All successful businesses want to grow. However, rapid growth can be a mixed blessing, and unbridled growth can quickly become a burden with bottlenecks and organisational issues flaring – so how do you manage a business boom?
Growth brings new challenges across all areas of your business from staff to systems, to quality control, customer service, fixed costs, labour productivity, and to cash being absorbed by working capital.
Overtrading is a common cause of receivership after a recession as working capital is depleted –and fast growth means businesses simply run out of cash. Construction companies commonly fail because they take on too much work, are spread too thinly, leading to quality defects, weak project management and timetables slipping behind. Performance and liquidated damages claims soon follow.
Hence one of the most common outcomes if you are growing fast is the need to refinance with your bank, to provide facility headroom and liquidity to support your growth, as for many small businesses attracting new equity is not a viable or quick alternative.
While most companies plan and strive for growth, not all are adequately prepared to manage it when it happens unexpectedly and hastily. Fortunately, there are things you can do before you find yourself swimming in more business than you had ever anticipated.
Firstly, be certain that your company is not undergoing seasonal or one-time-only growth – in our volatile COVID world, expect the unexpected as a downturn or new lockdown could happen anytime.
Some questions to ask include:-
Do I have the necessary capital (equity and term debt) to finance my growth?
Do I have surplus assets that I could turn into cash if need be? This may extend to securing or re-mortgaging your house.
Am I expanding too quickly? Is it profitable gross margin business or is it growth for growth’s sake?
Am I hiring too fast? Have I got the right people on the bus, and is our labour productivity being maintained?
Am I collecting my receivables fast enough?
Is my inventory and stock turn in line with my growth?
Is my production line efficient? Are my input costs competitive, and is our supply chain secure?
Is our quality control and customer service falling?
Are our fixed costs or chassis right to run the engine?
Lastly, does my management team have the right competencies to handle our company’s growth? Where are our holes and blind spots?
The purpose of these questions is to diagnose potential weaknesses, where the cash is going or leaking and to gain more control over the key aspects of your business that impact cashflow.
A source and application of funds on your balance sheet can quickly tell you where the cash has gone – or is going – and profitability trend analysis is a vital component of your financial analysis. Trend is your friend. Display your income statement in four different ways,
• $ for multiple periods / rolling twelve months • Averages over the last four or five periods • Common size expenses as a % of sales • Dollars/unit e.g. in a restaurant $/customer or $/table or in a food business $/kg.
Common sizing quickly spots expenses that have changed – and highlights questions to be asked, the main question being why the change?
Understand your breakeven position and current headroom. Explore a range of scenarios that forecast your cashflow and future cash requirements when you hit targets, fall well short or knock everything out of the park.
Knowing this, you can look at your current financial situation and assess if you can make improvements. You may be able to get additional financing for working capital, restructure your debt or convert unused assets into cash.
Carefully consider how each situation would impact your business numbers in terms of employees, costs, resources, and so on. Knowing your threshold before a jump in growth occurs will enable you to recognise early on when you’re reaching capacity and allow you to react with agility because you already have a plan in place.
Invest in a well-built simple financial model that can provide these answers quickly. You’ll be thankful you’ve done it should your business suddenly take off.
Demonstrating strong management of receivables, stock, and payables plus control of overhead costs is key to gaining a bank’s confidence in your management team. Be particularly careful about maintaining cost controls during growth spurts where businesses often go on a spending binge.
Communicate early with your bank. Banks hate vacuums, and too many customers leave it too late to address refinancing needs. Understand banks like to be repaid and high growth companies usually need more debt support and are therefore regarded as risky.
You can also look for alternatives to conventional debt financing. For example, you may be able to negotiate better payment schedules with suppliers, or look at leasing vs. buying assets or asset financing for vehicles or plant, or maybe you can consolidate a number of loans to simplify things.
The key is to get the refinancing you need. Longer term debt with reduced monthly payments can be achieved by spreading your payments over a longer period.
After analysing your company, you will be better able to examine your ability to repay debt. A refinancing application is very similar to a normal financing application. In both cases, the lender establishes certain debt repayment conditions, which you must be able to fulfil. If you cannot demonstrate your repayment ability, the lender will not assume the risk alone.
