Your blueprint for business success
`Structuring for Growth`
Organisations must perform four essential management roles in order to succeed over the long term:
1) Produce results (P). The P role produces the results that enable the organisation to meet the needs of its customers. It focuses on what needs to be done.
2) Administrate (A). The A role ensures that people do the right things at the right time and in the right manner. It focuses on how things need to be done.
3) Entrepreneur (E). The E role takes the organisation into the future and makes it proactive rather than reactive.
4) Integrate (I) The I role changes the consciousness of the organisation from mechanistic too organic.
At the same time, all companies go through an organisational life cycle that consists of distinct stages of growth and decline. The key to planning for growth involves knowing which management roles dominate in each growth phase and structuring the organisation accordingly. The growth stages include:
Infancy. The business is launched and struggles to survive. Everyone in the company focuses on getting the product out the door. The ideal management profile for infancy is Paei, meaning a strong focus on the P role, with less attention given to the other three.
Go-Go. The business develops a solid base of customers and earns enough income to more than cover expenses. Flush with its early success, the business grows very rapidly and begins to seek new opportunities. The ideal management profile for go-go is PaEi.
Adolescence. The company is still growing, but the lack of systems and procedures begins to cause major problems internally and externally. The company needs to begin focusing on how it gets things done. The ideal management profile in adolescence is PAei.
Prime. At the peak of the growth cycle, the company now has strong, profitable growth and good systems and controls. The ideal management profile for a prime company is PAEI.
Managing the Predictable Problems of Growth
Each phase in the organisational life cycle has a unique set of highly predictable problems that befall all companies who enter it. By knowing where your business stands in the life cycle you can identify these barriers to growth before they occur and take steps to minimise their impact.
Infancy. The primary challenge in infant organisations is survival. This manifests itself in the following organisational problems:
* Running out of cash
* Making a fatal mistake
* Loss of commitment from the founder
* Personal problems
To work through these inevitable problems in the infant phase:
* Keep the cash flow positive at all costs.
* Do not give up control of your business.
* Track cash flow before profits.
* Avoid premature delegation.
* Go-Go. The predictable problems in go-go include:
- Lack of controls
- Midas Touch syndrome (the owner thinks he/she can do no wrong)
- Lack of resources/founder spread too thin
- "More is better" syndrome (emphasis on growing sales at the expense of other areas)
As a result of these issues, every go-go company eventually makes a major mistake or encounters a disaster of some kind. If the company is lucky, the disaster serves as a wakeup call. If not, the company goes out of business. To keep damage in the go-go phase to a minimum:
* Stay focused on the core business.
* Do not spread yourself too thin.
* Keep your ego in check.
* Adolescence. Predictable problems during adolescence include:
- Resistance to the new policies and procedures
- Improper organisational structure
- Changing goals
- Lack of information systems
- Role clashes
- Founders trap (inability to delegate authority)
In an attempt to deal with the adolescent growing pains, the founder often brings in a professional manager (someone strong in the A role) to implement systems and controls. However,
· Do not bring in the A role when the company is in a financial crisis.
· Do not bring in the A role when you cannot afford to be distracted from external activities.
· Do not bring in the A role without a very clear organisational structure.
· Prime organisations have one major challenge -- staying there. Achieving this goal involves two courses of action:
· Continually redefine what business you are in.
· Continuously decentralise the organisational structure.
To stay in prime, you have to keep the E role alive. You do that by constantly redefining the business and by structuring the organisation to reflect each new definition of the business.
Keeping the Growth Alive: How to Avoid the Organisational Ageing Syndrome
Organisations age when they lose the E role. Four factors cause this to happen:
1) Failure to properly define the business. Defining the business by the product rather than by customer needs.
2) Mental age. Senior management thinks like a declining, rather than a growing, company.
3) Improper structure. The organisational structure is set up in a way that squeezes out the E role.
4) Style of the leader. The founder or CEO has an innate orientation that conflicts with the E role.
To prevent the loss of the E role and keep your organisation young at heart:
* Define your market carefully.
* Stay mentally young.
* Make sure your organisational structure supports the E role.
Check your own management style.
