Navigating the Growth Curve
Vantage Performance’s Michael Fingland says many businesses fail when their turnover is between the $15m to $50m mark, surprisingly from too much growth. They might have survived to that point, but being a bigger business presents its own challenges. Phil Dobbie asks what are the warning signs that highlight the need for change and how do you plan for this critical period in your company’s life cycle?
Phil: Welcome to the Vantage Performance podcast. I’m Phil Dobbie and today, we look at navigating the growth curve. How can you ensure that your business continues to prosper as demand increases? How do you scale up, in other words? Michael Fingland is the executive director and CEO of turnaround specialists Vantage Performance. He says the most dangerous and hardest period in the growth of a small to medium business is the period when its turnover pushes beyond 15 million dollars. Micheal, I’m surprised it’s actually not earlier than that before businesses start to struggle with this idea of scale.
Michael: Most successful entrepreneurs can get to $15 million pretty much on their own. You know, they’ve built a good business but it’s heavily reliant upon them and their brand and their good will and their ability to inspire their team. The reason why most businesses get into strife when they go from 15 through to 50 is they’re having to upgrade pretty much everything in the business. And most businesses that are transitioning from that 15 to 50 million mark are usually doing it at a fair rate of knots. And because they haven’t done it before, they don’t know the pitfalls that lie ahead.
Phil: So it is scaling up then, isn’t it, really? Isn’t a big part of that making the capital investment so you can operate efficiently from that point onwards?
Michael: Yeah it is, capital’s certainly part of it. But when you’re going through that transition every part of the business needs to be overhauled, for want of a better word. You’ve typically outgrown the skill set of a lot of the managers you’ve got in the business, They either need to be retrained or they need to develop new skills, new management skills to cope with the demands of a much bigger business. The capital structure is a fairly simplistic, Overdraft or Quicken finance type lending structure, very simple. You need to put in place a more sophisticated and flexible funding structure and whether its debt or equity to assist with that growth. A lot of businesses, roughly one-third of our clients over the last 15 years, get into strife yet are still growing 30 or 40% year on year. They outgrow their systems, they outgrow their finance structures. They could be profitable. The irony here is you can be growing 30, 40, 50% year on year and be profitable but still run out of cash. You need to get a handle of change management.
Q: Do you also run out of time? Because if you’re too busy coping with the growth that you’ve got, you haven’t got the time to put all these new systems and structures and processes into place.
A: That’s right. And that’s the typical entrepreneurial CEO is always incredibly time poor. Their excuse is “I don’t have time to look at that” or “I don’t have time to bring in expertise or let’s deal with that in three, four months time” because they can’t see how that workload is going to dissipate. So they hope that things will get better in the future and then you’ll bring someone in or hire some different people. But when you’re in that position, it’s a minority of entrepreneurs who actually identify that and are aware enough and self-aware enough to know they need help now, not in more three months, not in six months. Because as I said, you know, a lot of clients can go bust when they’re still growing at 30 to 50% year on year.
Q: If you’re the head of the business, if you’re the entrepreneur that got it all started there and you’re failing to recognize that, isn’t that a sign that you’re actually not the right person to be running the business at that stage?
A: No, not necessarily. This is why we’ve become huge advocates of coaches and advisory boards over the years. Because a coach, an executive coach–and we’re not talking about business coach here- we’re talking one on one, very senior, qualified, 30, 40 years in the business executive coach who’s been through it and has seen all the pitfalls and advisory boards for the most sophisticated businesses. A business running that fast no matter how a good CEO you are, he cannot see all the pitfalls ahead. He just can’t. So you need someone objective who’s off to the side, whether they’re an executive coach or even an advisory board in place who can identify those issues and raise it to the level of concern that it needs to be raised to so the CEO then can put appropriate resources and time energy into fixing those areas of the business.
Q: But that executive coach or that advisory board, they’re gonna be hard to find, aren’t they? Because they have to have been through this exact situation, someone who’s actually been in a large corporation that’s already been through this perhaps isn’t gonna be able to offer as much advice. You need someone who’s been there and experienced it.
A: The common mistake that a lot of entrepreneurial CEO’s or even family businesses make is, you know, to enable me to sit back and spend more time strategizing and helping the business grow consistently, they get a GM in. They think a general manager is gonna be the panacea. So they get a general manager in and 12 months later it’s all ended in tears. A number of times we’ve come across clients that have tried that and didn’t work. Often what’s more successful is to bring in that coach or bring in that advisory board first. They can help you then layout the landscape of all the pitfalls that you’re gonna be coming across over the next three to five years as you navigate through that $50 million mark. Once you built all the systems (one thing we haven’t touched on is systems) and supply chain and working capital management, all those areas are overhauled through that process. And typically, once you’ve got to $15 million dollars and you’ve built all the systems, you’ve got a really good management reporting system, you’ve got great supply chain management, you’ve got more sophisticated survey tools to know how your customers and staff are doing on a regular basis.
That infrastructure you’ve built, that will then carry you to 100 million and often 150 million. So that just gives you some context as to how much building is actually having to take place during that 20 to 50 million dollar mark particularly. Because it does set you up for another 100 million dollars worth of growth. So it is a lot of work that needs to be done and you can’t cut corners. And this is where you build those really, really strong foundations.
Q: Because the general manager may well do exactly what you’ve been doing, which is coping with the growth rather than coping with the long term. But what you’re talking about is putting the rig in place, isn’t it? So very often a company will have gotten to that $15 million stage by bolting stuff together, sort of like well, let’s make do. Just so as long as we’re getting the sales and it’s all working and…
A: And you’re chasing growth for growth’s sake.
