What are investment growth strategies
Growth strategies: These are the dangers
The pitfalls of growth strategies
Many young entrepreneurs and owners of SME companies are mistaken in equating additional sales with entrepreneurial success. The strategy mostly focuses on securing additional orders and new customers.
However, they run the risk of running into a liquidity bottleneck. The resources required for growth (systems, personnel, etc.) cannot be continuously secured, but rather arise in so-called capacity levels - for example when new employees are hired or systems are purchased. Investments in systems and investments in capacity building must therefore be made well in advance of use and usually result in a jump in costs. It should also be noted that every growth requires additional time investments in organization and management. As a principle, it can be stated that growth is important, but must take place in a controlled manner. Growth strategies must not be based solely on additional sales and contribution margins.
In addition to additional investments in systems, a growth strategy usually results in additional investments in personnel, in marketing and in sales. In the case of standard offers, the growth is usually accompanied by a price reduction, since new customers can often only be won with certain price concessions and the competition also reacts to additional efforts with lower prices.
As a result, growth has serious consequences for the income statement and the balance sheet:
- The income statement is charged with additional marketing and sales costs.
- Additional personnel and often space costs are incurred in the income statement.
- Depending on the type of financing, additional interest, leasing installments or dividends are incurred.
- The current and fixed assets grow and have to be financed (accounts receivable and inventories rise to the same extent as sales growth, etc.).
The additional costs and investments in the assets side of the balance sheet have to be financed, although lower prices and additional expenditure will reduce the cash flow somewhat in a transitional phase.
This is why questions of financing always arise in connection with a growth strategy that is well thought out and backed by a budget.
There are hundreds of examples where young entrepreneurs have gone bankrupt “because of their own success” in the market because they did not pay attention to the financial consequences and the liquidity requirements.
Errors and dangers associated with growth strategies
Studies at the FHS St. Gallen, the IFJ Institute for Young Entrepreneurs and the CZSG Controller Center St. Gallen show the following errors and dangers in connection with growth strategies in young entrepreneurs:
- Growth is not defined with a clear business plan.
- Attempts are made to convince investors with exaggerated numbers.
- An investment calculation is dispensed with. The time required to use the new investments is underestimated.
- The consequences of a growth strategy on investments, additional staff, more organization, additional time for management, increased marketing and sales efforts, price reductions, etc. are neglected.
- A forward-looking cash flow statement and consistent liquidity planning in connection with growth strategies are missing, as only budgeted income statements are used.
- In the case of standard offers, it is not taken into account that the average sales price per unit (piece / hour) tends to decrease because new customers are won with price concessions and / or the competition also reacts with price reductions.
- In the case of growth strategies, it is not taken into account that additional funds are tied up in the balance sheet for accounts receivable and inventories.
- Investments are made in growth without the corresponding financing being secured (e.g. investments via the current account, disregarding the congruence of maturities).
- In management buyouts and franchising projects, own funds are financed externally, which usually results in the company “bleeding out” because of the high level of debt servicing.
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