Growing Pains

By in Leadership, Opinion

We all remember growing pains. When our bones grew faster than our muscles, during our peak growth-spurt as adolescents. The same analogy is useful when thinking about the growth strategy of small businesses.

While revenue growth is favourable, it is essential that the foundations are planned in alignment with the business objectives and anticipated size. Even though the business might be experiencing overall strength, if other aspects of the organisation do not grow alongside the revenue, it can create weakness, and in the long term, may become the ‘Achilles heel.’

Amongst our client base, we can see that the following key strategic priorities are required to be addressed to ensure growth does not put undue pressure on the business and your people:

People

The success of business expansion will be heavily dependent on the ability of your people. We often see businesses that have experienced growth in a number of divisions, however the resulting profitability achieved varies significantly within these segments. When we discuss this with our clients, the most common reasons given for profitable and sustainable growth is largely due to the capabilities of the senior management team in charge of their divisions.

We would recommend considering including this level of management in your strategy development activities, setting KPI’s to monitor performance and taking timely, appropriate actions where KPI’s are not being met. We often see KPI’s linked to sales volumes, without consideration for the bottom line. Ensure your senior management teams are accountable for margins achieved, not just sales. We certainly have seen many business grow their top line and achieve no increase in the bottom line, and this just adds complexity and pressure to a business without any reward for owners.

Retention of key staff and management of underperforming staff is critical in our view. Promote high performers early, and they perform and continue to exceed expectations, consider providing non-traditional forms of remuneration to give them some ‘skin in the game’. One such method would be to implement a phantom share scheme – essentially a longer term bonus scheme that incentivises a senior employee by linking the scheme to sustainable and profitable growth KPI’s. On the other hand, some of our best performing clients deal with underperformance head on and in a timely manner.

As the CFO of your business, you will be the first one to perform the analysis on each segment of the organisation and your Directors rely on you for sound and well supported analysis around performance. We feel that the CFO role is more than just numbers in today’s world, and therefore would recommend you being honest and upfront on staff performance when communication to the senior members of the executive team.

Finances

One of the key concerns when managing larger entities is determining whether the facilities and reserves are appropriate for the size of the business. As the business grows larger so will the cash flow and cash flow management requirements. As CFO, it is essential you are across this critical element and ensure your finance team are updating complete and accurate cash flow forecasts in a timely manner. We often see clients struggling with this analysis, using time consuming spreadsheets to track cash flow requirements. There are a number of tools available to assist and automate the cash flow forecasting of a business and we are advocates for businesses investing in this technology to ensure the analysis is accurate and performed in a timely manner.

As the entity becomes larger it is important to assess whether capital is being used effectively and the business is gaining access to all available capital options. One way to ensure capital is being used effectively is to establish a relationship with an appropriate banking partner who understands the business and its objectives. Whilst on the topic of banks, we note that it is important to meet the requirements and reporting deadlines set out in loan agreements as history does count as your requirements change into the future.

Evolution of the business model

The success of a growth strategy will be determined by the adequacy of how the business model is selected, implemented and updated. So how does the business model evolve?

The evolution is a combination of factors, guided by the creation of a strategic plan for action and communication across all levels of the business. As a business grows, the executive team, including the CFO must learn to delegate day-to-day activities and focus on the strategic activities required to meet the growth objectives. To become a trusted and valued advisor in your business this higher level approach is necessary and more rewarding for you.

Consideration should also be given to the structure of the board during the growth phase: will it be an independent board or committee? We often advise businesses start with an advisory board, as typically a private board drives business growth forward.

We also recommend an appropriate wealth building strategy is developed for owners, and again this is in our view a key area the CFO can assist in. Dealing with entrepreneurial type owners can be difficult as they have typically obtained greater returns from investing in business. Risk and overall family wealth should be highlighted and built upon utilising an appropriate dividend policy to generate funds for private investment. Structuring is important during this phase, so be sure to get your trusted advisors involved early when implementing this plan.

As you grow, it is important to stay firm to the culture you created, whilst at the same time adapting the model to suit your growing needs. The same goes for building a strategic network which can help with growth. Just as you build your organisational culture, it is also important to know when to be selective and work with companies that suit your vision. If you are not experienced with mergers and acquisition activity, seek advice – mistakes are common and easily avoided with guidance.

Segregation of Duties / Internal Controls / IT systems

As the business grows, it becomes harder for top level management to be involved in day-to-day administrative tasks and this is where risk can creep in. We often see issues arise because team structures, IT systems and internal control environments get left behind to a degree. It is important to establish appropriate segregation, internal control and to evolve your IT systems. Your trusted advisor will be able to perform a simple health check in this regard and provide you with an appropriately prioritised list of improvements to be made during your transition through growth.

Growth can be exciting. Avoiding growing pains by expanding too quickly can be avoided when you prepare to be big, before it happens and adapt your business model through its evolution.

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