Monday, April 15, 2013

When Is Too Much Business Too Much Business?

A Growing Business Is Almost Always a Good Thing, but Here Are Some Big Issues to Watch Out For

You've worked hard for several years, or was that decades, to build up your business.  You are making a living, maybe even a good one...or at least most years.  You worry that if the economy takes another negative turn, you could end up as a greeter at WalMart.  Then one day, you catch the wave.  Maybe it was something you did to change the game.  Maybe it was a change in the neighborhood.  But at this point you don't have time to analyze.  You're up to your eyeballs.  

This topic occurred to me today due to an email from a client.  He is about to have a record month, by a lot, and he's scrambling to get the work out.  He's not alone.  Another of my clients doubled his sales in 2012 and is on track to do the same again in 2013.  Another client is working 12 hour days and hiring more help.  And yet another one reports that he will have a record April after just enjoying a record March.

Some of you are thinking that you would love to have that problem right now, and one of the ironic parts of business is that you are rarely in the sweet spot of having just the right amount of business.  But given a choice of too slow or too busy, guess which one I'm picking every time?

What Do You Need to Watch Out For When the Sales Numbers Are Exploding?

There are some serious potential pitfalls to that record month or year.  The plastics factory I used to run had normal monthly sales around $500,000 with a strong month being $700,000.  I will truly never forget the month we saw a chance to do $1,000,000 in a single month.  We had a huge backlog of orders, a 31 day month, and decided to go for it.

We put incentives in place for every every employee.  We put up charts on the wall to track the daily effort.  With manufacturing margins of 50%, we were expecting to end up with an extra $100,000 in profit.  Except:
  • Customer service couldn't keep up.  They could work 11 hours a day, but then the clients were no longer available to talk to.  With a 50% increase over best ever, they started bogging down.
  • Order mistakes.  We were manufacturing bicycle water bottles and printing on them.  They need to be printed and shipped in time for events.  Any mistake costs double, as you remake, reprint and ship by air.
  • Manufacturing infrastructure.  Machines need to rest.  We were going 24/7.  Equipment failed.
  • Overtime was way more than expected.  
  • June's big numbers sucked up the next month's business resulting in huge drop in July sales.
To be honest, it was a heck of a lot of fun.  We were all exhausted, but it was a blast.  But I could probably have found a lot better way to have fun.  We not only didn't add $100,000 to the profit, we actually lost money in that month and the following month.

These aren't the only possibilities of bad outcomes for big growth.  In fact, even 20% growth can create stresses unless there is good planning.  What are the major issues to watch out for?

1.  Growth Eats Up Cash!  Fast Growth May Outstrip Your Ability to Finance the Growth

How many times have I seen this over the years.  Great company...Great Products...Great People.  The company is going gangbusters, and then they are gone.  It would take 50,000 words to give you the full story on outgrowing your capital, because it is far different for a retailer than it is for a service provider, or for a manufacturer, or for an importer/distributor.  Growth costs money.  Here are the major areas of cost you need to be prepared to handle:
  • People - You have to hire, train, and manage people.  How fast can this be done?  When do you hire compared to when the business is going to start increasing?
  • Equipment - Every person needs a desk, computer, etc.  Some, such as in manufacturing, need a machine.
  • Space - Where will you put the people, the increased inventory, and the clients?
  • Moving costs - More space may mean moving
  • Cost of credit - If you need to borrow to expand, will the bank see the expansion as riskier than your current needs and charge more interest?  Or will you need to go to high interest lenders such as finance companies or accounts receivable lenders?
  • Inventory - How much will it cost to add the additional product you need?
  • Shelving and handling costs - You will also need storage and possibly forklifts
  • Newer equipment - Can your existing equipment handle the work load?
  • Increased power or other utilities - Your building may not be suited for the increased needs in power, water, gas, etc.
  • Computer equipment - At some point Quickbooks isn't going to be good enough

2.  There Are Managerial and Other Issues Beyond Cost When You Grow Like Crazy


Beyond costs, there are other concerns.  Can your suppliers keep up?  Do you have back-up supply?  Are your managers prepared to manage at a higher level.  There is a huge difference between managing 3 people and managing 6.  More critically, there is an even bigger difference between managing line workers and managing other managers.

Are you personally ready for the increase?  Will this be the first time you have managed managers?  Are you and your family prepared to have a few months where you might have to go back to 80 hour weeks. 

What will be the effect on customer service?  If you gain new customers and more sales to existing customers, but you ship late, have shortages on the shelves, and the phones aren't being answered, you may lose more than you gain in the long run.

3.  Will the New Sales Levels Be Sustainable?

You made it through the first season of the increase.  Nobody died.  Overall, you came through it alright.  But, you now have a larger, more costly facility.  Your utility costs are up.  Your payroll is up.  Have you positioned the company to maintain the growth or at least to be profitable at these levels.

Profit Curve May Drop During Growth
There is a profit curve anomaly.  You can actually grow by 50% and have your profit shrink or turn to a loss.  This is a normal part of growth.  Have you done projections of profits and cash flow based on various potential sales levels that take into consideration the added overhead?  If not, now is the time.  It isn't unusual at all for a small business with 7 employees to be providing a $100,000 plus to the owner, just to see that business grow to 25 employees, and the owner is taking nothing home.

Nothing above is intended to be discouraging.  Just being real.  Growth is generally good.  But it is much better when it is planned for, is managed, and is sustainable.  If you need help planning your growth, we can help.

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