So much is written about business growth and the number of start-ups that fail in the early stages that it can be easy to underestimate the next biggest hurdle: moving from a small to a medium business. What are the challenges management face when an enterprise experiences rapid growth, whether that’s from increased sales and production or acquisitions?
According to a group of founders and senior managers of high growth companies surveyed by Forbes, the three issues faced over and over again as companies scale upwards are cash flow, capacity and culture. Each plays a vital role in ensuring the long-term success and liquidity of a growing business but to complicate matters, in certain situations they can be in direct competition with each other, as when the recruitment of new staff necessary to provide sufficient capacity clashes with a need to minimize overheads to maintain a pool of working capital.
What are the issues that owners and senior managers of small businesses face as they seek business growth and make the leap to becoming a medium sized company?
Cash Flow And Access To Funding
According to a group of founders and senior managers of high growth companies surveyed by Forbes, the three issues faced over and over again as companies scale upwards are cash flow, capacity and culture. Each plays a vital role in ensuring the long-term success and liquidity of a growing business but to complicate matters, in certain situations they can be in direct competition with each other, as when the recruitment of new staff necessary to provide sufficient capacity clashes with a need to minimize overheads to maintain a pool of working capital.
Expansion and working capital are the most common reasons for businesses to seek outside finance according to the UK Bond Network survey. A need for more working capital can indicate a cash flow crunch precipitated by coping with a sharp uptick in demand. A study of high growth small businesses by the LSE showed that although they seek funding for expansion and acquisitions more than other SMEs, they’re most likely to seek finance as a source of working capital.
Companies often need to finance expansion in head count, premises, production or marketing long before they will see returns and while waiting for existing invoices to be paid. This means that the so-called “funding valley of death”, where expenditure outstrips income, is an issue for established smaller companies looking to expand as well as bootstrapping start-ups. In the worst case scenario, this can result in a company either failing to grow to its potential or facing insolvency due to serious cash flow failures.
High growth businesses in the LSE study, which the university defines as a company that experiences 20% year on year growth, criticized banks for not understanding SME growth points and for being too slow in making funding decisions, which is particularly damaging when businesses are fueling expansion through acquisition.
Capacity
Growing businesses need to ensure that they have sufficient staff and space to facilitate growth – and founders need to be able and willing to step away from aspects of day to day management to become strategic leaders.
Despite making up only 1% of the business landscape, fast growing SMEs who had a turnover of £1 – 20m and a 20% year on year growth rate created 68% of new jobs between 2012 and 2013. A rapid growth in staff numbers brings its own challenges for business owners and directors.
One of these is the process of recruitment itself, particularly in sectors facing skills shortages. There’s a balancing act between employing enough staff to maintain capacity, offering the wages and benefits which attract top flight staff and maintaining a sustainable cash flow. While recruiting people who are at a more junior level in their careers and training them can provide a solution, this isn’t always suitable when someone needs to start their job able to lead or grow the company in a new direction.
A side-effect of a rapidly growing business can be that staff skills, workflow and management systems lag behind the realities of the workplace, potentially fomenting problems from staff disengagement to breakdowns in delivery.
Culture
“Company culture is generally formed fairly early on by founding members and key management personnel,” Matt Grebil, an Operations Director at rapidly growing small business, says in Forbes.
“As you start to add new personalities, it can become a real challenge to assimilate all of these individuals and maintain the company culture.”
As something intangible, it can be easy for establishing and maintaining a suitable company culture to be bypassed in favor of seemingly more urgent priorities. This is particularly true when the original start-up had its own strong culture. However over time and as the company expands, this can either become diluted or simply not a good fit for the existing company, especially if growth is fueled by acquisitions.
The effect of mismanaged culture can be far-reaching. As well as putting off potential recruits, existing employees can become disengaged when they feel disconnected from company culture. And this leads to very real impacts on the bottom line, as employee engagement drives productivity and profitability. In one Gallup survey, the businesses which ranked well for employee engagement were twice as likely to succeed as those that didn’t.
Making it to medium is far from impossible, but founders and managers need to be aware of how cash flow, capacity and culture work together to navigate its challenges successfully.
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