The 5 growth mistakes (that can run you out of cash or out of business)

  1. Not enough capital to cover the cost of expected growth before the revenue starts to show up
  2. Not enough cash to fund the receivables from the growth
  3. Not enough people in the right areas:
  4. Damaged reputation from poor customer support and service
  5. Too much inventory because growth didn’t go as planned

Interview with Gary Hayes, Co-Founder and Managing Partner of Scale Finance

Ron:

So we’re here with Gary Hayes, Founder and Managing partner at Scale Finance talking about challenges and constraints to growth. And we’re going to ask Gary to tell us about how, if you’re not careful, growth can actually kill your business. So, Gary, talk to me a little bit about that and how growth can potentially hurt your business.

Gary:

The issue you need to be prepared to deal with is how do you support good growth vs. bad growth? Questions to ask yourself are: What is bad growth exactly? Well, you really need to assess new customers to determine likely profitability and collectability, in other words don’t give away the store or take too much risk just to earn the business. You can lower your price some but not below full cost.

In terms of “good growth”, ask yourself the following questions: Do you have enough people in the right areas, especially if it’s a service company? Do you have enough customer support… enough people to take phone calls? Do you have enough development people to keep generating new features and functions for the product?

Those are just a few examples, that if left unmanaged and not fully understood, the growth could bring the company down unexpectedly.

Ron:

I know a software company that hired a great sales manager who went from 6 sales a year to 24 sales the next year. It was way too much growth and the quality of service went down. Customers don’t forget. It took several years to recover from that growth. Talk to me a little bit about what other businesses could make a similar mistake.

Gary:

In any business where you’re delivering a product or service, you must have high quality support, where the customer experience is exceptional. If you don’t, then suddenly, word of mouth spreads and that can be deadly from a marketing standpoint.

This can be the beginning of the end as the phone will stop ringing, growth will slow down and eventually stop. You need to recognize this issue quickly and fix it, and if you don’t, negative cash flow starts, your reputation is in the tank, and it’s very hard to recover. Now you have the perfect storm of a bad industry reputation and no cash to fix it in a timely way. Your business reputation is the number one thing. If you have a bad rap in the market, especially in today’s world with the Internet and social media, you’re dead in the water quickly. Be aware of these pitfalls that are entirely related to your decisions about fast growth.

Ron:

A bad referral or two bad referrals can really hurt your business. So rather than focusing on making sure that every job is profitable, it sounds like what you’re saying is making sure every job has a satisfied client.

Gary:

Right. Nothing can beat having satisfied clients, even if you had to pay little extra to get them there, they will be a client hopefully forever. And more importantly, they’ll start giving back by starting to refer you to their business associates and friends, which is the easiest form of growth as you’re getting valid referrals from people who have used your service or product and trust you. This is incredibly powerful in all forms of professional services especially.

Gary:

I see many companies, such as computer hardware resellers, buy way too much inventory under the hope that they’re going to turn the inventory around quickly and they have not even sold one unit yet. If they guess wrong, then they end up with unused and potentially obsolete inventory with little or no resale value. Technology equipment goes obsolete within a year as new equipment comes out that is faster, better and cheaper.

At the end of the day you need to understand your customer base, new customer needs, and your competition. You can do this effectively by testing your new product idea with a handful of existing customers to determine if it fits the market and what they would pay for it. If the testing goes well then you are in a much better position on gauging probability of success and the level of investment needed to support it.