Most small-business owners want to see their business grow, but if you’re unprepared for that growth, it could lead to financial disaster. We spoke to business mentoring expert Terri Levine to hear more about the key areas business owners should be aware of when experiencing rapid growth.
Small Business Center: What are some of the financial risks experienced by small businesses during rapid growth?
Terri Levine: When a business has rapid growth this results in higher expenses for staff, production, and facilities. If the growth wasn’t planned, the business might not have enough working capital. I see this as a key problem.
What types of solutions do you recommend for it?
I instruct my clients to collect all outstanding debts quickly, decrease prices by 10 to 15 percent, think about refinancing or borrowing money, offer customers discounts for prompt or upfront payments, and reduce costs by eliminating unnecessary overhead.
What about profit margin? Is it important to keep an eye on it during rapid growth?
I find that most companies, including those listed in Crain’s Fast 50, describe themselves as unprofitable. Sometimes when a business grows rapidly, they burn through money and don’t keep their eyes on profits. To prevent this from happening, small-business owners need to watch the right key performance indicators. For example, they need to know the costs of acquiring a customer as well as the lifetime value of a customer. That’s because if a company has high margins and is experiencing rapid growth, they’ll quickly add customers. And if they’re spending a lot to acquire those customers while operating at a loss, they’re in trouble. Sadly, this is the case with many rapidly growing small businesses.
What are some options for keeping up with an increased inventory demand?
Inventory management is essential when a business is getting overloaded by rapid growth. The business needs to maintain an inventory of the predictable products that sell the best, which will allow them to ensure swift delivery of these products in the future. The goal is to reduce inventory storage, deliver products proactively, and reduce costs. By learning to accurately predict and forecast sales, the company can keep up with the demand caused by rapid growth. In addition, I sometimes recommend drop-shipping or buying in bulk to better manage inventory and reduce costs.
How can small businesses reduce the impact on their cash flow from increased vendor invoices?
During a growth cycle it’s normal to see higher vendor invoices, but companies typically haven’t set aside cash and prepared for it. I first recommend they take advantage of payment terms with their vendors. In addition, if their vendors accept electronic funds transfer, they should make payments to them on the last day they are due. This allows them to remain current with suppliers while retaining the use of their funds for as long as possible. I also encourage business owners to communicate with vendors so they understand the business growth and the resulting financial situation. Then, if the owner needs to delay a payment, the vendor will be more likely to work with them. Finally, if the vendors were selected for having the lowest prices, the business owner should seek vendors with more flexible payment terms instead.
If owners find the business is outgrowing their existing space, should they consider leasing a larger one?
Most small-business owners really don’t know how much space they are going to need over the course of the next few years. If the business is rapidly outgrowing their space, I typically recommend a short term lease, but they can be hard to come by in many areas. The next best option might be an executive suite. Even though they cost more per square foot versus a temporary lease, they’ll have the flexibility of upsizing or downsizing, and the furniture, phones, and setup are included. It will allow them to get through the growth period and determine what size space the business is really going to need. My least recommended option is signing a standard lease for three years or more because there might be uncertainty about their continued growth.
How can owners know when additional staff is needed to keep up with the increased demand?
I always have a business look at several factors before adding more staff. First, they need to determine if the demand for their products or services is increasing each and every month consistently, or if it’s only seasonal or temporary. Next, they’ll need to determine whether the work is still getting done on time with the current staff. They’ll also need to analyze their customer service: Is it suffering? Are they paying a lot of overtime or having to hire temps? And finally, they should determine if they lack a team member with a special skill set that they need. If they answer yes to two or more of the questions, then it may be time to hire.
What can small-business owners do to ensure that a sudden increase in sales doesn’t affect the quality of their products or services?
Often, when a small business suddenly expands, they neglect the quality of their products, services, and customer service, and customer retention drops as a result. One client hired my team because after the owner was interviewed by a popular magazine, the company went from selling 100 items a day to 1,000. Within a month they had orders for 10,000 a day. They couldn’t keep up with the orders and within a few months they foundered. They came to us because their product quality was poor and their customer satisfaction rating was awful. This is typical. Studies indicate that the major reason fast-growing businesses fail is not falling demand for their services or products. The reason is the companies can’t continue to provide the same quality and sustain rapid expansion.
We mentor businesses to put a minimum of one hour a day on quality assurance and one hour a day on customer service, even during their biggest and fastest growth spurts.
If a owners are considering expanding their business now, what sort of planning should they be engaged in?
I recommend before they expand too quickly they have some evidence that their business model works and they have market research that proves there is enough demand to justify expansion. Before expanding, a business needs to create a development strategy and build into that ways to measure progress. It must contain targets, costs, roles, responsibilities, and realistic time frames — and should be reviewed and adjusted often.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
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