Entrepreneurs: Dream big but beware the risks of rapid growth
(As originally published in the Financial Post, February 2013)
By Deborah Conroy, Vice President, Transaction Advisory Services, EY
We’ve all heard the awe-inspiring stories of winning entrepreneurs who risked it all to make it big. And with signs that the economy is poised for recovery and the confidence that comes with surviving leaner times, entrepreneurs may decide that now’s a good time to surge ahead.
During periods of economic slowdown, business leaders hear frequent warnings about the need to monitor its financial health, the capabilities of its team, and the well-being of its major customers and suppliers. However, business owners should be monitoring these things on an ongoing basis — even when the future looks bright and they’re anticipating significant growth.
Before taking the next big leap, here are some things every entrepreneur should consider:
Can you produce as much as you can sell?
Besides looking at capacity levels and increasing staff training, entrepreneurs must consider the strengths of their supervisory team. Will an experienced manager’s keen eye for detail lose focus when the production levels double or triple? Scrambling to complete orders on time often places the focus only on the immediate fires, and increases the risks of losing sight of overall operations.
Can you actually build what you’re selling?
In an attempt to secure a large order or a marquee client, some may over-promise, extolling product attributes that have not been fully tested, making overruns or inefficiencies almost inevitable. Will the brilliant design or engineering team that the company is known for find the solution before the order is due? Business leaders should also have strong enough relationships with their key suppliers to understand whether these suppliers can keep up with the increased demand, or whether they themselves are over-promising on deliveries in a desperate attempt to keep up.
Do you have adequate financing to support the increased level of operations?
The finance team should be prepared to manage realistic cash flow forecasts. There is a very real risk of exceeding lending limits or defaulting on margin coverage calculations if a company has not addressed its needs with its lenders. Cash flow considerations can and should be factored into the sales contracts up front, but are too often neglected in the eagerness to secure a large sale.
Can you provide timely, accurate information to oversee the increased level of operations and to satisfy lenders?
While financial reporting rules allow for estimates and provisions, a deliberate bias in the preparation of financial statements can produce distorted financial information. Loss of reputation in the financial world can have a lasting impact on a business owner’s credibility. This is not the exclusive realm of major corporations; many companies can be tempted to alter accounting provisions or exaggerate revenues, for example, to avoid reporting a loss or defaulting on loan covenants.
These are only a few examples of the risks to consider when assessing rapid-growth survival. Delegation is critical to free the leader of time-consuming tasks — or tasks better performed by another team member. But the bigger risk is not having enough oversight, or the right team, to effectively manage the big dream.