Growth is not linear. Profit is not one for one. Life is uncertain.
This is why small companies stagnate.
As small businesses grow, owners continually encounter new challenges. Some are solved by getting the next sale: cash flow, paying the bills, payroll – things that represent survival. Other problems can only be solved by taking on more risk: operational capacity, more employees, increasing profit – the things that represent progress.
The bigger the company gets, the scarier some of these decisions become. However, these conditions are normal and if we can identify decision points and give them names, it will be easier to work through them. I like to call these moments…
Sorting Things Out
Startups usually grow very quickly, but we soon learn how hard it is to maintain that pace.
What typically occurs is that young firms become so busy managing sold business that they neglect to keep the pipeline full. Or, the challenge of meeting demand strains resources and that slows the sales process. In any case, the conditions of demand, capacity, and resources conspire at some point to slow or stop revenue growth until we can sort things out.
In an ideal world, this becomes an intentional plateau while we hold sales at a consistent level and add employees, infrastructure, and capital to fuel the next growth spurt.
Sometimes growth stresses your operational resources, which forces the company to take an unscheduled break and sort things out.
The Pattern Is Grow-Sort-Grow
This act of sorting can either be reactive, intentional, or ongoing. As your company grows it will probably evolve through these three stages starting with reactive sorting, which often appears as an anomaly on the growth chart. Business steadily increases until the system is stressed and the company sorts things out.
During the sorting, revenue can behave erratically, profits will flatten out or dip, and some people will wonder if the company will survive.
The Longer the Break to Sort, the Harder It Is to Start Back Up
If the sorting is successful, then growth will resume, service will continue, and profits will recover – though often at slightly lower levels due to the added cost of employees and infrastructure. This all continues until the next sorting period.
Sounds simple, but some undesirable things can happen at these plateaus.
The most likely scenario is that the entrepreneurial brain of the organization will balk at additional investment, additional risk, and the reduction in gross profit percentages inherent in increasingly higher levels of business. These companies will effectively stop growing, but the fluctuations in revenue – often erratic swings up an down month to month and year to year – will create the illusion of a busy company that is progressing.
Busy companies often don’t slow down to improve service, increase market share, or take control of profits. As a result, the firm reaches a plateau, fails to sort things out, revenue levels off, and profits dwindle over time, which reduces the resources for fixing the problem.
Some Plateaus You Never Leave
This is the condition known as stagnation. Left unchecked, it will devolve into a downward spiral as service lags, costs increase, and revenue becomes even less certain.
Ideally management will anticipate these plateaus and proactively prepare the next round of added employees, processes, and tools to handle the higher level of business. Hopefully, shareholders will agree and provide the capital and the sorting time will be minimized.
The Less Time It Takes to Sort, the Sooner You Can Get Back to Accumulated Profit
As small businesses become larger organizations, they can gradually reduce and all but eliminate the plateau period with aggressive planning and calculated risk-taking. This state of awareness and preparedness is what we often call scalability: the ability to add resources in step with demand. Scalable companies can expand and contract with revenue and therefore respond aggressively to growth opportunities.