An article on Inc.’s website talks about 96% of businesses fail within ten years. It goes into a list of reasons all dealing with the cash flow issues. To me cash shortages are a symptom of serious underlying problems.
I subscribe to a blog written by Adam Hartung, the author of Create Marketplace Disruption. I became interested in his thinking because I enjoyed the book so much.
One of his blog posts talked about The Deadly Outcome of Stalled Growth, using the image below.
This image is a great overview of what happens if companies stop innovating and don’t keep pace with market needs. In his example he cites 70% lost more than half their value, which is on the way to over 90% failing. He is referencing large companies in his article, but I think the problem occurs regardless of size and smaller companies have a lower tolerance for error.
My thoughts on why!
My experience has proven that during the growth curve that companies experience if and when they get through the startup and survival stages don’t produce the profits needed to finance future innovation.
When the company is small and begins to grow it’s very “hands on” and is easily able to handle the sales volume. As sales grow costs begin to grow with the addition of people, increased physical space, and capital equipment. This increases both variable and fixed costs. When the growth spurt hits the early methods of hands on no longer works, and they begin to become much less efficient. Margin growth doesn’t track the increased revenue.
They “throw money” at the lack of scalable processes, to keep the customer happy.
I talk a lot about strategy, but the simple answer is they haven’t adequately planned for growth in the beginning and struggle when it hits. When they should be generating cash and planning for new products and services to continue growth, they use that money to try and keep up. Lack of processes and technology, lack of meaningful KPI’s cause waste, rework, late shipments, excessive overtime and customer returns.
When we started our value-added logistics company, we built it around a proprietary software program that was scalable. We went 22 months before we got our first big account and used that time to prepare for growth. I wish I could say that growth happened flawlessly, but it was still a struggle. The accounts we signed were huge, such as Apple and Hewlett Packard, and each contributed exponential growth that would have been impossible without the infrastructure we had in place.
It becomes much harder, but not impossible, to scale after the fact.
When I talk to business owners and founders, I often see a complacency that I feel is dangerous. They learn to live with things, that often have a snowball effect on the overall performance of the company over time.
The challenge for you is to look at your business critically, and execute the changes needed before they become critical.
Remember above when we added the fixed and variable costs they will only grow with time. You have some control on variable, but not the fixed. Not growing is not an option.
For a copy of my free report on the 7 common business mistakes click here.