Over several years where I was either engaged in running businesses or consulting businesses, I noticed a repeating situation across various companies. Many of them “expanded too quickly” and then had to cut back on their overhead and let people go as their expenses exceeded their revenues.
This is much more common than you may think. What happens is that a company’s leads and sales start going up nicely, so management starts adding more people, investing in more equipment and supplies, committing to more ongoing, fixed expenses, all with the idea of generating even more leads and sales and servicing the increased incoming business.
Often, though, there is a sort of panicky feeling that the business is expanding too fast.
Eventually (or much sooner in some cases), leads and sales start to drop for whatever reasons. Management figures it’s just a temporary situation. But leads and sales do not pick up despite management’s best intentions and actions – at least not quickly enough.
Management now faces reality and decides it must let people go which is painful, and it also sends a negative message to the remaining employees. That’s one thing.
But now the company also has higher fixed, ongoing expenses. Perhaps they increased the square footage of their leased premises and now have higher lease payments.
Or they have money tied up in unmoving inventory based on the past period of rising sales, thinking the inventory would turn over more quickly than it actually did. And now they are low in cash.
They may also have more or newer equipment that they now have to pay off which increases their ongoing monthly expenses.
And, they may have given pay raises to key executives or principals and now have to reduce their pay, which is very painful.
There is an old maxim in business that states, “the seeds of a company’s tough times (or even its demise) are sown in good times.”
So what are these “negative seeds sown during the good times?” First and foremost, it can usually be summed up in poor financial management. When times are good, the company starts spending money thinking that the good times are here to stay. And of course, there are ALWAYS good “reasons” why the money should be spent: “We need the added space and equipment to keep up with sales.”
Or, “We need to add more people to help service our expanding customer base.” And while there may be some truth in these “reasons,” often many of them are really “would be nice to have” type of expenditures, rather than “vital to have” expenditures. And there is nobody in control who can actually stand up and say, “No” to these non-vital expenditures.
Also, the idea of accumulating and building up a financial cushion (reserves) during good times tends to get pushed to the background.
So, Is Your Business Expanding Too Fast? Or Being Mismanaged?
There are three financial issues management needs to focus on during good times, in addition to ensuring there is adequate wherewithal to keep the show on the road:
1. If you absolutely feel you have to commit to fixed, increased, ongoing expenses, look before you leap. Look, don’t just listen. Make sure these proposed commitments are vital to your expansion, and that you have an exit plan in place in case your market or business starts trending downward significantly. It can happen! So really LOOK and evaluate both the need and the potential consequences (good and bad) of committing to increased ongoing expenses.
2. Steadily and surely, build up your financial cushion for a “rainy day,” and then hope you never have that rainy day. Like the boy scouts’ motto and some top notch military outfits say, “be prepared.” Good advice – especially in our contemporary fast-paced world.
3. Live within your means. It can be very tempting to say, “Hell with it, we’re on a roll.” Just leave that to the guys with testosterone overload and more beer than brains. 😉
Written by Bob Nelson
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