Growing businesses are often the victims of their own success. Almost as many small firms fail because they can't handle a sudden surge in turnover as they do from struggling with too little demand. So what can be done to prevent a thriving business from being wrecked by its own success?
Fast-growing revenues mean a drain on working capital. Higher sales rarely result in instant cash in the firm's bank account. So to avoid future cashflow problems, put in place sufficient working capital before you rush to increase turnover.
If you don't want to extend your bank overdraft, or can't, consider factoring or invoice discounting. Both offer credit based on the invoices you raise. Factoring is now a mature, safe and sophisticated industry that caters for even quite small businesses.
Is increased revenues what your business needs right now? higher sales often mean lower margins, so the impact may be neutral at best and negative at worst. Too many firms assume that revenue equals profit, without analysing the basic profitability of those extra sales.
Sit down regularly to review the profitability of each customer. Often, 80% of profit stems from only 20% of customers, so a lot of customers exist only to flatter the top line. Managing growth well means being hard-nosed about dropping unprofitable business and not accepting marginal new customers for the sake of top-line performance. Learning to turn down trade will stand both you and the business in good stead.
Accurate budgeting is also an essential growth discipline. Forecasts are vital, and they must be updated regularly on a rolling 12-month basis. If sales are rising at 25% a year, a budget prepared 11 months ago is dangerously out of date. Good forecasts must include a cashflow projection to avoid a working-capital crisis precipitated by unexpected VAT or rent bills.
Growth puts pressure on resources that is ignored at the owner-manager's peril. Overcrowded premises are inefficient, so plan ahead and build in flexibility with shorter-term property commitments. Production facilities, logistics and management information systems operating beyond capacity generate customer dissatisfaction and dilute profitability. So budget for extra capacity rather than taking on work and worrying later how it can be carried out.
But the greatest threat from headlong growth is what it does to the human capital. Managers and staff don't react well to being run at full speed round the clock. For very small firms, the consequences of someone quitting unexpectedly can be catastrophic. Recognise that more sales must mean more human resource. If you plan ahead, you have a far better chance of hiring the right staff than you will in a blind panic as operations grind to a halt.
Question the capabilities of existing staff, too. In sales and marketing, different skills are needed as customers get bigger and more sophisticated. And sooner or later you'll need a finance director (see accelerator1) rather than a book-keeper.
All entrepreneurs worry about loss of control, particularly when the business is growing fast. Hiring a non-executive director or an experienced business mentor can provide a sounding-board for ideas and a shoulder to cry on when things are tough. Good mentors are hard to find, so take up references and ensure that their expertise matches the requirements of your business. The right one can add enormous value and be very cost-effective.
Nick Hood is executive chairman of Begbies Global Network (firstname.lastname@example.org)
SIX WAYS TO KEEP YOUR FIRM ON TRACK
Organise working capital early - preferably from funders who understand your business. Growth means you'll need more of it.
Don't chase revenue growth for its own sake - question how profitable new business is likely to be.
Keep doing that 80:20 analysis - get rid of unprofitable business and you'll make more money and need less funding.
Update forecasts monthly on a rolling 12-month basis, and include a cashflow budget, not just a trading budget.
Keep your business hardware under review. Expand premises, systems and equipment sooner rather than later.
Don't penny-pinch with your employees - losing staff can be devastating, and replacement very expensive.