Organisational ageing is not a function of time or size. It's an attitude about your company, your customers, your market and what you expect from the business. Pay close attention to the E role, make sure the organisational structure supports it, stay mentally young, and you can stay young and growing for a long time.
Financing Rapid Growth
Most entrepreneurs make three huge mistakes when planning for growth:
* They limit their growth based on access to a common commodity -- cash.
* They limit their thinking to traditional "secured" financing.
* They attempt to acquire capital in increments rather than getting all they need at once.
The solution? Determine the full extent of your capital needs and acquire the financing all at once rather than piecemeal.
When planning for growth, most entrepreneurs ask, `How much capital do we have in the company and how can we best allocate it? ` In contrast, high-growth companies ask, '`What could we do with the business if we had all the money necessary to grow it to its full potential?'
Laying the foundation for obtaining growth capital starts with three basic steps:
1. Develop a credible business plan.
2. Let the professionals structure the financing.
3. Have a defendable strategy.
Today's capital markets offer a wide variety of financing tools. The most common include:
* Secured. A bank or commercial finance company loans the money based on a percentage of APR, inventory and/or hard assets.
* Anticipated future cash flow. Mezzanine lenders take an unsecured position based on the anticipated future cash flow of the business. It gets repaid with current cash flow.
* Subordinated debt. Also called "convertible" debt, this form of financing gets repaid with future cash flow.
* Equity. Equity can include many different forms of preferred and common stock, as well as certain types of convertible debt.
Slow-growth companies generally limit themselves to secured financing. In contrast, most high-growth capital deals contain a mixture of all four types of lending. By creatively applying today's multifaceted lending tools, you can escape from traditional capital restraints and achieve exponential growth.
When financing high growth:
* Do not include a term sheet in your business plan. Instead, let the lenders propose the deal to you.
* Give away as little equity as possible.
Do not get hung up on the valuation of the company when the money comes in. Instead, worry about adjusting the ownership based on actual performance when the money goes out.
Currently, there's a lot more capital looking for high-growth companies than there are companies to absorb it, If you have a good story and you look in the right places, you can find a way to finance your dreams of growing the company.
Six Principles for Financing Growth
Before approaching the capital markets, make sure you know the ground rules for success.
Match your financing needs with the correct financing product. In order to pick the financing products that meet your capital needs:
· Do the research.
· Get crystal clear about your financing needs.
· Get professional help.
· Minimise risk. Entrepreneurs often think they have to bet the farm in order to obtain financing. On the contrary, financing your growth should involve less risk, not more. To minimise risk:
· Look for lenders willing to structure flexible agreements.
· Build in a cushion in case things go wrong.
· Don't take out a second mortgage on your house, give any kind of personal guarantee or give up control of your company.
· Never give away opportunities to protect yourself.
Adjust your lending agreement for actual performance. Most lenders will discount your performance projections because they have no guarantee you will achieve your business plan. However, you can (and should) negotiate a clause that adjusts the terms should you hit all your objectives in the agreement.
Conduct a very broad search of lending institutions. When looking for growth capital, start with about 100 lenders and work your way down to a final "short list." In particular, look for lenders who specialise in your industry and type of company.
Never give up control. Many financing transactions require you to give up some equity in exchange for the money. Some equity is okay, but if you have to give up control to grow your company, don't do the deal.
Write a world-class business plan (visit www.cavendish-mr.org.uk). The quality and credibility of your business plan has a huge impact on the quantity and qualities of the financing you get. In order to get the best possible deal; create a business plan that lenders can't resist.
How to Avoid "Growing Broke"
Growing broke -- outstripping the company's ability to pay its bills even though sales are increasing -- presents a real risk for every entrepreneurial business. In fact, if you're growing at a sustained annual rate of 15 to 20 percent or higher, running out of cash probably represents your biggest threat.
Financial deterioration usually occurs when the entrepreneur focuses on top-line sales at the expense of more meaningful performance indicators. Maintaining healthy (i.e., profitable) growth requires protecting your balance sheet, which starts with an understanding of three fundamental principles:
When your business is growing its sales, its balance sheet is also expanding.
