Dangers of Rapid Business Growth and What to Do About Them

Once a business becomes profitable, the owner’s next goal is probably to see it grow. If that growth comes too fast, though, the company could run into some unexpected problems. Here are the top six problems caused by rapid business growth and advice on how to handle them.

The growth and expansion phase is an exciting time for any small business. The primary goal of a startup is to get customers, deliver the product or service, and reach the break-even point as quickly as possible. According to conventional business plans, once the break-even point is achieved, profitability should follow. For some small businesses, though, another goal is rapid growth, and that can be a problem. Businesses often underestimate the intense pressure that builds when trying to manage rapid business growth.

1. The business may face a cash flow crunch as it deals with increased demand for its products or services.

The costs of running a fledgling business can be difficult to manage, especially coming on the heels of cash outlay to open the business. At this point, a business may be surviving on credit as it tries to grow sales and revenues. As the company pushes for higher sales, the owners can expect monthly expenses to grow and possibly exceed their monthly revenues. If the collections are on track, that’s not an insurmountable problem. However, a cycle or two of delayed collections could leave a business in that proverbial spot: between a rock and a hard place.

To keep cash flowing, anticipate the cash crunch with a realistic plan that accounts for delays in the collection of receivables. Prepare a backup plan for raising cash from personal sources or through a pre-approved line of credit from the bank. It can also be helpful for business owners to diversify their client base if possible. If the business depends on one big client as a revenue source, it’s vulnerable to the whims of that client. That one-trick marketing strategy doesn’t always lead to business success.

2. Operational inefficiency because of uncontrolled expansion will cost a company time, money, and other resources.

When a business starts growing quickly, it’ll be forced to improvise to manage increased demand for its products or services. When business buildup happens too fast and too soon, the owners won’t be able to adhere to their perfect business plan, where the operational processes flow smoothly. Most business owners would feel pressured to hire more people sooner than they anticipated, and they may not be skilled in choosing the right people, or they may not have the time to redesign their workflow to accommodate increased demand. While higher demand should lead to economies of scale, this may not happen if rapid growth results in any of these problems:

• The new employees are poorly trained.
• The business can’t manufacture or buy inventory quickly enough to fill orders.
• Business leadership hasn’t accurately determined the cost of delivering its products or dealing with customers.
• The brand’s customer service isn’t up to par.

Wise entrepreneurs manage the ordering system and the order fulfillment process so that they don’t end up over-promising to their customers. If possible, they talk to owners of other fast-growing businesses to see what problems they experienced, so they know what to plan for.

For example, they might ask advisors at a local Small Business Development Center (SBDC) or Service Corps of Retired Executives (SCORE) chapter for advice. Their services are free (a huge plus if the company’s under financial strain), and they may be able to help a business owner stay aware of problems and solutions for their type of business.  Remember, too, that it’s better to turn down customers than risk annoying them if the company can’t deliver on time or can’t deliver quality goods and services.

3. The company starts receiving a lot of negative feedback due to customer service issues.

A few customer complaints every so often are part of doing business, but when negative feedback starts to pile up, it’s an indication that the company isn’t meeting client expectations. This could be due to a lack of personnel to manage client interactions. It could also hint at other issues if the company’s staff is spread too thin and is cutting corners to meet customer demand.

Clients who provide positive feedback are bound to come back, boosting customer retention. A host of negative feedback from the customer base could indicate that the business is unable to cope with the market’s expectations in terms of delivery because the company is overwhelmed.

Prudent business owners take the time to monitor their online reviews regularly, keep an eye on social media mentions of their business, and have a plan for how they’ll handle both positive and negative feedback.

RELATED: 8 Keys to Building Customer Loyalty

4. The company culture is suffering because employees are overworked, putting in long hours, and getting ready to jump ship.

A vibrant workplace inspires employees to work their hardest, but when work consumes most of their waking hour because of fast growth, an owner runs the risk of losing their trained and trusted employees. The owner might find that their business is a revolving door of employees despite generous compensation and benefits.

Prudent owners pay attention to the evolving workplace culture as their business grows. They find the time to discuss quality-of-life issues during staff meetings, and they make sure to address personnel matters as needed (but in an expeditious way).

RELATED: 7 Inexpensive Ways to Retain Employees in a Small Business

5. The company outgrows its office space.

As a business grows, the number of employees, the number of desks, filing cabinets, and the amount of inventory it keeps on hand are likely to increase, too. If a business outgrows its office space and moves to a new location before its lease is up, the owner could find themselves responsible for continuing to pay the lease until a new tenant is found for the space.

Even if truly sustainable growth is a bygone thought, the best way for an entrepreneur to avoid this problem is to plan for it when they’re signing a lease for commercial space. If the company’s just starting out, the owner may want to opt for an executive suite or space in a business center that they rent by the month or year. If the business is at the point where it makes sense to sign a more permanent lease, then they’ll probably want to limit the term (number of years) for the lease to three years if they expect to be growing more. Some business owners even have their attorneys negotiate an “out” clause in the lease. This is a clause that would spell out terms under which the business could end the lease early, such as by giving the landlord three months’ written notice.

If a business owner finds themselves in a lease with no out clause and they need more space, they could ask their landlord if they have available space and can work out a mutually beneficial arrangement. If they don’t or the owner doesn’t want to stay in the same location, they could check if their lease will let them sublet their space to someone else, and under what terms.  

6. The owner’s ability to lead and manage falters as key processes come under pressure from increasing demand.

As the business grows, the founders eventually transition to a leadership role, delegating most of the operational decisions and functions to someone else. However, growing too quickly could make an entrepreneur lose their focus on essential functions and take on too many tasks, delivering below-par outcomes that lead to frustration within the company and disappointment for clients. The problem escalates when internal business systems and procedures are mishandled due to everyone being overworked. Inadequate control over budgeting, inventory management, marketing, and sales programs could derail the company’s success.

Outsourcing some functions is a viable method to delegate some non-critical administrative functions. This arrangement can be transitional or permanent, depending on the owner’s needs, but it’s important to scale these processes as the company grows. No one is an expert in everything, so this may be the phase where an owner brings in the best personnel they can find to help guide the company through the changes required to become a bigger and better business.

According to data from the Bureau of Labor Statistics, about half of startups survive the first five years, while a third survive for at least 10 years. The survival trend has not changed much over the years, and businesses prepared to handle rapid growth are most likely to thrive.

A crucial part of this preparation is choosing the right business structure for an enterprise’s specific needs. While sole proprietorships and corporations each have their place, entrepreneurs who form an LLC often find the ideal balance of liability protection, tax flexibility, and operational simplicity during growth phases. Taking time to understand how to start an LLC early in a business journey can provide the legal foundation necessary to navigate expansion challenges with confidence.