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Author's profile photo Christopher Koch

Four Warning Signs for When Small Businesses Need to Become Big

/wp-content/uploads/2012/09/272454_l_srgb_s_gl_138795.jpgWho would have guessed that the human tongue would become an internet sensation?

The marketers at Orabrush had a clue. They make a strange device designed to clean your tongue. The weirdness of the concept, combined with the untapped urge people seem to have to stick their tongues out for the camera, has led to more than 100 homemade videos with over 40 million views on YouTube.

More important, it led Orabrush on a wild ride from an unknown, garage-based business to a supplier of retailing giant Walmart.

Businesses Grow Up Faster Now

The internet and an increasingly global value chain bring new speed and force to a moment of truth that every successful small business faces at some point: The need to start acting like a big business.

The signs of an inflection point can come suddenly—once the order from Walmart arrived, Orabrush had to very quickly figure out how to manufacture and distribute its tongue-cleaning utensil to 3,500 stores. Or, the inflection point is a gradual realization—for example, your management staff feels increasingly stretched, not just in workload but in skills. Yet regardless of the catalyst, growth eventually forces management to accept that the next phase of their business cycle will be very different than the previous phases.

Plan, Don’t React

One of SAP’s resident small business experts, Mark Lehew, says that this inflection point should not be dealt with in the way most businesses do it—in an ad hoc, reactive fashion. That’s a ticket to joining the losing half of all startups that fail within the first five years. The reaction can and should be more systematic. Mark is working with me and expert journalist Rob O’Regan, as well as experts from outside SAP, to develop a guide for small businesses to navigate this exhilarating but treacherous period in their development.

Mark and other experts we’ve talked to have identified four warning signs that small businesses should not ignore:

  • Structural cracks. Many businesses cruise right past the 20-30 employee count or the $5-10 million revenue sign posts without slowing down to consider whether the structure of the business should change from when it was a startup. It’s around this point that you need to “build a real organizational structure,” says Karl Stark, managing director of Avondale Strategic Partners, a firm that advises high-growth business clients.
  • The manna from heaven order. Walmart’s Orabrush order was a surprise, but it doesn’t always have to be that way. Sometimes you may fight for years for the big order, in which case, winning the deal becomes the focus rather than building the processes, systems, and infrastructure necessary to fulfill it.
  • Big in Japan. Who knew that a foreign market would suddenly become wild about your widget? You need to be prepared to think about new distribution models and supply chain implications, among other things.
  • The capital well runs dry. Perhaps you’ve heeded the warning signs and are planning to open a new factory or warehouse. Receivables and the bank account won’t be enough. It’s time for more sophisticated financial management and a plan for securing new levels of funding.

Create a Planning Process

The consistent thread in all of these warning signs is that they all require a planning process. As the business succeeds, someone must always be thinking about when and how it will get big. Otherwise, you risk chaos.

“The worst thing any executive team can do is try to grow faster than they can handle,” says Bill Ballou, former CFO of Bob’s Discount Furniture, a regional chain of 43 retail furniture stores across the Northeast and Mid-Atlantic U.S. “You have to understand the critical points that could be problematic downstream.” These potential challenges involve everything from staffing to systems capabilities to warehouse capacity. “You have to make sure you have the lead time required to address any one of these issues so that you can satisfy the growth requirements when you get there,” adds Ballou.

Prioritization is Key

Part of the planning process should be prioritizing the next moves. In the case of a sudden big order for example, leadership teams need to identify the areas that most urgently need additional resources—such as manufacturing capacity.

In this case, Mark tells us, “It’s rare that you are totally prepared when the growth hits. You find there are lots of leaks in the boat that need plugging fast. You need to attack the biggest roadblocks to meeting the customer needs first. Then you can start working your way down the list.”

What warning signs have you experienced in your small business? How have you dealt with them?

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