The 5 Biggest Risks of Scaling Your Business
If 20 years of coaching business owners to scale their companies has taught me anything it is this: the overwhelming majority of entrepreneurs want growth. They focus on it; work towards it; and even obsess over it. But there are risks of scaling your business.
Here are the five biggest risks of scaling your business that I’ve observed from working with hundreds of business coaching clients as they scaled their companies.
Risk #1: Cash flow challenges.
Generally growth costs cash, and that cash often is needed in advance of added revenues.
For example, one of the manufactures we’ve been coaching for seven years now estimates it costs them roughly $400,000-500,000 in startup costs to begin to make a new contract manufacturing part family. These costs are engineering time, C&C programing costs, tooling and machine costs, all of which occur before any new part comes off of production. Then they have a 90 day lag between the time they buy the raw materials, produce, and actually ship their first parts, and the time they actually receive payment for those parts.
But their contracts are lucrative and typically run five years so they want to grow more of them, but they need the capital to do so. For them they both self-finance some of this and tap as needed into a business line of credit.
This imbalance of cash flow is the most straightforward kind. But it often comes in more dangerous variations.
For example, in one service business I owned we had over $125,000 per month of excess payroll that we didn’t shed for close to 10 months.
One of the most important things you can do to protect yourself if you are growing fast is to keep a 90-120 rolling cash flow projection that you watch weekly to keep a close eye on your cash flow.
Risk #2: Getting caught in a “tidal” market.
The tide comes in; the tide goes out. Many rapidly growing businesses get burned by investing in more capacity and taking on higher fixed expenses, not realizing that their growth may be a temporarily thing.
I shared above about my past company’s cash flow challenge with excess staffing. What caused that was four years of 100 percent growth per year coloring my decision making glasses. I didn’t look at the market data that would have showed me that that growth rate was likely to taper off. Instead, I invested heavily on scaling up our staff to handle the projected growth. Not only did that growth slow, but in fact, for a year period we had a decline in sales. That was a $1 million of lost profit lesson that I won’t soon repeat.
How can you get better and better at predicting demand and sales? What are the clues that might indicate that your sales volume or margins might take a hit? By reviewing these factors quarterly you stay clear on how to adjust your fixed and variable expenses to stay profitable regardless of the market demand.
Also, how can you build flexibility into your expenses to be able to quickly dial back your non-strategic costs should the situation warrant it? Could you go with a shorter term lease with “options to renew”? Could you build a 60 day escape clause into a key vendor contract if you need to get out of it? Could you lease overflow staffing versus hirer more employees yourself? You get the idea. A little judicious negotiating at contract time can go a long way to protect you should you be caught in a tidal market.
Risk #3: Loss of focus.
This is one of the most prevalent risks of fast growth that I see in our business coaching clients. They are so attracted to a new opportunity (e.g. a new market, new sales channel, new product line, etc.) that they pull their attention away from what matters most to their business.
This is so common we even have a name for it – “Bright Shiny Object Syndrome.”
Have you ever been guilty of Bright Shiny Object Syndrome?
How do you protect yourself from it and keep your best resources on your best opportunities?
First, do your strategic planning quarterly, following a defined, structured process. If you are tempted by a luring opportunity mid-quarter, be cautious about going after it. Most of the clients we coach are really good about resist poor temptations when they do their formal planning, but struggle most when the opportunity comes “out of nowhere” during their normal workday. At this point they shortcut their structured planning discipline and make emotional decisions that lead them down the wrong path. Once committed, they rarely revisit these decisions, even years after the choice has proven to be a real waste.
For example, one software company we coach frittered away several hundred thousands of dollars of profits over a 24 month period chasing oversees sales of its industry dominant software. They could have grown by two or three-fold more than they did in this period, if they had not spread their attention over too broad a front. The initial decision came mid-quarter, and in fact, they only told us about the decision after they had already sunk significant resources about it to open up two foreign sales offices.
Second, get outside perspective to both challenge your allocation of resources and to hold you accountable to your decisions. This could be a formal business coach, or an informal board of advisors. The key is you need this to be from an outside party who won’t be afraid to call you on your behavior. It’s hard for your staff to challenge you, after all there is a real power imbalance. But the right coach or advisor will be able to do this for you.
Risk #4: Loss of “Coherence”.
Coherence means the core parts of your business all being aligned and in sync with one another, supporting and reinforcing each other. Too many fast growing companies lose their coherence as they scale. They slap together solutions and strategies that don’t fit together, and in fact may work against themselves.
Risk #5: Calling attention to a lucrative market niche that you can’t satisfy fast enough.
In biology they sale that an unfilled ecological niche is ripe for a new entrant to rapidly take over.
In business, if you bring to light a new, high margin, low competition market niche, and then don’t have the sales or production capability to satiate that market demand fast enough, some other company will come in and fill that empty market niche.
This is why platform tech companies work so hard to get to scale quickly, even at the cost of tens or even hundreds of millions of dollars. They know that if the market is big enough and profitable enough, someone else is going to get their soon unless they dominate the space fast enough. Just look at Uber, airbnb, and priceline.com. They all invested heavily to get to scale fast enough to sell and fulfill on the market demand for their niche.
If you enjoyed the ideas I shared, then I encourage you to download a free copy of my newest book, Build a Business, Not a Job. Click here for full details and to get your complimentary copy.