#9: Prerequisites for sustainable profitable growth

No matter what business you are in, it is important not to underestimate the work that needs to be done if the founder of that business is considering a push for sustainable, profitable growth. I am indebted to my good friends Paul Chapman and Mike Robson of Azure Partners, who have summed this up very well in their article “Creating value in your lifestyle company”:

“All business owners want to be successful, but their interpretation of success varies widely. For many, success is defined as providing the shareholders with a good salary and reasonable financial security. Some business owners are more ambitious. They want to create real value in their businesses. Perhaps they see a clear competitive advantage that can be exploited in their current market or a new one. Perhaps they have a new product, technology or service to roll out. Developing a valuable company from a lifestyle business is an admirable goal, but the reality can be tough. Making the change successfully requires most, if not all, of the following:

• A real market need and a clear understanding of that need
• A robust vision of how you can fill that need and the capability to realise the vision yourself rather than creating opportunities for competitors
• The right people at board, management and operations level and the structure that gives them the time to focus on the chosen growth path in addition to routine activities
• A scalable marketing and sales function that really does know how to beat effective competition
• A scalable delivery capability that can grow in size whilst maintaining service and quality levels
• Effective and timely financial and operational reporting systems and processes
• Experience of a wide range of marketing techniques and routes to market, either directly or through alliance partners
• The right funding at the right time to grow the business, organically or through acquisition
• Accessing experienced and relevant external help at the appropriate times

And by no means least: The commitment and drive of the business owners to succeed.”

At this point, it is worth mentioning 3 financial aspects which can often make (or break!) a business:

• Understanding breakeven
• Understanding the importance of margins
• Understanding the difference between cash and profit

It will therefore be worth devoting some time to assessing your readiness for growth. Your aim, as Michael Gerber expresses in the E-Myth Revisited, is “to build a business that works predictably, effortlessly, and profitably each and every day”. He adds that the business needs to work without you! You will know you have achieved this when you are genuinely working “on” the business, as opposed to “in” the business.

#8: Learning to let go

The founder/owner of a business will eventually need to let go of things and feel okay about it. When you think about change, you can be forgiven for assuming that it’s the province of the big companies. But nowhere is the impact of change felt more acutely than in the small business.

In this article we will explore two situations when letting go is important – adding staff and grooming the business for sale. Naturally, it will be difficult to ever be anything other than a lifestyle business if you cannot come to terms with this, but there are mentors out there who can help you through this process.

More staff

If you are looking to take the first step of adding a second director/partner, or hiring your first employee, you may want to consider some of the following questions to help you feel more comfortable with the process:

1. What do I really enjoy doing and what am I good at? You may want to consider undertaking some behaviour profiling to help with this. PRISM is a user-friendly tool to do this.
2. What aspects of the business could I safely and reasonably delegate or pass to someone else?
3. What aspects of this business are unseen by the client, so I could pass associated tasks to someone else whilst maintaining the client relationship?
4. What tasks are there that can be clearly defined, are linked to a timeline of some sort, are genuinely achievable and where outcomes can be measured

Selling the business

If your ultimate intention is to sell the business, then the sooner you can come to terms with letting go the better. My good friend Mike Robson at Azure Partners puts this very well when he talks about “Minimising the reliance on owners when selling”:

“Many of the business owners we work with have launched and developed their companies from an early stage and have built out their businesses around their individual skill sets, experience, preferences and personalities.

This is absolutely fine for a business in the early stages of development and growth, but it often means that vital parts of the business are run by people who are not specialists in their areas, which will ultimately restrict the organisation’s ability to succeed in the longer term. This weakness is often compounded by the fact that many companies lack a full set of Board and Management level business skills.

All these issues will be brought into sharp focus when you try to sell your business. So if you want to achieve a clean exit, there’s a lot of work to be done in advance of even starting an exit conversation.”

Letting go

Letting go means allocating tasks thoughtfully. Good task allocation will win you precious time, grow and motivate your colleagues, and potentially identify a successor. Poor task allocation will leave you and your staff demoralised and drained – oh and the job probably doesn’t get done either.

