While many think that the riskiest period in owning a start-up is during take-off, research suggests that this is not always the case.
According to research from Ormsby Street, 91% of small businesses survive the first year of trading, whereas, after just five years, only four in ten of these will still be trading. So why do these seemingly successful new companies fail over time?
The answer is quite simple. Survival of the fittest. Once your business starts to turn a profit, the most logical next goal will be to try to grow in size. The business world is ever changing so making sure your company adapts to those changes and expands carefully over time will be the secret to your success. However, the way you do this must be careful.
Adapt, grow too slowly and competitors will overtake your business. Grow too fast, and you could experience a whole host of other problems, including:
1. Cashflow problems
You may think that increased demand for your product or service would help your company’s cash flow, but much of the time it can have the opposite effect.
Look at it this way. If you have more and more orders coming in every month, how will you buy enough stock to cope with next month’s orders? What if you don’t have enough space to store all of the new stock? How will you pay the rent for a secondary warehouse? What about employees’ wages to fulfil your swollen order book?
As you push for more sales, your monthly expenses are going to increase too. Also, managing the inflow of cash by chasing up all invoices from customers in time to pay your overheads is often an impossible task. This can leave your company going days, weeks and even months without enough money to support itself.
Growing too fast may bring additional profits, but it creates a great deal more effort to make sure your cash flow remains positive. There are plenty of supremely profitable businesses which have not made it because they didn’t get the money they were owed on time.
Make sure you have a backup plan for raising cash in place, whether this is your own personal savings or a pre-approved line of credit from your bank or supplier. This way, you can make sure your business keeps its head above water while waiting for payments from customers when you have a lot of orders coming in.
2. Operational inefficiency
Rapid growth often leads to ‘uncontrolled expansion’. Mostly this is when one part of your business grows, another part must also expand to cope. This often makes managing your business operations increasingly difficult.
For example, when your business starts growing too quickly, you could struggle to keep on top of the demand for your products or services. You may wish to remedy this by taking on new employees, but if this process is forced to happen quickly, there could be many more issues to follow.
Quick hires usually result in lower-quality workers that are required to hit the ground running. They may not have all of the skills you’re looking for and you may not have time to redesign your workflow to accommodate less experienced staff.
Growing too fast can have a huge impact on your existing employees. Even before you consider taking on new staff to help shoulder the workload, it is likely your current team is feeling overworked and considering jumping ship.
That is why it is so important that you do not overpromise to your customers if you do not have the resources you need to fulfil them, and that you pay attention to the needs of your employees in order to retain talent.
It is always better to turn customers down rather than risk the poor reputation you will gain from not delivering what or when you promised to.
3. Negative feedback
Leading on from this last point, overworked staff, limited time and stretched resources often mean customers do not get the full attention they need.
Customers need face-time with your staff and prompt responses to their queries and concerns. When your company grows too quickly, it means your employees’ time is spread too thin to deal with these kinds of interactions.
Make sure you are not taking on too many customers for your team to be able to deal with, and that you also keep a close eye on your business’ social media mentions to ensure you are getting the right kind of feedback from your customers.
Worried how growing too quickly could impact on your business?
Growing and constantly improving how you run your company will do amazing things for your business, but managing your growth carefully is the only way to avoid these pitfalls.
It is essential that you control growth to ensure you can meet increasing demand and customer expectations at all times.
For professional advice and guidance on safely growing your business and making sure you’re part of the 40% that make it past the five-year mark, speak to your Maple accountant today.
Email us at firstname.lastname@example.org or call 01332 207 336 for our Derby office, 0121 769 2197 for our Birmingham office, 0113 418 2078 for Leeds, 020 7127 0649 for London, or 0115 832 0089 for Nottingham.