Finance and Lending
What is a good growth rate for a company?
October 26, 2017 |
The C2FO Team
What is the best growth rate for a company: should it be high or low? Should growth happen fast or should it happen slow?
The answer depends on several factors, including your business’s stage in the life cycle, your resources and your tolerance for risk.
The first thing to consider is what stage of the life cycle is your business in? Is it in the startup stage and growth stage, or is it mature, in decline or undergoing renewal?
Every stage of a business has its own nuances. For example, a startup business that needs to finance growth from its own profits may choose a slower approach—or lower rate—for growth.
A business in a growth industry, on the other hand, may need to expand rapidly to capitalize on a hot market.
Challenges of fast growth
In the rush to keep up with demand, businesses in the fast-growth stage often neglect to create and document systems and processes for their operations.
As a result, efficiency, productivity and quality may suffer. If shipments are late or products need reworking, you’ll have unhappy customers.
Taking time to develop and document systems and processes will save you time and money in the long run.
When businesses grow rapidly, it is hard to keep up with hiring and maintaining resources.
Because businesses need to fill positions fast, busy managers often don’t thoroughly vet job candidates and in their urgency, rush through interviews and hire employees who are not fitted for the job.
In addition, not taking the time to train new hires thoroughly may expand the problem. Training costs time, money and materials, however overlooking the training process may cause the business owner more damage in the long run.
The importance of employee training doesn’t just apply to new workers. Training existing employees is just as important for their efficiency, productivity, as well as workplace safety.
Another issue that is common in rapidly growing businesses is employee burnout. Employees are required to work long hours, which can result in exhaustion, demotivation, and lowered morale.
Employees are the foundation of every business, therefore it is important to make time to hire carefully, offer competitive pay and benefits, provide training, and schedule appropriately.
Cash flow problems
As demand for your product grows, you’ll have to purchase materials, inventory, equipment, and hire more employees to keep up.
Cash flow can quickly become an issue when your expenses are growing faster than your income. Depending on your customers, net 30 can end up being net 45, net 60 or longer. Plan ahead for late-paying customers so you don’t get caught in a cash crunch.
“Extreme-growth businesses are very difficult to finance conventionally,” warns Kevin Ehinger, president of Capital Solutions at C2FO.
Having alternative financing options available will give you peace of mind.
Challenges of slow growth
When business is running smoothly, it’s easy to focus on the short term. Don’t rest on your laurels and assume your current position in the market is safe.
Keep abreast of market trends, industry changes and what your customers and competitors are doing. Project what your industry will be like in the next five years and develop a plan to keep up.
Being penny-wise and pound-foolish
Slow-growth businesses may neglect to invest in new equipment, new employees or new marketing campaigns. Ultimately, this makes your business less competitive.
You risk becoming obsolete and losing both share of minds and share of the market to your competition. Don’t pinch pennies unnecessarily: Be willing to invest to keep your business current and growing.
Whether you’re operating with a lean team for financial reasons, or because your business isn’t attracting employees, slow-growth businesses are often understaffed.
As a result, employees and managers tend to play multiple roles, making them less effective.
If you don’t want to hire permanent employees, consider outsourcing to freelancers or independent contractors as a lower-cost way to get the talent you need.
Cash flow problems
Businesses that grow too slowly may find it hard to get financing from sources that expect high rates of return, such as equity investors or venture capitalists.
They may even find it difficult to get bank loans if their business is perceived as stagnant rather than stable.
The best rate of growth is a sustainable one
Somewhere between rapid growth and slow growth is sustainable growth: the pace of growth that’s realistic for your business to attain without falling victim to the challenges above.
Sustainable growth looks different for every business, but the following tips will help you find your perfect balance.
Create a growth strategy
You don’t always have a choice about how fast to grow. If your industry starts booming, for example, you need to take advantage of the demand.
Grape Solar, which sells solar panels to consumers through retailers including Costco, is capitalizing on the surging popularity of solar power.
Ocean Yuan, the founder, saw an opportunity in the growing popularity of Solar power and decided to make it a retail buy – something that has never been done before.
By having a growth strategy and the right partner Grape Solar grew a whopping 700 percent in just 5 years.
Whether your business is growing rapidly or slowly, you must take ownership of that and create a strategic plan to achieve it.
Consider the financial ramifications of every decision
If your sales increase to the level set in your sales goals, how will that affect your need for personnel, equipment and materials?
Reynolds Urethane Recycling, a Madison, WI-based company that recycles urethane for clients including Leggett & Platt, has grown slow and steady since starting as a one-person business 25 years ago.
In an industry with slim profit margins, founder Paul Reynolds carefully analyzes the ROI and long-term growth potential of every investment he makes.
The result: Today, the company has 24 employees and 80 trucks and recycles 7 million pounds of urethane annually.
Practical advice for solving cash flow challenges
Every growing business has times when expenses exceed income. Prepare for cash flow shortfalls by finding ways to get working capital before you need it.
When Leggett & Platt offered Reynolds the opportunity to request to receive early invoice payments on demand, he took them up on it.
Now, he regularly uses early payments to make payroll and pay suppliers on delivery (even though his customers pay net 30).
“The C2FO early payment platform is a tool we use to keep our business flowing. I’ve got to have good cash flow because I pay my suppliers right on the spot,” he says.
Grape Solar project executive Jack Caruso uses early invoice payments from his customers to leverage the company’s outstanding receivables.
“When we get a good price on inventory, it’s a way for us to move some cash (that’s) more competitive than getting a loan from a bank,” explains Caruso.
High or low—fast or slow? Whichever approach to growth you choose, each has its own challenges and rewards.
Thoughtful planning, careful management, and financial savvy can help you negotiate the ups and downs.