Growth: it’s easily the most common financial goal of small- and mid-size business owners. Growth is a fine goal, though it is not always the best goal—especially if the growth is unplanned and uncontrolled. The idea that growth can be harmful to a business might seem counter-intuitive when many business owners struggle to hit break-even revenue targets. But financial experts around the world have been warning of the dangers of uncontrolled growth for . . . well, pretty much as long as there have been financial experts.
Too often, business owners tend to focus on the wrong measures of success: vanity metrics. Vanity metrics are thrown around in conversation as bragging points--“we tripled our sales last quarter!” or “we have added four more locations just this month!” While these are impressive achievements, top line and asset growth can have undesirable effects that ultimately result in lower profits or even bankruptcy.
The worst effect of uncontrolled growth on your business is related to efficiency. When your growth occurs very rapidly, oftentimes you don’t have the infrastructure in place, which leads to your team consistently playing catch-up. Your team doesn’t have any spare time to focus on increasing efficiencies or making improvements to their work, yet when sales volume is increasing, efficiencies are even more important! If you invest time in process improvements regularly and do not sacrifice that time in the name of growth, you will be able to increase your bottom line, even without any additional growth. Also, you can maximize the impact that future growth has in the form of a higher profit margin. At the end of the day, the bottom line is what matters most.
The second—and most deceiving—way that growth can ruin financial stability is through a rapid increase in debt. Growth usually requires a significant capital investment, and in small- and mid-sized businesses, it’s mainly financed through debt. The negative impacts of too much debt do not show themselves in the top line or even the bottom line, because debt is tracked on the balance sheet along with assets. Owners may not realize that they have an issue with too much debt until it is too late: funding applications are being denied or monthly payments are missed. Even if top and bottom line figures are strong, high monthly debt payments can create a tight cash flow situation, and even one slow month or a large receivables balance can trigger a negative financial chain of events.
It’s easy to let the emphasis shift from quality to quantity with the excitement of potential growth. But quality is the backbone of all small- and mid-sized businesses, and letting quality slip can have long-standing negative impacts. Whether the business provides a service or produces a product, if quality suffers, existing customers will consider bringing their business elsewhere. They may also tell their network, costing you future customers as well. When employees (and owners!) are over-worked, tired, and frustrated and their quality of life suffers, the quality of their output and service will suffer as well. In the worst-case scenario, employees may even choose to leave the company in favor of a more stable work environment—and nobody can afford to lose good help in this labor market! Never sacrifice future growth in the name of present growth, as tempting as it may be.
Need help with your finances? Email Jessica at jessica@lmc.group.