What Are Some Of The Most Common Growing Pains That Young Businesses Tend To Experience?
- One of the most common “growing pains” for young businesses is growing larger more quickly than their infrastructure can support.
- Another common growing pain is when the founder’s big idea is not properly supported by a sound financial model.
- Yet another common growing pain, especially for young startups, is that people tend to hire their close friends and family in major functional and/or advisory positions. Unfortunately, just because someone is close to you doesn’t mean that they have the requisite skills, experience, capacity, and vision necessary for the job.
- Small businesses should use historical data and knowledge of business trends to examine the growth of their own business. This will allow them to predict trajectories and make smaller changes earlier on, to avoid having to make larger, potentially unmanageable changes later.
- Emotional spending without a sound financial plan is one of the biggest financial mistakes made by small business startups.
The most common growing pain that young businesses tend to experience is growing larger more quickly than their infrastructure can support.
I can give you a good example in one of our clients. This client was a startup company whose owner was dedicated to their craft. They sourced all the finest ingredients and had the best vender relationships.
At a certain point, the owner had the notion that he wanted his products to be sold at Target and Walmart. So, he aggressively pursued those contracts, and because they had the best products, there was a huge demand.
However, once they attracted all that attention and demand, and even after they signed some extremely high-demand contracts, they found that they didn’t have the ability to fulfill that many orders in a timely manner. By not understanding the business model of their customer, the company put themselves into a very precarious position of taking a high six or seven figure order and not having the ability to fulfil it. Ultimately, this meant that they lost an enormous opportunity almost as quickly as they got it.
The other big thing that we see as a growing pain for young businesses is when a big, ambitious idea is not properly supported by a sound financial model.
In these cases, you will often have a founder or business owner who has a tremendous idea—something very big, sometimes very ambitious and groundbreaking—and then decide that they want to form a company or business around that idea.
It’s not necessarily bad to base a business around a big idea. However, problems arise when you do not first build a sound financial model for your business based on this big idea.
A sound financial model will show the nuts and bolts of how the idea can turn into a profitable company. It will show what type of capitalization is possible, as well as what type of money they’re going to need in order to actually create a functional, profitable, cash flowing business.
Specifically, a sound financial plan will show what you are going to need to make the business a success separate and apart from a singular product idea. While that product may be amazing, if you think solely about the product, you are likely going to wind up under-capitalized and running out of money.
There’s something else to be said along these same lines about new startups, which is that new startups almost always run into some version of the first scenario that we gave: they often do not properly evaluate what their existing infrastructure can currently handle. This quickly leads to overpromising with respect to their capacity for production, and undermines business credibility when contracts are awarded and other opportunities are presented.
One of the only things that can really mitigate this potential blind spot and the ensuing issues are the type of people the founder or owner (the company’s decision-makers) have around them, advising and helping them. The question to answer, “do I have the right people in the right seats”?
Oftentimes in small-to-midsize closely held companies—especially if they are family-run—owners tend to hire family members and friends to advise them. This is often because they’re bootstrapping – which is very demanding of time and energy. This is coupled with their belief they are unable to offer suitable compensation right away from the company. As a result, they simply don’t feel as though they can attract people who truly want to help beyond their close personal networks of friends and family. This doesn’t mean that family and friends with valuable skills related to your business should not be involved; however, it does mean that every candidate should be vetted based on their capacity and qualifications and not simply their close relationship.
Remember, know that just because people are close friends and family doesn’t mean they necessarily:
- a) Have the skills to adequately advise you or fulfill a certain role within the company
- b) Have the experience to adequately advise you or fulfill a certain role within the company
- c) Have the capacity of time and effort to dedicate to the company
- d) Want what you want in terms of the vision of the company overall.
Admittedly, this is a problem we see more often than we would like when working with small businesses and are the relationships are often the source of internal power struggles and gaps in the flow of business.
When Do Growing Pains Tend To Become More Serious? What Are The Signs That Business Owners Should Look Out For That Indicate That A “Growing Pain” Has Become A Serious Problem?
The potential “Growing Pain” issues can usually be traced to decisions made during the business infancy Unfortunately, there are many instances in which you can’t identify them right away. Either because you simply don’t have data to back up the concerns or the entrepreneurs are still emotionally idealistic as opposed to analyzing all relationships from a neutral and objective perspective.
