Growth hides everything.

“Faster, higher, stronger - together” - the olympic motto goes. Doing better, or in business terms, growing is a trait that is deeply engraved in human nature. The American Constitution in its Fifth Amendment acknowledges the right to the “pursuit of happiness”, which also translates to doing better.

Doing better is great, and this is what we in business terms understand as “growth”. It is natural as the business grows we all grow and everyone is doing better.

However…

Growth hides everything.

As businesses grow and their financial performance improves the following starts to happen:

• We become more lenient

• We become less careful

• We become more accommodating

• We start spending more

• We become less scrupulous

In a word: complacency. Complacency sets in without anyone noticing it.

The danger of complacency

We’ve touched upon the structure of the P&L in an earlier article.

The challenge is that complacency in terms of cost structure tends to nest itself as fixed costs rather than variable costs. The following is likely to happen as a result of doing well:

• Higher than usual salary increases happen

• Bigger one-off bonuses are paid out taking cash out of the company

• Investments are made taking cash out and burdening the P&L for a number of years through depreciation

• We are more giving towards our service providers and will more readily accept a higher price for services than we would in more difficult times

• We spend on non-core activities

• We spend on non-value-adding activities

• We spend cash in advance because we can receive better terms with the supplier

• We let inefficient processes run loose

• We create inefficient processes as there is no urgency to optimise

The list can go on and on.

The damning effect of complacency as a result of growth

Business goes in cycles. Following a growth cycle comes a stagnation or decline cycle - the cause can be many and can be a topic in itself. For the purposes of today, what is important to know is that a decline in business accompanied with a burden of high fixed costs or suboptimal liquidity can have a detrimental effect on business, such as:

• Required restructuring, which most of all carries a destructive human component, and also generates more cost

• Lowered profitability leading to:

  • Lowered share price

  • Lower credit rating

  • Lower cash generation

• Cutting budgets where they shouldn’t be cut (profit making centres) so that costs generated in the growth phase can be serviced

• Lowered solvency (we spend the cash!)

• Bankruptcy

Of course the last point is the worse possible outcome, but one that can happen indeed.

So what can we do?

Be adamant and relentless about every cent spent. This doesn’t mean to cut, cut, cut as growth needs to be rewarded, your people and your shareholders, as well as yourself, need to be rewarded for good performance. This however doesn’t mean that we can be brainless when spending, we need to do it in a smart way, to keep the cost variable, and whenever possible make the obligations as short as possible as long as you still are able to have a good deal.

Do you feel like there are inefficiencies that need to be scrutinised in your operations? Contact us and we will be happy to discuss your possible opportunities with you!