Why rapid growth may be bad for business
Rapid growth often comes to a rapid end.
Several years ago, Inc. Magazine and the Kauffman Foundation explored the danger of rapid growth. Their study looked at the 500 fastest-growing private companies in the U.S. 5-8 years later.
These companies were performing worse than their slower-growing counterparts
Two-thirds of them had also shrunk, stagnated or failed.
The study concluded that fast growth was unhealthy, while steady and sustained expansion was the desired state.
Why do fast growing companies fail?
Often there is no one cause for the failure in high-growth companies, but the following factors usually play a role:
Growing at a frenetic pace often means that the business owner/leadership team does not have the headspace to work out what is, and is not, working in the business. Small problems are magnified as the business scales up, rather than dealt with at the time.
Rapid growth can mean insufficient resources being allocated to developing a roadmap for the business. What’s the strategy when demand drops off? What innovations are in the pipeline?
The increased demands on individual employees can lead to stress and low morale. Key individuals may seek employment elsewhere, taking critical knowledge with them. This can have a massive impact on the business, if that knowledge has not been shared or documented.
Recruiting decisions may be driven by a need to get people in fast, rather than driven by a desire to recruit employees with the best aptitude and attitude for the business.
Customer dissatisfaction can result from a decline in quality, failure to keep up with demand and/or an inadequate customer experience. The escalating volume of complaints then has a detrimental impact on the brand.
The cost of meeting the high demand can tip a business into negative cash-flow, for instance, the business may need to pay overtime, employ more staff or order additional stock. High growth is often fuelled by debt as the company’s borrowing spirals out of control in a bid to keep up. It then doesn’t take much to tip over into insolvency.
5 Red flags that you’re growing too fast
Demand is outstripping supply
Resources are stretched too thin
You’re not fulfilling promises to customers
Quality standards are not being met
Sales are excellent but you’re strapped for cash
How to manage fast expansion
First and foremost, you need to monitor your growth. It is possible to miss the fact that you’re growing too fast because initially you may just look like you just have a successful company.
Always remember that if you run out of cash, it doesn’t matter how many sales you have, you will go bust. So you need to understand how fast you can afford to grow. Don’t just focus on sales, you need to think about the timings of revenues and how reliable they are. When will those sales hit your bank account?
Also consider cash and resources you have access to and how many sales that supports. The goal is to be able to deliver what has been promised to customers with the resources that you have access to.
Time should be spent developing a strategic plan for growth, since this will help you to think about how you can plan for, and mitigate the risks associated with fast growth.
For instance, what will you do to make sure that capacity keeps up with demand? At what point do you bring in new employees or look at outsourcing? Is there anything you can do to throttle back demand if you need to? At what point will you extend your lead times to manage customer expectations?
Rapid growth often comes to a rapid end.
Aim for manageable and sustainable growth - Slow and steady wins the race, as they say 😉
Don’t put all your eggs in one basket.
Manage and minimise the cost of expansion.
Don’t rely on third-parties for your growth
Don’t launch a product before it’s ready.
Don’t rely too heavily on investments and loans.
Pay attention to cash-flow.
Be aware of the weaknesses in the business.
Don’t stop innovating.
"We're passionate about helping businesses to improve and grow"
Rebecca Webster, Electric Accountancy founder
To find out more about how we can help you to grow your business
and supercharge your profits, you just have to pick up the phone:
©2022 Electric Accountancy