As Small Business Owners we know growth is the name of the game. But, did you know you can grow too fast? Here’s a great post warning you about what can happen.
5 Dangers of Overly Fast Small Business Growth Strategies
By Suzanne Kearns
Posted in: Small Business
When you start your own small businesses, you immediately start thinking about growth. Maybe you just dream of eventually opening a second store, or you might envision becoming a huge conglomerate or one day franchising the business.
Growth isn’t just admirable – it’s expected. But often, small business owners don’t consider that growing a business too quickly can eventually cause the company’s demise. You can easily find yourself lacking working capital, which is one of the biggest contributing factors to the failure of one in six new small businesses.
You and your business can avoid the dangers of overgrowth. By managing your business correctly and scaling up at a good pace, you’ll guide your company on the path to success. Whether you’re running a home office or a company with many employees, the key is planning.
Make sure you know the five biggest risks associated with sudden, unexpected growth.
1. An Overbearing Debt Loan
If you don’t plan properly for an increase in business, you can wind up taking on far too much debt. Growth takes money, and especially during the early stages of growth, working capital will be low. Many business owners take on massive debt to feed the growth machine, and a vicious circle begins. Increased orders require you to take on more debt, and so on. Too often, the cycle breaks only because the debt becomes so high that it topples the business. Even though more money is coming in, you owe even more and can’t cover debts.
For example, if you owned a housecleaning business and suddenly began to get more customers, you’d need to purchase more supplies and probably hire some more help. These positive developments would involve a lot of cash flow, and they can quickly turn negative by eating up all of your reserves. The new business is good, so you give incentives to your existing customers to send you referrals, leading to even more customers. Again, you need more staff and supplies. Perhaps you go as far as adding a company car with your logo to spread the word and support the increased workload.
Your working capital completely depleted, you take the next logical step: getting a loan. At first, it looks like the increased profits will more than cover the credit payments. But while the client list is growing, the debt is piling on more quickly, and keeping up with payments becomes a struggle. The growth was good, but it came too quickly and caught you unprepared as a business owner. Better fiscal management would have allowed for controlled growth based on revenue and profits.
2. Being Unable to Satisfy Your Customers
As a small business owner, you’ll be thrilled to be in high demand. But you need to be sure that you can supply the level of service your customers expect. Personal attention is a key selling point that attracts customers to a small business, especially when you’re involved in an active local community. In the face of unexpected growth, you’ll face the challenge of maintaining quality with the increase in quantity.
Consider the case of the home cleaning service. With a manageable number of clients, you can easily give each one the personal attention that makes your company special. In fact, that personal touch is what got everyone talking about you, spurring the recommendations and the increase in business. While it’s inevitable that the bigger a business grows the less interaction the owner will have with the clientele, unless you manage expectations, some clients may end up feeling put out – and they’ll stop coming to you.
The answer to this problem is – again – managed growth. Calculate how many new customers you can take on without turning your back on the clients who got you started. As you grow, bring on a customer support staff to promptly attend to all of your clients’ needs.
3. Forgetting Your Original Goal
In an effort to expand your business, you’ll be tempted to move into somewhat related – but unexplored – territory. The housecleaning business, for example, could be growing at a comfortable pace when a satisfied residential customer encourages you to bid on the contract to clean a commercial building. It’s tough to resist the prospect of big contracts and new opportunities, but straying from your original business model too quickly can create a volatile situation. While you’re striving to succeed in an untested aspect of your business, you’ll be forced to turn your back on the duties and client base that got you started in the first place.
Entrepreneurs naturally want to try new things, and success often requires taking a risk on new ideas in unproven areas. But you have to carefully consider how much time you can devote to a new plan, and budget accordingly. More importantly, make sure you maintain the safety net of your current customers and business model. If your expansion effort doesn’t pan out, you need to be able to rely on the original concept.
