Underestimating the cost of growth

There are two ways to finance the costs of growing a business: retained earnings and increased debt. I play these two different approaches a few times a year in my Railroad Tycoon 3 game. When I play the scenario that prevents me from borrowing any money, the growth of my empire is very slow and incremental at first but eventually expands with multiplier effects. I've found that debt-free scenario has tempered my tendency toward runaway borrowing in the scenarios that allow it. I borrow more slowly and judiciously now. Expanding a business on retained earnings is called "solid growth". The enterprise does not get "ahead of itself" or "too big for its britches". The revenue, and the capacity to serve the revenue providers, grow together. 

It's very tempting to fall into the pitfall of underestimating the cost of growth. The mistake then requires borrowing heavily, committing future revenue to debt service. It sets up needing to give up some ownership to get cash infusions from investors. The bigger the enterprise becomes, the deeper the hole it digs for itself. Rather than climb out of debt with surges of new revenue, it sinks too lower into obligations. This is one of the big reasons the vast majority of startups fail in the first few years. 

The way around this pitfall is to start out strapped for cash and grow only from retained earnings. The growth is slow and solid. The delightful jumps in revenue can fund a little expansion or deepened reserves. The occasional shortfalls in expected revenue can be weathered without a cash crisis or flurry of desperate borrowing. There are no short sighted and selfish investors, lenders or creditors demanding faster growth to protect their interests. The decision making about expansion can be calm and clear headed. 

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