Many companies find themselves in the odd position of being in trouble on the heels of significant success and growth. Authors John Lambden and David Targett identified 6 common causes in their 1990 book Small Business Finance, which I am going to expand on here.
1. The Big Order
The big order that catapults your business to the next level but requires immediate investments in materials, labor, equipment and inventory to produce future sales and profits can drain your cash flow and bust the limit on lines of credit. Result = Cash runs out before the revenues come through.
2. The New Facility
A new office or factory is great and might be necessary to reach the next level, however the costs (anticipated and not) of moving, disrupting operations and increased expenses can wipe out cash and profits and overwhelm your line of credit. Result = Cash runs out before the dust settles.
3. Inefficiencies of Expansion
Costs rise across the board as production and sales volumes rise and require the management and handling of more staff, more suppliers and more customers.Consider the additional resources needed to process twice the number of invoices or to handle twice the volume of inventory. Result = Costs, time commitments and headaches outpace sales and profits.
4. The New Salesperson
Hiring for growth is exciting, but can you carry the increased salaries, payroll expenses and other costs until the new people generate enough business to pay for themselves? Remember that at 10% net profit a $100k salesperson needs to generate $1 million in sales to break even. Result = Cash runs out before the 1-year employee review.
5. Marginal Costing
How well do you know and control your costs? A unit of production priced at $1 that costs you $0.80 at current volumes might cost $1.10 at higher volumes if the increased labor, equipment and overheads go up more than anticipated. Result = Each additional sale takes money out of your pocket.
A small player can thrive unnoticed by bigger fish who see no threat, but an up-and-comer can attract attention too soon and trigger a storm of price wars, pressure on key suppliers and other attacks from the established market leader. Result = Increased costs and lower profits before you’re ready for the fight.
Most companies seek to grow, and profitable growth can be achieved. The key is to understand and mitigate these common pitfalls (and others) with insightful planning and effective execution.