Business Resource Centre

Get Ready

With the decision to grow, your company enters a new phase that is no longer business-as-usual. Many changes will occur in all functional areas in order to keep pace with the sales growth that is coming. In order to prepare for these changes, you must remove the barriers to grow in these key areas. What can you do to help you "break through" the barrier more smoothly, in a more controlled fashion? It's all about preparation in the key areas of business that must keep up as you grow sales.

Management: Conflicting Vision

To keep its eye on the target during these times of change, management must have only one target. Discuss the vision with key managers. State the vision - together. Only managers who believe in the vision should participate in the inner circle. A single vision is crucial - you cannot drive with double, triple or quadruple vision.

Limit the key management group to those who buy into the vision. Key managers must be capable of contributing to the accomplishment of the vision.

Work together on the vision statement (see: Planning for Growth) - agreement on the purpose of being in business is essential and revealing.

Operations: No Plan

Staff can work toward expectations only if there is a written plan that states what the operational goals are. Include equipment purchases and additional staffing in goals and plans. Make sure everyone knows the plan.

Without a written plan, existing staff have no way of knowing what's expected and you cannot know whether your expectations are being met.

• Know what staff and equipment can actually produce at full capacity each day.
• Prepare a plan with goals, objectives and a time frame. If you will expand production and service capacity, include equipment and personnel targets in your plan.

Finance: Strangulation

Cash is the air supply for growing companies. More production and sales means more cash is needed for inputs, inventory and equipment. Make sure financing is in place, watch cash flow like a hawk and hire or outsource the best financial help you can get. The most devastating barrier to growth is cash shortage. Cash is like air for the growing business.

• Project your cash needs, control costs, monitor cash flow and preserve some credit capacity for emergencies.
• Manage money smartly: hire or outsource expertise in collections, receivables management, cash management and foreign currency management, as necessary. You will also have more bookkeeping and accounting obligations.
• Build good relations with sources of funding. Let them know your plans and how you're doing.
• Cash is king. Profitable businesses can go bankrupt if they cannot meet bill payments.

Income Statements

Rod McQueen said it best in The Last Best Hope: "Volume is vanity, profit is sanity, and cash flow is reality."

Growing companies pursue new revenues, but volume isn't the same as profitability. There's also the question of whether the company can pay for the assets - current expenses and capital property - it uses in achieving growth.

The income statement tracks revenues and expenses over a period of time - a month, quarter or year. A pro forma income statement is simply a forecast of expected revenues and expenses.

Revenue: Sales and other income

Expenses: Expenditures made to generate revenue

Net Profit: Revenue minus expenses

Each growth strategy has an impact on the relationship between these three crucial items.

Growth strategies can sometimes have negative effects on income statements.

Dropping Prices

Increases in revenue may not offset changes in overheads or the increased risk of higher accounts receivable. Even if per-unit overhead costs remain constant - which is not often the case - volume rises may not be sufficient and net profit falls.

Example: A specialty coffee shop sells 1,000 cups of coffee every day at $2 each. Each cup of coffee costs $1.50 for the ingredients and cup, so they are making 50 cents on each cup or $500 a day in gross profit. If the owners decide to lower the price by 10% to $1.80, they are now making 30 cents on each cup. They must therefore sell 1,667 cups of coffee each day to maintain their $500 profit (assuming constant overhead costs, which are unlikely.) That's an increase of 67% in sales to offset a 10% drop in price.

Depending on your profit margin, you may need to substantially increase your sales volumes simply to maintain your profit level, so carefully consider whether you'll be able to make up the difference either through increased sales or through after-sales options and add-ons.

Adding Outlets

Marginal outlets can bring down the whole chain at the beginning. Shared overheads can reduce net profit for the chain to less than that of the flagship outlet. The second danger is a general downturn in sales - marginal outlets quickly drain the chain's resources.

• Management Rule #1: Develop a strong management training program - don't base the assignment on who's been around longest.
• Management Rule #2: If you are manager of the flagship outlet, you must become chain manager and hire a manager for the first store. You are not ready to branch out until you find a manager for your flagship store.
• Management Rule #3: Set high minimum profit expectations for new outlets. It's incorrect to assume that revenue from lower performance outlets drops directly to the bottom line due to shared overheads.

Geographic Expansion

Shipping, warehouse and travel costs can wipe out new revenue.

