The Danger of Growing Too Quickly

"Determine whether your company is on a course leading to disaster. Here are some tell-tale signs that your company is growing much too soon."
by Isabel M. Isidro

Some small businesses are faced with the "too much, too soon" syndrome, where the business grows too quickly for its founders to handle. While it is natural for a well-planned and well-executed new business to grow, some small companies are allowed to grow too quickly when management becomes flushed with early success.

While the founding entrepreneurs have built a successful company, they have also created a challenge beyond their experience and capability. Impatient owners might launch new product lines or services, expand into unfamiliar fields, hire too many employees, acquire expensive facilities, begin plans for acquisitions or an initial public offering -- without the necessary experience, management skills, capital and support. As a result, cash flow shortages occurs, maybe subtle at first, but expenses will begin to exceed revenues at an increasing pace with each new month of growth. The company then begins to hemorrhage.

Here are some indications that a company’s growth is too rapid.

• The decision to expand is based more on impulse than on sound financial evaluation, market studies or economic analysis. Oftentimes, the expansions are a result of the owner’s whim and personal satisfaction rather than a real understanding of the company’s capabilities. As a result, impetuous companies charge ahead and seek to take advantage of market opportunities even if they lack the necessary capital for the project. The undercapitalization of projects soon become their undoing.
• Loans acquired for expansion are so large that servicing them consumes the company’s earlier established cash flow. In addition, some growing companies experience problems with their account receivable management, despite a significant increase in sales. The financial distress could then bleed the company dry.
• The owner and other principals find themselves growing out of touch with the key employees on whom they must rely. Worse, these companies continue to put up with some unproductive division, asset or person putting a strain on the overall profitability of the company. Get rid of the deadwoods!
• Management becomes so involved with trying to administer all of the new operations acquired that it losses track of the essential business functions. A company’s risk of failure also increases given an overly centralized management team that lacks depth. A growing company must be able to recruit and retain personnel qualified and capable of taking the company to its next phase of growth.
• Mounting overhead begins pinching over vital expenses.
• Bureaucracy rears its head in the form of more memos, meetings, and buck passing, further compounded by a defective monitoring and information systems. Growing companies must be able to obtain information (internal costs and budget, competition, inventory controls, cash flow, sales growth, among others) in a timely, organized and efficient manner.
• Customer complaints increase and satisfactory servicing becomes a problem. Oftentimes, in pursuit of greater success, companies grow quickly that their back-end support system, delivery and order fulfillment sections fail to catch up.
• Over dependence on a key customer, supplier, lender, or contract is another pitfall for growing companies. Small companies should try to diversify their product lines, geographic trading areas, distribution channels and targeted markets.