When you ask a small business advisor what you need to do to create value, the three most often-cited strategies are….grow, grow and grow some more. Typically, advisors are only referring to your top-line sales because where the top-line goes, your cash flow follows! While this advice might prove true, it certainly is not the rule. Let me provide a new phrase for you to consider – Don’t Grow Broke!
What does this mean? In a nutshell, not all growth is good and many companies take a good thing (responsible growth) to the extreme and create massive havoc pursuing even more growth and sometimes kill their business. We have all heard the stories about the restaurant owner that had a phenomenally successful location that was throwing off a ton of cash flow. The owner was happy, not too over-worked and was making a very good living for herself and her family. She was lured to expand rapidly to other locations to take advantage of her company’s success and “not let the best locations go to her competitors”. But this story often ends differently – the owner opens up several new locations, expands too fast and the failed expansion overwhelms the initial location and pulls the entire business into bankruptcy. In other words, growing broke.
Usually, it is not that the business concept is flawed or that money is not available. Generally, after the fact, the business owner realizes the value of its talented management team was stretched too thin, the profitability of the new locations could not match the original location or demand was more transitory than previously thought. Or, even harder still to recognize at the inception, the incremental economics were vastly different.
For example, consider an IT service organization that offers maintenance support and repair. As the company grew into new markets each customer segment had varied terms, including 90 days to pay the IT firm. The sales growth was amazing, but given that the IT firm paid its employees and contractors on net 15 day terms, growing fast with this new customer segment required substantially greater upfront cash flow to support the new growth (the firm paid its people 6 times by the time the customer paid the firm for the first installment!). Eventually, the cash flow mismatch meant company had to dramatically downsize, lay off hundreds of employees and move away from this segment. Only the drastic action prevented the alternative – growing broke.
So, the next time some “expert” suggests expanding rapidly – remember our motto: Don’t Grow Broke! Unbridled growth could be a tremendous value creator for you and your business, but responsible and well-considered growth is the best path to prosperity.
Chris Myers is the co-founder & CEO of BodeTree, the leading support tool for small businesses. Learn more at www.BodeTree.com.