Changing your role is not necessarily easy. To make it work you need to change something you do and have the discipline to keep repeating this behaviour until it becomes a habit or a “new norm”.

One of the key leadership skills you will require as the business grows will be communication. Having the ability to craft a robust plan will only get you so far if you cannot inspire people to achieve outstanding results, and you want the focus on outcomes not activities. Command and control has largely died out as a leadership mechanism, so people have to “buy in” to being led, and if you can win them over and get them engaged it can make the difference between the business surviving and prospering.

The habits of good leaders are many and varied, but my favourites are:

• Communicate their vision, and inspire and motivate others
• Understand their markets
• Ask the simple question
• Take difficult decisions
• Learn from previous experience, adapt and apply solutions to current situations
• Behave in an authentic way
• Set the tone from the top, particularly in terms of business ethics

If you are interested in this aspect of growing your business, take a look at Leading at the Speed of Light by Caitlin and Matthews. I think you will find it inspiring.

For help with letting go, contact me.

#7: Managing change

Managing change in a big organisation is fraught with disaster. It’s not necessarily any easier in a young growing business.  If you are the founder it starts with you. How do you feel about hiring other people and letting go? Do you trust other people to do the job as well as you? How do you feel about hiring people who are smarter than you? How do you feel about the possibility of managing “on” the business as opposed to “in” it? All tricky questions, but ones that you need to address if you are going to achieve the sustainable profitable growth for which you are striving. All tricky questions that David Mellor Mentoring is prepared to help you solve.

One key issue that arises quite quickly is keeping track of everything in your own head – as the founder and “boss” you knew everything, but all of a sudden it’s hard to know personally every prospect, client, or supplier. How do you keep tabs on everything?

There are probably four areas you need to look at:

• People
• Structure
• Process
• Technology

People in a growing business

Firstly – people. It starts with you. In terms of Emotional Intelligence and Self-Awareness, how are you placed to lead by example in terms of embracing change? Can you adapt your behaviour to help others cope with change when they prefer stability? Are they as excited as you are about changes in pace, responsibility, and overall structure?

If your staff are not “on the bus” with you then it is going to be very difficult if not impossible, so how will you make it happen? Your communication with them will be vital. The failure of many change initiatives is attributed in whole, or in part, to failures in communications.

Structure in a growing business

In terms of structure, how do you need to be organised to make the business scalable and capable of sustainable profitable growth? You need to be constantly thinking about the structure you need to get through today, and at the same time the structure you need to get you to the next level. How can you become, and remain, both efficient and effective?  It is important to work back from the client perspective – how do you ensure client no. 100 enjoys the same level of client service as client no. 1?

Process in a growing business

Process is very important. You know you have “cracked it” when your key staff tell new joiners “This is the way we do stuff around here”. Processes and procedures for winning clients (sales) and making them happy (delivery) need to be documented and regularly updated.

Technology in a growing business

And then there is technology. This is particularly important if your business model is “low cost” as opposed to “differentiation” or “niche” where using technology to automate may be less critical. Technology can help you streamline tasks so that your operating margins are at worst sustained and hopefully improved.

Something we will revisit is attitude to change – how do you feel about it and how do your staff feel about it? We will come back to this in a future article. In the meantime you might want to check out PRISM – a very useful tool for assessing this for a leader, and a team. Either contact them directly, or contact me and I will explain what they do.

#6: What do YOU want for yourself and the business?

As we draw to the end of this section on how far you have travelled on your journey, and what the world looks like, it is time to make sure that whatever plans you make for the business are 100% “in sync” with what you want for yourself.

A good place to start is your values and beliefs. I think it is important that the business reflects what is important to you, and checking that this is and will remain the case is an important part of you being able to live out your personal code of conduct every day.

Question one for yourself might be “what do I want out of the business”, or “what do I want to achieve”? Examples might be:

• “I want to be financially independent in 10 years”

• “I want to help small businesses make the right choices in their IT procurement”

• “I want to position the business so that I can sell it in 7 years time and use the proceeds to help me contribute to a philanthropic cause that is dear to my heart”

Once you know what you are aiming for, and in what timescale, you can begin to plan how you are going to achieve your personal goals.

