Don't Grow Your Business Into Failure

Growth is good, right? For the most part, yes, but too much growth can doom a business. Here's how to avoid that peril.

Whether you are an entrepreneurial CEO or an investor, you are probably focused day-to-day on the basics of growing your business.Growth is about defining and penetrating your core customer base.It's about scaling your operations profitably.It's about making the right investments.

Sometimes, however, growth is also about slowing down.Too much growth, or growth with the wrong customers, can lead to failure just as quickly as a lack of growth.

In a recent article, Take a Crooked Path to Growth, we discussed the need to grow slower, rather than faster, to create sustained growth.But we've also looked at some of our portfolio companies lately and have asked the question, Can too much growth drive our business to fail?The answer in each case was yes.We needed to moderate growth to keep the business from failing. 

We also read a recent article about a failed start-up, Ecomom, whose founder tragically committed suicide after growing his company to failure.This is a classic case of a company growing faster than it could financially support, and its customer acquisition costs sunk the business. 

How do you avoid letting a high growth rate sink your company? We recently talked with Jess Eddy and Crista Freeman, two entrepreneurs who are building Phin and Phebes, a high-growth ice cream company.  They are faced with the strategic decision of how fast to grow given limited capital.

  Even though they have increasing demands from grocery and specialty retailers to supply their ice cream, the company must invest in inventory and distribution for each new store they serve. 

Eddy says: "As a company with limited capital we have to align our growth with how much money is in the bank now and when invoices are paid. It's sometimes an accounts receivables game."

Freeman adds: "If a great opportunity comes along we try to make it work and maybe that means getting a short-term cash infusion like a line of credit. However, the worst thing that could happen is we grow faster than the money in our bank account, and then it's game over. It's all a balancing act."

Here are three things to consider when managing growth:

Map your cash flow.

The easiest way to fail is to run out of cash.Most businesses require some level of cash outflow prior to cash inflows.Analyze the impact that your growth will have on your cash needs and predict when you will run out of cash.You have to make a product, before you sell it to customers, and then get paid for it later.This order-to-cash cycle can sink a growing company quickly.

Understand your customer acquisition costs.

What is the cost for you to acquire a customer?In the Ecomom case, the company relied on discounts to acquire customers, which means they lost money on each new customer and would only be profitable if the customer made repeat purchases. This strategy can be especially troublesome if you acquire the wrong customers--those who won't buy from you again--and are never able to return a profit.

Secure funding options early.

 

Look to secure a line of credit or equity capital that matches your growth plan.This is hard to do at the last minute.When you need the cash, you need it immediately, but fundraising takes a long time.Make sure you have secured growth capital before you make the sale.

Growth is good if you grow in the right way.Make sure you understand the specific risks that growth creates in your business and mitigate them.It will allow you to grow at a rate that creates a sustainable business.