A cautionary growth tale

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You know it’s funny, but I honestly believe that so many businesses don’t really plan to grow. What happens is that they find a niche and they’re very good at filling that to a small group of customers. Then more people get wind of how good their business is and start demanding their products or services – and before you know it, the business is bursting at the seams. 

My electrician, let's call him Steve, took on extra staff to cope with an explosion of demand for his services. He always turned up, was friendly and polite, didn’t charge the earth and after doing a great job, he even cleaned up his mess. 

Along with all his regular customers, I started referring him and before long his stocks were soaring. He took on employees, but there was no plan. 

He was running everywhere looking after employees who didn’t give the type of service he did and he was fixing up their mistakes. He couldn’t keep up his bookkeeping and invoices weren’t being sent. Before long he had people problems (customers were complaining and employees were asking for more money and time off), cash flow problems and one giant headache. 

Know what he did? He went back to being a one-man band. He thought growth was too hard – and it wasn’t for him. He didn’t anticipate it and there were no growth plans. It was just one big mess. He is determined now to stay small and never go through growth again – but that’s not really the right attitude. 

Steve has gone back to having a job, to a comfort zone that he knows and likes. But if anything happens to him, he better make sure that he has lots of insurance because without him doing all the work he has no business.

When your business is growing, the needs of the business change, often dramatically. Michael Schaper, Adjunct Professor at the School of Management at Curtin University, says that most small owners don’t have any idea about how to deal with the extra demands being put on their resources.

“Some growth will create a need for more spending. If extra stock, larger premises, new tools or additional staff are needed then money has to be found to pay for them. New loans may need to be taken out (in the case of long term asset purchase), or else additional working capital needs to be found for short-term needs. 

“While some businesses will already have retained earnings that they can draw upon, others many have to set up or extend their overdraft facilities. However businesses that don't have enough cash flow to service the debt will find themselves in trouble, whilst others may find that they don't have a suitable track record or security to obtain a loan and so stagnate from a lack of capital,” he says.

Schaper says, quite rightly, that businesses that sell good on credit can often face severe cash flow problems when additional sales take off. They can find their list of debtors rapidly accumulating which maybe e a problem if adequate account collection mechanisms are not in place.

“It's often easy to ignore the size of the business’s rising costs, especially if sales are also increasing rapidly. All of this means that the business's financial projections – especially its cash flow forecast and its profit and loss projections – have to be carefully scrutinised and constantly re-evaluated,” he says.

The sparkie got a shock!

When my mate the sparkie took on unplanned growth, he had no plans in place at all. He took on staff but had no idea if there would be enough business to maintain him over a long term.

As you start to see signs of growth in your business you should undertake a marketing audit to ensure that your current and future marketing strategy is adequate to take you to the next level.

“More sales implies more customers which means your growing business needs to revise its marketing plan if you want to turn these customers into long term ones,” Schaper says.

“Is the right advertising being used? Are the right promotional strategies in place? How well defined is the expanded customer base? Many businesses mistake a temporary change in purchasing behaviour for a long-term commitment and mistakenly embark on expansion programs as a result. Finally, the business needs to be careful that it doesn't alienate its original customer base in the process of luring new sales,” he advises.

Steve needed to slow down and ask himself these questions:

  • Do I have the knowledge that’s required? 
  • Am I capable of making decisions, delegating work, dealing with staff and coping with stress? 

What else did my electrician friend not consider?

Steve got himself into trouble because he didn’t realise the amount of time that can be taken up with employees – they get sick, have ‘issues’, need motivation, need training, etc. 

Here’s what Shaper says on the subject of staff:

“As soon as you start employing you become a manager of people and all the marvels and mysteries that go with them. You won’t have time doing things like you used to and will need to devote more time to administration and supervision. Some people can’t handle the responsibilities of managing staff and there can often be more stress. Alternatively, having employees can free you up from being consumed by things you really shouldn’t be doing in your business and leave you more time to concentrate on fulfilling your growth potential.”

Steve had no idea of how to handle people – understandably because it’s tough stuff managing staff. Because he had no developed systems about his way of doing things and manuals on how to treat customers, his employees were acting the way a lot of trades people act and they were burning his previous loyal customers. 

Now, you might say, well that’s the way trades people have always acted – they’re a law unto themselves. Well, Steve was different and if he had done some planning and taken growth on at a slower pace, then he could have had time to train his staff to do things the ‘Steve way’. People can be trained.

I know a bloke who inherited his father’s cleaning company and was so overpowered by his father’s lack of systems that he sold it within two years – it was a monkey on his back. 

His dad had done things on the run for years and made lots of money but everything was inside his head. And when he wasn’t there, the business was just one chaotic mess – too big a mess for even him to clean up! 

This informal approach to business means that’s there very little to sell at the end of the day when the original owner decides, one way or another, to move on.

When you make a decision to grow your business, or if you see growth potential via strong demand for your goods or services staring your right in the face, make a firm decision to set a clear goal of what you really want the business to do. 

This helps stop you focus on what you need to do to maintain consistent growth while at the same time laying down strong foundations in your business to ensure that it has a future. 

Sure, stepping back and planning can be hard, but the consequences of not doing this are far more difficult to cope with.

Look for these danger signs 

  • Constant cash flow problems
  • Increasing levels of debt
  • Owe money everywhere
  • No business plan or never look at existing one
  • No clear goals of where your business is heading
  • Do everything in your business yourself
  • No well developed marketing plan
  • High turnover of staff
  • Make or sell too many different products or services
  • Never seek out help
  • No innovative practices.

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