Question two might be “what business am I in, and what business do I want to be in?” The way you phrase your answer is quite important, and will influence the way you market yourself going forward. In my case, I never say I am a consultant, or that I offer consultancy services. Rather I tend to say that I help owner-managers make more money and work less hours, thereby focusing on the benefits I believe I can bring to them.

Question three links back to the first question, namely “what am I in business for?”. Your answer could include something internal (i.e. for you) and external (for the community) e.g. “To leverage my skills and experience doing what I enjoy most (helping SMEs develop their brand) so that my clients get measurable results they wouldn’t otherwise get; being paid fairly for what I do so that I can retire in 5 years time, and feeling fulfilled in the process. “

Question four would be about what the business stands for. You may want to capture just 3 statements that say a lot about you and what is important to you:

• “We will always use ethically sourced materials”

• “We will sometimes work over the weekend if we genuinely believe that in doing so we are making a difference to our client”

• “We will never take on work where we have a doubt about our suitability to do the work”

Two final questions will complete the set:

• “Who are our clients?” – the more precise you can be about who your customers are, the more you can fine-tune your message so that you find this audience and they hear/see what you do and understand that it is for them.

• “What makes us distinctive?” – what differentiates you from your competitors, that makes you unique in some way, and is something that your clients value? N.B. you will need to keep this under regular review to check that your clients still value your distinctive offering.

Having addressed these questions, you are in a position to make 2 high-level statements, one about your core objective and the strategy associated with it. One of the best examples I have come across, which I have amended a little, was for a wealth management firm:

1. Their objective was “to become the provider of choice to high net worth individuals in London…..”

2. Their strategy to achieve this was “….by building trusted relationship and exceeding client expectations”

I encourage you to take this approach, and commit this to paper in the fewest words possible.

Finally, as we have already covered, the business is going to change, and your role is going to change with it. This is an ideal time to hold up the mirror and identify where your behavioural strengths are, and where you could most use help. I heard a great quote recently: ”leverage your strengths, and delegate your weaknesses”. It sums up the exercise you will need to go through quite well. PRISM is a great profiling tool to help you with this vital exercise. Take a look at www.prismbrainmapping.com.

We are now ready to start looking at how we are going to achieve the transformation.

#5: Taking stock

So you recognise that things have got to change. But where do you begin? A good way to start is by taking stock of where you are.

You may want to start with some relatively generic questions:

• How do we define what we do?
• What do we excel at?
• What do our customers value?
• What is our reputation?
• Who are our customers?
• How do we define success?
• What measurements of success do we use?

Then you could move on to take a high-level look at your headline financials, in particular the trend over the last 3 years in turnover, profit before tax, and cashflow. In terms of turnover and profit, how did your results compare to your forecasts, and do you understand the reasons for any gaps between what you expected to happen and what actually happened? In terms of cashflow, how did you fare managing your creditors and debtors?

Next would come a review of your products or services. You may want to create a little table like the one below, which will help you with your analysis. This may in due course force some hard decisions about which parts of the portfolio you keep, and which you downscale or discontinue.

It would be helpful to adopt the same procedure for your customers. Again, the table below may help you do this. One additional aspect you may want to consider is how profitable you think each customer is, bearing in mind your biggest client is not necessarily your most profitable. Are there any trends to analyse as far as client winning and client retention is concerned? Furthermore, did you receive any testimonials from happy clients, and did you have to deal with any complaints?

There are four areas left to consider:

• Firstly, if you have any staff, how successful have you been at hiring the right people?  Are you comfortable with the interview process? What is the trend in staff turnover? Also, how would you fare in an HR Audit – would you be HR best practice, HR compliant, or worse…!

• Secondly, who are you dependent on in terms of external suppliers, service-providers and associates; how strategically important are they to you, and how well are they performing for you? Again, this could prompt some decisions.

• Thirdly, who are your competitors, and how do you stack up against them? What strengths do they have that you can learn from, and what weaknesses do they have that you can exploit?

• Finally, what lessons have you learned on your journey to date?  Based on these lessons, what can you keep the same and/or develop, and what do you need to change, start or stop? It may help you to do this using a SWOT analysis – what are the top 5 Strengths, Weaknesses, Opportunities and Threats in your business, and what action should you contemplate based on the analysis? How good you are at Marketing and Sales might feature here.

