While no one can deny the benefits of owning a money-making business, taking a risk and trying to grow too quickly can be a recipe for disaster.
When you started your business, you did it with high hopes for the future, expectations of success. However, there are always traps and pitfalls along the way from that great idea in the shower to inking your first investment deal to actually opening shop, and even after that there are things you need to watch-out for lest they lead you down the path of ruin and business failure. One such concern, and always a great temptation, is overexpansion.
Overexpansion is a fairly simple issue and it is a pretty easy trap to avoid, yet thousands of businesses fail each year from falling victim to it. Overexpansion means that you are growing your business too fast, that you have somehow confused success with expansion, and that your business is spinning out of control. Some of the symptoms of overexpansion include customer service and production problems such as an inability to fill customer needs in a timely way or your employees failing to keep up with production demands. There is also a tendency to let certain things within your company grow without a commensurate return on investment to actually justify the expansion. If you notice these or similar issues, that could indicate that your company is getting too large for you and your staff to handle. For an example of this in action, you need look no further than your local convenience store.
There was a time, not too long ago, when convenience stores were the can’t miss opportunity. They were even seen as a threat to fast-food chains and some analysts even saw the rise of convenience store fast food as a key trend for the 1990s. There is no telling what the future will bring, but today, after all the expansion through the intervening years, the convenience store promise is far from being fulfilled. What we have is a lesson in the dangers of overfinancing and overexpansion.
According to business writer Charles Bernstein, in an article for Nation’s Restaurant News, the constant rolling out of new stores and resulting losses of control were crucial factors. He writes that “within their tight spaces, the mix of items in a convenience store’s arsenal does not seem properly balanced. Operators are relying too much on low-margin (11 percent gross-margin) gasoline sales. And the 12 to 15 percent average proportion of fast-food volume in the total non-gas sales mix is too low for a category that yields the highest gross margins, 45 percent, in the store.”
The biggest flaw he found in convenience store strategy, however, was the pricing structure, which he cited as being as much as 20 percent more expensive than either supermarkets or fast-food chains. “For a while the public was—and to some degree still is—willing to pay extra for the convenience of buying items in the local neighborhood 24 hours a day. But now the pricing difference has become more pronounced, and consumers are ultrasensitive to it. In addition, customers have noticed a definite decline in food quality and sanitation standards at convenience stores.”
It does not take very long to see problems emerge in companies that have lost control and are overexpanded—pricing issues, quality problems—they tend to affect sales rather badly, but how do you respond to them? The fact is that for many businesses, the response is to shut down the areas that are underperforming. A restauranteur, for example, who hastily opened new restaurants may decide that it is best just to close the ones that are not making the money he needs. This is a positive first step to getting back on track, but it is not the only step. You have to make real operational improvements—to put your business on a sound, cautious path to expansion.
Of course, if you take that route from the start, the headaches of overexpansion are easy to avoid. The key to success here is to focus on slow and steady growth, and not the meteoric rise that all business owners dream about.
It takes discipline to keep from growing too fast, but at the same time, you do not want to repress the growth of your business, either. You have to begin with the basics and establish a solid customer base and a good cash flow. Without these, there is no point even thinking about expansion, but once they are in place, you can then allow your success to help you set a properly measured pace for your company’s growth.
To do that, you will need to perform a very careful analysis of your business situation and your market, identifying who and what you will need to add in order the grow the business. Remember, the benchmark you need to follow is your existing success, not what you hope your success will be in the future if X-number of things go right. There is no guarantee they will so pinning your hopes on them is dangerous, to say the least. Stick with what is really in your hands and make your decisions on those assets and that income. Once you have done that, you will have a clear idea of the right systems and people to put in place. Only then, and once you have determined a strategy based on a reasonable growth rate, should you focus on growing your business. As you do, consider these suggestions from the business pros at SCORE:
Get outside help. Growth is tricky and stressful, so smart business owners rely on outside assistance—such as consultants or SCORE volunteers—to get them through it.
Hire ahead of the need. If you’re growing fast, add a chief operating officer and/or chief financial officer—even if only on a part-time or consulting basis.
Change your own role. Stop “doing everything yourself.” Delegate day-to-day operations to others and become the leader, the strategic thinker and the planner—in other words, the CEO.
Weed out customers that don’t contribute sufficiently to your bottom line. Let go of those who distract you from your goal—for example, because they are outside the area in which you want to work or take too much of your time.
Have reserve capital to weather growth’s inevitable bumps. Reserves don’t have to be all cash—they can be excellent receivables or something else that can be turned into cash quickly.
For more information on managing and growing your business, visit www.americasbestcompanies.com or www.score.org. — Charles Cooper
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