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Why Too Much Growth Is A Bad Thing And How FP&A Can Help

Too much growth isn't always a nice problem to have

19Jan

Xiaomi, the nearly seven-year old start-up that expanded so fast it became known as ‘China's Apple’, has decided against announcing sales figures for its smartphones in future, citing disappointing figures and an attempt to avoid commentary that they’re on a downfall. This is not unusual in and of itself, what is unusual is the reason for the disappointing figures - excessive growth. As a consequence, the smartphone giant has now pledged to rein in its pace, although it is still targeting $14.5bn in revenues this year.

Blaming excessive growth may seem strange, but it is becoming an increasingly common problem in an era when start-ups are frequently hitting unicorn status within years. However, there comes a point in any company’s life when growth will flatten out for any number of reasons. And as is the case in most things, the faster you grow, the faster you fall, or at least stagnate. Xiaomi increased its smartphone shipments from 7.2 million to 62 million in just 2 quick years, making it a poster child for the tech boom. However, such rapid expansion does not come without problems and the company does not seem to have set itself up to manage. China accounts for roughly 90% of its smartphone sales, according to analysts, but it has been overtaken by rivals like Oppo, Vivo, and Huawei who favored selling through physical stores rather than online, like Xiaomi did, had more nimble business models, and offered something different at the same low prices that originally set Xiaomi apart from higher end phones like Apple and Samsung.

Xiaomi’s decision comes barely two months after the CEO of fellow global tech giant LeEco, Jia Yueting, released his reflections on his year of ‘fire and ice’ in which he said overly aggressive expansion was having a negative impact on the company. LeEco’s meteoric rise in China sent them westward, establishing headquarters in North America and buying Vizio, one of the leading TV brands, but it did so with an alacrity that appears to have been damaging. In a memo sent to his staff that was obtained by Bloomberg, Yueting wrote, ‘We blindly sped ahead, and our cash demand ballooned. We got over-extended in our global strategy. At the same time, our capital and resources were in fact limited.’

There are many problems caused by excessive growth, and CFOs are an integral part of developing a strategy for sustainable growth and ensuring that they are not caught out.

One of the most serious issues it can cause is in supply chain. A rapid rise in demand may lead to supply chain partners being unable to meet the need for raw-materials and any other resources needed for the business to run. In such cases, supply chain leaders need to communicate and be transparent with suppliers. For real sustainable growth, they need to have developed a long-term relationship where they will do everything possible to cater to your needs in the first place, and will want to consider looking elsewhere if this is not the case. The CFO can work closely with supply chain managers to ensure these partners have the financial capability to be the long term partners the organization needs, and they can ensure that suppliers are paid promptly and any debts managed.

Central to paying suppliers is having cash to hand. It’s easy to think that because your accounts receivable is growing you are getting cash rich, but your company needs to be collecting the cash it’s due. A period of rapid growth will both cause the rate at which cash enters the business to go up AND it also increases the rate at which it exits, with more money needed to pay for more employees, more advertising, more materials, and so forth. It is the CFO’s job to ensure that a cash crisis does not occur, to identify where to make cut backs to sustain the cashflow, and have things like accounts receivable insurance in place to lessen the shock if a client doesn’t pay.

FP&A teams also need to keep a careful eye on debt levels. In order to facilitate rapid growth, organizations often take on significantly higher debt levels. When you borrow like this, debt issues can rear their heads fast when your growth slows down. One bad month, one missed payment, is all it takes to start a death spiral into insolvency.

Of course, it may just be that your business model isn’t scalable beyond a certain point. It is a CFO’s place to help the CEO understand the potential to scale the business and to look for signs that the company is growing beyond its limitations. It is, admittedly, difficult to predict when growth could be occurring too fast, particularly when you’re blinded by dollar signs. Essentially, you’ll know when you are having to make decisions too quickly, without the due diligence and information that they require. If you need staff, it is obviously important to hire, but it is important to hire the right people. As LeEco’s North American operations lead Brian Hui noted, ’Fast is not about staffing, it’s more about whether you hire the right people.’ The same is true of all company resources and processes. Fast is not about expanding as quickly as possible, it is about expanding right.

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