Business growth is a good thing right? On the whole yes, growth shows a demand for your product or service and usually means your business stands a good chance of being sustainable. However, business growth is complex, impacting every aspect of your business and not all of these impacts are immediate or obvious.
Everyone has heard the stories of small businesses that grew overnight into multinational companies. The story you don’t hear as often, but the one that is based in reality, is that many businesses that grow, especially those that grow quickly, actually fail as a result.
The majority of problems that arise from business growth stem from the perception that to grow simply means to increase sales, which will bring in more money, which will increase profit. This is a grossly simplified formula that encourages a dangerously narrow focus when it comes to managing growth.
Growth causes a chain reaction that creeps its way through your business and this is the case regardless of your business or industry. If you haven’t planned for these far reaching impacts they can catch you unaware with dire consequences.
Here’s a real example from my days in business banking. Management of a small successful earthworks company made the decision to chase larger contracts and were successful. To fulfil the contracts they needed to scale up so they hired additional staff and purchased new machinery.
What they hadn’t planned for was that the larger contracts came with longer payment terms and they were faced with a long lag between their initial outlay and payment. Now if they had planned appropriately for this growth they could have approached their bank and had the choice of numerous products that would have facilitated this lag in cash flow.
Unfortunately, their plans for growth stopped at getting bigger contracts, the cash flow lag caught them by surprise, and by the time they realised what was happening it was too late for the bank to help. The business folded.
The scenario in this example probably seems obvious, but bankers see variations of this story all the time. Business owners don’t plan/manage growth, and what was supposed to make their business ends up killing their business.
Most people start a business because they have a great idea, or they are good at something, e.g. technical development, sales, or a trade. As a rule, people don’t go into business because they like producing financial projections or reviewing banking products, which is often coupled with unrealistic expectations of service providers in these areas, especially when it comes to business growth.
Many business owners assume that their banker will let them know if/when they need to change products, or that their accountant will proactively suggest new strategies regarding cash flow management. I’ve got news for you. They won’t. At least not without instruction from you because they are not mind readers.
They don’t know (without you telling them) what is on the horizon, and the regular work they do regarding your business deals with mainly historic data. Even standard projections will be based on what has happened previously.
Another common misperception of business owners is that because they are growing, they will be perceived as a good investment by suppliers, bankers, etc. In fact, the opposite is often true and growing businesses, especially rapidly growing businesses, can be seen as a risk, with a business owner who doesn’t have a thorough, well defined plan to manage this growth seen as an outright liability.
Even businesses that have maintained steady growth can be impacted. As businesses grow the risks they face change and become more complex. These new challenges need to be managed differently than in the past.
At some point, in the absence of planning, the management of your business and its growth will become reactive instead of proactive, and business owners can find themselves constantly chasing their tail instead of preparing for the next step, or worse, struggling to keep above water.
If your business is facing a growth phase here a few key things to consider:
- how will growth impact other areas of your business, e.g. cash flow, staffing levels, location or premises, distribution etc. This can be a very long list.
- undertaking scenario analysis. This will help you assess the financial implications of your plans before you implement them. It is very useful when weighing up different plans/options to assist you in choosing the best course of action.
- talking to your banker. It is always a good idea to review banking arrangements and products earlier rather than later. Your banker should be happy to be part of the process when it comes to planning for growth.
- speaking to your accountant. Their input can extend well beyond tax planning and they can help you identify financial implications you may not be aware of.
Planning for and managing growth in your business is important. It will save you money. It will reduce stress. It will make you more likely to succeed, and less likely to go under. It’s a very simple formula.
In 2017 we re-branded to better reflect our services, changing our name from CAV Consulting and Analytical Services to Insight Business Plans & Analysis. This article was originally published under our previous name.