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It’s not uncommon for small and medium enterprises (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. The “buck should not stop,” with the finance manager or accountant – ultimately these employees should serve as consultants and advisers who offer an informed opinion, rather than the final decision-makers.

Inefficient systems

The old adage, “practice 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-, relationship- 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. Scaling customer service as the business grows may entail hiring more people in specialised positions, increasing focus on training existing staff, introducing staff incentives for top performance or providing more open and transparent feedback exchanges between customers and the business.

IT Security risk

One of the most prominent risks of running a business in the digital age is cyber security risk. South Africa in particular, has experienced a record number of cyber attacks since the onset of the pandemic. Cybersecurity company, Kaspersky, reported that cyber attacks increased tenfold since President 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 cyber attack 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 cyber criminals.

Effective cyber security, even at a micro level should begin with a “prevention rather than intervention” approach. Basic protective measures don’t have to set businesses back by hundreds of thousands – there are simple measures that can be applied from the onset of expansion. 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. Risk assessments are crucial and should examine how easily a company’s data can be accessed by outside parties and the responsibility that each employee has to prevent a possible breach. In the upcoming weeks, ahead of Fraud Awareness Week (14 – 20 November), we will be exploring this topic in more detail.


About the Author: Ben Bierman

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Ben Bierman has been our Managing Director since 2015. He joined our company in 1990 and has risen through the ranks occupying various positions ranging from being a management accountant, Head of Information Technology and Chief Financial Officer. Ben is an avid reader, enjoys classical music and being in the outdoors including for hunting trips. He is our go-to-spokesperson for our SME Confidence Index, SME sector policy and trend matters, and business leadership articles.