Blog written by David Lightfoot, B2B CFO
Virtually every business plan is based on growth. I’ve never seen one that projects a static level of sales or a decrease. And often, too often, growth is seen as the savior; the thing that will deliver the company to financial bliss. As Ron Kranz says, “Be careful what your wish for.”
Growth, the very thing that every business strives for, can sometimes be the undoing of that business. I’ve seen businesses fail because of issues stemming directly from growth. How can this be? Let’s explore the most common perils of growth.
The biggest threat to a business—any time—is a cash shortfall. That is, the company finds itself in a position where it cannot meet its obligations as they become due. The worst of all is an inability to meet payroll.
While growing sales is generally good, the focus needs to be on profitable growth. And even with profitable growth, that very growth can cause terrible cash flow problems.
Mostly this due to the cash or operating cycle of the business. Cash is spent upfront to pay for employees, payroll taxes and, if you’re a manufacturer, raw materials. Even if you’re a service provider and you don’t have or make inventory, you still have to pay the people who provide the services your customers pay for. Most businesses sell on credit, that is, they invoice their clients who then pay in 30 days (if you’re lucky).
The cash-to-cash cycle from paying payroll, delivering the service, invoicing the client to collection of the receivable is often two months. And it is not unusual to see an operating cycle of four to six months.
What growth does is accelerate the problem caused by the operating cycle. That is, the amount that must be paid up front keeps growing and soon exhausts the capital resources of the business.
There are solutions such as financing receivables, getting better terms from vendors and other creative approaches. But the business needs good planning to make sure they always have enough cash. Cash to a business is like blood to our bodies.
Change in the Owner’s Role
Most businesses can grow a little and not change the fundamental way they operate. But with enough growth, things need to get more formal and robust. Systems must be developed to coordinate efforts and ensure consistent operating performance. No longer can processes be in someone’s head.
With increased headcount, invariably the span of control for the owner gets beyond what a person can manage (that’s usually about eight direct reports). At this point, the owner must hire others to start managing staff. The owner becomes a manager of managers and that takes a special skill set.
In addition, the owner will need to be able to think strategically and plan using an increasingly long timeframe. Besides managing people who have their own direct reports, the owner must recruit, train and retain good people. The owner must also have the vision for their company and be able to convey it to others. They must be a leader.
All these roles may be uncomfortable to the owner but they come as a result of our friend—growth. This is a longer term threat than cash flow but it is still real. There are solutions, there are always solutions, but they aren’t easy.
Having a team of trusted advisors who have grown companies before and dealt with the challenges growth brings can help the small business owner. After all, the goal is to successfully transform their small business into a not-so-small business.