Growth is critical for businesses that want to gain traction and become a dominant business in their industry. Growth is often seen as a positive thing, but growing too fast can be dangerous. Joe Ambrose, Executive Director of the First Bank Center for Family-Owned Businesses, said, “While growth is an important objective to ensure success of your business, rapid short-term growth can pose many risks if your business isn’t properly prepared.” For family-owned businesses focused on longevity and multi-generational leadership, recognizing the warning signs and handling them appropriately can help ensure healthy growth in the future.
Below are some of the pitfalls of growing too fast to keep in mind.
1. You lose sight of your profit margins
One pitfall of growing your business too fast can be that you lose sight of what your profit margins are. Ambrose said, “One thing that can happen to a business that is trying to grow too fast is that they can run into hidden costs. A business can be very focused on trying to grow that they may lose sight of their business finances to properly determine if the business has the financial means to support and sustain the growth.” Some common hidden costs can include repairs and required maintenance, training, and supplies. For family businesses looking to grow through multiple generations, Ambrose suggests reviewing past profit margin reports and comparing them to revenue forecast reports. This can help determine if the business is prepared financially for growth and the associated costs in the years to come.
Learn more about measuring profits and revenues in a family owned business at the First Bank Center for Family-Owned Businesses webinar titled, “Measure What Matters in a Family-Owned Business.”
2. You don’t have the proper systems or devices in place to acquire growth
Growing too fast can also result in outdated systems and insufficient devices. When a business is preparing to grow, it’s critical to assess the systems that are being used. Determine if the systems, technology, and devices used are up-to-date. How is device performance? Do additional devices or systems need to be added and can they be integrated with what is currently used? It’s recommended to periodically audit all current and new systems and devices that may be needed to determine how they can affect anticipated growth. Just as the leadership in the family business can change, your device and system needs can change as well.
3. You outgrow your resources
Outgrowing your business resources can be detrimental to businesses that aren’t properly prepared. Ambrose said, “Businesses that grow at a rapid rate can risk using up their line of credit due to increased expenses from growth. This is why it’s ideal to understand your financial situation and how well the family business is positioned for growth.” Evaluate the cash that is available to help support and achieve the growth and identify the gaps that your line of credit will help fulfill. Ambrose stated, “It’s ideal that outstanding financial needs that are anticipated to be covered by a line of credit do not exceed the available line of credit amount. It’s recommended that you assess your financial reserves in the event that you need to pull cash from elsewhere to cover expenses.”
Learn how a Business Line of Credit can give you the financing you need.
4. Quality standards aren’t being met
Another risk of growing too fast can include changes to the quality of products or services. While the needs for more products or services will change with higher demands, the quality should remain the same or improve. One way to monitor quality is through customer feedback. Are products being produced quicker resulting in lower quality? Is service being affected by an increase of customers or clients? If quality standards are not where they need to be, it’s critical to assess and resolve the issues to ensure a steady client base through the generations.
Growth is an important business objective to achieve, but growing too fast can be risky. Before growth strategies are implemented, it is critical for owners to understand the financial situation, including financial reserves of the business, how systems and devices will be affected, and how to maintain the desired quality of business products and services. For more insight and resources tailored to family-owned businesses, visit First Bank’s Center for Family-Owned Businesses.