New legal requirements imposed on Banks mean they require comprehensive business plans, strategy, and a credit story supported by both historic and forecast financial scenarios. This takes time and expertise to prepare. If it is not in your management team’s skillset – get independent advice.
In all cases you need to demonstrate:- • Your management are competent and experienced • The key risks are managed and mitigated • That you have sufficient working capital and equity in the business • That you can clearly demonstrate your ability to repay the loan/s
In conclusion, extreme growth is a good problem to have so long as you’re prepared for it. Combined with simple management strategies such as benchmarking stress points, empowering employees, optimising efficiency, and leveraging technology to create scale will put you in a strong position when your company finds itself on a hot streak.
It’s a horrible feeling. That sudden realisation that the wrong fuel has gone into the car. I’ve done it myself – in fact, I did it the other day. I made the fatal mistake of putting petrol in my diesel vehicle, but fortunately I realised what I had done before starting the engine. From what I understand it is not an uncommon mistake, particularly for those that regularly swap between diesel and petrol cars.
After several phone calls I realised that the only thing I could do was to engage a ‘fuel removal specialist’. Although I had a busy day in front of me I had no choice but to wait for two hours at the filling station for the expert to arrive so he could suck the petrol out of the tank and thus avoid serious damage to my engine. Not only did this cost two hours of my time, it cost $275.00 for the service. A costly experience, but a small cost in comparison to what I would have had to pay for engine repairs, had I started my engine.
On reflection, there are two reasons why this incident happened; I was rushing and I wasn’t truly present in the moment.
Relating this experience to business, how often do employers make a rash decision because they are rushing and not present in the moment? Maybe they make a poor hiring decision and promote the ‘not quite suitable’ person from within the company, or employ an external candidate even when their gut feeling says they shouldn’t – but they do so anyway because it seems the easiest option and they just want to get it done.
I have made this mistake too and it is one that I always regretted. Like the fuel scenario, hiring the wrong person can be detrimental to business – much like putting petrol in a diesel engine. Not only can this lead to a financial cost to the business, it can also undermine the culture within the team. In this example, your investment in an effective recruitment process to ensure you have the right people on board will pay significant dividends over time and will more than compensate for the time and effort you put in.
We live in a busy, sometimes chaotic world, so we need to raise our awareness around this propensity to rush. Rushing affects our ability to be present, it increases our stress levels, it can lead to mistakes and it can inhibit our ability to make effective business decisions. So take your time – and don’t ruin your business engine.
New Zealand has one of the OECD’s lowest levels of productivity and to stand alone in an uncoupled world this is something we need to improve – and a very practical way to start that improvement is by understanding your businesses labour efficiency.
In his book Simple Numbers, Greg Crabtree details what he refers to as the Labour Efficiency Ratio or LER.
It is a simple calculation as follows:
Sales – Cost of Sales = Gross Profit before Direct Labour.
If you then divide your direct labour costs into the gross profit before direct labour, it tells you how many times direct labour is covered. Generally, a score of anything less than two is problematic with the goal set above three.
Let’s look at some examples where direct labour has been managed differently using automation, more flexible staffing and other approaches. Notice the correlation between the LER and percentage net profit before tax.
Note: it is important to ensure all direct costs are captured in your cost of sales. Too often equipment hire, project travel and accommodation and other direct costs are shown in overhead expenses. These should be recoded as COS to give a true contribution margin. Similarly, direct labour needs to incorporate all those in the making of products or delivery of a service. If supervisors spend more than 50% of their time on the job, then include them as direct labour, otherwise show them as indirect labour as an overhead expense.
As you can see from the examples above, getting productivity up impacts on your bottom line.
