It really is possible to have “too much of a good thing”—even if that “good thing” is skyrocketing sales.
When you start a business, you dream of growing bigger and better every year. However, the pace of that growth must be controlled in order for the business to succeed.
Below are three common signs that your business is growing too fast and some strategies for handling those situations.
Scalability Growing Pains
Whether they’re a manufacturer, distributor or service company, most businesses plan to be scalable as they grow. However, as volume grows, quality can diminish.
For example, is your labor pool highly specialized or seasonal? If so, it may be hard to secure experienced employees when needed. As volume increases, some businesses struggle with meeting production deadlines for their “new normal.” If the quality of your work declines, your reputation will take a hit.
A contractor client of mine, when the company adds staff, puts a seasoned employee in charge of each new team. This way, the person in charge of each project is familiar with the company’s standards.
Many fast-growing companies decide to purchase real estate and equipment to support their business and build equity at the same time. As you increase your long-term debt, you’ll want to make sure your business can cover it in good times and in bad.
Put together three- to five-year projections with best-, worst- and likely-case scenarios. If your projections show that you can cover the debt for a new building even in the worst-case scenario, you can feel comfortable making the leap from renter to landlord. However, if a likely-case scenario shows a strain on cash flow, you might sleep better at night if you simply rent your space. Doing projections also can help you determine a break-even point on renting versus buying equipment.
Banks often have Debt Service Coverage covenants that require your cash flow to be 1.20 times your monthly debt obligations. This benchmark is just as important for the business owner as it is to the bank. Meeting this requirement allows you to have a 20 percent cushion to make your required loan payments.
As your business grows, are you increasingly reliant on one client? Then make sure that client is financially sound and has a positive outlook. Ideally, you’ll want to add additional clients so you aren’t vulnerable to revenue swings caused by one or two clients.
If a large client concentration is unavoidable to your business, you’ll want to be extra conservative by having a substantial rainy day fund and minimizing your debt obligations so you can survive under a worst-case scenario.
As you navigate your business’s growth, it is critical that you communicate with your banker along the way. There are many solutions your lender can offer, such as a temporary increase in your line of credit or bulge line for a seasonal business. Or, if debt obligations are temporarily strained, it might be possible to stretch out the amortization of term debt.
These types of solutions are much easier to put in place when you’re in front of the curve versus being reactionary. Keeping your banker informed can also allow him or her to suggest ways to help.