An overview of the Q & A from a Synergy48 Group Knowledge Sharing Dinner panel discussion on 8 October  between an accountant, a bookkeeper, a debt collection specialist and an IT integration specialist. The topic for the evening: is rapid growth sending your business broke?

The discussion was hosted by Synergy48 Group Integrated Business Improvement Solutions Coordinator and business consultant Stewart Clark from SCS Performance. Guests at the dinner were members of Synergy48 Group and their clients and invited guests.

This post contains the questions and answers from the panel discussion at the start of the evening.

Meet the panel

Q & A with Greg Clarkson

In your experience what are the stages of business growth and the challenges faces in each stage?

I draw upon the knowledge of my business partner who has grown a business from 1 to 200 plus staff in Australia and then went global with 800.  I compare his experience with my own knowledge of other business growing.

Our experience is that there are 4 stages of growth for a business:

Stage 1 – Direct Influence
Stage 2 – Delegated Influence
Stage 3 – Metric-based Influence
Stage 4 – Divisional or Deconstructed Influence

Stage 1 – Direct Influence

The first stage is 1-20 staff.  In this stage my business partner would say that the ‘theory of relativity’ reigns supreme in that for any decision there is always someone’s relative involved.  Now it’s not really a relative but typically people will do business with someone because someone they know recommends them.  In other words, people choose to do business with someone they trust.

It may not feel like it when you’re in the middle of it, but often this is business at its simplest because so long as you have a good idea and good service and a trusted network of people ready to engage with you then you can operate and operate well.  In fact, for many this is when the business is at its most “profitable” – for example, services business will probably find their “profit per person ratio” at the highest it will ever be.

A key reason business is simple as this stage is because the owner of business can know and therefore personally influence their staff of 20.  The staff can work out the vision and direction of the company because they know and experience the CEO of the organisation.  This ensures that an owner can personally create a working culture of productivity and communicate a clear vision to both staff and customers.

Stage 2 – Delegated Influence

Stage two is company with 20-50 staff, the owner starts to know their staff less and can’t manage all of them directly.  So often a couple of managers are appointed to run parts of the business.  The first set of managers are critical to maintaining the culture that you want for the business.

As Mario mentions “If someone is not a fit now they won’t be a fit later”.

This is an awkward stage for deciding on technology investment decisions.  How long do I stay with the systems that served the business well from 1-20 and when is it requires to move to a more scalable platform?  The right decision really depending on the owners’ aspirations for the business.

In working through these issues, a business will be tempted to look for one tool to solve their problems.  “I need a crm” or “I need a finance system” is their belief and then moan when it doesn’t realise the value they hoped for.  Generally, one monolithic piece of software will not help their business but will in fact slow them down

Stage 3 – Metric-based Influence

Stage three is 50-120 staff. Now you become a budgeting company become more crucial.

Our experience is that if a business can maintain a net 20% profit then they very likely have no requirements for external funding.

To get the level of budgeting and forecast requires generally requires a lot of staff education on the importance of timely and accurate recording of data.

The theory of relativity becomes harder to maintain.  The ratio of profit to operating expense shrinks.  Therefore, cash flow becomes an even bigger issue and so debtors need to be reigned into less than 40 days.

Stage 4 – Divisional or Deconstructed Influence

Stage 4 is 120+ staff.  That this stage the owner will need to break the business apart and give people their own p/l to operate with appropriate authority and responsibility.

The challenge to maintain personal contact and one strategy is to further break the business into cells of 10 people or less.  This is great for the ‘theory of relativity’ but not easy to ensure consistent culture and vision across all cells.

If a business is rapidly growing what role does technology play in preventing them from going broke?

