The dangers of growing too quickly

It may seem strange to suggest that there may be dangers associated with a company growing too quickly. After all, in a perfect world any company we invested in would significantly increase turnover and profitability in a very short space of time. Unfortunately, there are some rather nasty side-effects when a company is growing too quickly which can have a detrimental impact on the share price.

Cash flow

In any business cash flow is king and should be treated with respect. While not all companies will experience cash flow problems as they grow, this is still an indicator which should be monitored very closely. It is all good and well increasing your turnover and theoretic profitability but if you are paying out on services and materials before you receive sales proceeds, the larger you get the bigger the problem can become. Where public companies are concerned it is very easy to monitor the cash flow because it is an element of the company’s financial report and accounts. You may have to dig deep to get the true picture but the information is there.

The dangers of growing too quickly
Watch for the bursting bubbles!

Management structure

Time and time again we have seen founders and co-founders of fast-growing companies eventually forced out of office due to limited management experience. While very often they will retreat into the background maintaining a large holding in the company not all founders and co-founder are long-term management material. One of the keys to a successful business is to recognise your strengths and your weaknesses and bring in third parties to fill any gaps.

Company culture

The culture of a company which only employs a handful of people is very different to that which employs tens of thousands of people. We only need to look at relatively new kids on the block such as Uber to see a developing situation of this nature. The company is currently the subject of an array of accusations regarding sexism and a less than professional work culture. Indeed the new chairman recently resigned his position after just a few weeks amid concerns about the ongoing problems. While these issues have yet to be proven beyond all reasonable doubt they do reflect the need for a very different company culture when employing a large workforce.

Consolidate and move on

A company which continues to grow without any period of consolidation could be storing up significant problems for the future. As new business is received this should be the main focal point before any new growth opportunities are considered. There is absolutely no point in acquiring businesses or increasing your customer base unless you have the structure and the management to maximise these. Growth companies have in the past experienced very difficult conditions simply because they refused to slow down on their growth plans and consolidate the business. It is not sensible to grow too quickly!

Selling before the top

When a company is growing, in a structured manner, this can best be described as honey for investors. The more sensible investors will time their sales in such a way as they sell out before the company’s growth rate begins to slow. When a company is growing relatively quickly, and is expected to do so for the short to medium term, stock market valuations can be pushed beyond the normal limits. However, when the growth rate eventually begins to slow this will have an impact upon investor sentiment and the future stock market valuation. In a perfect world you should sell before this reduction in growth rate and get rid while “on the crest of a wave”.

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