Why Can Rapid Corporate Growth in Sales and Profits Cause Financing Problems?
Rapid growth might seem like a business owner’s dream come true, but it can do more harm than good depending on the amount and timing of the growth and your ability to manage it. Fast expansion places a number of stresses on your business, any one of which might be the domino that starts others tumbling. Understanding the negative side effects of rapid growth will help you recognize them and take steps to deal with them.
When your sales increase, you’ll need more labor, materials, supplies or other resources to make and ship your product. Since you might not be paid for what you sell for another 30 to 90 days, you might need to borrow money, run up your credit cards or deplete your cash reserves. Any time you foresee rapid growth, even in one product or service, take steps to evaluate your capital situation and ensure you can fund your growth.
A quick increase in sales can cause a large amount of payables that come due well before your receivables arrive. When you use credit to fund an expansion, you can lower your credit score, making credit more expensive. Higher interest rates eat into your profits. If you can’t pay your bills in a timely fashion, you might lose access to vendors and suppliers, then lose customers when you can’t fill their orders. When you face a boom in sales, meet with lenders, vendors and suppliers, let them know of your good fortune and let them know that you might have a hiccup in your cash flow that will require longer credit terms. Your creditors will have to wait a bit longer to be paid, but you’ll have more business for them.
Increasing sales places a drain on your production, labor and administrative resources. This can lead to morale problems, employees who leave if they are overworked or don’t receive more compensation, a lack of warehouse space and shipping capabilities and too little production capacity to fill orders. Take steps to manage your finances in ways that let you better manage your resources during a sales spike, including temporarily outsourcing some of your administrative, production or shipping needs.
If your growth is coming from one or two key customers, you might need additional financing if these customers don’t pay on time. You can be left with expansion costs you can’t finance if you lose these accounts. Rapid expansion that relies on only one or two clients increases your dependency on those clients. Even if they stay with you, they have more power to negotiate lower prices, longer warehouse storage, free or reduced shipping costs and more favorable credit terms.
Higher profits mean higher taxes. Don’t wait until after your sales are back to normal to figure out your tax situation. You might find out you’ve spent money needed to pay a larger tax bill or haven’t reserved enough cash to pay your sales and income tax liabilities on time. Look at ways to reduce your tax liability, such as using excess profits to replace old equipment, increase worker training, give bonuses to key employees you want to retain or depreciate assets.