Define objectives: Treat the new market as a start-up and do a complete costing.

Set timelines: Taking too long to establish the market can endanger long-term profit and cash flow.

Be strong locally first: If you can't focus on your expansion, neither old nor new locations will be successful.

Product Line Expansion

Track cost of new-product sales separately to determine if it is worth the resources it consumes.

Becoming a Manager

Interestingly, the successful growth of a business is generally reflected in the personal growth of the entrepreneur. It's not just "yours" any more, but you still have a huge influence on company performance through the team you build. The ultimate achievement: true leadership.

Undertaking a significant growth strategy often projects an owner into an entirely new orientation. The focus is on what's best for the business, not what the owner wants to do next.

The qualities that make entrepreneurs successful - determination, independence and individualism - can become liabilities. Bigger companies require different management skills, especially delegation, teamwork and co-operation.

To become a manager:

Separate yourself from the business:

• Treat yourself as an employee and take a vacation each year.
• Establish separate credit cards, accounts and phone lines.
• Strive for balance: Learn to pace yourself and become selective about what you do yourself. Time on one project is time away from another.
• Revisit goals regularly: Keep your eye on the target. Write down long-term business goals and review regularly. Don't get lost in detail.

When businesses grow, the stakes become higher. Investors, employees, lenders and suppliers are often taking a considerable risk along with the owner.

• The owner therefore begins to act more like a manager.
• The focus of attention shifts to the business.
• Business objectives are strategic goals, not personal ones.
• Problem-solving is a controlled team decision, not an immediate directive.
• Decisions are researched and proactive, not intuitive and reactive.
• Managers ask how the business can work best, not what work needs to be done.
• Planning occurs backward from the future goal, not by projecting the present forward.
• Results are measured based on how well the customer is satisfied, not how best to produce things.

Measures of Success

You have communicated the growth plan, secured adequate financing and sharpened the management of your company. Sales are on the rise. It's time to evaluate results, not to label your efforts as success or failure but to guide you as growth continues and business environments change.

Growth is partly about building sales but also getting more out of what you have. In other words, building efficiency. Performance measurement gives your efficiency-building efforts a focus.

The first step is to benchmark against past performance and the performance of other companies. Identify key processes affecting performance.

Measure:

• Compare with other companies or industry databases.
• Conduct gap analysis to find opportunities for improvement.
• Focus on high-priority processes.
• To measure, you need something to measure against. Benchmarking compares your company statistics against the performance of similar and better-performing companies.

Benchmarking:

Benchmarking not only tells you how well you're doing over time, it also helps avoid "reinventing the wheel" by quickly zoning in on areas of difficulty and then learning from other organizations how to do better. It's a quick and continuous way to research improvement.

Types of Benchmarks:

• Process: Measures work processes such as tool-and-die changes, order processing or customer response times.
• Performance: Measures outcomes of processes such as cycle time, percentage of repeat orders or positive resolution of complaint percentage.
• Strategic: Measures critical success factors such as customer satisfaction, market share, return on assets or gross margin percent.

Benchmarking Steps:

• Identify key processes affecting performance - those that use a lot of people, cash or materials (warehouse order picking), generate high value (customer service), impact on risk (receivables collection) or highly visible to customers (call response time).
• Measure each part of process.
• Compare with best in industry.

Databases

If you cannot find or prefer not to ask other non-competitive organizations for comparative data, commercially available databases contain plenty of information - especially for processes such as credit management that reoccur in many types of organizations. Check major consulting companies or those that specialize in your industry.

Gap Analysis

Finding the major variations between your data and data from other companies reveals the best opportunities for improvement. Focus on those with greatest impact on performance.

Pitfalls

• Misplaced priorities: You can't measure everything - it's wasteful and irritates employees. Measure what's important to customers and things that have an impact on quality and service. It should not be a Big Brother operation.
• Busy with numbers: For some organizations, measurement becomes the job. Don't forget to act on what you find out. Get everyone to realize the numbers are just the indicators to tell you where to look and what to do.
• Shallow measures, vague response: Measure customer satisfaction, but also find out what drives satisfaction and measure that. Quantify and be specific. If your surveys show delivery times are too long, measure them and target a reduction of 30 minutes by end of quarter.
• Forgotten soldiers: Don't forget to measure employee satisfaction. Find out what they want, work on it and measure again. Grumpy employees usually make customers equally unhappy.