The market makes you look smart or dumb. When it’s going your way, it covers up a lot of mistakes. When it’s not going your way, when the market is down, all your weaknesses seem to be exposed. This is a big issue when you’re growing your business.
One of the things the market does is pull your senior management’s focus away from what it should be focused on.
Internal vs. External
As a firm scales from $1 million to $10 million the senior management team is typically focused externally on obtaining new business. Yet this is exactly the time when a little more internal focus, to establish healthy organizational habits and a salable infrastructure, will pay off in the long term.
As the business grows past $10 million in revenues organizational complexities draw the senior management team inward. This is precisely when the team needs to be focused externally on the marketplace due to increased competitive pressures that come with size.
This is counter intuitive and goes against all natural tendencies.
In parallel, there is a natural sequence of focus related to financial issues.
Between $1 million and $10 million, the team needs to focus on cash. Growth sucks cash, and since this is the first time the company will make a 10x jump in size, the demands for cash will soar. At this stage, the company is still trying to figure out its unique position, and these experiments and mistakes can be costly.
This is when the cash model of the business needs to be refined and a financial strategy created and implemented to ensure that the business will generate enough cash for the company to keep growing. Will the company generate enough cash internally? Will the business need to be supported with lines of credits? Should the business need to raise money from investors?
As the company grows past $10 million in revenue, new issues, both internal and external, come up. Externally, your company is getting more attention and your competitors are taking notice. Customers are beginning to demand lower prices as they do more with your company.
At the same time, internal issues are creating more and more fire drills. You have turnover issues and development problems. This causes costs to rise faster than revenue. All of this begins to squeeze the company’s gross margin.
As the gross margin slips a few points, the company is starved of the extra money it needs in order to invest in infrastructure, like accounting systems and training. This creates a snowball effect of further expensive mistakes as the company passes the $25 million mark.
To combat the squeeze in margins, it’s crucial that the company maintain a clear value proposition in the market. At the same time, the company must continually streamline and automate internal processes to reduce costs. Those companies that are successful doing these things can support stronger gross margins providing that much needed extra cash to fund infrastructure, training, marketing, R&D, etc.
As the company passes $50 million in revenue it should have enough experience and a strong enough position in the market to predict profitability accurately. While profit is always important, it’s critical now to generate predictable profit because profit swings of a few percentage points either way represent millions of dollars.
Predictable and Unavoidable Growth Issues
Growing a business is a dynamic process as the senior management team manages its way through the issues of growth. It’s a lot like the growth stages of a child, they are predictable and unavoidable.
To deal with these challenges, the company must grow the capabilities of the leadership team throughout the organization, install scalable infrastructure to manage the increasing complexities that come with growth, and stay on top of market issues that affect the business.
If you’re wondering how you create a blueprint for growth and break free of the growth wall, contact me to discuss the Valuation Amplification Process.
I also invite you to download the white paper and learn How to Quickly Increase Your Valuation – A Proven 5 Step Process.