Viable businesses, especially startups, are eager to enter in warp-speed growth phases that push small companies into the big league. While profits may increase during such periods, fast-tracking company growth may incur problems that put the entire business operation at the risk of failing, experts warn.
A veteran entrepreneur, John R. Burgess who oversaw a massive growth spurt for the consulting firm he founded back in the nineties. He started his company in 1991 as a small business, and by 1999 the overall revenues were exceeding $105 million per year. The rate of growth was remarkable. However, Mr. Burgess does not advise small businesses owners to put the pedal to the metal without recognizing the pitfalls of a rapid growth cycle. There are many challenges involved with growing a company too fast that can turn success into failure. Here are some of the unexpected problems business owners should expect if a company is growing too fast:
Major Cash Flow Management Issues
One of the main problems companies that grow too fast face is called the “cash flow crunch.” If the business is growing, that means the demands for the products are rapidly rising. The business will have to meet this demand, but do not expect the revenue from sales to cover all expenses when they are due. The result is rising expenditures that are not getting covered by the revenue from sales causing a shortfall in cash to pay bills when they are due: the proverbial cash flow crunch.
Businesses that can’t manage the cash flow to pay bills when they are due, often turn to borrowing money to meet the cash needs of the business. However, this can be a “Catch 22”. Many banks will not lend money to a business in a cash flow crunch because they may see it as a bad risk. However, it’s the lack of cash that put’s the business in jeopardy that makes the company a bad risk. Some business owners turn to factoring their receivables when they can’t borrow from bank to meet their cash flow needs with a line of credit. However, factoring is a high-cost option that often creates more pressure on cash flow in the future if revenue from sales does not accelerate as anticipated. Obviously, there are issues associated with running a company entirely on credit. The risk of the business being too indebted is high and there’s no guarantee that the marketing efforts would actually pay off in income as expected. Therefore, business consultants strongly advise small businesses to realistically plan their cash flow needs to support future growth. The most prudent business strategy is to plan for managed, profitable growth.
A company that grows rapidly is like a car that is speeding at the maximum possible limit. It can be fun and the driver may get to the destination quicker than usual, but the speed will exert a massive toll on the engine and available fuel. Similarly, companies that enter into warp-speed growth deplete resources much faster than usual. This is problematic because profitable businesses are highly efficient. Rapidly going through available resources—mainly labor and time—will eventually lead to serious operational inefficiency such as quality control problems resulting from either poor managerial control over operations or the stress on labor resulting in workers cutting corners leading to poor performance. All of this can be costly in the long run.
Owners should not underestimate how rapid growth affects employee performance and morale. More often than not, rapidly growing companies expect employees to work more and stay late. This is an easy way to overexert the employees, which will hurt performance levels and also overall morale. Companies that fast-track growth also hire new workers that it may not require for the long haul. The excessive hiring and firing of workers can be costly. Labor needs should be planned to be efficient.
Rather than aiming for lightning-speed growth, owners should invest in strategies that allow the company to grow without taking a toll on resources or employees. Be aware of the above-listed problems and actively take steps to avoid possible problems in the future. The key is planned, profitable growth!