The risks of fast-growth - creating a business for the long-term

Growing your business can mean achieving your financial targets, increasing employment and fuelling the economy, but growing too fast can be as damaging as not growing at all. We look at some of the risks of growing your business too quickly and what steps you can take to achieve a better balance and a more sustainable business.


1. Risks of fast growth

There’s a whole range of reasons why businesses fail, but with 5-year survival rates for UK businesses standing at just 44%, an inability to grow sustainably has to be one of them. Whilst we’re not advocating standing still or turning down opportunities, it’s worth bearing in mind that growing too quickly puts pressure on every aspect of a business – from HR to finances, supply chains to IT. Understanding the risks and addressing them is vital to pursuing a balanced and sustainable approach to growth that will reap longer-term rewards.

  1. Taking your eye off the ball – as sales increase and demands on your time grow, it can be hard to keep track of essential processes and much easier for a business to de-rail.
  2. Sales vs. profits – growing sales doesn’t always translate into increased profits. Pursuing sales without considering the costs involved can actually harm the bottom line. Making a strategic decision to take a short-term hit on a deal that will be profitable in the long-term is fine, but being buoyed up by achieving more and more sales whilst being blinded to potential losses, is not.
  3. Cash flow – increasing sales and a big growth in accounts receivable is good news, but failure to collect cash in a timely manner can lead to cash flow issues. Fast growth increases the rate of cash leaving your business as costs rise. If the rate of cash coming in fails to keep pace, you can be in trouble.
  4. Stretching the supply chain – operational and reputational damage through an inability to fulfil orders can occur if your supply chain can’t keep up with the pace of your growth.
  5. Finance – having the capital in place to fund growth needs to be balanced against taking on too much debt. Ensuring you can service debt in the long-term if sales decline is crucial.
  6. Staffing and skills – finding the right staff can be a challenge for a growing business, not just in terms of skills and experience, but also ensuring they project the right company image, particularly for customer-service oriented brands, and that they fit with your business culture.
  7. Retention – customer satisfaction can be a casualty of fast growth. Winning new business is great, but retaining old customers is important to long-term business health.

Back to top

2. 10 Top tips for growing your business sustainably

 

  1. Have a plan – creating a business plan for growth and reviewing it regularly can help you to spot any issues across areas such as cash flow, capital requirements, staffing or supply chain. Forecasting and then checking actual figures against your projections mean you can respond early and take action that could keep sustainable growth on track.
  2. Understand your business’ sustainable growth rate – the maximum amount of sales growth you can reach without compromising your cash flow or requiring additional finance. Aligning your growth strategy with your growth capacity can identify any areas of financial or operational overreach.
  3. Do your research – if you’re entering new markets, launching new products or targeting new customers, make sure you analyse available data and thoroughly research long-term growth potential, payment terms and upfront costs.
  4. Create robust, scalable processes and systems – investing in processes and systems that can be scaled or automated as your business grows can lead to efficiencies later on. Accounting, cash collection and time-management processes in particular need to be rigorous.
  5. Re-appraise your finances – the financial needs of a steady business are different from those of a growing one. Taking a look at how your finances are structured can be an eye-opener. If you’re regularly exceeding your overdraft limit, perhaps a loan could offer better terms? Seasonal businesses may require more flexibility from their finances, and businesses looking to purchase plant, machinery, office equipment or company vehicles may find that leasing, hire purchase or other forms of asset finance could prove more cost-effective than outright purchase.
  6. Remember that ‘cash is king’ – make cash flow a priority. Keep a cash flow forecast and monitor performance rigorously. If you’re struggling to collect what’s owing – whether that’s due to recalcitrant customers or lack of admin time – invoice discounting or factoring may be solutions worth considering.
  7. An eye for profit – if sales are growing but profits falling, re-considering your pricing strategy may be appropriate, particularly if you heavily-discounted to corner market share. Working in a profit percentage for each sale, for example, can ensure margins aren’t eroded.
  8. People – hiring, training and developing the right people can make a big difference to the success of your growth plans. Spending time thinking about and documenting your organisation’s culture and core values gives you a benchmark to assess how potential employees will fit in. Working with a trusted recruitment partner, who understands your business and its culture can also save you time and money.
  9. Manage your supply chain – make sure you take suppliers with you on your growth journey. Communicate your plans to your suppliers to check they can meet increased demand or consider diversifying to bring additional suppliers on board.
  10. Collaboration – you don’t have to go it alone. Whether it’s outsourcing non-core activities, formalising partnerships or joining forces to achieve economies of scale, collaboration can help you grow into new markets or secure new customers by acquiring skills, experience or more practical assistance like access to distribution networks or specialist machinery.

Supporting businesses to secure sustainable growth is in everyone’s interests, so asking for help from your bank, accountant or your local business network can provide a real boost and a fresh perspective on your plans and any issues you’re facing.

Lending is subject to status.

Back to top

Important legal information

Calls may be monitored or recorded in case we need to check we have carried out your instructions correctly and to help improve our quality of service.

Lloyds Bank plc Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Telephone: 0207 626 1500.

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under Registration Number 119278.

Eligible deposits with us are protected by the Financial Services Compensation Scheme (FSCS). We are covered by the Financial Ombudsman Service (FOS). Please note that due to FSCS and FOS eligibility criteria not all business customers will be covered.

Lloyds Banking Group includes companies using brands including Lloyds Bank, Halifax and Bank of Scotland and their associated companies. More information on Lloyds Banking Group can be found at www.lloydsbankinggroup.com (opens in new window)