Because balance sheets and income statements work together, how you manage your business determines how big a balance sheet is needed to support a given level of sales. Just one more dollar of sales will force an incremental expansion in the assets on the balance sheet in order to support that additional pound/dollar of revenue.
For every additional pound/dollar of "forced" asset growth, a business must find a way to fund it.
Protecting your balance sheet also involves tracking key balance sheet percentages relative to sales rather than total assets. As sales increase, certain variable assets -- cash, accounts receivable, inventory and pre-paid expenses -- automatically increase. To manage growth, you need to understand how these variable assets change relative to sales and how those changes impact your balance sheet.
The final step in protecting your balance sheet involves looking into the future to see how an increase in sales will impact it. To forecast your balance sheet, simply plug in all your variable asset percentages based upon your projected sales growth. The percentages will tell you how much your total assets need to grow in order to support the new level of sales. From there, you can determine where and how to come up with the funding to support the additional assets.
Smart CEOs and business owners never forecast sales without also forecasting the balance sheet. If you cannot get the funding to support your desired level of sales, either find a way to cut costs (so you can self-fund the growth) or else bite the bullet and scale back your sales objectives.
The Entrepreneur's Dilemma: How to Get Through `No Man's Land` without Blowing Yourself Up
Entrepreneurial companies face many obstacles in their journey from new kid on the block to established player in the market. One of the deadliest is `No Man's Land` -- that difficult area between when you are too big to be small and too small to be big.
Making it safely through `No Man's Land` requires a transition in four key areas:
1. The economic model
In the early stages of most growth companies, the value proposition is built around the "cheap, high-performance labour" provided by the founder and one or two senior executives. Making it through `No Man's Land` requires developing a sustainable value-added proposition beyond high-performance cheap labour. To determine whether you have a sustainable economic model:
* Study your competitors.
* Project your economic model going forward.
* Understand your cost/revenue relationships.
Manage your business by looking ahead, not backward.
By nature, early stage growth companies are market-driven, which makes them simple to do business with. As the company grows, the entrepreneur becomes less involved with customers, and problems develop symptoms of this inevitable growth problem include:
· Customers only want to deal with the entrepreneur.
· Margins and sales shrink for no apparent reason.
· Sales and operations are constantly fighting with each other.
The entrepreneur turns his or her attention to new products and services to avoid dealing with the growing pains.
To reverse this trend and make the company simple to do business with again, the entrepreneur must do two things:
Institutionalise his or her expertise throughout the organisation.
Build a solid management team.
Even if you successfully navigate the first three transitions, you still need money to grow. Most entrepreneurs manage to scrounge up enough money to get the business off the ground. As the fledgling enterprise grows, however, it runs head-on into the "capital gap."
The issue with the capital markets is they're not set up to provide financing until the company needs at least a million pounds/dollars worth of capital. As a result, capital between £250,000 and £1 million costs so much that most growing companies can't afford it. This capital gap represents one of the most dangerous points in `No Man's Land`. In their attempts to close the gap, many entrepreneurs take too much risk or end up giving away control of their companies. They try to raise money by selling the upside of their businesses when they need to focus on lowering risk.
Assuming your value proposition can sustain itself in the marketplace, you can get through `No Man's Land` by doing the following:
Acknowledge the issue. Accept that your company is entering a very fragile point in its growth cycle and manage the business accordingly.
Manage the four-M's. Pay close attention to each transition -- economic model, marketing, management and money. Recognise that the correct strategies in these transitions are often counterintuitive.
Never grow just for growth's sake. Companies do not get large and make money by luck; there has to be a sustainable, bottom-line reason for growth. Never forget that you can grow yourself right out of business.
Surround yourself with the talent to get there. Hire at the senior level first and fill in the gaps in the middle as you grow. When going through `No Man's Land`, the organisational chart should look like an hourglass -- wide at the top and bottom and skinny in the middle.
Finally, figure out what you do best and position yourself to do it. Sometimes the highest and best use of your time does not involve running the business. If so, hire an `experienced manager` to run the company so you can focus on doing what you do best. Never forget, however, that the more the company depends on your unique skills, the more you limit its ability to grow. A catalyst and a team approach are the most successful.
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