Business review

The Small Business Growth Path

Introduction

When starting out with a new business venture it is almost impossible to accurately predict the growth progression of the business in its early years. Despite this fact attempts are still made and form the core of any business plan. Typically this growth is represented as linear or near linear when in fact it is more likely to be stepped. These steps are called Crises of Growth and this article attempts to explain them in a little more depth.

The Crises of Growth

The impossibility of predicting the future especially in respect to one's own business inevitably leads to a common mistake of representing likely growth in a linear fashion, similar perhaps to figure 1 shown here:

see Figure 1

This linear representation of prospective growth is not necessarily a mistake, but more often an expedient representation of something that is, in the final analysis, unknowable. That is, we know we will progress from point A to point B and we do not need to worry too much in the business plan about the day to day detail of how we will progress on that growth path.

As the vast majority of business plans are ultimately about money this approach is a useful expedient, but ignores the detailed problems that may be encountered along the way – some of which may be insurmountable. It is a bit like planning a long expedition across a plain, but ignoring the fact that half way through the journey you will need to climb up a sheer rock face: if you know at the start of the journey that you will face this obstacle then you might take some climbing equipment with you; without this knowledge you will get stuck half way through the journey and may need to turn back.

In reality business growth paths are fraught with many difficult obstacles and this tends to make make the growth path look more like that in figure 2 shown here.

see Figure 2

This growth path shown in figure 2 is also an idealised one, but at least shows steps which will coincide with something known as a Crisis of Growth.

A Crisis of Growth is a step change in the business operation. This is likely to be a significant step up in both sales and operations. In other words everything is changing at once so that it feels like, and indeed is, a crisis.

To understand this, imagine you are a one person company. In this company you are the means of both production and sales. It is difficult and you have to work long hours, but you only really have to support yourself – you earn a living wage from the business and that is all it needs to make. Then the business starts to grow, your sales process is successful and you find that you can generate more work than you can fulfil. You may be turning work away because you know you cannot do the work, or perhaps you are even taking work on, but letting people down and jeopardising your reputation.

At this point you decide to add one person to the business with the prospect of almost doubling your capacity (they are unlikely to be as driven as you). This decision then creates a whole new set of problems.

Firstly, if you employ someone who is not a family member, the chances are that you need to consider premises and move out of that back bedroom. This will add a new set of costs to the operation of the business: premises, rates, power, telephone line, internet access. Equally (for this one person business) a large capital outlay will be required to furnish the office with desks, cabinets and perhaps a new computer for the new employee – and this may need to be networked.

Secondly you need to ensure that the overall income that will come in will cover both wages and the increase in costs. Your sales may have been successful in recent times, but you may need to increase the level yet again and this may need to be a significant increase. Not only that, but you need to have confidence that this new level of sales will be consistent and can be maintained and built upon. This may mean that you will need to double your sales efforts so that you will be spending less time on fee earning work and so in fact adding one new employee will not double your capacity at all but perhaps only add about 50% capacity. Will adding 50% of fee earning hours to the business cover both salaries and the additional associated costs?

Thirdly, before you get to make the capital outlay or deal with the need to double your sales, you need to spend time and money on recruitment. The time is probably a bigger issue than the money, because you will have to take time out of either fee earning or sales to: write an advert, review CVs or applications, make initial screening interviews, make final interviews, write an employment contract, write a discipline and grievance procedure (to protect yourself more than anything), write an appointment letter, and send off thank you letters to unsuccessful candidates.

Fourthly, should all this work out well and make financial sense you then have to deal with the administration of a wage and tax on a monthly basis. You may be be able to sub-contract the administration of the wage to the accountant (another cost), but the chances are you will also have to deal with a new cash flow issue of ensuring cash is always available to pay your employee consistently every month at the same time – something you have not had to deal with before in this business.

Hopefully from this you can see that to make this bold step in the business will change everything at once while at the same time initially reducing your capacity to earn while increasing your costs. This whole process will be enormously painful and getting it wrong might break the business - it is undoubtedly a crisis.

Once through to the other side of the crisis and finding things working then adding another employee will not be such a crisis. It is just a case of another desk in the office, adding one more person to the payroll and going through the recruitment process which the first employee can help out with by perhaps working over time and covering the lost time to a large extent. Adding a third employee will be easier still.

Adding a software management and administration product into the business such as ProQuin, (see www.proquin.co.uk) will make things easier still.

The next crisis is likely to come when the number of employees reach a point where dedicated management is required and the business founder has to withdraw from day to day production / fee earning activities. This may also coincide with a need to increase the workforce to a point where new premises are required and perhaps a new administration system or production process required to ensure consistent high quality from all members of the team.

Again everything will change at this point, but once it has done so, a period of growth can be experienced which is relatively easy to manage.

Obviously not every business is the same and the exact nature of each crisis will be different for each business, but the principle stands all of the way up the growth path. For example consider the takeover/merger of two major PLCs (e.g. Lloyds Bank and TSB) and how much change must be required to make the two operations work together as one so the new organisation can be built upon and new growth added. Mind boggling really, but again a make or break crisis.

Conclusion

Crises of growth are make or break points in the development of a business. The ability of the management to recognise and deal with these crises will be a deciding factor on the ability of the business to grow.

Many businesses seem to reach a natural ceiling beyond which they do not seem able to grow – this is as much an issue of the management's inability or unwillingness to deal with the associated crisis that will take the business to the next level than anything else.

Recognising that these crises will occur periodically at the outset will allow you to deal with not only inadequate provisions within the business overall, but your own limitations before the need occurs.

For additional SmallBusiness Resources see:Small Business ControlFor more about ProQuin go to: http://www.ProQuin.co.uk

Joe Quin is a writer on small business management and adminsitration and start up issues.
he has been a consultant to small businesses in the north of england for the last 12 years
For more of Joe's writings see: www.smallbusiness.com.

Article Source: ArticlesBase.com - The Small Business Growth Path