Before I start this post about growing too fast, I need to point out a fact… you have to pay for inventory before you sell it. We’ve covered this in other posts, but it is important to remember. Ok… now on with the post.
Once upon a time there was a company growing at a “Meh” rate. They weren’t going backwards, but they weren’t featured in the Masters of Scale Podcast.
Then, all of a sudden something changed, the hired a new sales person, contacted a major retailer, or a rich uncle showed up, whatever it was, something changed and a growth curve turned into the shape of a hockey stick.
YAHOO! But then something happens… and as quickly as they grew, they closed their doors and the owner is now working somewhere else just to pay the bills.
Growing Too Fast
In every business there is limited capacity. For service based businesses, it is the number of employees or hours in the day, and for product based businesses, it is current production limits. At some point in this rapid growth mode, a business hits a capacity limit.
But, no worries! Right? We can fix this, we just need to hire a few extra people and get another production line up and running. This would fix the capacity issue.
This is true. But unfortunately, the only thing more limited than capacity is CASH.
You can keep expanding capacity, but expanding capacity takes cash. You need cash for hiring and cash for paying for new production.
You can expand once with a loan from a credit card or bank, but if you keep expanding, there will be a point when even their sources of cash run out and the business won’t be able to meet customer’s demands.
Why do you think everyone on Shark Tank tells them they’ll use Herjavec’s cash for more inventory?
But that’s not all. There is also a really funny magic trick that growth does to your profit margin.
Disappearing Margin (Warning Math)
Let’s say that you are nimble enough to keep producing without Mr Wonderful or Lorie G.
Remember when I mentioned the simple but important fact that you have to pay for inventory before you sell it?
This is where you find out why it is important.
When you sell a product, you make a profit, if you don’t, stop selling it, actually if you’re not making a profit you should really think if business is for you. Seriously. A good profit margin can be 20%. If you have steady sales with no growth, you can expect to be putting that 20% right into your bank account. However, if you are growing on average at 5% each month, that means you have to continue to buy more and more inventory in anticipation of the higher sales. This means you could be putting only 15% of the potential 20% in each month.
ARGGG I know I know too many numbers… but keep following me for a second.
Let’s say you grow at 40% month over month and you have still only that 20% margin. That means you have to come up with that extra 20% from… somewhere. This is where you can start really running into issues. If you’re an Etsy store and you just land Nordies you could jump from growing at 5% each month and making some good side cash, to growing at 1,000% and maxing out every credit card you were offered since college.
This is WHYYYYYYY growing sustainably, is SO key.
You need to know how fast you can grow without running out of capacity.
So what are supposed to do?? Not grow?
Nope, growing can be good, but it is not the only goal, you have to grow sustainably.
Learn how to grow sustainably.
Great question. I will be tackling that in an upcoming post.
But if you would like to learn how to grow sustainably before the blog post comes out reach out.