Would you invest in your business?

guest commentary by David Potts

Editor’s note: David Potts is a certified public accountant with more than 33 years experience. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case. Feel free to e-mail topic suggestions or questions to davidpotts@potts-cpa.com

Opinions, commentary and other essays posted in this space are wholly the view of the author(s). They may not represent the opinion of the owners of The City Wire.

Many new business owners open for business with limited capital but unlimited dreams. If the market is cruel to their business concept, their limited capital becomes a capital shortage that sometimes ends the dream. If the market likes their business concept, their business will enter a period of sustained growth with profit on their bottom line, employees are no longer idle parts of the year, and it is easy to ask their customers for a testimonial to be placed on their web page.

At this stage in some businesses life, a point where many owners expect life to be easier, the pressure and stress of business ownership begins to increase again. It seems odd. Everything is going as they had always wanted. They are taking home enough money to convince their spouse they are not insane for engaging in the entrepreneurial life. Now they can afford to buy their kids the iPhones and MacBooks that were previously denied. They have proven themselves to be a business success and have a bright future.

So why do so many growing businesses stress their owners when things appear so successful.

I’ve witnessed this scenario again and again during my career. As the business continues to grow, the owner finds it more difficult to deliver customer orders on time and sometimes begin to experience quality control issues. Next the owner finds he has become a big liar, not intentionally. All the employees are working hard and all the machinery and equipment is busy but owner had promised one of the company’s best customers they would deliver their order by Friday. On Wednesday afternoon, with the job still incomplete, a key employee goes home sick forcing a shift in the remaining employees’ job duties in order to fill the promised order on time. By doing this, the order was still a day late and the change in scheduling caused another order for another good customer to be late. Next a machine stops because a repair is needed and the scheduled production has to be revamped. The owner had promised customers they would receive their orders by certain dates and failed to meet those dates.

Nobody would call the owner a liar since the company’s troubles were unexpected. But a business owner can feel like a liar when he promises delivery of an order and fails. Many times this is the start of dissatisfied customers.

There can be many excuses given as to why a business appearing to be at the top of their game loses its momentum. But in cases just described, the reason is the company’s management failed to see far enough ahead and ended up short on operational capacity.

A growing business that the market permits to sustain growth over a long period of time usually will eventually have to add capacity in order to support its growth. A high growth company can find itself still short of uncommitted capital to expand because its existing capital was required to finance the company’s growth. When the line of credit is tapped out to finance inventory and accounts receivable and the bank balance fluctuates daily with dips toward a zero balance, a business owner may feel his options are very limited ... and at this point they are.

Nobody expects a growing business to get in trouble, but strong sales growth initiated by a great product or service has diverted many businesses from a strong growth path. Some high growth companies end abruptly. By implementing a few basic management tasks, most of these troubles can be averted.

Small businesses tend to avoid a formal planning process. If the company is limping along with satisfied owners, a formal planning process may not be important. It may be why they are limping along. But a company with a high growth rate will find itself in trouble by failing to look ahead.

It is just a law of the universe that if a business grows and can sustain this growth, an increase in operational capacity will be needed. But in the battle of gaining new customers and servicing existing customers, a fast growing small business has a tendency to overlook the need to plan their future. When the business fails to scale up their operations before it reaches capacity, customer satisfaction decreases and business growth can stop.

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For most companies it takes significant time to increase operational capacity, especially when buildings must be modified or expanded and a company has to finance the expansion with borrowed money. Many of you have heard the old adage (probably credited to Ben Franklin), “If you fail to plan, then you plan to fail.” It applies to businesses as well as individuals. I am of the opinion that planning for the next ten years is excessive, but planning for the next three years is prudent.

If your business is growing and you want the growth to continue, you need to invest in your company’s increased capacity ahead of the growth curve. Otherwise you find company’s growth stunted.

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