4. Losing Employees
Any small business owner will tell you that your best employees are the lifeline of the business. But when a business experiences quick growth, lines of communication can break down. If you’re surprised by your business’s growth, you’ll get preoccupied with keeping up, and if your employees aren’t ready for it, you’re in trouble. You need to let your employees grow with the business, but training them for management and leadership positions takes preparation. If you catch your staff members by surprise, and you’ll likely lose them. For a small business, losing employees – especially longstanding ones – means losing institutional memory, customers, and money.
In the case of our cleaning business, getting wrapped up in all the new business could easily alienate an unprepared employee in charge of the residential aspect of the business. Without guidance and support, that staff member is left in the field guessing at what decisions are best for the company. Since this employee isn’t trained for management and doesn’t have your insight into the business model, you’re probably going to be unhappy with those decisions, and your customers will be dissatisfied too.
5. Focusing on the Short Term
It’s amazing to watch a company in the middle of a growth spurt. Cash rolls in and business owners think that they’re on the way to the top. Profit and loss sheets look good, and it starts to look like worrying about bills and cutting business operating costs and expenses will be a thing of the past.
But a dangerous trap lurks in these bright days. In the search for good news, you can make the easy mistake of looking only at short-term profits. Instead, consider the plans that you’ll have to implement to sustain long-term growth and success. Don’t lose control just because you see a few good weeks and months in store. Making rash decisions to boost one day’s profits can cost you something – your cash reserves. And if you’re unprepared, those good days will suddenly end.
Remember that company car with the cleaning service logo? It may have been a little premature to have taken on the expense of a brand new car and decal work. Celebrate your success, but don’t overindulge.
For your small business to succeed, the name of the game is growth. But growth is very complex. It’s hard enough to grow in the first place, so make sure that you handle it properly when that success comes. Keep your eye on three areas of the business: your systems, your staff, and your cash reserves. Successful growth requires taking the time to plan and prepare to sustain all three as your business increases.
Congratulations! You’ve decided to start your own business. You know just what you want to do. You can’t wait to get started. You’ve answered all the questions I posed in my previous blog. (Click here if you haven’t read it).
Hold on there, kiddo! Before you quit your day job, there is a lot of thinking to do. And…yes, more questions to answer.
“Oh, come on,” I hear you say. “I answered a bazillion questions last time”
But…Wait, there’s more.
Remember I said if you are going to be successful you have to know where you are going? I want to expand on that.
There is a simple six step formula for being a success at anything. Here it is.
- Know where you are
- Know where you want to go.
- Take action
- Evaluate the results of that action.
- Based on what you found out in step 4, repeat the action, modify the action, or try something different
- Repeat steps 3, 4, & 5 until you get what you want.
“Really,” you say. “Huh, six simple steps. Who knew it was that easy?”
Yes it is that easy. But (ah yes, there’s always a but) you have to apply the six steps, with brutal efficiency. You cannot let anything get in your way.
And…remember Murphy’s First Law, “Nothing is as easy as it looks.”
Let’s look at the six steps.
I’m assuming you have completed Step 1. You know where you are.
Step 2 is know where you want to go. This step actually contains two elements: A Business Plan; and an Operations Manual.
Why Do I Need an Operations Manual?
Two good reasons:
- Even if there’s only you, it forces you to think about how you are going to handle your customers and/or clients
- An operations manual standardizes policies and procedures for your employees. They will know what to do if you’re not around.
Building an Operations Manual is easy. Get a three ring notebook. At the top of each page list a topic.
One topic might be customer relations.
Under customer relations you might list: “Answering Telephone Calls. The script is: ‘Good (morning)(afternoon)This is Fred, how may I help you today?’”
Now as things occur to you, get out that notebook, creating topic sheets as you go, and adding items to them.
My point is, you don’t have to write the whole operations manual in one sitting.
The same is true for the business plan. You do need a plan.
What? A Business Plan Too?
Here is the challenge with a business plan. You sit down and spend a week on it. You wind up with a 50 page document, complete with graphs, Xcel spreadsheets, and time lines. Now you think you’re locked into it. Every action’s evaluated by how it fits into the plan. Then something goes wrong. Now what? Do you sit down and rewrite the whole thing?
