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Growing Pains: The Perils Of Unplanned Expansion

Thursday, February 24, 2011   By Mike Reddy

 

When sales are increasing and new opportunities can be sensed, many a business owner’s thoughts turn to expansion. But unplanned expansion can be as detrimental to your business as no growth at all. Fast growth can destabilise a business giving its owners a false sense of well being while the additional revenues eat up more operating dollars than expected. If expansion is on your agenda, keep these things in mind.


Watch Your Overheads

The biggest danger in expansion is the erosion of a low overhead structure by unjustifiable purchasing or from simply being too busy to keep track of what is happening. Overhead expenses that were under control in the stable business situation now grow rapidly to cover extra expenses associated with a bigger scale of operations – transport, inventory,  rental on larger storage space, and all the rest will deplete precious capital.

Track Your Margins

While it might be expected that more sales would return the same profit margin, or even better since overhead is spread across a greater amount of sales income and because the cost of goods goes down as you buy in greater quantities, this is not automatically the case. Additional sales often come with unanticipated costs that can actually decrease your margins. Margin analysis will tell you if you are really growing or just running faster to stay in the same place.

Employ Strategically

With extra production needed it seems natural to hire more people but a sudden influx of new employees can introduce problems ranging from changing the dynamics among the old team and creating morale problems to markedly increased insurance and employee benefits costs.

Consider alternatives that pose less of an administrative burden for the business such as retraining some of the existing employees to pick up new tasks, taking on freelancers and temps or maybe even outsourcing some of the work. Balance your use of temps against the training investment they require and the skills you will really need to have on tap in the business because these people will take their knowledge and skills with them when they leave.

Don’t Underestimate Funding Requirements

Typically, most small business owners will seek a business loan to expand operations. But the danger here is that if the expansion doesn’t go according to plan then the business can very easily end up in the red and acquire a bad credit record. Look for cheaper sources of funds from accredited providers such as government small business agencies and have a detailed and realistic projection of income and outflows when making the request for funding.

Keep Customers Loyal

Good customer service is often a significant component of small business success, but ironically it is also one of the first things that tends to be lost sight of when businesses go into expansion mode. Employees get caught up in the ramping-up activities and lose track of what is happening with customers. So the very customer service that was the springboard for growth in the first place becomes difficult to sustain and customer defection occurs. Securing new business through the growth phase can also be hard to factor in to activities. The key to retaining customers is to maintain adequate staffing levels that ensure current customers continue to receive the attention and service that has made you their supplier of choice.

Forecast Cash Flow

Sudden expansion can involve heavy investment to handle production of new orders that won’t translate into cash in the bank for some time. In the meanwhile the business still has to pay its creditors. Poorly managed or inadequate cash flow is a major cause of expansion failure. Building strong cash flow when going into a period of rapid growth will make the process much less dangerous to the business' survival.

Avoid Disagreement Among Owners

Multi-ownership can pose its own threats to the success of an expansionary drive. Ownership arrangements that have functioned effectively prior to expansion activity can become increasingly problematic. As business issues become more complex the views of different owners on such things as how to run the business and their vision of where it should be going may diverge and introduce a conflict at the very top level.

Particularly hard to deal with is the situation that arises when the expansion takes the management of operations beyond the competence of one of the owners so that they are no longer making a real contribution to its running. When this happens the departure of one or more partners may be necessary to establish a unified direction for the growing company.

To succeed, businesses must grow and business people should not shy away from growing because there are challenges involved. Businesses don’t fail because they grow. They fail because they don’t manage their growth or grow their managers. There’s no substitute for expanding according to a sound business plan.


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+.