Small business owners constantly think about expansion. We all want our businesses to grow and succeed. According to a 2015 Wasp study, top strategies for increasing small business revenue include expanding into new markets (28 percent of SMB participants) and launching new products or services (22 percent of participants).
But I will be the first to admit that a bigger business is not always better.
MyCorp’s size was actually the biggest problem I faced when I took over. The company got too big too fast and, while it did well, I knew it could do better and chose to seriously downsize. And while it may seem counterintuitive, there are actually three solid, financially-based reasons why a bigger business might not be a better business.
1. Growth typically means debt
A new product or expansion takes a lot of research, time and money — which is why serious growth takes debt. Of course, there is nothing wrong with loans, as long as you can pay them back, but if you get too big too fast, you’ll quickly find yourself in a very, very deep hole.
A high debt-equity ratio could mean you’re growing yourself out of business as revenue — already a fairly fluid element — becomes less predictable through expansion. You’ll have a couple great months, followed by a few terrible ones. Too much debt means you won’t be able to weather those bad times and suddenly you’ll have debtors banging down your door.
Pro tip: Tie your assets to long-term sales numbers, and make sure your debt doesn’t grow quicker than your operating revenue.
2. You forget to cut costs
“If it ain’t broke, don’t fix it” is not a long-term growth strategy. But if your business is making a ton of money, it’s tempting to just expand as you ride that wave. Unfortunately, tactics and strategies that worked when the business was small stop working as it grows.
Bigger businesses automate and streamline their sales-flow, bookkeeping and general operations for a reason.
This was actually our biggest problem after I bought the company — we were a lumbering behemoth of redundant operations and bloated decision-making because the company grew too fast to update itself.
Pro tip: Constantly look to, and experiment with, cutting costs without sacrificing quality. Otherwise, you’ll be forced to make dramatic shifts well into your business’s life.
3. You might actually be losing money
Successful businesses are run with the long-term in mind. Short spurts of success are awesome but, if you aren’t careful, you’ll lose money because rapid expansion nearly always signals faltering customer service. Case after case exists of businesses expanding too rapidly, losing what made them “special” to customers, and then being forced to either shrink or shutter.
Retention is the cornerstone of long-term, sustainable growth; five one-time customers are never as good as just one regular. Not only will that regular keep coming back, probably earning you more than just those five, but they’ll be key to any word-of-mouth marketing.
Pro tip: As you grow, focus on maintaining the high-level of customer service that makes your small business’s customers feel special.
Avoid premature scaling
Premature scaling remains one of the top reasons startups fail. Sustainable growth takes time and patience, and while it’s tempting to strike while the iron is hot, taking on too much too quickly is a recipe for disaster.
Prudent business owners take a step back and plan out their next move when sales start to increase. Know how much debt you can reasonably carry, review your day-to-day operations, and never sacrifice quality or service just to bring in more money.
Trust me — growing your business properly is much less stressful, and much more rewarding, in the long-run.