It’s the dream of most business men and women, a sales curve that looks like the side of a pyramid stretching inexorably skywards! Fortune really does favour the brave, but is your business overheating?
The first thing to look at is why? Why has your business suddenly taken off? Of course if you’ve seen the potential, laid careful plans and this leap in sales is the result of your hard work and meticulous planning, then you won’t be taken by surprise and you’ll have contingencies in place to cope with the upswing, this post is aimed at the many businesses who are taken by surprise by a sudden upswing.
You may be so busy rejoicing that a couple of really important facts fall below the radar, has a competitor stopped supplying a key customer due to a poor payment record? Has a customer spotted something you haven’t, such an impending piece of legislation which will have a serious detrimental effect on your sector, are you selling your product or services too cheap, whatever the reason you need to get to the bottom of it and feel comfortable that the reason for the growth is genuine!
If you’re a manufacturer or a producer of goods, you may experience problems such as processes keeping up with the increased demand, shortages of raw product, capacity issues caused by machinery, suppliers spotting a potential opportunity to increase prices? If you’re having a sudden boom it’s a fairly safe bet some of your competitors will be too, so any spare machinery or means of production will quickly become sought after and a sellers market will quickly be established.
It’s at times like this when I bemoan the throwaway and ‘just in time’ culture of the modern business world, in the past machinery could be mothballed, raw material stock piled.
Of course if you’re a large corporation you shove all the risks down stream to your suppliers, contracting them to be ready at all times for a sudden surge in components, even if that doesn’t come for years, but that’s not the case for SME’s and small family businesses.
So we have to be smart, we have to read the market, stock pile when we see a potential upturn, OK so it means you may be left with some stock if the surge doesn’t happen, but unless you’ve got it massively wrong you’ll still be able to shift it in the short to medium term, and how about that machine that needs upgrading for the newer version, is there the potential to store it and keep it ‘just it in case, even if it is just cannibalise for spares in the future? As entrepreneurs we need to understand the risks and sometimes do the unthinkable anyway, ‘fortune favours the brave’, or ‘fools rush in’ we pay our money and make our choice.
If you’re a service provider, will your staff be up to the sudden increase in business and potentially longer working hours? Will some of the more opportunistic amongst them see this as the perfect time to press for that pay rise, increase in overtime rates or added bonuses? Can your telephone system cope, do you have capacity to add extra lines and how long will this take?
Whatever your business your staff are key, and they’re key at any time in the business cycle, but even if you’ve planned carefully for a growth spurt, getting the timing right to employ new staff, training them and trusting them to be as efficient and high quality minded as your existing staff is never easily achieved. Speaking of your existing staff, will the increase in work, and influx of new, less experienced staff, give rise to an ‘us and them’ situation in the workplace, just when you really need your team to pull together they fall out and add to your worries!
Many smaller business don’t have the experience of dealing with staff, or the funds to employ a Human Resource (HR) professional on a full time basis, so a good compromise is to use the services of an HR consultancy where you will only pay for the services provided as and when you need them, the Chartered Institute of Personnel and Development (CIPD) produce a factsheet on selecting a suitable consultancy that meets the regulatory requirements and the needs of your business http://www.cipd.co.uk/hr-resources/factsheets/hr-outsourcing.aspx .
Cashflow is critical to the continued success of any business, but cashflow comes into sharp focus when a business experiences a period of high growth.
Some sectors are notoriously bad at paying bills on time, construction, professions and certain parts of local and central government, although they are trying to cure this problem. http://www.fsb.org.uk/LegacySitePath/policy/rpu/london/assets/late%20payment%20july%202011.pdf
Cashflow can be a particularly pernicious problem for small businesses because it attacks a them on several fronts, as sales increase, costs of production inevitably rise, staff work longer hours, often at increased overtime rates so staff costs rise, lead times start to stretch, so delivery can be delayed, part of the payment maybe withheld until delivery is made, with the balance taking anything from 40 to 90 days to settle.
This problem is sometimes called ‘over trading’, much beloved by bank manager’s as a handy excuse not to give you a overdraft, usually they’ll try to sell you a loan instead, and smug accountants who’ve seen it a thousand times before, (although they’ve never actually run a business!)
To avoid having that ‘overtrading’ conversation with your bank manager or accountant you need to plan for contingencies, cash is always tight in small businesses, if you can put some aside during the good times you should do so, but there always seems to be a much better reason for using spare cash, other than simply putting it aside for a rainy day.
So presuming you’re not sitting on a war chest waiting for serious problem to raise it’s ugly head, you’ll first need to talk to your bank manager, an overdraft is by far the cheapest method of securing funds in the short term, if the bank doesn’t feel able to offer an overdraft you’ll need to consider other options, crowd funding, peer to peer lending or more traditional routes such a bank loan, which is often the next best thing after an overdraft or factoring/invoice discounting. Avoid using your credit cards if at all possible, I know businesses who have managed to extricate themselves from some very tricky situations with the judicious use of a Visa card, but it’s really not to ne recommended. I’ve also seen companies dig themselves in deeper and deeper, a short term cash flow problem is one things, a serious problem with your business will not be solved by taking on debt at an APR of 21.6%, or in some extreme cases nearly 60% http://www.thisismoney.co.uk/money/cardsloans/article-3469629/Average-credit-card-rates-hit-time-high-21-6-APR-worst-offender-charges-three-times-more.html
Many accountants hate factoring, they see it as expensive and offering little in terms of added value, an old fashioned myth is that it is the last resort of a business before it heads into financial ruin, this neither accurate nor helpful and misses the point. Factoring, and invoice discounting, offer an excellent albeit, expensive solution to businesses experiencing high growth, the ability to leverage your sales invoices to achieve a large cash injection, quickly and with the minimum of fuss, cannot be underestimated when a business requires funds. (If you’re not sure what factoring/invoice discounting means have a look at this link it defines the term and lists the advantages and disadvantages. https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-factoring
Possibly the most serious consequence of an unplanned high growth event, is the toll it takes on the senior management team. Running a small business is already a pretty high maintenance occupation, so when a stressful situation which causes a strain to be placed on several areas of the business at once occurs, it’s inevitable that the weaknesses will be exposed and things can quickly get out of hand. Important projects get put on hold, personal grievances erupt, the blame game can start!
Strategy is an important discipline to master and integrate into every part of the business as soon as possible, all businesses, large and small need help with strategy, owners, directors and senior members of the management team are usually far too close to the operational day to day workings of their business to allow themselves the luxury of taking time out to view the direction their business is heading, and yet that is exactly what they need to do and they need help to guide, prod, push and ask the awkward questions that nobody else within the business will ask, local business consultants can be found here http://www.iconsulting.org.uk/
For more information on contingency planning, not just unplanned high growth, have a look at this blog post and short video, whilst the style is a little corporate there are some good points, well made. http://whatis.techtarget.com/definition/contingency-plan
Nick Hodson May 2016