The business landscape may appear to be dominated by corporate goliaths, but the reality is that small businesses outnumber large companies by a significant margin. In fact, most businesses never grow beyond the scope of the owner they start small and stay small. In the US, more than 99 percent of companies employ fewer than 500 people. In 2012, there were almost 5 million small businesses (with fewer than 49 employees), but only 6,000 companies employing more than 250 people.
Aspiration, or its lack, is a key factor for small-scale companies. Many small-business owners are content with the lifestyle the business allows them, and have no desire for growth. But he biggest reason for a lack of growth is finance. Growth requires access to capital, which is difficult and expensive to access for small companies. Moreover, unlimited liability means that an owner’s personal assets (such as the family home) are at risk if the business fails a risk that many are unwilling to take.
Nothing Great Is Created Suddenly
One reason many new businesses fail is, perhaps surprisingly, because they grow too fast. Excessively rapid growth can cause companies to overreach their ability to fund growth: they simply run out of cash to pay for day to day operations. A major challenge for any manager is to balance income with expenditure, ensuring that there is sufficient cash to meet the rising costs of the business.
In 2001, business professors Neil Churchill and John Mullins created a formula for calculating the pace at which a company can expand from internal financing alone. Known as the self-financeable growth rate (SFG), it helps managers to strike the right balance between consuming and generating cash. It does this by measuring three things: the amount of time a company’s money is tied up in inventory before the company has paid for its goods or services; the amount of money needed to finance each dollar of sales; and the amount of cash that is generated by each dollar of sales.
Sustainable growth
When accurately applied, the SFG formula determines the rate at which a company can sustain growth through only the revenues it generates without needing to approach external funding agencies for more cash. Essentially, it predicts a sustainable growth rate and helps to avoid overtrading. When a market is growing faster than a company’s SFG, Churchill and Mullins identified three ways for managers to exploit the growth opportunity: speed up cash flow; reduce costs; or raise prices.
Each of these “levers” helps to generate the cash needed to fuel faster growth.
As a young start-up business, the fashion brand Superdry enjoyed phenomenal growth. From its inception in the UK in 2004, the company rapidly added new stores throughout the world. In 2012, however, after several profit warnings, it became clear that Superdry had become a victim of its own success. Critics suggested that the brand was so focused on growth that it had forgotten its fashion roots, failing to update products on a seasonal basis. Other reasons for the decline included supply issues, accounting mistakes, and an inability to react quickly enough to fierce competition. In a tacit acknowledgement that excessive growth was to blame, the company announced plans to review its new store openings.
Business growth expert Edward Hess suggests that growth can add value to a company, but if it is not properly managed, it can “stress a business’s culture, controls, processes and people, eventually destroying its value and even leading the company to grow and die.” Growth is not a strategy, he claims, but a complex change process, which requires the right mindset, the right procedures, experimentation, and an enabling environment.
Edward Hess
A graduate of the universities of Florida, Virginia, and New York, Edward Hess has been teaching and working in the world of business for more than 30 years. He began his career at the oil company Atlantic Richfield Company, and later became a senior executive at several other leading US organizations, including Arthur Andersen.
Hess specializes in business growth, and especially in debunking the “myths” that growth is always good and always linear Contrary to the dictum that companies must “grow or die,” he suggests that they are likely to “grow and die.”
Hess is the author of ten books and more than 100 practitioner articles and case studies. He is currently professor of business administration at the University of Virginia, US.
