How To Monitor Your Business And Keep It Safe: Growth Rate
Managing and monitoring a business is always a difficult task, from market influences to staffing issues, keeping one’s business on track to succeed and grow is a true balancing act.
Sometimes, however, despite best efforts, things don’t go to plan and the balance tips towards uncertainty for the business. It is essential therefore for early warning signs to be recognised and acted upon.
Usually business owners, especially those that maintain close links to good quality external advisers, will spot the symptoms themselves and take early corrective action. It only becomes a problem when any issues are not noticed or, even worse, ignored and that symptom turns into a potentially fatal illness for the business.
We will be highlighting the triggers to watch out for in a series of news items to be published over the coming months.
The fourth in our series we look at business growth rate and the associated issues.
It is a fact that companies that grow too quickly, without the proper foundation or management team in place, are more prone to fail.
Growth Rate and Overtrading
Rapid growth can mean that a business could run out of money by overtrading or run out of management, and indeed people resource, to keep the expanding business trading under control.
Often the outward perception for rapidly expanding businesses is that those businesses are profitable and therefore would have no issue in attracting monies from lenders to continue to finance their increasing working capital demands. Lenders, however (and particularly true in the UK), will also want to see adequate cover in terms of securities for their lending. If that security is already marginal due to prior expansion, no more money will be forthcoming and the business may have to resort to an unattractive, high cost finance option such as factoring.
Businesses need to bear in mind their expansion plans, and ensure that the management team have a firm future road map of where they want the business to be in terms of size and profitability, and how this is going to be achieved in a stable, structured way in order to avoid the business sprinting before it has learnt to walk. Without taking these actions and running full pelt, there’s more chance of it falling flat on its face – an undesirable consequence for all concerned.
Another path to rapid growth is by way of acquisition. This process can be a relatively painless way of expanding rapidly, provided that all of the following pre-conditions are met:-
- Business of the same type as the acquiring company
- Identified company already profitable and not requiring major capital injection
- No major reorganisation required to integrate the business
- Management and employees will co-operate fully with the integration plan.
- No cultural differences between, the organisations or the countries they operate in.
In practice, not all of these factors will be favourable, and, if most of these points are not met, the acquiring company can be severely stretched both, in management and financial resources to “sort out” its new acquisition.
It is important that the acquiring company should:
- Be sound financially
- Have spare management capacity, preferably having set up an acquisition task force
- Have investigated as fully as possible the target business and have no illusions about problems it will inherit with the acquisition
Doing your homework with acquisitions is imperative. Thorough due diligence and getting your lawyers and a team of experts like Baldwins Corporate Finance involved at an early stage will pay dividends in the long run and ensure you don’t ‘buy a lemon.
Growth Rate Generally
Studies conducted of major business failures show that high sustained growth rates, whether organic or by acquisition, point to a substantially increased risk of failure.
The companies surveyed, that had failed the average annual compound growth in turnover, was more than 50%, sustained over a four year period. This compares with an average growth in turnover of 6% for surviving companies.
There appears to be a clear correlation between growth rates consistently exceeding 20% per annum and an increased risk of failure. The higher the growth rate, the higher the risk.
Again, ensuring you engage, and have in your artillery, a trusted team of experts will mean that you can manage the risk of rapid growth more sensibly, in a structured way, therefore maximizing your chances of success in your business.
In the next article we will be looking at planning and forecasting, capital requirements and gearing.
If you would like to learn more about the warning signs of business failure and or would like to discuss the future of your own business please contact me on the details below.