Most of the time, you want a company to get at least a little bigger over time, even if your focus is on a specific locality. But the pace at which you grow has a big influence over you'll still be around years down the road, and available data says you shouldn't go after skyrocketing expansion if you want to survive long-term.
Research says slow and steady wins out
In a 2002 study, California State University finance professor Cyrus Ramezani looked at more than 2,000 public companies, examining the link between shareholder value and business growth. Ramezani discovered that companies that had the fastest revenue growth (average annual sales growth of 167 percent over a decade) performed worse in terms of share price than their slower-growing counterparts, whose growth averaged 26 percent.
But what are the real odds your company will crash and burn if it turns into Speedy Gonzales? More recently, The Kauffman Foundation and Inc. Magazine conducted a follow-up study of businesses five to eight years after they made it onto Inc.'s 5,000 fastest-growing companies list. The findings revealed that 2 out of 3 companies on the list had gotten smaller, been disadvantageously sold or gone out of business entirely.
Why fast growth rains on the business parade
The businesses that downsized, were sold or went belly up in the Kauffman Foundation and Inc. Magazine study suffered primarily because they could not find ways to make it past the third stage of enterprise maturity and become self-sustaining. They could not rely on any one person for success anymore and, at the same time, were unable to develop new and sophisticated processes necessary to meet demands.
Looking a little deeper, fast growth can cause a number of issues that keep otherwise great companies from forming better ways of operating for the future. As noted by CPA firm Dugan Lopatka, Derek Lidow of Fortune, George Meszaros of Success Harbor, Brian Hamilton of Forbes, and Suzanne Kearns of Money Crashers, these include
- Mounting overhead
- Decision making based on personal desires rather than careful analysis of circumstances and the market
- Poor management; leadership tries to take on too many roles or operates such that day-to-day tasks overly depends on them
- Assuming rapid growth will result in financial viability
- Using research and development to create incremental rather than large-scale improvements to the processes or products in place
- Loss of innovators; the company acquires creative businesses but drives talent out
- Failure to address growth possibilities in loan planning resulting in large loans that are difficult to stay on top of
- Reduced quality of customer service, often due to loss of personalization and management confusion
- Reduced quality of goods as focus shifts to quantity
- Employee turnover due to communication breakdowns
- Focus on short-term gains
- Accounts receivable issues; cannot collect money owed fast enough
- Inability to handle increasing complexity or load of financial accounts
- Assumption that more sales is synonymous with profit; capital can exceed the ability to grow in the proper manner, eating up available money
- Hiring the wrong people to fill positions quickly and thereby fostering a negative or otherwise undesirable company culture
How to know if your business is in trouble
Given the factors above that can destabilize a growing business, you need to recognize the warning signs that it's time to put on the breaks and slow down a little. Red flags include
- Increased customer complaints
- Increased HR problems
- Cash flow difficulties
- High levels of employee stress
- Low morale
- Inability to keep up with demand despite up-to-date systems
- Inventory maintenance difficulties
- Significantly increased waste (space, human resources, inventory, etc.)
Being the model for others
Growth in itself is not bad for a business. It means that you've found a way to meet a demand consumers have, and that people like the solution you've come up with. But unless you keep your growth in check, you could be the supernova of your industry, destroying everything you've worked for as you explode. So be like the sun instead. Burn slow, burn long and be the constant, trustworthy light others look to in order to find their way.