In most cases, business expansion is usually a good thing. The need to expand your presence in the market means that you are doing well in your niche, you’ve built up a war chest and it’s time to take profit to the next level. However, growing strong doesn’t necessarily mean growing quickly.
Launching new product lines, prematurely plowing into other fields, acquiring new assets and hiring too many people are just of the possible pitfalls. Without the necessary experience, long-term planning and capital support, rapid expansion can lead to negative cash flow and financial hemorrhaging from which your business may take years to recover, if at all.
Caption: Before expanding, you need to cover your financial, operational and logistical bases to ensure sustainable growth.
This problem is by no means limited to SMEs and can even affect established companies. At the height of Toyota’s massive recall scandal, CEO Akio Toyoda admitted that “I fear the pace at which we have grown may have been too quick.” According to Toyoda, quality and safety, which have always been the hallmarks of the Japanese carmaker, were put on the backseat because the company “pursued growth over the speed at which we were able to develop our people and our organization.”
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If industry giants like Toyota can suffer from rapid over-expansion, smaller businesses with limited capital and support face even greater risk trying to capture a larger market share. Below, I’ve gathered some of the warning signs that you may be expanding your business too fast or too early.
Warning sign #1: You start shifting focus from quality to quantity.
When we say quality, we don’t just mean your products but something more important: your people.
Employees are the backbone of your organization. However, eager companies sometimes take shortcuts during the hiring process in a bid to fill in that slot before the end of the month. This results in a new hire with adequate skills, but one who is not necessarily the most qualified.
Instead of pressuring Human Resources to replace a vacant slot within a set period, set a reasonable number of applicants. Once it reaches, say, 50 for a managerial position, that’s when you can choose the one with the best credentials. Focus on gathering as many applicants as possible, rather than filling in the opening at the shortest time. After all, it takes time and resources to train a new hire. If you end up replacing him or her too soon, you stand to lose more than if you waited for the most qualified person for the job.
Warning sign #2: Your system gets overwhelmed.
Business owners dream of the day when they have a deluge of orders more than they can handle. However, the reality isn’t pretty: if you can’t fulfill new customers they will simply take their business to your competitors, and it’s not just potential clients you stand to lose.
An upsurge in sales can overwhelm both your employees and your system without adequate preparation. Phone lines can get clogged, software can crash and your people can be burdened with twice the workload. This might be okay for a while, but if not remedied soon, you may lose not just potential customers but dissatisfied employees as well. And the quick-fix “solution” of rapid hiring brings you right back to warning sign number one.
Before you launch new product lines or services, make sure you have the necessary product support, hardware and people in place to handle the increased volume.
Warning sign #3: Your supply line can’t keep up.
When expanding too quickly, it’s not just your internal resources that get overwhelmed. The demand can get passed on your supply line. Vendors and business partners may not be able to meet the influx, leading to inadequate materials and longer delivery dates, all of which throws your production into chaos.
A stop-gap solution is to hire additional suppliers to meet higher demand. However, the shorter time frame will force you to settle for who can deliver the earliest, instead of getting the best quality or cost. By paying premium, you end up with a lower profit margin just to fulfill the uptick in orders.
Warning sign #4: Customer service goes down the tubes.
Client satisfaction is a good indicator of how well your company manages growth. As your business expands, after-sales service has to be multiplied, instead of being divided among what account executives you have. If you start losing long-term clients, then your customer support isn’t keeping up with the rate of your expansion.
There are two points to every sale: the actual sale itself, and the customer relationship management that ensures repeat business. When you start neglecting the second half, you end up frantically getting new clients to replace the established ones who walk away. Remember that it’s more expensive trying to attract new customers than keeping them.
Warning sign #5: Your cash flow gets interrupted.
One of the biggest hurdles to business growth is capital. Even if you have amassed enough of a war chest to fund your expansion drive, it might not be enough. Underestimating the cost or acquiring too many assets too soon can exhaust your supply of cash, forcing you to borrow or use credit cards to see the process to fruition.
Before going through with your expansion plans, allot a safety margin in case of cost overruns. Also set up a line of credit with your bank so you have a financial safety net to fall back on. If you need more capital, ask your suppliers to extend their payment periods or work out a credit line, before falling back on credit cards and business loans.
For small businesses, rapid expansion carries inherent risks. Avoid falling in the quicksand of “too much, too soon” by preparing a solid ground from where your company can grow slowly but steadily.