In the world of pumps, while the engineers may focus on designing a better proverbial mousetrap, sales and business leaders are often laser focused on one primary factor—business growth. While true with all sizes of companies, this can be even more pronounced with small to midsized companies. The business owners and executives are constantly chasing the next sale, sometimes to the exclusion of all else. While a big contract or project can often seem to be the answer to everyone’s prayers, there are several factors that can trip up a company and make it wish it had never encountered the project(s) in the first place.
Undercapitalization: Growing Too Fast
When I was a junior bank employee nearly two decades ago, one of the senior bankers took me aside and asked what I thought might be the most common reason a company goes bankrupt. My response of “poor management” was the correct one. He then asked what I thought might be the second most common reason. When I hesitated, he responded that growing too fast was the second most common reason a small to midsized company would go bankrupt, as counterintuitive as that might sound. The primary dynamic at play is that a company’s Accounts Receivable (A/R) (and inventory if relevant) is a use of cash, whereas the Accounts Payable (A/P) is a source of cash.
An example of this can be seen in a company that sells its products but doesn’t get paid for them for 30 to 60 days. In this intervening period, the company has to pay its workers and other bills before it receives the money for the products it sold. The result is that the cash in its bank account will be depleted. The more products it sells, the more it has to pay and the faster its cash will be depleted, all things being equal. Another way to think about it is that the higher its A/R, the faster cash will be depleted.
By the same token, A/P are bills the company owes that it doesn’t have to pay immediately. The higher the A/P balance, the slower the cash is depleted.
However, at some point, the level of A/Rs can rise—either through rapid growth or failure to collect the receivables in a timely manner—to a level that exceeds the company’s capacity to obtain financing for it (its bank won’t extend line of credit, suppliers refuse to extend more trade credit, etc.). In other words, the gap between the A/R balance and the A/P balance becomes too large for a company to cover from its cash reserves. When this happens, the company runs out of cash and is forced to close its doors, done in by its own success.
Moving Into Another Business Line
One of the temptations that often afflicts business owners/executives is seeing a new line of business that isn’t exactly what the company does but appears to be something the company could learn to do. Too often, the skills and processes that one thinks will transfer easily into this new business line simply do not. Any company that is thriving in its current market is doing something well, and it is often doing that something well because it has the people in place and has developed internal and external processes that allow it to do well in its industry.
Companies that are already thriving in a new business segment have done the same thing in that segment. A company moving into a new business line often doesn’t fully understand the dynamics and complexity of the new segment, assuming rather that it operates largely the same as what they are already doing. This is very often an incorrect belief. I have seen companies move into new segments, lose a lot of money and have to shut down their venture. In a few cases, it has even bankrupted the original company. This doesn’t mean one should never venture into a new line of business, but it is important to be careful and diligent when doing so.
Failing to Recognize Changing Conditions
This factor can often impact companies that have been very successful, have their processes in place and are growing at a fairly steady rate. Over time, the company becomes convinced it has found the secret to success. This belief reenforces itself within the executive ranks and becomes a part of the company culture. Success, it is felt, simply becomes a matter of continuing to do what has always been done.
However, businesses do not exist in a vacuum, and conditions are always subject to change. Sometimes it’s a change in overall market conditions. Sometimes it’s a new competitor that appears on the scene and can do things a little bit better. Sometimes it’s a change in a series of regulations. And sometimes it’s a change in technology. But whatever it is, the company persists in continuing as it always has, convinced its processes and products will overcome the challenge.
Often the negative impact of the challenge does not become apparent until some time has gone by. Sales might still grow, initially, but then the company might start to find that it becomes increasingly challenging to maintain the same level of growth. Then, it becomes a challenge to keep sales figures level, and the company begins to realize that what it has been doing no longer works like it did before. By this point, the company has often lost its position within the market, even if still is able to continue indefinitely at a diminished level.
Not Understanding the Value Proposition
Another pitfall that can affect a company is not having a good understanding of what they are actually selling. In my career, I have had restaurant owners not understand that they are not selling food but rather an experience. People can get food anyplace. The reason that they go to a certain Mexican restaurant as opposed to a different Mexican restaurant is often for the ambiance.
In a pump world, understanding the value proposition is also key. While sometimes the value proposition is obvious, sometimes it isn’t. This can be especially true in competitive market segments. While a company might think it is selling engineering or design services, it might really be selling its ability to produce work quickly. Or a company might think it is selling a certain type of pump, but what it is really selling is its ability to get spare parts or technical assistance quickly to the customer to whom it has sold the pumps. A lack of fully understanding the true value proposition of what your company is doing is likely to inhibit your company’s growth going forward.
Not Accepting That Growth May Require Significant Process Change
Finally, many executive teams will tell themselves they want to move their companies into a growth phase. However, in many cases they think this simply means telling their existing staff to produce more sales. Or they think increasing commissions for sales staff will incentivize them to produce more sales and then will sit there, puzzled, when the anticipated growth does not appear.
What these teams don’t appreciate is that many of their internal procedures and processes, as necessary as they might have been at some point in time, are often a major contributor to the fact that the company cannot move beyond its present level. Often, the staff has a better understanding of what is actually going on than does the executive team. Depending on the size of the organization, the problem might even be a single individual in the wrong role. But it is often the processes employed to produce whatever it is the company produces.
That being said, changing processes can be difficult and wrenching for an organization. Some people may be made redundant. Others may have to take on new roles. And a lot of folks may have to learn new ways of doing things. Whatever happens, it will not be easy on the organization, nor will it be easy on the executives. Accepting this up front, as well as understanding how much growth this organizational wrenching process is likely to produce, will be key in setting expectations, as well as deciding whether to pursue a growth strategy in the first place.
For example, is this likely to produce an extra 2% in annual sales volume, or will it produce an extra 30%? Pushing ahead with initiatives that are almost doomed to fail can lead to low morale, and it may also appear that executives don’t really know what they are doing.
Obviously, there many other factors that can damage or destroy one’s potential for business growth. But these are a few that I have seen in nearly two decades in commercial banking. While some of them are easier to spot and rectify than others, they all have the potential to stunt growth, or even destroy a company, if not managed correctly. Fortunately, being aware of these pitfalls is often enough to enable a company to avoid them in many cases. And if a company finds itself currently struggling to grow, looking to see if one of these pitfalls is the reason can help start the process of moving beyond it.