Fast growth needs careful managing

Oct 15 2008 By Jim James for The Journal

Jim James, corporate recovery partner at Ward Hadaway, strikes a cautionary note regarding fast-growing companies.

AS A person dealing with businesses in financial difficulties, I often come across fast-growing companies who find the speed of their growth has indirectly led to problems. Business people need to be optimistic in order to start new ventures or expand existing ones. Whilst not wishing to rain on anyone’s parade, that optimism needs to be tempered with caution.

Fast-growing businesses can find themselves in difficulty for a variety of reasons, but the common theme is a lack of cash. This can be as a result of struggling to recover monies from those granted credit.

This may not only be from granting credit to businesses who are not in a position to pay, but also from large companies who just don’t want to pay. Other fast-growing businesses sometimes consciously “buy business” by undercutting established competitors at the expense of margin. If they fail to manage their overheads or have simply miscalculated, then the fast-growing business will soon crash and burn.

The challenge of managing fast growth is a major one, and sometimes companies can invest for an extrapolation of their current growth only to find that the growth rapidly levels off, leaving them with excess resources. This can prove to be a fatal drain on their cash flow.

There is no great panacea for these problems. Each business has its strategy and individual model. That model can be difficult to change as circumstances change, especially if it is a fast-growing new business.

However, the most important way of avoiding a crisis is to ensure that timely management information is available to ensure the earliest possible warning is given of trouble ahead. A 90-day rolling cashflow is a must-have but can be expensive in terms of management time to maintain. A balance between investments and reserves of cash is also important with contingencies for the unexpected. Even fast-growing business can have stutters and may need to temporarily retrench before setting out again on a growth path.

If your fast-growing business does run into difficulties, or you can see difficulties ahead, then take advice early. There is often a way of avoiding those difficulties or at least providing a way through.

Fast-growing companies bring a vitality and a future to the region. They tend to be in new industries or represent a new way of approaching an old problem. Often they will be generating employment and trading opportunities for the local area. They are to be welcomed even though growth produces its own risks.

Jim James is also the current regional Chairman of R3, the Association of Business Recovery Professionals. For advice and assistance on the above issues, or any other corporate recovery matter, contact Jim at jim.james@wardhadaway.com or call him on (0191) 204 4220.