General George Patton, the famous WWII Tank Commander once said, “The best battle plan in the world isn’t worth a damn after the first shot is fired.”
Here’s this quote from Dwight Eisenhower: “The plan is useless, but planning is essential.” (Berry, Tim (2008-08-01). The Plan-As-You-Go Business Plan (Kindle Locations 214-216). Entrepreneur Press. Kindle Edition.)
Let me put this another way, the plan is not the battle.
You have to stay flexible. Don’t plan too far ahead.
This is where the six steps come in.
The first page of the business plan is your success statement. You should have this from the last blog.
This is your goal. From now on, with everything you do, every action you take, you should be asking yourself, “How does this support my goal?”
This also is Step 2 from the list above.
Now comes Step 3. Look at your goal. Ask yourself, “What is the first thing I need to do in order to achieve my goal?” Write it down. Then ask “What is the next thing?” Keep asking until you have five or six things on your list.
Now, take action. Do the first thing on the list. What happened? Was it a success? If the answer is yes, then repeat the task. If the answer is no, what did you learn? Can you modify the task, and repeat? Should you abandon that effort and try something different?
I know this sounds overly simplistic. But here is the point. If you just begin, one task will lead to the next. If you stay focused on the goal, as you complete a task, the next one will appear to you. If it doesn’t, ask yourself “How can I accomplish …?” Be still. The answer will come to you. It may not be instant. It may take an hour, a day, a week, or a month. But…it will come.
Keep going. No matter what happens. Stay focused. Keep putting one foot in front of the other. You will achieve your goal.
“Oh, come on,” you say. “Nothing is that easy. Something is bound to go wrong.”
What to do When Things go Wrong!
Yes, indeed. Something will go wrong. Murphy’s Third Law says: “If it can go wrong it will. And, at the worst possible time.”
So what? Napoleon Hill, in his Laws of Success series of books teaches that in every adversity, there is the seed of an equivalent or greater benefit.
Notice I said seed. That seed, like all seeds, needs nourishing. Sometimes, the benefit is simply finding within yourself strengths and abilities you never knew you had. But, the seed is there. If you nourish it, you will overcome whatever obstacles are in your path.
Do you know what this means? You can’t fail. Or, the only way you can fail is by quitting. Remember, success is never a straight line. There will be mistakes, dead ends, blind alleys, disasters of all kinds for you to learn from. These only make you smarter.
Thomas Edison ran over 10,000 trials before he found the right material for the filament in the electric light bulb.
Here’s the hard part. (You knew there had to be hard part, right?). The hard part is sticking to steps 1 through 6. These steps seem simple and they are. The challenge is in sticking to them, sooner or later we become bored. Once boredom sets in, we become distracted. Once distracted, we forget to focus on the goal.
How can you combat this? The best way I know is to read your goal out loud to yourself at least twice a day. Why? Because it will keep the goal upper most in your mind. When distractions arise, you will ask, “How will doing this move me toward the goal?” If the answer is, “Not much,” you will drop it.
Follow these simple steps. And…remember this quote from Winston Churchill. “Never, Never, Never, Never, give up.”
So…there you have it. A simple way to build the necessary plans to use as you get ready to launch your new business.
By the way, I think “The Plan as You Go Business Plan” is an absolute must read for anyone starting a new business. You can buy it here, just by clicking on the link below.
You can click here to be added to my mailing list
Why You Need a Business Plan (And the Best Style for You)
This is the first in a four-part series by Hal Shelton, SCORE small business mentor and author of Writing a Successful Business Plan. Topics include why you need a business plan (and the best style for you), four sections every business plan must have (and why they’re important), when is the best time to revamp your business plan, and creating a business plan for a nonprofit.
Running a business without a plan is like running down the street with a blindfold on. Abusiness plan removes the blindfold, creates a map, and prepares you for the certain bumps in the road.
In this post, you will discover what a business plan is, why you need one, and what style is best for your situation.
What Is a Business Plan?
