The recession may be over but SMEs face a bumpy ride as economic growth returns. What is the best way to keep a tight rein on costs as your business expands?

Turnover at Neal Harrison's computer networks business Convergence Group has tripled from £2m to £6m in the past three years. And this year, scenting new opportunities in the wake of recession, Harrison has targeted 155 per cent organic growth. Yet he is well aware that it's when expansion accelerates—rather than during a downturn—that many SMEs face most danger. They could run out of cash before revenue from new business arrives. It's a trap that Harrison, who was digging roads before founding his company, has neatly avoided as he's quickened his own firm's development. "I'm not going to spend money that I haven't earned," he says. "We've always been winning new business and then reinvesting the profits."

The adage that "cash is king" is especially true when growth returns, warns Paul Zimmerman, corporate finance partner in the entrepreneurial business team at Deloitte. "For those that grow too fast, it can be one of the first things to run out, even if you're generating profits and your profit and loss accounts look good," he says. So monitoring liquidity levels to predict short-term cash needs is vital, he adds.

That is a lesson not lost on Aaron Ross, chief executive of FirstCare, an absence management service, with clients such as British Gas and Coca-Cola. Since 2008, the company's turnover has motored from £2m to £7.5m, but the firm only came into profit late last year. Ross says that hasn't been a problem because FirstCare has been well financed by venture capitalists.

But he adds: "We are very tight on the purse strings. When we started we were in some pretty down-at-heel offices in Southwark (south London) and costs were kept to a bare minimum."

Phil Garvey, managing director of environmental services IT specialist Whitespace Waste Software, is another who knows all about the financial pain of fast growth. Garvey started the business from his back bedroom in 2005. It now has 30 employees and a £1.5m turnover, which is rising quickly.

But Garvey had to remortgage his house to raise £100,000 in order to strengthen the balance sheet so that potential local government clients could be reassured about the company's financial stability. "When you need money, nobody will ever lend it to you," he says. "If you have a great profit and loss account and balance sheet, people will lend you money."

The problem of cash management is doubly difficult for fast-growing SMEs because they need to conserve money while investing in new products and services to keep ahead of the competition.

Scott Martin, chief executive of vending machine operator Coffee Nation, says his company has invested £5m over the past four years—"a big chunk of that in the last 12 months"—on developing enhanced machines to serve the new tastes of coffee drinkers. "We needed to make a quantum leap to move people's perception away from vending and therefore we had to do the development." Martin says the investment will help to power the £25m-turnover company's 15 per cent year-on-year growth.

One key way growing companies can continue to expand while avoiding the heavy hit on their balance sheets that large-scale capital expenditure delivers is through outsourcing. Simon Gray, managing director of energy drinks company Boost Drinks, says that a key to the company's development has been its outsourced business model. As a result the £12m-turnover business, which averaged 88 per cent growth a year between 2005 and 2008 and is still expanding, employs only six people.

"We outsource production. We have third-party logistics. The haulage and storage is outsourced," says Gray. "We have a marketing manager based at the office and she plays a link role between me and our PR and marketing agency, which works on the brand with me. We pull all this activity together in the head office."

Yet outsourcing also brings potential dangers for a business on the up. "We did have all our eggs in one basket with one manufacturer," recalls Gray. "We have had to de-risk some of the business by going down the multiple-supplier route, so we now have two or three manufacturers making the same products for us."

Keeping tight control on finance is not the only problem directors face. Another is finding the right people to help them take the company forward. And as new people come into the business, the culture changes—perhaps not always for the better. "In the early days an SME is 50 or fewer people who grow up together over a period with their own habits, customs and ways of doing things," says Professor Davide Sola, UK director of the business school ESCP Europe. "As additional people who are different come on board, it can be a risk to the company's success. In companies that grow very fast, one of the most common things people hear is, 'it's a very different place than it used to be'.

"Of course, people with fresh, new ways of doing things are positive, but keep in mind that a fast-growing company has found the right recipe, so they need to ensure those new people and ideas, while different, have the right fit with the culture of the business."

FirstCare's Ross admits this issue has caused problems as the business has expanded. "We have had to delegate recruitment responsibility to other people within the organisation, which meant the culture changed from that of a start-up—that has led to some mistakes in the past."

He points out that when you launch a business with a small group of people, the members all share the same beliefs. "But when the company becomes larger, you end up with some people who don't necessarily share the same views. By the time you've discovered that, it's too late and you have to take fast corrective action."

Coffee Nation's Martin has tackled the issue by embarking on a programme of organisational change. "When we were a start-up, we had a small number of people who were driven by a vision and an enthusiasm to deliver that vision," he says. "Now we are not a start-up, but we want to engender the spirit of being a start-up."

The programme has included retraining and redefining the communications process so that all employees are in touch with what's happening. It has reduced staff turnover, cut absence and instilled more initiative among employees.

Sola advises: "Maintaining the culture as an SME grows very fast is a great challenge—as is retaining the innovation spirit, values and attitudes that created the company in the first place. It's this that is so often the biggest single hurdle for entrepreneurs."

Whitespace's Garvey is clear about what directors need if they want their company to grow quickly. "If you're not 100 per cent committed, don't even bother trying because it's four times harder than you imagine," he says. "It's 24 hours a day, seven days a week. It's a way of life."