Financial Disease #7
Growth Influenza better known as the flu. This flu and its complications can be deadly in severe cases. Organization that have grown, but have not properly anticipated growth’s impact on the infrastructure can become very susceptible to aggressive viral attacks. Rapid growth overwhelms the in place systems and makes them more susceptible to errors, increased costs, delays and other issues. This crippling viral attack will degrade the quality and timeliness of your customers’ experience. Unless actions are taken to upgrade the infrastructure and get a handle on cash, it has the potential of killing the patient.
Growth and volume has a habit of separating the so-so run companies from the well run companies. There is a step function with growth. As you grow you must adjust your infrastructure to efficiently handle the increased business activity. This requires planning, funds, and discipline.
Six key areas to address before high growth lands on your doorstep.
- Plan for Growth
- Upgrade or Use Technology to Reduce Costs and Manage the Increased Volume of Information
- Plan to Increase Working Capital
- Stay Focused
- Review Procedures
- Uncover Quickly and Fix What is Not Working
There are all too frequent stories of companies experiencing rapid growth then sudden bankruptcy. This should provide us with some valuable lessons learned. If a company pursues economies of scale incessantly to achieve rapid growth without improving the high-cost structure, it will face a big problem soon or later.
Too many companies hastily try to lower production cost by means of economies of scale to satisfy customer demands for lower prices. While capital investment will increase production capacity, it usually accompanies a big increase of debt payable. Increased debt payable increases interest payment, and naturally, decreases capital adequacy ratio. Most companies salivate with the thought of sales increase, but they must factor in the risk of increasing interest payment and other cost increases.
In short, rapid sales increase means increasing expenses associated with the revenue. In these conditions, a company has cash-flow problems and a high probability of bankruptcy due to a sudden change of business environment even though its results are in black. If a company faces this situation, it had better be realistic and avoid business beyond its capability, namely abandon the idea of expanding the business and take only highly profitable orders. Always, you have to keep in mind the risk associated with a rapid business expansion.