Normally avoiding going broke relates to good net profit and managing cash flow (cash is king).  The trick to answering your question is to know why the business is growing and then it becomes clearer how technology can assist.  I can think of 5 examples:

  1. It’s a one-off project that may open you to boom/burst cycle. Look at cloud services or other consumption-based models
  2. Its due to a merger or acquisition. In this case be clear on the technology stack of each company and how they impact each other (perhaps use the profit stack framework) to ensure the M&A perceived value is realised.  There is an article from IBM caution business on how easy it is to lose shareholder value during the integration of the two-business’s system.
  3. High Demand Service. High service demand generally means more people are needed.  Technology can help HR/Process.  Also, as an augmented revenue stream technology can assist in developing products that are complementary to the service.
  4. High Demand Product – automation of manufacturing, distribution and purchasing of the product.
You’ve said in the past that ‘anyone who offers to take care of your IT so you can focus on your business is doing you a disservice’. Why is that so wrong – esp for a business that wants to grow fast?

Technology impacts the modern business in some many ways that it is impossible to separate them.  Business and Technology are fused together.

I am reminded of a NZ logging company that says “we are no longer a timber company that uses technology, we are technology company that cuts down trees”.

The realisation that a business is a technology company we call techceptance and we have even produced a video about this that I can show people at some stage.

Further, the RBA Chief reflecting on the two-speed economy of Australia said that a significant differentiator between those business growing and the other that are stagnating is that the growing business have significantly invested in technology.

So what we want to do is help businesses reach their techceptance and realise the impact technology has on their business and how they can maximise this impact to improve the profitability of the business.  We have developed a framework easily do this that covers the 5 profit stacks of sales, people, operations, finance and structure.  A key part of the finance stack is to avoid going broke during the growth!

Q & A with Robin Snelling

How can you tell that rapid growth may send your business broke?

The key point here is that you have reporting systems which inform you about your business performance –  where your business has come from – and where you are going. We are not talking about the simple profit and loss report or balance sheet coming out of your Xero or MYOB system. We are talking about more detailed analysis of your business.

In your profit and loss, the analysis helps you to understand the changes which have come about since business started to grow.

  • You may have cut prices to stimulate growth, so your gross profit is much less now than it was six months ago.
  • You may have gone to a new supplier who has better delivery times to help you produce more, but the cost is higher.
  • You may be paying more overtime to your service staff to get the additional work completed, but this is again reducing your margins.
  • Yes, your profit may be higher, but it is coming at a cost and the percentage return on sales may be lower.

The analysis looks at the factors impacting on your cash flow.

  • How long is it taking to collect the amount your customers owe. Perhaps your growth is with bigger commercial clients, who will not pay before 60 days, rather than the 38 days you had before.
  • What is the time you take to pay your creditors? Can you stretch out payment terms a bit longer, or have you taken suppliers to the limit?
  • Are you importing more materials from overseas, where you must pay before the goods are shipped?
  • How long does it take to move your inventory – are your new products taking longer to make, which increases the time between paying for the materials and finally receiving payment from the customer?

With all this information about the current state of your business, you should have a cashflow projection.

  • The current trends in your profit reports can be projected forward to see what cash is generated from profits.
  • It will estimate when your sales will be paid by customers.
  • With stock levels calculated, you will know the value of materials purchased, and how much you will pay suppliers and when.
  • Add in estimated labour, overhead costs and taxes payable.
  • With all this data consolidated into a cashflow forecast, you will be forewarned about a cashflow crisis – and it will be much easier to go to the banks, or finance providers beforehand, to request funding, rather than when you are in the middle of a cashflow crisis, with wages to pay this week, and a key supplier withholding delivery until they are paid.
What are some reasons for a growing business to struggle with cashflow?

Business growth is one of the common reasons for businesses to have cashflow problems. It seems to be paradoxical, but it’s true.

One reason is the cash conversion cycle. This is the length of time it takes to convert additional resources like materials and labour into expanded sales.

Here’s an example:

  • Let’s say that a business buys $50,000 of materials to make its new products which are fuelling the spurt in revenue. It pays the supplier in 45 days.
  • The business incurs $20,000 in labour costs to produce the finished items after 45 days.
  • So, 45 days after buying the materials, the business is now $70,000 out of pocket.
  • It will sell the goods for $100,000, but customers will not pay until day 90. For the 45 days in between, the business requires new working capital of $70,000 to fund its growth. Profit will increase by $30,000, but to achieve this extra profit, the business must find more cash to fund the growth – either out of its own pockets or through an external source of funding.

Another reason for business growth impacting on cashflow is the additional resourcing required.