So how can the LER be improved? Here are some ideas;
Use subcontractors until there is sufficient business to support a full time equivalent
Employ more part time staff and map them to periods of demand
Ensure people know what is expected of them
Remove obstructions to production
Employ supervisors who are independent and capable of effective supervision
Know your error rate – DIFOT (Delivery In Full On Time) for products or IFOTIS (In Form, On Time, In Specification) for service delivery. Target 98% or better
Follow up on all complaints and respond with a ‘Correction Action Process’
Post Audit Quotes & Estimates
Conduct post audits on project work
Review and recalibrate processes from findings
Constantly incorporate learnings into Standard Operating Procedures (SOPs)
Regularly debrief and reset SOPs – again, people need to know what is expected
Look at using machinery to do the mundane
Look to introduce robotics to significantly increase throughputs
Use systems to capture any manual processes like books or paperwork showing units input, outputs, labour hours etc. Electronically capture and utilise API’s etc to put directly into the system.
Proactive Equipment Maintenance
Ensure your equipment is always functioning at full capacity
Monitor equipment downtime within
Have planned back up processes when failure occurs
Although not related to staffing, the following will favourably affect your LER.
Price increases – when was the last time you put them up?
Tighter terms of trade – stop discounting and provide transparent terms based on volumes and true costs to serve
Improved account management to increase sales
Improved or increased effective marketing
Look at your main basket of goods and get people to bid and achieve EDLP (Every Day Low Pricing)
Ask your suppliers for improved terms – you will be surprised
Know your costings
Forensically cost all your product lines and or services – the devil is in the detail
Know what margins each of your products and services deliver
Re-engineer unprofitable lines or services or delete them
Following all or some of these will improve your business performance.
A guide to Net Profit before Tax
Less than 5% and your business needs life support – meaning its dying.
Between 5 – 10% you are on your way to recovery, but you have a way to go.
Between 10 – 15% you are running a good business, retaining sufficient profit to manage growth and any business shocks.
15% plus puts you in a good niche but keep an eye on your competition. Unless you are nicely niched, over time, you may be seen as too pricey which will encourage new players to enter your market.
These are volatile times, and it is important we have balance sheet strength to help us get through. What is good is different for each business but as a rule of thumb, if you can access resources to sustain you for three months of overheads without any sales, then you will be better off than many others.
Simple Numbers by Greg Crabtree is available on Amazon.
You know what you want in life; how is your business going to get you there?
Studies show you are 33% more likely to achieve your personal goals just by writing them down.
Think back to when you first started your business. Or, better yet, when you first conceived the idea for your business. You had a great vision about what your business would mean – to you, your family, to your customers and perhaps to the community. Are you realizing those dreams? Are your personal goals being fulfilled?
One of the most difficult things for any of us to do is look out beyond our immediate horizon and imagine what can be. It is even harder to “paint that picture” in such vivid detail and bright colors in our “mind’s eye”, that it becomes a source of daily motivation and constant inspiration.
While there is an eternal desire to find what motives successful people, most are motivated by their own vision of success. Some make great sacrifices to give the best to their kids, others to buy their first house. We are moved by the stories of ordinary people facing enormous adversity. The common thread with these personal goals are the stories of determination is that people are strongly motivated by the clarity of their vision and purpose, but also the clarity of the route to achieving it.
In this white paper we will:
Discuss what having a written Personal Vision should look like & how it will help you achieve your goals.
Provide 6 considerations to developing your Personal Vision.
Introduce how your Personal Vision will work with your Business Vision to get your business working for you, and not the other way around.
Are you tracking key performance indicators for your business growth?
There are no standard key performance indicators to measure company performance. By setting measurable company goals, you can effectively use key performance indicators to help grow your business strategically.
This Key Performance Indicator white paper will:
Define key performance indicators & discuss why they are important
Discuss how KPIs can help grow your business
Set guidelines for what KPIs you should track based on your company’s goals
Strategic business leadership is not just for large corporations!
A strategic plan will help you focus your company’s activities on what matters most. TAB’s Strategic Business Leadership process was designed specifically with the small and mid-sized business in mind. Download our white paper today to learn more about how strategic planning can help navigate your business toward greater success.
Strategic Planning will help you:
Focus business activities on more effective growth & improvement
Improve communications with employees and your leadership team
Make better decisions
Download White Paper - Strategic Business Leadership