Slow and steady the way for SMEs

However often it may have been said and however often it may have been proved, thousands of small and medium enterprises go to the wall because they don't believe that you can grow too fast. Many see rapid growth as purely positive and even a goal, despite the fact that expansion needs to be measured, planned and constantly monitored.

Whether your products are goods or services, you need to chart where you start, see where you're going and be prepared to pull in the reins when things look too good to be true. They invariably are. I don't want to be a killjoy, we all want to succeed and we all want to grow, but most importantly, we all want to stay in business. Most SME owners have an ambition to expand in some shape or form, whether that's horizontally, vertically, organically or through external investment. But, however good the intentions of that expansion, and however rational the planning behind it, human nature has an amazing capacity to sweep aside the reality of premature growth and replace it with the concept of early success.

Planning for sustainability

I think there are three constants for growth: sustainability; profitability; and necessity. If your business is one of those rare creatures where you create a market of your own or fill a gap that has previously been gaping, you may well be able to surpass your expectations in a shorter timeframe. But the truth is that many of us are simply trying to provide a superior service at a more attractive rate than that of our competitors.

As far as sustainability is concerned, we can measure our growth and assess the constants, and from that we can responsibly decide whether our timing is practical as well as desirable. However, we can only anticipate the role external factors will play and need to have a realistic contingency plan in case our planning was wide off the mark. At Gulf Finance, many of our clients have sustainability because they came to us in times of planning and now have that all-important working capital available to support their growth. By definition, sustainability is the ability to reinvest without seeking alternative investment – it doesn't mean being able to secure funds and repay without default.

For profitability, we need to look at whether your business growth has a long-term future. Expansion often means a permanent increase in costs and a temporary decrease in profits. Are you prepared to sacrifice a smaller return for the greater good, and just how long will it be before you can see how great and how good it is?

And so to necessity. A great gauge of if and when you should expand is the demand on your current resources. If you find that after a stable and sustained period of profitability you are being stretched to supply your product, at the same standard, to a wider customer base, then it may well be time to think big(ger). Some of the greatest success stories are of small businesses that have needed to expand because demand dictated. But again, for those stories to be successful, the rate of growth needs to be measured. It is often the case that gradual increments are far preferable to quantum leaps.

Harrods department store in London has been a recent headline-grabber. One of the most celebrated names in luxury retail began life as a small grocer's shop. Admittedly, having a Knightsbridge location didn't hurt, but its growth wasn't exponential; it was sustainable, it was profitable and it was necessary.

The model applies regardless of size or geography. We are all witnessing irresponsible growth on a global scale. Again, collective human nature abandoned the three pillars of expansion and assumed that somehow, this would be different.

Success stories in the UAE

Closer to home, the UAE has witnessed plenty of examples of SME success, and some failures along the way too. In a dynamic market that relies heavily on the sustainability of its small businesses, we have seen inspiring start-ups that stuck to their guns, measured their growth and refused to be tempted by the promise – and opportunity – of unprecedented profits.

We live in a unique part of the world, where the resources and the support for small businesses are apparent and accessible and the prospect of a start-up can become a reality. But its availability can be both a blessing and a curse.

At Gulf Finance, I have had the privilege and the pain of seeing both sides. By the manner of our business we need to determine whether an enterprise is treading a sustainable path. As responsible lenders, we need to support responsible owners and there have inevitably been cases where companies have faltered and growth has been the culprit.

Whether it is through ambition, lack of preparation or a simple case of the dreaded human nature, many of the most difficult cases are those that have been blinded by the light of rapid expansion. Action has been the driver and consequence nothing more than a passenger.

Despite, or in some cases because of, the current climate, this is still a great time to start a new business. Not only are there the opportunities for responsible, realistic and practical entrepreneurs to enter the market, there are the gaps for their products and services that other less pragmatic owners have left behind. There are also lessons from which new businesses can learn and expansion pitfalls they now know to avoid.

- The writer is MD of Commercial Finance at Gulf Finance. The views expressed are his own

Follow Emirates 24|7 on Google News.