Like being too rich, it's impossible to be too successful, right? Curiously enough, the only thing more threatening to a business's continued existence than not doing well is it doing too well, something that's evident from a quick perusal of ASIC figures. These show that in 2011/12, the mining boom states of Western Australia and Queensland managed to boast both the highest growth and the highest insolvency rates in the nation1.
As bizarre as it seems, every day of the week Australian companies go out of business because business was too good. Or to put it more accurately, they didn't have the necessary systems in place to cope with growth. What are the signs you're growing too fast and what can you do about it?
A business growing at an unsustainable rate will often have high employee turnover and/or staff shortages due to employees being overworked and managers not having sufficient time to devote to recruitment. What should really set alarm bells ringing is patchy business data, in particular a lack of information about how much cash the business is burning through and how much profit it is making.
Once you've come to the realisation your business is expanding at a potentially fatal speed, it's necessary to do the following:
1. Immediately get a handle on the cash flow situation
The most common headache for expanding businesses is that money starts going out the door a lot quicker than it's coming in. Of course, you should be getting more revenue in from all those extra customers down the track, but that will be little consolation if unpaid suppliers force you into bankruptcy in the meantime. Make sure you have appropriate overdraft facilities in place and explore trade finance facilities.
2. Develop a plan
Once you have a handle on the cash flow situation, develop a six or 12-month plan outlining projected growth forecasts and cash flow and clarifying what your goals are. It is often wise to determine a limit on how much new business you'll take on and stick to it rather than saying 'yes' to every opportunity. It's also worth keeping an eye on profit margins as businesses in a rapid expansion phase frequently take on new customers they don't make any money from.
Make the time to consult with the business's key stakeholders
This means staff, suppliers, customers, banks and investors. Everyone loves a winner and you'll find, for example, that employees are happier about doing overtime and suppliers are more willing to offer generous payment terms if you are honest about the fact the business is running into temporary capacity constraints and you are clear that you're working hard to address them.
4. Decide what you need to invest in
If the business is expanding, you'll need to consider moving to new premises, taking on more staff, investing in new equipment and engaging new suppliers. This will require a delicate balancing act between spending what you have to provide customers with the service or product they're demanding, without saddling yourself with ongoing fixed costs that will remain even if business drops off.
Exponential growth can be incredibly rewarding for those involved in a business, but it comes with its own set of problems. If you don't want to end up a victim of your own success, make sure you have the right systems and staff in place to manage the challenges of fast-paced expansion.
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This article represents the views of the author only and not those of American Express.
Nigel is a freelance journalist and web content provider. Over the past 15 years he has worked for many of Australia's major print media companies and written for a wide range of newspapers, magazines, trade publications and websites. Nigel most enjoys writing about entrepreneurship, popular culture, politics, social trends and small business.