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Bigger is not always better - The pitfalls of expanding too quickly

Thursday, August 30, 2012   By Mike Reddy

 

Success breeds success. And after some good results it is common for small businesses to rush into rapid expansion.

While growth is a necessary goal, it must be planned with precision and meticulously managed.

At one time or another, every business goes through a growth spurt and, whether it’s a multi-national corporation or a small enterprise, expansion can be a tough process to navigate.

Cash flow, customer satisfaction and employee communication are typically the first areas to suffer, and in the most extreme situations can lead to failure for an otherwise flourishing business.

Keep an eye on the overheads. During a growth spurt it is easy to lose focus on ensuring that the overhead structure remains efficient.

Track your margins- while an increase in sales is desirable, it can also come with unanticipated costs. Your net profit margin ((net profit ÷ sales) = % NPM) will confirm if your business is really growing or is just running faster to stay in place.

Taking on too much debt is a common mistake when a business is growing. While expansion does require investment and available capital can be in short supply, accessing external funds to meet the day to day costs of a business is almost certain to lead to disaster.

Consider alternative funding methods. Enquire with local and central government agencies that support small business.  Ensure you create realistic projections of incomes and outflows when borrowing. Consider a number of best case and worst case scenarios and apply weighted averages to arrive at a conservative estimate.

Remember that it is more profitable to sell to an existing customer than it is to acquire a new one. Ensure there are strategies in place to retain these profitable customers.

Make your clients aware of your plans and keep them informed- they will appreciate the heads up and will be more likely to be supportive during the small changes.

Developing relationships with new customers will demand more time and support. Encourage and reward your employees for their additional efforts.

Hire temp workers or consider outsourcing to cover demands during the peak periods.

Remember to focus on the long term. Businesses don’t fail because they grow. They fail because they don’t manage their growth.


Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.