Be Aware of the Risks of Rapid Growth

Rapid growth for a new business can present special problems in a financial sense.  Business owners see growth as something to increase and maximize. The reasoning behind this way of thinking is simple:  as growth increases, so should the profits. From a financial perspective, however, growth is not always wonderful. Rapid growth can put considerable strain on a company’s resources and unless a small business owner is aware of the effect and has taken active steps to control it, rapid growth can lead to bankruptcy. Companies can literally go broke.

Almost as many companies go bankrupt because they grew too fast as do those that grew too slowly.  It is unfortunate because the companies that grew too fast met the market test by providing a product people wanted and failed only because they lacked the financial wisdom to manage their growth properly.

All successful companies pass through a predictable life cycle.  The cycle begins with a start-up phase in which the company loses money, while developing products and establishing a foothold in the market. Next comes a rapid growth phase in which a company is profitable, but is growing so rapidly that it needs more capital to operate at a higher capacity. The company suddenly must increase assets such as inventory, accounts receivable, and production capacity.  Just like the old adage, “It takes money to make money,” increased sales require more assets of all types which demand payment.  This rapid growth phase is the one many business owners are not prepared for and end up going out of business because they cannot generate enough cash to stay afloat.

It is entirely possible for a company to grow too fast for its own good. This is especially true for small businesses which may do inadequate financial planning. They do not realize that the faster they grow, the more cash they need, even when they are profitable. Eventually they will meet their debt capacity and find themselves without the cash to pay their bills. All of this is preventable with proper financial planning.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

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