This article is the conclusion of a two-part series. Read the first part here.
Our last article discussed the trade-off between how quickly you can grow and how much cash you need. What nobody tells you about growth is how expensive it is - the teams you need to hire, the training you need to impart, and the processes you need to set, test, and scale. For a service business, these can rapidly deplete funds.
Hitting the bullseye means figuring out the ideal balance between how fast your team expands and how much cash you generate. In reality, you will miss the ideal balance frequently. This will have financial consequences for your company. So your strategy is as much about setting yourself up so that missing the balance is manageable. To do that, you must understand the impact of missing the balance in different scenarios on your company and how to manage that risk.
Undershooting Sales, Undershooting Hiring: The Disappointment
Nothing gained, nothing lost. You did not meet your sales targets but fortunately, you did not overspend and end up in a cash crunch.
Short-Term Actions
If the reason for missing the sales target was that deals got delayed, you may be looking at a delivery issue in the next quarter.
Manage your ego and don't get distracted by your vision of where you want to be. Direct your attention to the long-term improvement of the company.
Long-Term Actions
Look into forecasts and understand what was not accounted for that caused the forecasts to miss. Develop more visibility and resilience in your forecasts to prevent sales from undershooting forecasts.
Make sure there are no delivery scaling issues. Even though not scaling worked in your favor this time, there may still be underlying issues that need to be fixed to meet future demands.
Fortunately, you did not overhire and preserved cash. Make sure the alignment of sales and delivery stays strong so you can adapt and make decisions based on the ground reality.
Overshooting Sales, Undershooting Hiring: The Overwhelm Trap
Too much of a good thing. You have people interested in working with you, but you don’t have the capacity to take on the work.
Short-Term Actions
Focus on your most profitable customers and those that hold the most strategic value
Strengthen flex capacity capabilities with subcontractors and partnerships.
Do not compromise quality by taking on too much work. Your reputation and customer relationships are the most valuable assets you have.
Long-Term Actions
Investigate issues with delivery scalability and figure out how to scale delivery appropriately.
Leverage the excess demand to refine your company's positioning.
Overshooting Sales and Hiring: The High-Risk Growth Spurt
You're booming! Don't go bust. This scenario represents aggressive growth: your sales have outpaced expectations, and you've proactively expanded your team in anticipation.
While this can be a sign of a booming business, it also carries the risk of increased overhead and potential cash flow issues if the sales cycle doesn't maintain its momentum.
Short-Term Actions
Keep a very close eye on your cash flow in addition to your revenue.
Re-evaluate your forecasts, paying close attention to future pipeline health so you can separate bumpiness from increased demand.
Vet financing options - both debt and investments - to get through the cash crunch. In particular, look into debt with accounts receivables as collateral if running into a major cash crunch.
Long-Term Actions
Ensure consistent quality since you'll be scaling faster than you planned and are prepared for. You may need to strengthen your delivery leadership to accomplish this goal.
If there is a real increase in demand, look into increasing pricing rather than capacity. Increasing pricing gives you more leeway in maintaining the balance between growth and cash.
Create long-term financing options. Get approvals for lines of credit and start talking to equity investors. You may need to engage an investment banker to help you find the right investor.
Overshooting Hiring, Undershooting Sales: The Costly Miscalculation
You gambled and lost. Your optimism about growth led to hiring more staff than current projects could support. Sales did not meet the expectations set by the hiring rate, leading to underutilization of resources and increased financial burden.
This is the time to play it safe to secure the financial health of the company because a situation like this can quickly turn into an existential crisis.
Short-Term Actions
Keep a close eye on cash reserves and create financing options.
Re-evaluate your forecasting to understand the source of the error and create safe forecasts for the next quarter.
Right-size the business, doing strategic layoffs if necessary. Doing one round of layoffs and moving forward is far better for the health of the company than not being aggressive enough and having to do a second round of layoffs. Act quickly because any time wasted will leak money for the company.
You may need to take on money in less-than-ideal circumstances. The phrase "Start fundraising when you don't need the money" applies in this scenario.
Long-Term Actions
Fix alignment issues between sales and delivery. Sales targets were missed and the delivery team failed to adapt to the changing reality.
Reduce operating cash cycles by reducing onramp and hiring times.
Fix the common problems that can land you in this situation including customer concentration and lack of recurring revenue.
Wrapping Up
Over the life of your services company, you'll have many successes and failures. Plans will fail more often than not. You'll work on fine-tuning your forecasts and, as you reach new levels of scale, new problems will unfold. You will frequently find yourself outside the bullseye if you're trying to grow very fast.
The reason we're discussing these options is so you can be strategic about the company that you're building.
If you are going to be aggressive on growth you need to be aggressive on costs and make sure you have financing options lined up. You will also come to terms with a higher risk, tighter cash operation that will require far better financial management. If you execute well, this route can be extremely profitable. But a mistake can cause you to go bankrupt.
On the other hand, a more measured growth strategy will let you sleep better at night. You will have lower risk and the cash you already make will more comfortably cover operations. You will be able to make a few mistakes - but you might find it harder to thrive in the long run, and your limited size may become another type of existential threat.
Both strategies are valid options. What's critical is that you are intentional about the direction you are taking and prepare your company accordingly. You are the one setting the course for your company's growth, and you must know exactly where you want to go - as well as how and why.
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