Armed with this information you are well-placed to consider next steps, which begin with what you actually want to achieve and where you want to take the business.

#4: A “heads-up” for the founder

We have already talked about some of the signs that a business needs to change if it is going to grow, and it is almost inevitable that the change has to start close to home i.e. with the founder. He or she is normally so busy running the business that there is no time to consider taking on additional staff (even if the business can afford it), or if staff have been taking on, there is no time to offer them the strong leadership which they probably need.

There are therefore 2 issues be tackled; firstly, how do you feel about letting go, and trusting others with aspects of the work, and secondly, assuming you can come to terms with this, how do you go about doing so and continuing to feel ok about it?

You will not be the first person to have experienced this dilemna i.e how do you grow the business and give your fledgling team a sense of direction and common purpose? A good starting point would be logging how you spend your time in a “typical “ week. This could give some initial pointers as to how effective your time management is.

A second stage would be looking at the list of tasks and identifying:

• What absolutely has to be done by you
• What could without delay be passed to another member of staff
• What could be passed to another member of staff subject to the requisite training
• What could be outsourced to an external supplier or service provider
• What probably did not need to be done at all!

As part of this you can also factor in :

• What you enjoy doing
• What you are good at
• What you do not enjoy doing
• What you are not good at.

You can then start to make some informed decisions about how you free up your time. You can also use this as an opportunity, if you haven’t done so already, to create processes for different roles and tasks, so that work can be done consistently on a repeat basis to the standard you expect.

You can progressively ease yourself out of jobs as you create a related process and are satisfied that the person assuming that task is comfortable taking it on. Don’t forget that they may initially need your support in this activity – throwing them in at the deep end may not be the best strategy!

#3: Managing expectations

It’s often helpful to be able to position yourself in terms of how far you have come. Not only can you benchmark yourself against other small businesses, but you can see what lies ahead on your “Darwinian” journey, and begin to plan accordingly.

There are a number of small business frameworks in existence, as the topic has fascinated researchers for a long time. One which has stood the test of time is “The Five Stages of Small Business Growth” by Neil C. Churchill and Virginia L. Lewis, which featured in the Harvard Business Review in 1983! I personally like it because it breaks the journey in to logical phases :

• Existence
• Survival
• Success 1 – Disengagement (maintaining a profitable status quo)
• Success 2 – Growth
• Take-off
• Resource maturity

It then addresses and characterises each stage by an index of size, diversity and complexity, and described by 5 management facets:

1) Managerial style

2) Organisational structure

3) Extent of formal systems

4) Major strategic goals

5) Owner’s involvement in the business

It is relatively easy to position yourself on this continuum and therefore consider what is going to happen next.

Another favourite of mine is Leading at the Speed of Growth by Caitlin and Matthews. This explores a similar journey, but sets out the different stages in a, for me any way, unique manner. Based on research with over 500 entrepreneurs, it depicts a very concise and clear picture of what is happening at various stages of growth, including:

What are the company goals at this point?

What characterises the company?

What “Red Flags” are out there – i.e warning signs that all is not well and something needs to change?

Dangers of not changing

Leadership role

Critical responsibilities of the leader

Personal changes required

The book is full of great anecdotal evidence of the benefits of acting on such dynamic benchmarking, and the potential downside of ignoring the warning signs and carrying on regardless.

So, a useful exercise for you to do, as part of your taking stock, is to check where you are, how far you have come, what you need to keep doing, what you need to stop doing, and what you need to start doing. You can therefore increase the chances of making the right decisions at the right moment and thereby put the odds in your favour that you get the right result.

#2: Increasing profitability

So, you’ve proved that your business model works, and you have broken through the first barrier – achieving breakeven!

Now the focus turns to achieving sustainable profitable growth, whether your ultimate aspiration is a trade sale or merely an orderly winding-down when you have decided that it is time to move on. Creating a strong business gives you a degree of security and offers you choices.

The Ansoff matrix (below) is a very helpful way of helping you to gather your thoughts on how you could go about increasing revenue and profitability, as it enables you to consider both the short and medium term options.