One of the things that I strongly recommend to startups, small and medium-sized businesses is to try modeling a variety of scenario numbers using their data. I suggest that these types of businesses look at the financials from a purely historical perspective and start making predictions based on this historical perspective (i.e., what’s happened in the past).
This way, you can understand, predict, or at least speculate with a good degree of accuracy as to how every decision that you make today will impact your business in the future
It sometimes seems overwhelming to run these predictive models, especially with all of the other hats that a startup or a small business owner has to wear at once. However, from my experience, it is profoundly worthwhile. In fact, in some cases, it might be the single most valuable thing you can do for your business. It is essential to take that data and use it to make not only predictions but also to make the small decisions that need to be made in order to continue growing.
One of the other things that I think it’s essential for every small business owner to know is how businesses tend to grow, in a general way, and how important it is to understand business growth trends.
When you see depictions of the growth of businesses charted through statistics and graphs, you often see charts with smooth, flowing lines charting exclusively upward. However, businesses in the real world simply do not tend to grow that way. Instead, growth is always jagging, rising and dipping. It’s not just a gentle slope up: rather, it’s up, it’s down, it’s left, it’s right—it’s all over the place.
Along with the ups and downs of a particular business, though, you should also be looking at trends. The only way to perform that sort of combined analysis is by looking at some very specific things that are unique to your business that you can quickly spot for the trend that they represent and use them to predict future trajectory (and then create fixes, if you want to change that trajectory).
That is, let’s say you see X trend happening in your charts. Historically and in terms of business trends, X trend tends to lead to Y outcome. You want Z outcome instead of Y outcome. In order to get Z outcome, you can make a small change now to avoid having to make a big change later, all because you were able to use the data and your understanding of both your own business trends and larger, more general business trends to predict and act.
It’s far better to make small tweaks and small pivots earlier on than to wait until the issue gets bigger and you’ve got much more drastic changes that you have to make.
What Are Some Common Financial Patterns That Are Ultimately Destructive To A New Or Existing Business?
There are several common financial patterns that I see in new businesses that wind up ultimately being destructive to the business or company.
One of the biggest financial issues I see has to do with spending.
When we think of what a new business typically has, the first thing that comes to mind is cash. In order to get off the ground, new small businesses need some amount of startup capital. They may have some equipment that they need to buy, or a space that they need to rent, or marketing that they need to do, or employees that they need to hire. Whatever their expenses initially, that startup capital is necessary to cover it.
One of the biggest challenges that I see with a new business—and in particular, with new business owners—is that they’re not properly tracking how they are using their assets, which are usually cash. They are not tracking how well or how poorly those assets are being converted into useful elements of their new business
As a result, they may have major cash allocation problems, or problems in the making. For example, I often see companies spending cash on items that are not actually deploying right away or quickly enough. When that cash investment isn’t producing something on their income statements, the items become more like liabilities than assets.
I often see startups spending without a plan because it’s something they’ve seen others do and they haven’t really gotten as savvy as they need to be about how the cash spending will actually create value for the business.
If the company has met with some level of success, I also sometimes see owners pulling too much money out of the business and treating it more like their personal piggy banks to support their lifestyles. These lifestyle tastes and demands often grow over time, only worsening the problem.
What those companies should actually be doing is taking very measured steps in preparation for growth. Instead, they are spending chaotically, often because they don’t have a written strategic growth plan that they can follow, that stands beyond the current moment over a longer period of time.
Without a strategic growth plan, these companies are not planning properly for the future and spending in accordance with that plan. They’re not planning 10 years out into the future—or even 3 years out, for that matter. They are literally just remaining stagnant, briefing profits but not really taking into account that everything changes.
This is another essential point for every small business decision-maker to remember: things are always changing. Markets are always changing. The level of success that you achieve at the outset and the way that you achieve that success is very different from what you need to do to achieve success moving forward.
Unfortunately, many companies do not understand this in time, especially companies that became very successful very early on. They often don’t understand what they did right and what they can carry through and adapt as the business grows and changes to replicate that success.
Many of these initially successful small business owners have much more of a mindset that they “got lucky” than a mindset intent on trying to understand what was done to achieve that success and how to replicate it. A savvy small business owner in this position will be taking measurements, taking polls of their customers, and looking at historical data and market trends to project the landscape of the future and plan accordingly.
Unfortunately, what we often see are many of these small business owners continuing to grow their own lifestyles without understanding how their companies are going to grow along with them.
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