Are You Growing Too Fast?

For Allen Printing, 2008 should have been a banner year. Sales at the family-owned printing business in Nashville, Tenn., hit an all-time high, but Paul Heffington, Allen Printing's owner and CEO, wasn't celebrating. "Our top line was growing, but the bottom line was not moving much and we had drawn down a lot on our bank credit line," he says. When the slowing economy caused sales to drop slightly the following year, the company started "gasping for cash," as Heffington put it. And when Allen Printing's bank, facing problems of its own in 2010, suddenly called in its loan, the company was so strapped for cash that it had to file for Chapter 11.

Allen Printing had fallen into a familiar trap: unsustainable growth. Positive business conditions coupled with relatively easy credit can entice firms to chase high growth. However, high growth can easily overwhelm the internal controls of a small enterprise. Heffington, working with Steve Curnutte, a restructuring advisor, realized that as new orders poured in, it became difficult to establish the true cost of fulfilling them. And, because credit was readily available to cover the growing need for working capital, it was easy to ignore the sizable number of unprofitable and late paying customers. Whenever an economy is heating up--even now, as it does so haltingly--the temptation to focus solely on growth can seem irresistible. But, as Heffington learned, the tables can turn viciously when economic conditions deteriorate.

So what can an entrepreneur do? First, understand your true operating costs and how they evolve as your business grows. Rapid growth frequently put margins under pressure as the company tries to keep customers happy with such services as faster fulfillment and generous payment terms. Second, get a solid grasp of your working capital needs--how much cash does your firm require to conduct day-to-day business? Third, avoid the widespread obsession with income statements as an index of health. Typically a company needs three to five metrics besides revenue to get a quick pulse of how the business is doing. These include cash available, status of accounts receivable, inventory and one or two other metrics specific to the business. In the case of Allen Printing, these metrics include new orders booked and overtime hours worked. (HBR invites readers to try out a new simulation tool on managing growth that demonstrates how growth, margins, and need for working capital interact. The cost for using this tool is $37.50.) Finally, be ready to take action based on these metrics. For example, Allen Printing should have considered "firing" customers who didn't pay on time, even if doing so cut into the firm's top line.

Paul and his wife Shannon ended up losing their house to save their business but their new focus on managing for cash and better understanding of their costs has allowed Allen Printing to exit bankruptcy. The company is doing well and has taken the lesson of smart growth to heart. The exhibit below shows a "Weekly Dashboard" that Allen Printing's top three executives now use to inform the 15-minute "huddles" that the company's top three executives have every Wednesday. Instead of traditional accounting statements, which provide a rearview mirror, this dashboard gives a "windshield view," enabling Heffington and his team to respond quickly to emerging trends and do a better job of navigating the market.

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