Dangers For Fast Growing Companies
It’s very common for businesses to rapidly grow beyond the capabilities of their staff or management team.
At Vantage Performance, we see lots of high growth businesses where the business might rapidly grow 30% to 50% or more in a year and if their management skills, staffing and financial systems and controls don’t keep pace, this manifests in poor customer service, high staff turnover and a decline in profits.
A current example of these dangers is the multi-billion dollar task of rebuilding Queensland and Victoria after the floods – this is putting at risk the viability of many businesses caught up in the fast growth of the rebuild.
While the initial focus has rightly been on flood-affected businesses who were struggling, it’s important that companies who pick up large contracts in the rebuild process are aware of the risks to their own businesses.
On average, one-third of our clients have actually been growing at 30%-50% year on year and they come to us because they’re growing too quickly for their finance facilities, management structure and systems and controls.
That leads to cash flow issues but essentially they’ve got into strife by being too successful.
These are firms that are making a profit on paper but outgrow their finance facilities and run out of cash. They may have committed to large contracts that they find they can’t fulfil because of a lack of cash flow.
Danger industries in the post-flood boom include mining services, civil contracting and labour hire.
Mines that were shut during the floods have started rebuilding and there’s lots of catch up, also with civil contracting and the myriad of roads, buildings and bridges that need repairing.
Labour hire is a business that can rebound like a rubber band after low periods so it is one to watch for managing risks of fast growth.
Common mistakes for fast growing companies
It is critical as a business grows that management increase the sophistication of financial modelling and internal systems and controls.
Owners and managers usually see this as a cost centre and not vital. They put it in the too hard basket because it’s not as exciting as winning new work – but it is crucial.
If you are trying to grow your business, grow everything in tandem – this includes the financial facilities, internal systems and controls and staff capabilities.
Vantage Performance assists the management teams in high growth companies to develop and execute a clear Strategic Growth Roadmap detailing the various initiatives, strategies and improvements needed in the business at each step of the way (usually over 6 to 18 months, but some firms plan up to 5 years).
Vantage either plays an advisory role or they can appoint a senior executive to work in the business to help management execute the strategic plan.
Ways fast growing companies can reduce risk of crash-and-burn
- Consider what parts of the business are crucial to upgrade. If you only have an accountant and are growing quickly, you may need to put in place a financial controller or even a CFO to deal with the changed circumstances. Similarly, putting in place a general manager can ensure crucial administrative components of fulfilling new contracts are not overlooked.
- Focus on a six to 12 month plan, mapping out key risks and milestones and outlining growth forecasts and cash flow.
- Prepare a strategic growth roadmap as outlined below.
Creating a Strategic Growth Roadmap
- Review management forecasts to determine what finance facilities or other capital will be needed to fund the business during the growth phase;
- Identify key issues and risks which may hinder management from achieving their growth plans;
- Identify requirements for internal systems, controls, communication, financial reporting and people;
- Decide on the appropriate management structure for each major milestone;
- Assess if an advisory board would be a worthwhile structure to put in place to help guide the management team; and
- Develop a comprehensive strategy to achieve management’s stated growth strategy in a controlled and managed way.
Michael Fingland is a director of the Turnaround Management Association of Australia and founder and Executive Director of Vantage Performance. Michael is a Chartered Accountant with more than sixteen years experience in corporate turnaround, profit improvement and corporate restructuring. Follow him on Twitter at http://twitter.com/helpyrbusiness.