Business growth is a significant factor to staying in business and is at the top of most leadership strategies. In addition, growth is often important to keep competitors at bay. However, when growing your business it is important that the growth is both manageable and controlled.
If your business is growing out of control it can lead to the business failing.
Employee moral can decrease due to the stress of being stretched to thin or you might start to lose business because there was no structure in place to keep up with increased demand. That is why it is important that controlling and managing the growth in strategic planning should be a focus. This way growth can happen properly to strengthen your business against competitors and not destroy it.
A common scenario
Among the biggest challenges that many “high-growth” businesses face is finding enough financing for their expansion plans. Their owners often think, “If we want to double sales, we’ve got to double assets.” Buying equipment, hardware, software, raw materials and other assets usually requires debt or equity financing — which can be good for a lender but perilous for a borrower.
Overzealous asset acquisition strategies can cause repayment problems if cash flow projections fall short. There’s often a delay between:
- When a growing company buys inventory, makes products or provides services, and pays employees (cash outflows), and
- When it receives customer payments (cash inflows).
The faster the growth, the bigger the gap. Businesses typically fund the shortfall with a credit line, and as they take on more and more debt, loan repayments can eventually consume most or even all the company’s cash flows.
Warning signs
It’s easy to get swept up in the whirlwind of rapid growth, but it’s not inevitable. You and your leadership team can watch for common warning signs that you may be at risk of becoming a victim of your own success. These include:
An increasing debt-to-equity ratio. High-growth businesses tend to burn through cash at an alarming rate, if given the opportunity. If your strategic plan will likely drive you to consume an entire credit line, and then ask for more, watch out. Closely monitor your ratio of debt to equity. A consistent upward trend is cause for concern — even if it’s within loan restrictions.
Quickly declining profit margins. Leadership teams overly obsessed with growth tend to focus on the top line and lose sight of expenses. Low prices and an undisciplined approach to taking on any and every customer can further erode profits.
Rising complaints. High-growth companies are often inclined to overlook quality control and fall short on backend obligations, such as warranties and customer service. This typically leads to customer complaints. Meanwhile, cash shortfalls may lead to delayed payments to vendors and lenders. At some point, these parties will likely start complaining as well.
Do the managing
Make no mistake: growing your business is an important and, in many cases, necessary goal. But if you don’t manage that growth, it could manage you — into a crisis. Contact your Rudler, PSC advisor at 859-331-1717 for help building reasonable financial objectives into your strategic planning process.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Jonathan Peul, Staff Accountant and Karen Daugherty, CPA.
If you would like to discuss your particular situation, contact Jon or Karen at 859-331-1717.
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