A business plan contains five key elements:
- Business goals
- The reasons why these goals are attainable
- A plan for reaching those goals
- Data backing the uniqueness of the products and services to be sold
- Supporting information about the organization and team attempting to reach those goals
But it is much more than a document: It is a process to test ideas to determine if they are feasible and financially attractive. During the process, you develop a consistent set of messages, based on facts and analysis, which can be used in discussions with customers, funders, board members, advisers, vendors and employees.
While you may think the only goal of business plans is to seek funding, ultimately, a business plan is written for yourself — to help you set goals, decide whether to start or grow a business, and develop a compelling message of why you will be successful.
As a small business owner, you are probably working 60 to 100 hours a week and still not getting everything done. If you are working this hard, make sure it is worth the effort. Again, this is where a business plan comes in. For example, if you forecast earning $20,000 a year, is this good news? It is good that the number is positive; however, if you live in a large city, have family financial obligations, are paying off bills and saving for retirement, and plan to make this your full-time activity, it is unlikely you will be satisfied with $20,000. Wouldn’t it be good to know this before you invest too much?
What’s Your Style? Finding What Type of Plan Is Right for You
Business plan styles range from informal, back-of-the-envelope sketches to 30-page plans with illustrations and exhibits. Which style you choose depends on a number of factors including are you seeking funding, are you starting a new business or growing an established business, is the business complex and needs much explaining, etc. Common to all styles is a clear message.
Plans for Existing Businesses
Start with a short plan, emphasizing mission and goals, to ensure the venture/project is headed in the right direction for the next year. If you are planning to grow your business, focus on markets, products, and services, in addition to having sufficient resources. If you are solving an operating issue, focus on that particular matter, such as staffing, cash flow, operations, vendors, etc.
For example, a business that is focusing on increasing sales may determine after talking with its customers, looking at its competition, and conducting research, that it needs to enhance the awareness of its products and services in the marketplace and, in particular, the online marketplace. In my book (www.secretsofbusinessplans.com), I share an all-graphic, brief business plan that is ideal in this situation.
If you’re seeking funding from your current bank, use a medium-sized plan in the 7 to 15-page range. Talk with your small business loan officer and see what they require from someone the bank already knows.
Most business plans start with an executive summary and end with the financial statements. In between are sections that describe the business idea operationally. You have the flexibility to arrange this discussion in a manner that best describes your company. However, if the format is too different from what your audience is used to, they may find it difficult to read your plan. Make it organized, clear, and purposeful.
It helps to know your audience and what information they need to act favorably. For example, a customer wants to know you will provide quality products/services and will be around to provide maintenance or upgrades. A vendor wants to know that you will pay invoices on time and be a repeat buyer. A banker wants to know how much money is requested, what it will be used for, how long the funding is needed for, and reasonable projections that you will have the resources to repay the loan in full. Hence, while you may focus on sales, the banker will focus on cash flow.
Usually you will not be in the room when your business plan is read, so it needs to speak for itself and reflect positively on you and your business.
Be able to explain the following clearly and succinctly:
- What customer problem you are solving, and why your solution is better than current alternatives; sometimes called the value proposition
- What tasks are necessary for the business to succeed
- Most important, why you will be successful
• A business plan is primarily written for yourself. However, it should not be about you — it should be about the market and your customers.
• A business plan is both a document and a process.
• Business plans need to be tailored to your situation and kept current.
• Design your business plan in a manner that best explains your business idea.
• Know your audience and what information they need to act favorably.
• The message is more important that the style.
- Note the reasons you are considering writing a business plan.
- Describe your audience, what you would like them to do after reading your plan, and what information they need to favorably take that action. The audience could be you, a banker, an angel investor, a key vendor, a potential employee, a contracting official, a key customer, etc.
Next month, we will look at four sections every business plan must have (and why they’re important).
Hal Shelton’s business planning skills were developed as a certified SCORE small business mentor, corporate executive, nonprofit board member, early-stage company investor, and author of The Secrets to Writing a Successful Business Plan: A Pro Shares a Step-by-step Guide to Creating a Plan That Gets Results. Suggestions for additional topics are welcome; email Constant Contact or Hal directly from his website:www.secretsofbusinessplans.com.