From debt that grows faster than your earnings to new staff members that just don’t understand your business like your first few hires, growth presents a range of issues that can affect your company’s cash flow and solvency.
We asked insolvency experts Corporate Recovery Help to break down the negative effects that uncontrolled, rapid growth can have on your business and explain the importance of having control over how fast – and how much – your business grows in any given quarter.
Rapid growth often means taking on more debt
Companies that grow quickly often take on a lot of debt to fuel their growth, and for good reason. When you’re growing quickly and have the opportunity to expand your business, it makes sense to ride the wave and seize the opportunity.
Rapid growth, however, often comes to a rapid end. When you borrow heavily to let your business grow faster, it’s easy to run into debt issues when your growth slows down and your business’s quarterly profit stays at a steadier level.
Borrowing in order to fund your business’s growth isn’t always a bad thing. Taking out loans on the assumption that rapid growth will be continual, however, can lead your business into risky territory.
A single bad month, a single missed customer payment or a single setback is often all it takes to cause your business to miss a payment on its debt, trigger a series of events that can lead to its eventual insolvency.
If your business has the chance to grow rapidly by taking on debt, make sure you take a conservative approach to borrowing. Holding back on your loan might cost you growth, but it offers your business stability that rapid growth can’t provide.
Growing fast could mean changing your product
Not all companies are built to be big. If your company offers a personalised service or a handmade product, for example, rapid growth probably isn’t compatible with your product and your business model.
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If your business model isn’t scalable beyond a certain point, growing your business often means compromising or changing your product. This can, in turn, reduce your product’s value and negatively affect demand and customer satisfaction.
Imagine if an exclusive Swiss watch brand like Rolex quadrupled its production in order to sell more watches. Since the value of its product is based on its exclusivity and quality, increasing sales might negatively affect its customer perception.
If your business model doesn’t allow for rapid growth, don’t compromise it in order to increase your sales. While this approach works in the short term, it usually has an immensely negative long-term effect on your business.
When you’re growing, it’s easy to ignore bad news
Many entrepreneurs make the mistake of valuing revenue growth above any other metric. This has a predictable result – growth of revenue, but not of profit – that is quite difficult to see when your company appears to be growing every month.
When your company is growing every month, it’s easy to spend more time focusing on vanity metrics like total revenue, all the while assuming everything is okay, than actually looking at the nuts and bolts of your business.
From growing liabilities to holes in your business model that weren’t so apparent at a slower growth rate, growing rapidly often results in your structural issues that can seriously harm your business growing in the background without you aware.
When these issues affect your business’s solvency, the results can be disastrous. As your business grows, keep a close eye on all of its metrics – not just total revenue – so that you’re fully aware of your business’s financial status and solvency.
Paper growth can often lead to cash flow problems
There’s nothing more valuable for a growing business than cash. When you’re doing more business, closing more deals and generating more income every week, it’s easy to mistake growth of accounts receivable for real, cash-based growth.
If your company isn’t collecting the cash it’s due, there’s a real risk of it running into a cash crisis while it grows. This is because fast growth not only increases the rate at which cash comes into your business – it also increases the rate at which it goes out.
If your expenses are increasing every month in order to pay for a larger number of employees and a bigger advertising budget, your business needs to be able to bring in cash consistently from its customers or clients.
Let your accounts receivable grow at a faster speed than your bank account balance and there’s a serious risk that your company will run out of cash, making it difficult for you to pay creditors despite the amount you’re owed by your customers.
Is your company growing at an unsustainable rate?
In the right conditions, growth is a good thing for most businesses. Growth results in more income, which in turn results in the ability to hire more employees and create great new products and services.
Despite this, not all growth is good. If your business is starting to display one of the four negative side effects of growth we’ve listed above, it might be the right time to take a look at your finances to ensure your business has adequate cash flow.
Ivan Lavelle is senior business rescue consultant at corporaterecoveryhelp.co.uk.