Investment bank JP Morgan’s CEO, Jamie Dimon, once warned that companies that grow for the sake of growth or expand into areas beyond their core business strategy often stumble. A more detailed analysis might suggest that growth without sufficient financial and human resources to support it or tight financial discipline to control it is the problem rather than the motivation.
Poorly planned or executed growth kills more businesses than any other factor except bad management. Whether the expansion is organic growth, through new products or services, or in new markets, the risks of business growth are present. Here, we take a closer look at how these risks can be mitigated so that business growth can be achieved securely.
Planning for business growth is key
Planning for business growth will mitigate many of the risks involved. Directors should consider if their business’s growth has been thought through from every angle and subjected to rigorous financial and operational planning. If there are areas that need more specialist assessment, external input from an independent expert may be the best solution.
Directors should also consider what assumptions have been used and what contingencies have been built in. Has a proper sensitivity analysis been undertaken to identify a variety of potential scenarios and their different outcomes? Asking these questions from the outset will help create a rigorous growth plan that is realistic and achievable.
Financial resources
Growth increases the working capital requirement for larger inventory, higher debtors and raised overhead costs. Directors will want to assess if this been factored into cash balances or borrowing facilities, in addition to any capex involved, especially when the expansion is via the acquisition route. It is common for buyers put finance in place for the purchase price, but overlook the impact on working capital, which often leads to a cash crisis down the line.
Failure to raise additional working capital finance until the growth has already stretched cash flow to breaking point is a common cause of business failures. As a result, lenders are understandably reticent about helping borrowers who have not considered all aspects of their business’s finances and management.
Getting this balance right will be a vital step for businesses looking to successfully grow, especially with the aid of funding.
Human resources
More activity will require more people and, depending on the nature of the growth, possibly a broader range of skills. This also requires planning and time for onboarding. Directors should avoid the expectation that existing staff can pick up a heightened workload and skills outside of their grasp. This will lead to poor morale and high turnover at the exact point where the business will need more hands on deck.
Unfortunately, the current recruitment market is facing significant skills shortages, which will also need to be planned for in any growth strategy. We recently investigated the issues of staffing in the hospitality sector.
The next step to consider is HR. If a larger workforce is put in place, there will be greater stress for HR as it currently stands. Park of a director’s resource planning needs to take this into consideration and create extra support and time for the HR team as the business transitions.
Financial monitoring
With a growth strategy in full swing, management teams can become distracted from day-to-day financial monitoring. This is when a business’s financial controls, reporting systems and cash management can be put to the test. A business’s systems have to be sufficiently robust to cope with additional data volumes before any business growth takes place. They should also be flexible enough to recognise different KPI’s where the growth is outside the company’s traditional business areas. But, most of all, management teams need to keep focused when it comes to financial monitoring and react promptly to adverse signals from their reporting systems so they can be dealt with straight away.
Regulatory & compliance issues
Growth can bring with it other operational issues and regulatory and compliance issues is one of them. A business’s existing rules and regulations could become more complicated as the firm and its workforce grow. There is also the possibility of having to meet regulatory standards from which the business was previously exempt.
Technology and business growth
With the advent of tech-specific industries and AI, it may well be necessary for a business’s growth strategy to take on more technology to facilitate its operations. Businesses will need to thoroughly research any new tech onboarding before a growth plan is underway so this does not become a distraction or challenge while the business is transitioning.
Read more about these potential challenges in our recent blog on the technology challenges in the manufacturing sector.
Keeping a business’s culture intact
Amid all the excitement and potential of business growth, it can be easy to lose sight of what initially made a venture special and set it on the path to success. An organisation’s culture is embodied in and maintained by its people. During a period of growth, it’s vital to take every opportunity to engage with the workforce, gauge people’s views on how the expansion is impacting them and the company, and remember to reward those who contribute above and beyond expectations. In our experience, the most successful business growth projects incorporate the positive aspects of a business’s existing culture.
Growing for the right reasons
Financial reporting in the media and the business community has been dominated for too long by growth at all costs. Often, the yardstick for success has been top-line revenues rather than bottom-line outcomes. But the true gauge of business success is adaptability and longevity. Growth for growth’s sake is rarely successful, and successful growth strategies take time, planning, and patience to see through.
Expansion should always deliver tangible benefits to a business in line with its objectives. Working with a business growth specialist can pay dividends and turn a business’s growth aspirations into a stable and successful reality.
How we can help
We have extensive experience assisting business owners and directors, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our Partners.