Can growing too fast be dangerous?

Growth problems can erupt without notice, don’t let them hit you in the face.

 

Growing too fast can be dangerous

When your business is growing too fast, the inadequacy of working capital soon shows up in the deteriorating cash flow. Often, before you realise you have cash flow problems and the business is out of control. But keep in mind that the biggest risk you will ever take is not taking one at all.

If your business is in a growth phase, ensure you are working with accurate budgets to avoid surprises. If you are not confident in preparing and managing your cash flow budget, seek immediate help.

While many see a budget as a method of worrying before they spend money, as well as afterwards. They also feel that whatever happens is inevitable and beyond their control. If you feel this way, or you are in any way negative towards your cash flow management seek immediate advice.

Otherwise, you are taking unnecessary risks. The cost of seeking external help for your cash flow will be minuscule compared to the costs of not doing it. It might even save the business from a complete financial breakdown.

Ensure your business grows at a consistent rate you are able to manage. Fast growth requires extra capital for debtors, inventory, new machinery and general operating expenses. If you don’t have the capital, be very careful about how fast you grow your business. While a budget tells you what we can’t afford, it doesn’t keep you from spending. Maintaining a good working budget to produce the results you want requires discipline.

“Grow safely as you learn about and understand how your business behaves”. Peter Sergeant

Poor margins lead to poor profits and inhibit growth. If your margins are poor and your expenses are rising, there will be an immediate impact on your cash flow and profits. Low profitability generally means there will be poor cash flow at some point in the not too distant future, and growth will stall.

Finding yourself in such a position, you might want to re-examine your pricing strategy. As well as competitive advantages, to see how they can be changed to enhance profitability and the cash flow to grow safely and sustainably. You don’t want growth to stall.

See if you can lower your expenses and increase productivity at the same time as a first step. Review the technology you are using and new technology that might have become available to solve your growth issues.

Increasing your prices is not the end of the world. Those businesses who sell on price alone are in a race to the bottom, don’t get caught up in it. Increase the prices of your products and services according to the features and value you offer your customers. Take into account the customers problems, frustrations, wants and needs.

Avoid surprises

Plan your capital requirements, prepare accurate budgets and update your business plan well in advance. Ensure your business model is one that works well, all day every day, in order to avoid surprises. Focus on making sales first, raising capital second.

If you do this well, you might just avoid having to go into more debt. Do you feel you are not going to be good at handling the financial aspects of the business? If so your time may be much better spent taking control of opportunities that will increase revenue and profits, rather than sweat over the money. Outsourcing to financial advisors, bookkeepers and accountants can also be very cost effective.

Take time to evaluate your systems and business processes to see what needs to be improved, or tightened up. Have confidence in your systems and processes, ensure they keep working even when things get tough. Harness your strengths and take the actions that will rid you of cash flow problems forever.

Just because your business is making good profits is no good reason to start spending. The more you put money back into the business, the faster you’ll be able to grow and the more profitable your business could become in the future. Building financial reserves can eliminate your cash flow problems forever. A penny here and a dollar there, placed at interest, goes on accumulating. In this way, the desired result is attained.

Many businesses fail because the owner wasn’t willing to invest sufficient working capital. Others were surprised because they weren’t educated on the difference between spending money frivolously and investing money into the business for growth. Many others fail, not because of a lack of assets. By not understanding the risks and rewards associated with cash flow. It can be like playing with fire.

Personal Experience:

You will find as your influence in the marketplace grows and as you increase your market share others start to react to win back their customers back. Unfortunately, I have found that the length of time you are associated with an industry and the more you experience in business is no guarantee of your success.

There will always be new issues to deal with such as globalisation, technology advances trade practices, multi-national policies and market forces generally. Competition has become so strong that in order for you to win, someone has to lose.

It is very clear to me that measuring the key numbers is critically linked to our success and the more you work the numbers the more you understood what is going on. It’s easy to measure the numbers of individual sales but can become more difficult with growth. Now,  I instinctively know that measuring key numbers is linked to performance and is critical to your future.

Sometimes you get it right by doing things well, other times subtle forces will undermine your efforts and this is where your ability to understand measurements certainly helps you make better decisions.

For example, we once captured a major market share in one of the best areas in our region by really studying the numbers and customers in that area. Having captured about 80% share, it taught me a very important lesson. Leave something in it for your competitors, Find the right market share to suit your business, because if your share becomes too high competitors will take their revenge, even to the point of knocking you out of business.

 

 

 

 

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