Business 101: How to mitigate the risks when growing your small business

Ben Bierman
Managing Birector: Business Partners Limited

The original article can be found here.

It is not uncommon for small and medium enterprise (SME) owners to be forewarned about expanding their businesses too fast, as it can lead to pitfalls in the future.

In fact, as a wise person once put it – “accelerated growth can be just as dangerous as no growth at all.”

With many business owners using the last couple months 2021 for forecasting and growth planning purposes, perhaps the time is ripe to explore some of these risks and how to mitigate them.

Cash flow problems
The Business Partners Limited Q2 2021 SME Confidence Index – a quarterly survey measuring the attitudes and confidence levels of South African SME owners – identified cash flow problems as one of the key reasons why businesses fail.

Consider for example that a business’s production volumes have doubled. This is great news for the bottom line, but higher production necessitates higher upfront expenses because customers can take up to 90 days to pay. This can put considerable strain on cash flow and lead to lower liquidity, which is essential as a buffer in times of crisis and emergency.

To mitigate cash flow issues that can result from expansion, businesses may opt for different forms of SME finance, including invoice financing, which provides funding against the amounts that are due from customers.

This is also where effective financial planning becomes indispensable and highlights the need for SME owners to be actively involved in the financial management of their businesses.

Cash flow is a common challenge for small businesses
Photo By: Fernando Santander via Unsplash

Inefficient systems
The old adage, “practise makes perfect”, when applied to the world of the expanding SME, can be reworded as “process makes perfect”.

SMEs rely on large volumes of information in the form of invoices, receipts, employee profiles, regulatory requirements, human resource procedures and file sharing.

When businesses expand, it’s all too easy for the systems that govern these essential pillars of an SME to fall short and fail to regulate the business’s newfound capacity.

Generally speaking, an SME with only a handful of employees and a small operations system can rely on handshakes and good faith, but expansion can unearth new complexities that need to be managed by processes. Technology can provide some answers.

There is free and affordable software for various levels of operation, including task, financial, time, relationships and internal communication-management.

SME owners who have not yet invested time and resources into optimising these technologies may find that at expansion stage, digital literacy becomes imperative.

Reputational risk
When expanding by diversifying a product or service offering, growing a team or reaching out to different target audiences, it’s easy to make the “quantity over quality” mistake.

Too often, when small businesses are intensively focused on growth, they neglect one of their most valuable assets – good customer service. In fact, most small businesses can provide higher and/ or personalised levels of customer service due to their advantage of being smaller. The challenge lies in maintaining the same “small business energy” at scale.

Setting benchmarks for customer service that need to be upheld as a business expands could be effective in building a foundation that remains solid despite fluctuations and change.

IT challenges can be crippling
Photo By: FLY:D via Unsplash

IT Security risk
One of the most prominent risks of running a business in the digital age is cybersecurity risk. South Africa in particular, has experienced a record number of cyberattacks since the onset of the pandemic.

Cybersecurity company Kaspersky reported that cyberattacks increased tenfold since President Cyril Ramaphosa declared a state of national disaster. This can largely be attributed to the standardisation of remote working and the dramatic spike in digital transactions.

For small businesses, a cyberattack can be crippling. Unlike large corporates who have bigger financial resources to invest in top-of-the-range cybersecurity systems, small businesses are increasingly vulnerable and easy targets for cybercriminals.

All devices used by staff, for example, should have anti-virus software installed, with regular updates being run. Implementing a security policy that all staff members agree to can also mitigate the immediate effect.

Ben Bierman is a managing director at Business Partners Limited.