The bottom left hand box (Existing Products to Existing Markets) is all about improving performance in the short-term with your current business model. To make this happen you can work on one or all of the following 3 strategies:

a) Cut costs
b) Increase prices
c) Sell more

Obviously if you can achieve improvements in all three of these areas, however marginal, if can already make a marked impact on your performance.

In terms of costs, it is worthwhile doing a cost audit say every three months. There is nearly always somewhere where you are leaking some cash, so can you plug the hole , without cutting in to “bone and muscle” and unnecessarily handicapping your business.

Turning to increasing prices, do not necessarily assume that there is an automatic link between price and cost. This obviously is linked to how price –conscious the market is, but it is surprising how often you can use your differentiation on quality of product or service to command a slightly higher price.

Finally, there is selling more. This is probably the hardest strategy of the three to implement. A review of your marketing mix (both offline and online) might be a good starting point- is your message “spot-on”, and is it reaching your desired audience? In reality what you have to come up with is something about what you do that can help you take business away from the competitors in your current marketplace.

When you have exhausted possibilities in this area, you need to look at the medium-term options, which are represented in the three other boxes in the Ansoff matrix:

1. Top left – Existing Products to New Markets
2. Bottom right – New Products to Existing Markets
3. Top right – New Products to New Markets

These all carry a degree of risk (and cost), with the top right box being the high-risk option, as you have doubled the “unknown” factor. It makes sense to research and analyse the other two options first, and I would suggest that you then prioritise one of the two, so you can concentrate your firepower and avoid becoming too diluted.

It is for you and you only to decide whether you want to stay in your comfort zone (in pontoon terms “stick”) or move forward to more of a value business (“twist”).

Assuming you are deciding to move forward as opposed to adopting a holding pattern, then whichever direction you choose to take, make sure that your preparations enable you to expand with “eyes wide open” as opposed to “eyes wide shut”!

#1: Characteristics of a growing business

Growth can be characterised in several ways – sales, profit, employees, but whichever way you look at it the underlying driver is likely to be that the founder wants to look beyond funding his or her lifestyle and set their eyes on value creation.

It all begins with the owner-manager taking the leader’s role. He or she will undertake activities based on the desire to make their dream happen; they will take calculated risks, work hard, control pretty much everything, and aim to have fun. They will gradually assemble tools and methodologies to help them work smarter not harder. And they will be driven by achieving results that demonstrate value is being created.

But certain pressures start to build as they move from comfortably funding their lifestyle. Some of the warning signals are:

• Not enough time
• Pressure on product and market development as customers demand more of you
• True experts needed to fill big gaps in functional expertise
• Competitive heat as others respond to your presence
• Your people don’t feel empowered but you don’t think you are micro-managing!
• No one shares your sense of urgency
• The business is beginning to control you rather than the other way round
• Management information is becoming neither timely, relevant or meaningful
• Product and client profitability are becoming unclear
• Cash management is getting more complex

You may recognise some of these!

There is also a Darwinian process at work. Darwin realised that life forms needed to reproduce to survive, and that regularly there were more than the environment could support. A lack of resources put pressure on population size, which led to increased competition, and some would not survive. Furthermore, those who died were not totally random; the more suited were the more likely to survive. So there was a “weeding out’ of less suited organisms leading to the survival of those better suited. In other words Darwin deduced that organisms evolve over time.

We therefore have two separate ‘streams’ to consider:

• The growth stages of our business
• The evolution of the founder’s role at each stage

Note – we already believe that it’s not how fast or smart we are…it’s our ability to adapt that determines whether our business – and ourselves – will survive!

We will look at these stages in future articles, but for the moment let us just consider some of the characteristics of successful business, who have figured out the need to evolve and adapt. Typically they:

• Have a clear strategy and vision
• Know when and how to exit their business
• Organise their business around systems, not people
• Know how to recruit and retain people
• Know their market position or niche
• Have an efficient “sales machine”
• Plan and control their finances
• ‘Manage’ rather than ‘do’
• Have an effective board structure
• Seek advice

You may want to benchmark yourself against these and check how you are doing.

Good luck!