Growing Too Fast Can Destroy Your Business
Posted on May 3, 2012
Many entrepreneurs are preoccupied with “growing their business.” Don’t get me wrong, you should definitely grow your business, but I think it is important to reassess what your true priorities should be.
Growth is important, but you should focus on growing profitably. Failing to focus on profitable and sustainable growth can actually destroy a great business. In fact, according to post published in the New York Times this past year, out-of-control-growth is the third biggest reason why businesses fail. It’s quite possibly the single biggest reason why great businesses fail.
There are a number of reasons why a great business can fail to grow profitably. When you are growing your company, you must avoid making the following mistakes:
Lack of resources
Many businesses dream that they double their customer base overnight. As tempting as that sounds, you should ask yourself if you are able to serve all these customers. Do you have the manpower, physical capital and cash to serve all these customers?
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Sometimes you are just going to have to say no to customers. Telling a customer that you can’t take any new clients now may not be easy, but it is better than doing a shoddy job or missing deadlines when you start spreading yourself too thin. However, I would encourage them to be in touch when you aren’t as busy. They may not need your work by the time you free up, but if they do they will remember that you are in demand and can manage your commitments responsibly.
Expanding into markets with no potential
You can’t suck blood out of a stone. I have no idea where that phrase came from, but I at least understand what it means to entrepreneurs. Some markets just aren’t profitable. You can spend time, energy and lots of capital reaching them. Why waste so much of your time and money reaching a customer base that doesn’t have the need or means to buy your product or service? It would make much more sense to stay small and serve the customers that are going to pay off for you.
Not being able to meet cash flow
You can’t run a business without cash. You can bring in lots of sales with good profit margins. The problem is that many business models depend on customers who will be paying after you have delivered your products. If your business pays on net 60, you will need to wait up to two months before many of your customers pay you. Even longer if they are delinquent on their payments.
You will also need to wait until you are able to finish delivering their work. In the meantime, you will have to pay all your own expenses on time.
One of the biggest mistakes you can make is going right for a really big client. While going for the big fish can be tempting, it can also be really costly. Filling the needs for bigger clients usually requires more of an investment and it may take a lot longer to pay off. You may find it takes six months or longer to deliver for a corporate client and they may not give you an advance no matter how much you ask.
You need to plan your cash cycle so that you can meet all your expense obligations while expanding. Sometimes you are going to face an opportunity you can’t say no to. I wouldn’t pass it up, but I must warn you not to take it until you know how you are going to be able to manage your cash flow. If you are going to take on a huge project, you may need to take out a loan to meet your expenses if you know you aren’t going to get paid for a long time.
One other thing: make sure a new account has a track record for paying their bills. Some businesses that promise big payments for your work may stiff you at the end.
Functional limitations with a market
You may have heard that many people in your industry are making a killing serving clients in Japan or marketing to New York commercial real estate brokers. Clearly, you may face some great growth opportunities doing that. What’s the catch?
These are very complex markets to be dealing with. Your competitors may have connections and knowledge about an industry that you are not privy to. Unless you have the money to hire a consultant with the expertise in those markets, you should avoid pursuing them. Going after them will only be a cash drain.
Growing too quickly has destroyed plenty of businesses. As sad as it is for any business to fail, it is most depressing when an entrepreneur fails because they were too good at what they did. Don’t let yourself fall into this trap. Make sure you plan your growth so that you stay profitable and never have to worry about getting in over your head.