Years ago, when I was a commercial lender, I helped finance a new business in a highly capital-intensive industry. Getting it started wasn't easy. We had to get pretty creative with the financing, but eventually we found a way to make it work.
Sometime early in the process, I told the owner that one of the biggest risks to his business would eventually be growing too fast.
He laughed at me.
I understood why. When you're trying to get a new business off the ground, the idea that too much growth could become a problem sounds ridiculous. At that stage, you're worried about finding customers, generating enough revenue, and simply surviving. If someone tells you that customers wanting too much of what you're selling might nearly put you out of business, it sounds like a pretty good problem to have.
About four years later, that's almost exactly what happened.
The company was successful. Revenue had grown quickly and there was plenty of demand, but supporting that growth required more and more cash. The company had to make investments, carry more inventory and receivables, and fund the costs of a much larger operation well before all of that growth turned back into cash. Eventually, the gap became large enough that the business found itself in real trouble.
We worked through it, and fortunately the company made it to the other side. A couple of years later, the owner reminded me of that original conversation. He admitted that he thought I was crazy when I warned him about growing too fast, but by then he understood exactly what I meant.
The good news is that the story didn't end there. The company got its financial footing underneath it and has now grown steadily for five consecutive years. It's doing fantastic.
That experience has stuck with me because it illustrates one of the strangest things about business: a profitable company can grow itself broke.
That's what I mean when I talk about growing without growing broke.
Growth Requires More Than Sales
Most business owners naturally think about growth in terms of revenue. If you're doing $5 million today and want to become a $10 million company, the obvious challenge appears to be finding another $5 million worth of work.
Usually, that's only part of the problem. The business also has to be capable of supporting $10 million worth of work.
That distinction becomes particularly important in construction. A contractor may have to pay employees every week while waiting 30, 45, or 60 days to collect from customers. Materials may have to be purchased long before the job is paid. Larger projects can mean larger receivables, more retainage, and significantly more cash tied up in work in progress. Growth may also require additional project managers, estimators, field supervision, vehicles, equipment, and office staff.
Most of those costs arrive before the cash from the additional revenue does. That is why a company can have a great year on its income statement and still feel like it is constantly short of cash. Profitability matters, but profitability and liquidity are not the same thing.
As revenue increases, the amount of money required to operate the business generally increases with it. If the company's financial capacity doesn't keep pace with its sales, growth can make the problem worse. The very work that looks like proof of success can become the thing putting the most pressure on the company.
Every Business Has a Capacity
I've watched businesses reach this point at very different sizes. Some struggle to move beyond their first few million dollars in revenue, while others operate successfully at much larger levels before they encounter the same problem.
The revenue number isn't particularly important. What matters is that every company eventually reaches the limits of the organization that has been built underneath it.
In the early years, an owner can compensate for a lot of weaknesses simply by working harder. The owner sells the work, solves customer problems, supervises employees, approves purchases, and keeps a close eye on the money. That works remarkably well until the business becomes too large for one person to keep doing it.
The same thing happens throughout an organization. A project management structure that works perfectly well at one level may become overwhelmed at the next. Financial reporting that was adequate for a smaller company may no longer give management enough information to make good decisions. Working capital that comfortably supported yesterday's volume may be nowhere near enough to support tomorrow's.
Eventually, something becomes the constraint. It might be cash, estimating, field leadership, job costing, equipment, banking and bonding capacity, or the fact that too many decisions still have to run through the owner. Usually, it is more than one thing.
The temptation is to respond by selling more. Unfortunately, additional revenue tends to put even more pressure on whatever part of the business is already struggling. That is why companies sometimes seem to get stuck at a particular size. It isn't necessarily because the market isn't there. The business itself may need to change before it can support the next stage of growth.
The Business Has to Grow Too
There is an old saying that what got you here won't necessarily get you there. It is particularly true in business.
The company capable of producing $3 million in revenue is not simply a smaller version of the company capable of producing $30 million. As a business grows, it needs different systems, different people, different financial resources, and eventually a different style of leadership.
For contractors, that evolution might mean better job costing and WIP reporting, stronger project management, more disciplined estimating, additional working capital, deeper banking and bonding relationships, or a management team that can make decisions without everything running through the owner. Often several of those things need to happen at roughly the same time.
This is where growth gets uncomfortable. Adding infrastructure costs money before it produces an obvious return. Hiring a strong manager before you're desperate for one can feel premature. Leaving more cash in the business instead of distributing it isn't particularly exciting. Improving an accounting system doesn't generate a new customer tomorrow.
But those investments create the capacity that allows the next stage of growth to happen safely. The business has to be built for the revenue before it can carry the revenue.
Revenue Isn't the Goal
Revenue is an easy number to measure, which is probably why businesses focus on it so heavily. We talk about being a $5 million company, a $10 million company, or a $50 million company as though the revenue number tells us how successful the business is.
It doesn't.
A well-run $10 million company with strong margins, healthy cash flow, and adequate working capital may be far more valuable — and far less stressful to own — than a $20 million company that is constantly borrowing money, struggling to make payroll, and discovering losses after projects are finished.
The question shouldn't simply be how much revenue a company can generate. The better question is how much revenue the organization can support without weakening itself in the process.
Answering that requires looking beyond sales. How much cash will the additional work consume? Will margins hold as volume increases? Does the company have enough management capacity? Can its bank and bonding relationships support the additional volume? What happens if one large project goes badly?
One question I particularly like is this:
If revenue increased 25% next year, what would break first?
The answer tells you quite a bit about where the next investment in the business probably needs to be. It also forces a more useful conversation than simply picking a larger sales target and hoping the rest of the company catches up.
Growth Should Be a Choice
None of this means every company needs to grow indefinitely. There are plenty of excellent businesses whose owners have intentionally chosen to stay relatively small. A highly profitable $5 million company may be exactly what its owner wants, and there is nothing inherently better about turning it into a $20 million company.
The important word is intentionally.
Choosing to remain at a certain size because it produces the income, lifestyle, and organization you want is very different from being stuck there because the company cannot support another level of growth.
My interest is in helping business owners understand the difference. Growth should be an opportunity available to the business, not something that threatens its survival.
Sometimes preparing for it means improving financial reporting. Sometimes it means building working capital, changing how projects are managed, developing another layer of leadership, or having a very different conversation with your bank. Occasionally, it means having the discipline to turn down work until the company is ready for it.
The specific answer will be different for every business, but the principle is the same: a company has to build the financial and operational capacity for the business it wants to become, not just sell its way there.
That is what it means to grow without growing broke.
Joshua R. Bohlke spent over a decade as a commercial banker before serving as CFO and financial advisor to construction and specialty-trade businesses. He helps owners understand what their numbers are saying, what is limiting their growth, and what needs to change before the next stage of the business.
jrbohlke.com • The Analysis