When a business grows too fast, what can happen?
Growth is good, but make sure it's sustainable. If you haven't put enough planning around the growth phase, a few things can go wrong. The most common thing, and the one with the most impact, is cashflow.
If you find yourself without the cash to deliver orders, fulfil a project, pay wages for extra staff, or export goods, your growth will be short lived.
Sometimes a growth spurt can finish a business because it generates expenses that require payment before your customers pay you. This is called negative liquidity and nobody can keep that up for long.
But if growth is planned and paid for, the rewards can be terrific. For example a manufacturer may be able to increase production without additional hiring by examining the productivity of the existing staff and improving how they do their jobs. If a business owner just runs off and hires a bunch of new staff, the owner can end up with a lot of people who expect their wages long before the products they make sell through.
A common example where a business can go wrong, is when a company wins a contract by agreeing to meet tight delivery times. But when the contract is drawn up, they forget to allow for the additional cost of staff to pack and dispatch orders, or to put in a contingency for exchange rate fluctuations. So a big win turns into a big loss and puts the future of the whole company in jeopardy.
How have you stepped in to help businesses in this situation?
One of the biggest things that business owners need is a handle on the operating costs of their business.
Sounds simple, but so often people aren't aware of what it costs to run their business and break even, let alone make a profit. This stuff is critical, and if you're struggling, get help.
Even companies that do understand their costs can come unstuck during a rapid growth cycle. I always help them look at the variable costs - staffing, inventory, debtor days - and understand the ones that are at risk of spiking and what they can do to mitigate it.
Perhaps an online sales company needs to implement a Just In Time strategy to ensure they don't have expensive stock sitting on its shelves. A services company may be tempted to hire more staff when a big project comes along when careful use of contractors could be the way to go. The trick is getting your contracts right beforehand, and we often assist to make sure the business is carrying as little risk as possible.
Having a good budget in place is essential. Just Do It is not a strategy for a successful business. You will never achieve your objectives if you don't have a budget in place as a starting point for everything you do.
Owners often struggle here. It's boring and often feels like guesswork. Don't avoid this bit - get help if you need it otherwise everything will start to unravel.
What systems can businesses put in place when they are starting out to cope with large demand?
It comes back to planning again. It's important to choose a few key metrics and stay on top of them daily. As working capital is almost always an issue, pick things that affect it.
Revenue is a key one and is your early warning system that there's a problem. Identify your biggest costs. If wages are where you're exposed, think about limiting overtime, using casual staff, or even investigating the use of automation to cap the wages bill.
Start with a monthly budget and break it down until you have a daily wages budget. Have a 'work in progress' meeting each day so everybody is clear on what's expected of them that day.
Keep a watchful eye on things that affect the money coming in. Accounts receivable must be monitored daily. Terms of trade need to be clearly articulated at the time of sale and agreed. You're not in business to be a bank for your customers. Follow up late payments right away and make sure late payers are penalised. Customers need to know that you are serious about enforcing terms.
What has happened with companies you have helped through a fast growth phase?
In one case I have seen, an export company won an export deal to Australia. They were in talks with the customer for months before signing on the dotted line to ensure they were perfectly equipped to deliver. They invested in capital equipment rather than staff. Their workforce remained constant and this helped with forecasting. Their plan included a hedge for exchange rate changes and terms were agreed to up front to ensure that payment occurred upon shipping.
Another business owner tried to do it all himself. He won a decent sized manufacturing deal and was so fearful of missing out to a competitor, committed to a contract before doing his due diligence. In his haste he failed to secure his supply chain, and was turned down by his suppliers for not meeting the requirements of their terms of trade. Nor would the bank give him a line of credit. His business wasn't ready and he failed to deliver. A bit of planning and help would have told him that he was six months away from being able to bid for jobs of that nature.
What other tips would you have for small businesses that might be crippled by growing too fast?
Get professional advice early. Plan and measure!
Manage your workforce structuring and take advantage of contractors to enable upscaling during the boom times without long-term employee costs.
Borrow smart and get advice first. Borrowing to fund capital can be a very good thing for your business in the long-term. Borrowing to fund day-to-day expenditure never is.
Understand your bottom line. Question any variances to budget. Watch your working capital like a hawk.
And most importantly, don't try to be an expert at everything. Get outside help when you need it. Do it once, do it right. Then you can focus on what you're good at, which is why you're in business in the first place.
And with precious customers in mind, next week, our topic of discussion is going to be customer service. What can SMEs do better and why do they sometimes do it better than their corporate competition?