Rapid Growth: How Entrepreneurs Can Reduce Potential Financial Risks
Financial risk management is critically important to our clients and we’re very appreciative of our friends Nancy McCullough and Lori Baerg at e2E for providing this guest post. We love guest posts and please reach out to us if you’d like to write something for our blog. Here is Nancy and Lori’s guest post.
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Ask any entrepreneur what they hope their company will achieve and one of the primary answers will be “rapid growth.” Dedicated, driven innovators celebrate rapid growth because it provides validation of their ideas and approach. However, when it happens too quickly or without adequate preparation, growth can backfire and become a curse instead of a blessing.
A joint study by The Kauffman Foundation and Inc. Magazine examined the success rate of organizations that had previously appeared on their list of “the 5,000 fastest-growing companies.” To their surprise, they discovered that “about two-thirds of the companies that made the list had shrunk in size, gone out of business, or been disadvantageously sold,” Fortune reports. Why? They weren’t able to sustain their initial growth over the long-term.
So, how can companies that expect accelerated growth lay the groundwork for a successful scaling process?
Risks of Rapid Growth
Whether you’re at the helm of a tech startup or a brick-and-mortar small business, rapid growth presents several obstacles that must be strategically overcome. The first thing entrepreneurs need to do is recognize these risks so that they are prepared to address them.
Inability to Meet Demand
Successfully scaling a business requires accurate, informed predictions about supply and demand. Depending on the type of product you provide, the challenges posed by rapidly increasing demand will be different. For physical products, manufacturing capacity and material sourcing are a concern. For SaaS or other digital products, scaling customer support or back-end development are vitally important.
No matter what type of product you sell, your company needs to make a plan to address rapid growth. This includes a comprehensive financial model that covers rising costs alongside rising revenue, increased personnel demands in areas like customer service, account management, or development, and infrastructure costs including space and equipment, among others. Seek out expert advice from experienced professionals who have previously worked with businesses during periods of accelerated growth. Their experience and expertise is invaluable in planning for and working through these exciting and volatile moments.
Financial Mismanagement
One unfortunate side effect of early success is that many companies are not financially prepared for rapid growth. As Cox Business notes in Inc., often “excessive growth has to do with your business outpacing your capacity to conceive of its size and scale.” As revenue and costs rise, many entrepreneurs are ill equipped to keep up with the financial aspects of a rapidly-growing business. This is why it’s vital to consult regularly with financial professionals about bookkeeping best practices, flexible budgeting, cash flow management, and changing tax obligations.
Accelerated growth also places entrepreneurs at risk of making cash flow mistakes that can ultimately prove fatal. “Whether it’s overly-optimistic growth projections or the failure to understand the difference between profit… and actual cash on hand, a slip-up here can mean big trouble,” Cox explains. Especially during periods of rapid growth, expenses may outpace operating capital, which places your business at high risk. Mitigate these risks by working closely with finance experts, whether in-house or on a consulting basis.
Staffing Issues
In Entrepreneur, Sheila Eugenio addresses how staffing problems can be problematic for companies experiencing accelerated growth. “The employees you hire have a huge impact on the future of your company,” she writes, yet employers can get sloppy during periods of growth as they struggle to build a team that can keep up with demand. Staffing experts can help you determine whether new full-time employees are the best way to meet your needs, or if a more agile workforce suits your company at this stage in its growth.
Hiring additional workers, whether full-time or freelance, also increases the importance of payroll and tax planning. Don’t allow the stress of accelerated growth to negatively impact this aspect of your financial obligations.
Enlist the Experts for Success
Startups and small businesses, even if they are growing fast, often don’t have access to the same internal resources as large corporations. From payroll and tax planning to staffing, financial modeling, and beyond, it’s smart to reach out to subject matter experts who can offer advice, provide valuable services, and help you develop processes that create a strong foundation for success. Accelerated growth is a great place to be as long as you have the resources you need to adapt, grow, and thrive.
At e2E, LLC, our focus is on helping startups and small businesses grow at whatever speed is right for them. Our team of experts in finance, HR, marketing, business management, bookkeeping and tax prep understand the challenges of entrepreneurship and offer valuable insights and services that will help your business grow. Contact us today to learn more!