Q: Yeah, whereas now, you’re talking about systems and processes that are gonna enable you to grow as a big business. It seems like an entirely different mindset. Can you actually train managers who are not used to that to be able to cope with that?
A: You can. Most management teams can survive the journey, if you like. They’ll need some additional training. A simple analogy is as you’re growing through that process, you might have got to 15, 10, 15 million dollars on the back of one key product or a few products. But once you’re sort of expanding geographically and all the rest, you’ll end up with multiple service lines of product lines. That’s where having a more sophisticated reporting system and accounting system where you know with certainty what the gross margin is for all these products so you can keep a track of how they’re performing. A lot of first-time entrepreneurs where they just simply don’t know what they don’t know…all of a sudden they get to a $25 million business and they’re still running a simple profit and loss where they don’t know…they know they made money or they didn’t for the month but they don’t know where or how or why.
Laying out ahead of them a strategic plan by someone who’s done it before multiple times, they can then adequately put resources in place so they are, as they are going through that process, they laying those foundations ahead of them. So they can still grow quickly and it’s not a discussion about slowing growth. You can still grow as quickly as you want as long as you’re laying those foundations ahead of you. And most management teams going through that process haven’t done it before. So that’s where it involves your board, executive coach, having dynamic cash flows, three-way forecasts, regular surveys. All the tools that we’ve talked about over the years in these podcasts, we’ve got to have those systems and tools in place to give you those warning signals where things are starting to go off the rails.
And so you’ve then got time to address them, appropriately resource and fix those problems. Or if certain management teams or supervisors or people in your business aren’t gonna cut it, then you need to also be aware of that and have plans in place to replace them with more suitable skilled managers who can take the business to the next level. But it’s, when you’re running at such a pace, that’s why a coach or an advisory board is so critical is when you’re running that fast, no matter how good you are you just simply cannot see all the pitfalls ahead, particularly if you’ve never been through that growth phase before.
They act as the insurance policy, your sounding board to make sure that the many, many hurdles–and there are many as you’re going through that period, particularly–can be navigated. The reason why a lot of CEO’s get complacent in a way is because they have got to 5 or 10, like you said before, which is the biggest danger period because as we know, 60% of all businesses fail in the first 5 years. So they think, okay, I’ve got through that five year period. Great, it’s plain sailing from here. It’s not. There’s another big hurdle coming and that’s why 80% of all businesses are failed by the 10-year mark.
Q: That’s a scary statistic, isn’t it? The point at which you need to start to make a move on all of this changes from industry to industry. We’ve mentioned the 15 million dollar turnover mark but it’ll be different from company to company. So how do you know when to start looking at an advisory board? Are there any warning signs that you should be looking out for?
A: Yeah, there are. When you start to see the culture in the business starting to throw off some signs and just starting to deteriorate, customer complaints start to rise because you’re running so hard to try and get product out the door, you’re cutting corners just to try and keep up with sales. So having a really good customer survey tool, we recommend the net promoter score or NPS tool, which we’ve talked about on this show before, that gives you really quick, honest feedback as to how things are going.
But they’re the two. If staff aren’t happy and they’re really struggling to keep up and you’ve started to have staff turnover; key warning sign. Customer turnover; key warning sign. Customer returns, those sorts of things. When you see your working capital, so your cash debtors, stock, and creditors, and there’s a formula…debtors and cashless and stockless credit is that your working capital. That’s how much cash you’ve got tied up in the business. If that is growing at a faster pace than your sales, then you know you’re heading for a brick wall.
So having a simple formula in your monthly dashboard, which is why we always have these in here, is showing the rate of working capital versus the rate of revenue growth. And quite often a lot of those businesses that are growing 30 to 50% year on year, that’s what’s getting out of whack. Their working capital is growing, so they’re building up too much stock, they’re not collecting their debtors as quickly as they used to. Revenue’s still going great and that’s what they’re focusing on and they’re profitable. But all that cash is being tied up in the business and it’s getting bigger and bigger and bigger disproportionately to revenue growth. That means your cash flow coming into the business is deteriorating even though sales are going up. That’s the biggest warning sign of all. That’ll usually show up before the customer and employee turnover concerns that are throwing off.
Q: Right. But I am sure that there will be business owners who will say “well, look, you know, we’ve looked at the P&L, we make a good margin on our products, it’s profitable. What you’re talking about is introducing things that are gonna add cost. You’re gonna squeeze our margins more. Why would we want to do that?”
A: Well, again, to look at their cash flow, profit doesn’t always equate to cash flow. And that’s where most management teams who haven’t gone through that period before don’t understand the difference. And there’s a huge difference.We’re talking about an executive coach, two or three grand a month. It’s not a huge cost when you’re thinking about how much money do you waste having to bring in a firm like us or another firm in a year’s time where you’re experiencing significant growing pains. I mean, the cost of replacing a senior person in the team is about 15 times. When you think about the lost productivity, the lost time, lost training, and the cost of replacement…so you think about the cost of 3 grand a month, 36 grand a year to 40 grand a year for someone to be that sounding board for you versus several hundred thousands of dollars if you lose one or two or three key people who just get churned up by the disruption and the pace of growth of the business, it’s an investment sort of cost.
Q: Yes, absolutely. It makes perfect sense and here you are, Michael Fingland, talking yourself out of business again, trying to get people out of trouble before they need you. I don’t know why you do it but I’m glad you’re doing it. Thanks for your time.
A: Cheers, Phil.
Very insightful, as always. Michael Fingland on the Vantage Performance podcast. Next time, what are the beliefs in your company? Do you need to know? That’s next time. Thanks for listening.