  • New staff may be employed to do the additional work. It may take months for them to be properly trained in the company processes and it may take a while for them to be fully utilised as volumes of work catch up with the higher capacity of the business to do work. All this comes at additional cost, which is a drain on finances before the business sees a positive return.
  • On the bigger scale, business growth may require larger premises, which could be a massive distraction to the whole company, with a short-term cost on existing business, as well as the higher costs of the larger building to contend with. A business I am working with has taken out a larger office lease to enable it to expand – but unless it finds new business very quickly, it will have the distraction of finding short-term tenants to offset the additional rent cost incurred.
What are some steps that you can take to help a growing business to avoid going broke?

Business planning is critical. No business should embark on growth without creating a financial roadmap, which shows all the likely consequences of the changes to be made. This allows management to focus on the key issues.

In relation to sales, the business plan does not simply state that sales will increase over a period.

  • It should state where the potential new clients are and the size of the market to give more certainty that the budget is realistic.
  • This in turn will impact on the money required for marketing – what type of marketing will influence the target market that we are looking for? How much will it cost?
  • The prospective client base will give us an idea of when we can expect them to pay. For example, consumers may be more likely to make prompt payments than commercial customers. Maybe we need to set up finance arrangements if our products are expensive.

Another key area to be planned is our internal resourcing of staff or machines.

  • To achieve higher sales, the business must produce higher volumes of work.
  • The plan will determine the required output levels of production or service departments to meet the additional volume.
  • Does the company have machinery capable of this output?
  • Does it have the labour skills and number of staff required?
  • From this we can determine what number of new machines or additional staff the business will require to meet this higher level of work.

There are plenty of other things to consider:

  • What will be the material volumes and costs?
  • what levels of administration staff and overhead expenses are required to service the additional work?
  • What capital expenditure is required to support the business growth?
  • From all of this, you start to have the financial roadmap and a cashflow budget can be constructed which will indicate the additional finance required. It is detailed stuff, and if you don’t like numbers, it can be a pain. But without this preparation, growing businesses may be in serious danger of failing.

The financial plan will also help businesses to focus on ways of improving cash flow. For example,

  • Better stock management to reduce wastage – can you be sure that the stock you are buying will sell in a reasonable time?
  • Reducing stock levels where possible
  • Ensuring that debt management is improved. Would discounts for early payment by customers help the business?
  • Should new payment terms be negotiated with suppliers?

When a small business starts up, their owners are focussed on the core operations of the business, which is usually their key area of expertise.

At the stage where business is growing rapidly, if he does not take himself (or herself) out of this daily operational activity, the owner will be overstretched and key warning signs in the business may be missed.

  • The owner needs to take a step back and look at the strategic issues – which includes business planning.
  • However, business owners cannot be expected to be an expert in finance management, or a marketing guru, or an expert in IT. This is where a good leader will be prepared to bring in outside expertise to add to the overall management capability of the business and help them to steer well clear of the possibility of going broke. This might be another permanent manager in the business, or it could be using the expertise of advisers who are available to consult for a fraction of the cost of a full-time person.
If the financial consequences of rapid business growth are not addressed properly, what are some potential consequences for the business?

The obvious one is that the business ends up being put into administration, and either sold off or closed. That would be really sad if the owner had developed a great product or service but was unable to realise their dream of running a successful business simply because they failed to have a handle on their finances.

Another consequence is that the business loses ground in the market because it was unable to deliver when sales were coming its way. Without proper planning, the business may not have realised the number of staff required to service its growing customer base. Not just the quantity of staff, but also the quality. With poor service resulting from an overstretched workforce, customers may drift away. Worse, the company may have poor comments on the product review websites which turn potential customers away.

Business growth is not always a steady upwards curve on the chart. It can be volatile, with a rapid upwards movement, followed by a shorter downturn before another upwards movement. How will the business handle these swings? If it takes on more staff to handle the peaks, these people will be underemployed when business levels move down. Will some of them become disillusioned and leave the business, meaning you have to go through the cost of replacing them before business picks up again? Are there alternative sources of work to tap when the main growth products or services are slowing? Is outsourcing of work, or employment of casual staff an answer to this volatility?

