- Pay attention to cash reserves and employees
- Anticipate problems and plan accordingly
- Some companies were luckier than others
- Don’t be a victim of your own success
Companies are supposed to grow and founders work tirelessly to make that happen. They’re thrilled when new clients sign up as that means more profit, new hires, and bigger offices. Growth is good, and the faster the better – that’s what most people usually think. But growing too fast is as dangerous as growing too slow, and clever entrepreneurs shouldn’t fall into that trap. They need to anticipate such problems and have solutions. This is easier said than done, of course, but there’s some red flags you should keep an eye out for.
A clear sign of a business that’s growing too fast is cash drying up despite an increase in sales. At the same time, employee morale tanks as they have to serve a rising number of clients with limited resources. Customers leave since they're not getting the best service possible, and CEOs get dragged into day-to-day problems, leaving little time for planning for the future. This leads the company into a downward spiral destined for bankruptcy. These problems are hard to solve, but careful planning can prevent them from happening.
Smart business owners know that growth takes money, so they’ll make sure there’s enough of it before production surges. Employees need to be compensated for overtime, and tasks need to be efficiently delegated so that a management team has time for making strategic decisions. This will ensure that clients will be taken care of and it’ll avoid the fate of the two-thirds of the fastest-growing startups that usually fail, as a joint study by the Kauffman Foundation and Inc. has found. All it takes is to be aware of the warning signs.
Pay attention to cash reserves and employees
One in six new small businesses fails because of a lack of working capital often caused by increased expenses in the high-growth phase. Of course, if clients pay on time, there’s no problem. But one or two missed payments and you’ll soon find yourself cash-strapped, which is a clear indicator of unsustainable expansion. At the same time, your employees have to deal with a huge number of clients and their ever-increasing demands. If this aspect of your business growth hasn’t been factored in – by hiring additional staff in time – you could find yourself in a challenging situation. Overworked and underpaid employees aren’t likely to want to stick around – a clear sign that the mounting challenges caused by fast growth need to be addressed before they become bigger problems.
When companies eventually do hire additional employees, they often underestimate how much time it takes to train them. Meanwhile, clients are increasingly frustrated as their emails or phone calls are still not attended to adequately. As Matt Schmidt, the CEO of Burial Insurance Pro, says, “Our first signs that we were growing too quickly were simple things such as not returning prospects emails/calls as timely or not being able to take inbound calls as needed.” Unhappy customers then post negative reviews and speak badly of the company, prompting even founders to get involved in minor daily issues. But instead of solving problems, they lose focus from long-term planning and the joy of having their own business is buried under the growing pile of problems. Such a scenario is a nightmare for anyone. So how can companies avoid that fate and ensure their growth is sustainable and won’t overstretch their resources?
Anticipate problems and plan accordingly
The first step is to be aware of the challenges and carefully plan the high-growth phase. Ensure you have enough funds to survive several months during which expenses exceed revenues. Also, make sure you have an open line of credit with a bank, or friends from which you could borrow some cash. And if clients don’t pay on time, consider working with an invoice factoring company that can pay outstanding invoices while chasing debtors. That way, you’ll have working capital to cover expenses and the salaries of your hard-working employees.
And when it comes to staff, it’s critical to have enough people serving the growing number of clients. If you can’t afford to hire them, take on less work. This might be a hard decision, but it’ll ensure you have loyal and motivated workers to whom you can delegate critical tasks. That way, you can have more time to plan for the future and make strategic decisions. As Zheila Pouraghabagher, a business consultant, explains, “If you’re in the midst of rapid growth, just make sure you know where you’re headed, a plan to get you there and the resources needed.” Otherwise, you’re likely to be heading for disaster.
Some companies were luckier than others
One such disaster struck Wise Acre Frozen Treats, a producer of organic popsicles launched in 2006. Its founder, Jim Picariello, was initially working alone in a schoolhouse kitchen, but two years later, he had 14 employees and moved production to a 280-square-metre facility. His products were popular and Picariello even won a few awards. However, financing a hiring spree and expensive equipment eventually bankrupted him as revenues couldn’t cover the rising debt.
The game development studio Zynga faced similar problems – but had a bit more luck. Its games, such as Poker and Mafia Wars, were so popular that by 2011, the company was able to build a data centre worth $100 million. But a lack of innovation during the high-growth phase marked the beginning of a downward spiral. Without new games, revenues shrank and Zynga had to let go of most of its employees. It even closed down the famed data centre. Luckily, the company still exists but only as a minor player in the gigantic video game industry.
Don’t be a victim of your own success
Growing fast is mostly a good thing. But growing too fast without a plan to address potential future challenges can be a death sentence for most companies. They’ll run the risk of losing cash quickly as expenses exceed revenues and overworked employees provide a substandard service to their customers – who eventually leave as a result. And with problems mounting, founders and CEOs will get bogged down in daily problems, losing sight of the company’s future. Conversely, smart entrepreneurs will anticipate these potential problems and plan ahead. They’ll build up money reserves, hire enough staff, and provide excellent customer service. Only that way can a company grow in a sustainable way, ensuring it doesn’t eventually become a victim of its own success.