows. This is because fast growth not only increases the rate at which cash comes into your business – it also increases the rate at which it goes out.

If your expenses are increasing every month in order to pay for a larger number of employees and a bigger advertising budget, your business needs to be able to bring in cash consistently from its customers or clients.

Let your accounts receivable grow at a faster speed than your bank account balance and there’s a serious risk that your company will run out of cash, making it difficult for you to pay creditors despite the amount you’re owed by your customers