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How to overcome the risks of scaling up a business

For most businesses, growth is a key goal and is essential to the organisation’s ongoing sustainability. However, when companies aren’t prepared for growth, they can hit roadblocks and encounter issues that can endanger the entire operation.

To overcome these risks while scaling up the business, decision-makers need to plan carefully and incorporate specific risk-mitigation measures, according to Atradius.

Mark Hoppe, managing director, Australia and New Zealand, Atradius, said, “Scaling up is a make-or-break time that requires planning, funding, and systems in place to promote success. Growing too quickly without the right resources in place can cause problems in terms of being able to supply customers effectively. Similarly, taking on a large swathe of new customers creates risk if these customers are unable to pay their invoices. Scaling up, therefore, needs to be a well thought-out process that directly targets long-term goals and considers the business’s capacity and capabilities.”

Atradius has identified five key risks growing businesses must address:

1. Cash flow management

As businesses grow, they need to invest in additional capacity, which often requires advance payments. This can tie up the business’s cash flow so it’s important to plan for this. Failing to plan effectively can result in an imbalanced cash flow, which can stop further growth in its tracks. Businesses can solve this issue by creating a new revenue stream, or seeking bank loans or crowd funding to overcome financial constraints. The business should also review the budget regularly while scaling up to ensure it remains under control.

2. Scaling up too fast

It’s important to note that scaling up too fast is risky. According to a study by Start-up Genome, high-growth start-ups have a 74 per cent failure rate due to premature scaling. (1) Businesses must therefore focus on internal processes and how to improve what they are currently doing, rather than focusing on what is next. Businesses should consider where they sit within a market and their goals. This will let them see where the business is positioned and what needs to be achieved.

3. Managing staff and avoiding burnout

Scaling up can pose a risk of staff fatigue if existing employees must endure an increasing workload, which will inevitably tire them and risk damaging the business’s growth trajectory if they leave or slow production down. To avoid this, businesses can consider restructuring or hiring additional employees.

Scaling up does sometimes mean hiring additional staff. The process of hiring and training someone takes time but, if there is an immediate need to hire someone, the business may pick someone who is not right for the position, which could cause more harm than good. Businesses should hire new employees based on a strategy timeline so that they enter the business at exactly the right time but this isn’t always possible. At a minimum, businesses should take the time necessary to find someone who is the right fit, or restructure management to accommodate the resources currently on hand.

4. Managing compliance

As a company grows it needs to understand its legal obligations as laws can change depending on the size of the company. And, while a smaller company might get away with not complying with general regulations, a larger company will attract the attention of the authorities so it’s essential to manage compliance proactively. If compliance isn’t considered when planning to scale a business, it can be later overlooked and pose a threat.

5. Dealing with new buyers and markets

Through scaling up, businesses may trade in new products, markets, or customers. Working with unknown entities can increase risk so it’s important to get as much information as possible before extending credit to buyers or moving into new markets. Working with a trade credit insurance provider can help overcome this risk because the insurance provider can assess new markets and buyers for their creditworthiness. The insurance provider can protect the business’s income in case of non-payments or customer insolvency, reducing the risk of entering new markets and acquiring new customers as they scale up.

Mark Hoppe said, “Scaling up is important for businesses but it does come with serious risks so it’s essential to plan for these. Trade credit insurance can help protect businesses against financial losses by providing some certainty around cash flow, which gives organisations the confidence to seek out new markets and customers. And, if growing businesses are exploring bank funding, a trade credit insurance policy may help secure more funding and can act as security on the loan as opposed to a director using personal assets like a house. This reduces risk even further.”

(1) https://s3.amazonaws.com/startupcompass-public/StartupGenomeReport2_Why_Startups_Fail_v2.pdf

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