When a company’s leadership engages in strategic planning, growing the business is typically at the top of the agenda. This is as it should be — ambition is part and parcel of being a successful business owner. What’s more, in many industries, failing to grow could leave the company at the mercy of competitors. However, unbridled growth can be a dangerous thing. A business that expands too quickly can soon run out of working capital. And the very leaders who pushed the business to grow beyond its means might find themselves spread too thin and burned out. That’s why, as your company lays out its strategic plans for the coming year(s), it’s important to focus on manageable growth.
A common scenario. Among the biggest challenges that many “high-growth” businesses face is finding enough financing for their expansion plans. Their owners often think, “If we want to double sales, we’ve got to double assets.” Buying equipment, hardware, software, raw materials, and other assets usually requires debt or equity financing — which can be good for a lender but perilous for a borrower. Overzealous asset acquisition strategies can cause repayment problems if cash flow projections fall short. There’s often a delay between: When a growing company buys inventory, makes products or provides services, and pays employees (cash outflows), and When it receives customer payments (cash inflows). The faster the growth, the bigger the gap. Businesses typically fund the shortfall with a credit line. And as they take on more and more debt, loan repayments can eventually consume most or even all the company’s cash flows.
Warning signs. It’s easy to get swept up in the whirlwind of rapid growth, but it’s not inevitable. You and your leadership team can watch for common warning signs that you may be at risk of becoming a victim of your own success. These include: An increasing debt-to-equity ratio. High-growth businesses tend to burn through cash at an alarming rate, if given the opportunity. If your strategic plan will likely drive you to consume an entire credit line, and then ask for more, watch out. Closely monitor your ratio of debt to equity. A consistent upward trend is a cause for concern — even if it’s within loan restrictions. Quickly declining profit margins. Leadership teams overly obsessed with growth tend to focus on the top line and lose sight of expenses. Low prices and an undisciplined approach to taking on any and every customer can further erode profits. Rising complaints. High-growth companies are often inclined to overlook quality control and fall short on backend obligations, such as warranties and customer service. This typically leads to customer complaints. Meanwhile, cash shortfalls may lead to delayed payments to vendors and lenders. At some point, these parties will likely start complaining as well.
Do the managing. Make no mistake: growing your business is an important and, in many cases, necessary goal. But if you don’t manage that growth, it could manage you — into a crisis. Contact us for help building reasonable financial objectives into your strategic planning process. © 2022