For those of us running a business, growth is definitely a good thing. It can be exciting, and it's a measure of validation for our ideas and all of the hard work. And of course, in general it's a good thing for businesses to be growing, because they then hire more people and fuel the economy.
The issue comes when your growth gets in the way of running your business correctly. It's hard to run any company, but there are specific challenges that are especially hard about running a fast-growth company. If you're not careful, these challenges can turn into hazards. Here are five:
Misunderstanding what's going on financially. When your business is smaller, you probably have a pretty good command of your numbers. You're able to watch your cash and know quickly how expenses are stacking up to sales. But once you get to a certain sales range, above $5 million or so, it's very hard to keep track of your financials in your head. That's why it's so important for business owners to consult their accountants at more than just tax time. Accountants have tons of financial data about your business and other businesses like yours. Because of that insight, a good accountant can often very quickly point out strengths or weaknesses of your business to help you better manage your business.
Thinking that sales growth trumps everything. While I'm a big believer in the importance of growing sales, most entrepreneurs just figure that if you increase your top line, everything else will take care of itself. Unfortunately, more sales does not always equate to more profit. You can get different levels of scale and different levels of expense, and sometimes you might not make money for a little while as you grow sales. So that's another reason to look at your financial data beyond just the revenue line on your income statement and make decisions based on the trends across several metrics. And that's why it doesn't always make sense when venture capital or private equity firms come to private companies and say "We're going to give you a bunch of money to help you grow." That's terrific, but if you can't grow really quickly in the right way, the wheels can fall off the bus. The capital can exceed your ability to grow quickly.
Hiring the wrong people. Once a company is really growing quickly, the quality of the people you hire becomes a big issue. You want to hire the right people. The culture of a company is very important. You have these certain culture points that made you successful, and as you grow quickly, you want to keep some those intact to the best of your ability. In order to do that, it's very important that you hire the right people.
Losing touch with the customer. When you're growing quickly, it's really important to make sure your customers are happy. When sales are up, it's easier to get sloppy with products and services. In fact, it is terrifyingly easy for customer service to fall flat. Even if you're winning new customers, your old ones may be becoming dissatisfied. This leads to customer retention issues. The core elements of what makes a company successful usually are customers and products, so, even in times of growth, customer service has to be front of mind.
Allowing receivables to outrun sales growth. The biggest challenge I've seen for fast-growth companies is that their accounts receivable run faster than their sales or their ability to collect. The company's growing, but they're selling on account rather through than cash transactions. This turns you into a debt collector. Suddenly, you find yourself in the banking business (to a certain extent). You could have -- and you do have -- cases where the company's growing, they're even profitable, but because they're not collecting their accounts receivable quickly enough they go out of business or they have big problems. Even though that seems obvious, I've seen really intelligent, great business people fall into that trap.
None of these are issues related the intelligence of the business owner. These are typically smart people. It's a balance between their aggression in growing the company and doing what they know they need to do to grow it the right way. Most entrepreneurs underestimate how difficult it is to grow a company well.
Growth is terrific, but good, sustainable growth is much better. It's much harder to grow well than it is to just grow. As obvious as this may sound, it's something that we miss sometimes, both on Wall Street and in analyzing private companies.