Before you decide to scale up your business, read this...

After successfully setting up a business, every startup founder dreams of scaling it to the next level. Fast growth attracts investors as it shows that an entrepreneur has a great idea in a hot market. But the truth is that many entrepreneurs are not prepared to handle the demands of a bigger business. In fact, scaling up too fast is one of the leading causes of startup failure. A study from California State University showed that startups that had fast revenue growth performed worse in the long term than their slower-growing counterparts.

Zynga, a gaming company is one prime example of how rapid growth can be detrimental to a startup. Founded by CEO Mark Pincus in 2007, Zynga produced popular games such as Texas Hold’Em Poker, Mafia Wars, and Facebook’s most popular game ever, Farmville – all of which had millions of downloads.

In 2011, the company was so flush with cash that it built its own data centres for $100 million. But while investing in new equipment and games, the company lacked in innovation. By 2013, Zynga was initiating waves of layoffs as it closed its data centres in favour of more cost-effective data service. While the company still exists, it definitely isn’t the gaming powerhouse it used to be.

It is understandable for an entrepreneur to be excited about the prospect of growing their startup to a mid-level company. However, before you jump feet first, it is prudent to carefully assess how prepared your business is to handle rapid growth. Remember, growing too rapidly can be every bit as dangerous to your startup as having no growth at all.

Here are three of the most common pitfalls of scaling up your business too quickly:

1. Losing Track of Finances

It is relatively easy to have a good command of your numbers when your business is still small. But once you get to a certain level, keeping track of the numbers in your head becomes a tricky task. When you have a big business, the numbers get bigger and more complicated.

For instance, you have to keep track of your cash flow, sales, cost of customer acquisition, amount owed to investors, amount owed to lenders, tax obligations, employee salaries, interest rates on loans, and so on.

If you scale your business, you will need to hire an accountant to help you track and understand the important numbers, especially during tax season. An accountant will be able to look at all the data pertaining to your business and tell you what the actual situation is. They can also compare your data with that of other similar companies to help you understand the context of your decisions. 

If you lose track of your numbers, you are more likely to encounter cash flow problems – the leading killer of small businesses. There are many ways that a rapidly growing business can encounter cash flow problems. For example, if you receive a large number of orders or one large order, it can exceed the capital capabilities of the business. If you work with commercial customers who pay in 30 to 60 days, you will soon run out of cash to service orders. You will have to decline orders, which will negatively affect client relationships and lead to loss of business.

2. Ineffective Business Operations

With a bigger business, you will have to hire more employees. This brings the need to be even more organised and to have defined processes in place for all your business operations. Working without defined systems might be alright when you have a small, tight team of superstars, but it won’t cut it with a bigger team.

The positions which were previously held by individuals turn into teams of people, which you have to keep track of. You will have sales, marketing, IT and accounting teams and so on. As the business owner, you have to make sure that everyone in the company works together towards the common goal. If you don’t do this effectively, it can lead to disorganisation that might cost you millions of shillings or even the total failure of your startup.

To effectively manage a bigger business, you have to come up with a clearly defined business operating system. Just like the operating system (OS) in your computer, a business operating system organises the way your business functions. It ensures smooth communication between you, your leadership team, and all the other employees. Without an OS, a business feels out of control – no one seems to be on the same page, employees are rowing in different directions, you encounter the same problems over and over, and there’s chaos everywhere and no one to take accountability.

On the other hand, when you have an OS, it feels like the business can run itself. Every employee knows what is expected of them and how to achieve it, you have ways to measure progress, everyone works together like a well-oiled machine, and you can take time off without everything crashing down.

As the business grows, many startup entrepreneurs also get wrapped up in the day-to-day operations instead of focusing on the bigger picture. As you scale your business, you should be able to trust your team with the daily tasks. However, entrepreneurs should also be careful not to become so divorced from the daily operations that they’re basically clueless about the business.

3. Not Scaling Customer Service

With the growth of a business, you should also recognise that there will be increased demand for customer service. A small business with a small team can afford to have a more personalised customer service with representatives who are willing to go the extra mile for clients. But growth can make it difficult to live up to these standards.

If you’re only relying on sales to measure the success of your business, you might not even notice the slipping customer service. As you grow, you must pay attention to your customer service operations and have clear standards to ensure success.  

hustle@standardmedia.co.ke