The Little Known Hazards of Growing Your Business Too Fast
There’s an alarming myth making rounds in the business world: fast growing businesses have found the recipe for success.
I can’t blame the admiration, and perhaps the envy surrounding such successful companies. One day they’re a team of passionate entrepreneurs bootstrapping funds, a few months in and they get a surge of investment from venture capitalists. Then in less than a year, they’re making millions. Now that’s how you build a successful business!
Unfortunately, that’s not always the whole story. Many accelerated startups end up crashing, ridden with debt. Others fizzle away after their initial year, kind of like musician and his one-hit wonder.
Growing your business rapidly involves taking more risks. If you think starting a business from scratch is risky, try making a bold move when you have a bunch of backers to please and a team of 50 whose salary depends on you!
Yes, growth is commendable. It’s actually expected— your family, vendors, customers and employees all expect your business to grow in some ways. To make the growth sustainable though, certain risks must be considered.
Business Owner Alert: 3 Risks to Avoid in Your Quest for Growth and Market Domination
A Vicious Borrow-and-Pay Cycle
This is a common problem among entrepreneurs who scale business operations too quickly.
You won’t have much capital when you’re just starting out. Increased orders — or projects, if you’re a service professional — require additional funding to support the need for raw materials and labor.
For instance, a newly opened restaurant that gets an unexpected surge of customers will need more supplies and extra help. Of course, you’ll need money to fund this growth so you’ll tap into your reserves. A few weeks after that, the restaurant does well so you decide to give your diners incentives to refer new people.
New diners then come in. You’re running low on supplies and your staff couldn’t cook and serve fast enough to accommodate the crowd. So you decide it’s time to open a new branch. That will cost money—more than what you have now. You loan money from the bank. You’re growing your business, right? It’s a business risk worth taking.
A few months in, it looks like the increased diners are bringing you more than enough profits to cover the loan payment. But your debts and bills are piling up quickly. Before you know it, business slows down and keeping up with all your financial obligations will become a struggle.
One Market at a Time
Sometimes it’s not upward growth that’s the problem. Having your fingers in too many pies is exciting, but you could be spreading your resources too thin.
And what if the other ventures don’t pan out?
The restaurant in our example earlier, for instance, can expand into a catering business. It’s different, and the possibility of getting big catering events is tempting. But it will take your focus away from your main business.
To avoid this, focus on your core business first. Make sure you have a reliable system: a good staff, production line and recurring revenue that won’t collapse when you’re not monitoring everything.
After that, take a calculated business risk by tapping into another market. The new venture will present more challenges, but at least you know the core business is steady enough on its own.
Should you increase your profit margin or go for a bigger market share?
I often hear these questions from entrepreneurs trying to grow a successful business:
- “Should I raise my price?”
- “Should I lower my prices to get more buyers?”
These questions are two sides of the same equation— market growth and profitability.
If you hike prices too early, you’ll limit the business’s growth because premium prices deflect the masses. While the premium prices might earn you a bigger profit margin, you might lose a significant customer base so the extra revenue may not be enough to make up for it.
On the other hand, you can keep your prices or lower it, so you can grab a chunk of the competitor’s clientele. You can build a successful business this way but if price is the only distinguishing value of your product, another competitor can just as easily do that.
Whatever route you choose, pay attention to your customer’s behavior first before making any radical changes. And don’t forget to find more ways to deliver more value.
The Common Flaw
In 17 years I’ve coached business owners, the one flaw I find common among them is lack of understanding. Many entrepreneurs attempt to build a successful business at breakneck speed, not knowing the difference between serving 30 customers and 300 customers.
If there’s one thing you remember from reading this, it’s that serving 300 customers is not as simple as multiplying production by 10.
© 2015 Incedo Group, LLC