Fast Growth Can Be Risky Business

Many business people envy the companies that are on the “100 Fastest Growing” lists.  The risk manager says, “Be careful what you wish for.”  Sometimes what looks good from the outside can be a painful problem on the inside.

What happens when you grow too fast?

Mike Van Horn, President of The Business Group (businessownerstoolbox.com), warns “The greatest threat is the inability of management to change quickly enough to respond to new situations.”  In addition to the well-documented cash flow related risks that can toss you quickly into shark-infested waters, here are some other pitfalls:

  • Losing focus on the details that are critical to your quality, customer service and employee morale;
  • Out-running or getting too far ahead of your vendors and service providers, your materials and equipment, your staff and their time, skills and experience;
  • Damaging the quality of your existing business relationships while focusing on getting new revenues.

How can it get worse?

  • The loss of experience and customer knowledge when your “boomers” retire can lead to expensive mistakes.
  • Outsourcing to stay lean can make sense, but watch your customer’s experience carefully.  For example, if a computer service firm uses an outside cabling service for a new network and something goes wrong – whose reputation will be on the line?
  • HR-type liabilities can be killers if you’re going too fast to pay attention, and you allow poor employment practices, like antiquated job descriptions, to creep in.
  • Having the wrong advisors – who may understand where you’ve been, but are not experienced in where you’re going – can be a huge liability.
  • Finally, anything “new” can be very expensive in the insurance marketplace.  If the underwriter doesn’t really understand and thinks you might be cutting corners, you could be up-rated or refused.

What do you absolutely need now?

  • Protect yourself with reliable, up-to-date systems and with documented process and procedure guides.  They will go a long way to ensure:

– Accuracy and quality in your products and services;

– Consistency in meeting customer service expectations; and

– Ease in training new people.

  • Make sure you have the right trusted advisors for tomorrow’s challenges.  This strategy will help you stay lean, focus on the big picture and be ready to handle:

– Forward-looking financial planning;

– Hiring, screening and skill testing – when you need to add staff;

– Technology troubleshooting – for expansion, upgrades and maintenance;

– Contract legal review – for those new business opportunities; and

– Risk management and insurance options – to avoid nasty surprises.

  • Stay on top of all your insurance exposures; inform your broker frequently:

– Update values, new locations, equipment, products and services;

– Make sure liability limits remain adequate; add new coverages if needed; and

– Keep your Safety and Workers’ Comp programs energized.

Do you have suggestions about easing rapid growing pains, or questions your own business’ rapid growth?  Join the conversation below!

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3 Comments

  1. Corri F. DiBagno July 11, 2013 at 4:25 am - Reply

    All solid points as respects a fast growth firm and the potential risks the organization may face. I would add consultations with your insurance agent/broker on a more frequent basis can offer additional insights into the evre changing market for a rapidily expanding company i.e. business income/time element coverages,W.C./payroll,audits on policies ,,schedules for vehicles(and the care /maintenance). If overlooked,even for but a quarter ,real financial consequences may happen.

  2. Mike Van Horn July 9, 2013 at 3:47 pm - Reply

    Thanks for the mention, Charles! Also, responding to what Cox Ferrall said, I wanted to add a few comments:

    — A company’s rate of growth is of course limited by the amount of growth capital accessible. Other major growth limitations include how fast the market can be tapped into, the quality of the management team and its ability to expand the team, and how fast operations can be ramped up.

    — Permanent growth capital is needed for inventory expansion, new facilities, hiring and training, marketing and promotion. Trying to rely on short-term financing for these things is deadly.

    — Revolving line of credit should be used for receivables lag and seasonal swings. But it takes discipline to pay this back on schedule.

    — Rarely can small, growing companies generate enough growth capital from internal profitability. They need outside money–whether debt or equity.

    — It’s in the interest of some vendors to partially bankroll the growth of their customers. For example, by giving generous terms on the purchase of inventory or materials that will be turned over rapidly, so that AP is paid out of the sales revenue received. And of course leasing companies do this explicitly, by bankrolling equipment, fixtures, vehicles, etc.

    — The only way to pay back growth capital that is borrowed is through profit generated by operations. (Ah, with the exception of an infusion of venture capital or IPO that pays off prior investors.)

    That profit is generated through productive, cost-effective operations. So this all fits with your other points.

  3. Cox Ferrall, CMC July 9, 2013 at 11:38 am - Reply

    This is a wonderful article and it touches on topics that are too often overlooked or, worse, just totally ignored.
    One additional point that deserves mentioning is the issue of internal financing of growth. Particularly for companies with supply chains (manufacturers, distributors and retailers) the general guideline is 15 per cent per annum: Any growth rate much over this will usually stretch a firm’s payables beyond the point of sustainability. Simply stated, outside vendors do not like to bankroll the growth of their customers!

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