It's a familiar story. A new company appears on the scene. Its products are highly popular, and soon its facilities, production, and marketing efforts are all growing exponentially. It appears to be an overnight success story--until one day the bottom drops out. Customers complain about poor quality or messed-up orders. Investors complain about falling revenues and non-existent profits. Soon the company is gone altogether, another victim of having grown too fast.
That's pretty much what happened to MJ Gottlieb, serial entrepreneur and author of How to Ruin a Business Without Really Trying. To help keep it from happening to others, he offers some sage advice for young companies faced with too many opportunities:
1. Don't let anyone pressure you into spending.
That's the error that led to Gottlieb's downfall. "During the first few years of my second business, things were moving at a feverish pace and the company was growing very quickly. I couldn't have been happier...or so I thought," he says.
The trouble came when his clothing line's retailer customers began pressuring the Gottlieb to support the brand with a national advertising campaign. He knew his company couldn't afford it, but the retailers threatened to reduce their orders without a better-known brand. With 20/20 hindsight, letting them cut their orders would have been the right decision, but instead he used his connections at four national magazines to buy advertising on credit. That turned out to be a fatal mistake.
2. Don't spend anticipated profits.
This can be highly tempting for a growing company. Why not borrow against the profits you know you'll be making when your product sells? Because things don't always go as expected, as Gottlieb learned. He'd intended to pay off the national advertising from profits on the retail sales that advertising was supposed to enable. There was only one problem--it turned out he had nothing to sell.
There was an error at the factory producing the company's apparel which resulted in the season's entire order being cancelled. "I remember looking down at my desk at a quarter of a million dollars worth of advertising bills and had only $300 in the company bank account," he says. It was an error that the company did not survive.
3. Be wary of credit.
"When put in a position like I was, it is easy to be pressured into looking for credit wherever you can get it," he says. "However, credit destroys ten times more businesses than it helps."
Unfortunately, there will usually be plenty of organizations prepared to offer you credit whether you're over-extended or not. So, Gottlieb advises, never accept credit without first getting solid advice from your accountant and/or financial advisor. "Slow and steady wins the race," he says. "Don't make any short-term decisions that will hinder long-term growth. It is very hard at first to say the word 'no' to your customers. I get it. Just make sure you are saying 'yes' to your company first." (Here are some tips on how to say no to a customer and still preserve the relationship.)
4. Build long-term customer relationships.
"Establish a personal relationship," Gottlieb advises. "Explain that you are a growing company and tell them if they can help grow with you now, you'll give them concessions later. Tell them their loyalty in the beginning will earn them your loyalty in the future. And when that time comes, do exactly what you said you would do. Then you have a customer for life."
5. Nurture your 'hip-pocket' accounts.
A hip-pocket account, in Gottlieb's parlance, is a customer that you know will give you a predictable order, month after month, year after year. These may or may not be your most lucrative accounts, but they are your most valuable. "It is worth more to have 40 loyal customers than 400 that will drop you the moment someone new comes around," Gottlieb says. "Knowing you have certain customers in your hip pocket, it becomes easier to project your inventory and sales revenue season after season."
And when things go wrong, your loyalty to these accounts is likely to pay off, he adds. "When times become tough, you'll be amazed by how you'll suddenly have 80 hands offering help to get you through."