2-Minute Business Lesson: The Risk of Growth


The Risk of Growth

The Case Study:

Max Co. is a small manufacturer of tubing for the chemical industry. Started by Max in the 1980s, the shop had experienced only modest growth over the years, but the company was financially strong, employing 18 workers. Max was very proud of what he had built, the families he had supported and the quality of life he had attained. In 2011, Max brought his son Peter into the company. Peter’s background was in sales and he had wanted to join the company for many years knowing he could open new markets. And that he did. In just 2 years, Peter increased orders by 40 percent, production was barely keeping up with 8 new production employees and 4 yet-to-be filled open positions. Orders were starting to back up, equipment maintenance was being delayed, accounts payable were in chaos resulting in angry suppliers and Max felt the wheels were about to spin off. Peter kept selling.

The Question:

Can a business grow too fast? The answer is a resounding yes! To waltz through a significant production increase takes planning beyond just sales and marketing. This company failed to prepare for the impact on human resources, facilities management, cash flow and access to capital considerations, support personnel, etc. Nearly doubling the size of a company without a supporting strategy may just kill it. What is the right way to grow?

The Lesson:

When entering a new market or executing any expansion strategy, the business owner and the team need to be prepared before the new business arrives. Many questions need to be asked and solutions determined. Among them:

– Is the workforce available at a rate that will allow for profits?

– Will they require training?

– Can materials be secured and inventoried in the current space?

– Can the physical plant maintain operations at the higher output?

– Will the company be subject to more regulation due to higher employee counts?

– Is cash available?

Access to cash is the greatest factor for a successful growth strategy. It is a very dangerous game to try to pay for growth with cash flow, because you will always be playing catch up. One of the first, and perhaps most important, planning steps is a meeting with the bank, financial planner or an investor. Is cash available to put people, inventory and systems in place? Can the business afford to risk current assets against future gains? How will the debt be serviced and over what time period? Bottom line, is this a good move for the company given access to capital?

Do it now:

Plan for growth. Know your industry and the opportunities ahead. Maintain and nurture a good working relationship with your banker. Keep an eye out for competing or complementary businesses that may be interested in selling. Be wary of a new opportunity that would bring big growth too quickly.