Rapid growth is a problem all small business owners seemingly want. In fact, many may not even see this as a problem at all. A booming business certainly does sound like a dream come true. However, sudden and unexpected growth requires quick adjustments, from taking on new contracts and clients to changing operational processes. Your business needs to be able to accommodate these changes.
Last month, we spoke about how start-ups can run into trouble when they fail to scale and don’t have a profitable business model. Before you celebrate moving past the initial hardships of owning a business, implement a well-managed growth strategy to ensure long-term success. Growing too quickly presents a unique set of challenges for SME owners, but our tips can help you avoid the most common risks associated with overgrowth.
Risk #1: Cash Flow Problems
We’ve talked about this time after time and we’re sure you’ve heard it elsewhere, too, but that’s because cash really is king. As things ramp up in your blossoming business, you’ll be faced with both increased cash inflow and outflow. A common problem of rapid growth is that cash flow becomes more complicated, and your expenses can quickly exceed your revenue. If you’re using investors’ money to operate right now, that becomes an even bigger problem. What was once just a bad month of sales can now place your company in huge financial turmoil.
Have your accountant perform an in-depth analysis of your company’s sales, expenses, receivables, and assets. What is eating up most of your cash and how can you control these areas? Keep a close eye on accounts receivable: when you constantly have outstanding receivables, you might find yourself at risk of taking on more debt to cover costs. Your accountant can ensure your accounts receivable and accounts payable are in sync.
Risk #2: Never-ending Cycle of Debt and Growth
Ask yourself if your business is able to handle its debt. Growth requires cash: the more you grow, the more capital you’ll need — this often means getting a loan. Soon, you can get caught up in a never-ending cycle of debt and growth if you don’t have a long-term financial plan for your business. Let’s say you own a trucking company and as your client list grows, you need more and more vehicles to handle the workload. Your increased profits won’t totally cover the cost of a new fleet of trucks, so you take out a loan. As your debts increase and you fail to keep up with payments, you can find yourself in hot water.
This problem can be avoided if you simply plan for this debt. If you know that you’ll need to get a loan down the line to accommodate growth, sit down with your accountant and financial advisor to create a plan for how to pay off debts and what can be done to minimize debts. Half the battle is also just properly keeping track of debt. Who do you owe and when? Your accountant can help give you a better idea of how to manage your debt.
Risk #3: Lack of Experienced Leadership
As your company grows, so should your leadership team. Many business owners make the mistake of thinking they can do it all, but an expanding company means expanding departments, from marketing to finance, and one person simply cannot do it all. Furthermore, more often than not, business owners don’t have the experience or expertise to perform certain leadership roles.
You may want to retain control of the company, but you can still dictate the vision of the business without being the operational manager. Perhaps you have the skills to drive the direction you want your business to head in, but simply don’t have the financial know-how. Hiring or consulting with an experienced finance team that has handled rapid growth before can take your company to new levels.
Prepare a Growth Strategy
These are a few of the most frequently seen problems that come with rapid growth. However, it all depends on your business: you may be faced with other challenges due to the unique circumstances you’re in. You’ll need a dedicated team of experienced accountants and bookkeepers to properly assess the risks and opportunities for your business. At Qmulus, not only do we provide accounting services such as accounts receivable and payable management and cash flow planning, but we also offer consulting meetings, where we can create a plan together on how your business can grow strategically. Call us at 647-476-2145 or schedule an appointment to get started.