Q & A with Heidi Froelich

In what way would not having policies and procedures contribute to going broke from rapid growth?

Typically, when a business starts to experience success it’s because one or two key operators are very good at what they do.  They know all the aspects of the business, they have the processes down to a fine art and can deal with kinks in their road effectively – making quick and beneficial decisions to keep the business ticking along.  Everything that is needed to be known about running the business is in their heads – it’s easy to get information.

As the business starts to grow and more people are employed you have more minds trying to achieve the same end goal but the new people don’t have the original key players’ mind sets, their knowledge and sometimes not even the map to get to where they want to go.

The knowledge can be shared, and generally good people will learn well enough how to do the various functions of the business but when a process is a complicated one that takes a while to do and relies on several inputs across the business, it’s not so easy to remember.

Add to the complexity a situation where a number of factors can change every time you do a particular task and you have to make decisions on how to act dependant on what that change is.  If you can’t remember the decisions that were made the last time you had this particular situation you either make a different call that could cause complications in itself or you spend time researching history to find out what the decision was previously.  Either way you are inefficient.  I see this a great deal with payroll and time is wasted frequently either getting a decision, making a decision or making a mistake and having to fix it.

Lack of efficiency can be a draining cost to a business and generally shows up as business functions taking longer to perform and more than likely not being done terribly well or at the least not done as well as they used to be.

Or it can even be as simple as the inability to make decisions.  If a staff member has to go back to a superior for a decision before they can proceed it immediately creates a time cost for both parties.  The superior has to review the situation and the employee has to wait.

When new people don’t have mechanisms to make the business work, inefficiency can take over and drown a business in confusion.

Have you ever worked in a place where you felt hamstrung because making decisions and progressing a task was dependent on constantly checking with the boss about the next step?

This is where documented policy and procedure make a difference to everyone working in an area.  A policy will generally provide the rules under which you can operate, it gives guidelines and helps in making decisions about how to do something or handle something.  When you have a framework to guide you, you invariably save.  Documented processes allow you to also assess how you do things and makes room for improvement and that’s where you get efficiency gains which should equal cost savings.

Why would a documented process be a time/cost saver if the process is something I do every day?

Granted, repetitiveness (practice makes perfect) will mean that a task can and should be performed efficiently but that isn’t always the case.   As long as you are the only person who will ever do that particular function, there is potentially no need for the documentation.

There will always be situations where that person who does the task day in day out, isn’t able to do the job.  Just imagine that this particular person is the accounts payable clerk and they are due to make some payments.  They call in sick and there isn’t anyone else who really knows the job but there are payments that absolutely have to be done that day.  Payments that will ensure continuation of supply.

Someone else steps in to make those payments but doesn’t have any real idea of what checks ought to be done before a payment is made –they know enough about the system to organise things electronically and they get the payment set up so it can be made.  One aspect has been satisfied, the supplier will not put them on stop supply, however, what if part of the process was to confirm the balance owed before it gets paid and there was a large invoice duplication that got paid twice because that step was missed.  Not only has cash flow been impacted but the P&L might have been messed up as well because of the double payment and then this makes your information unreliable.  Also, the time it will take to find the error and rectify it has to be included in the costs of the business as well as the implication of how long it will take to get the refund from the supplier.

A written process would have listed checking the supplier balance and the steps to take to do that.  It would have also given the information on what to do if the balance wasn’t right.  Anyone with some accounts knowledge would have been able to follow it easily and saved a lot of trouble.

When a business has grown but doesn't seem to be coping with the growth, what would you say the key issue is?

Small businesses with one or two people running things keeps ticking along for the most part because the key people are involved in all the areas of the business.  They know what they are doing and do it relatively well.

Things start to come unstuck as the business grows because all the knowledge on how the business functions is usually in the key people’s heads and when they are not available to everyone all the time to instruct on the doing of the business, the wheels can start to fall off in key areas.

Efficiency starts to die off and error rates increase and it starts a downward cycle of constant fire fighting.  Basic admin policies and procedures can alleviate this a lot.  They don’t always have to be documented in detail but if you have the basics documented you can safely rely on the same information being available to everyone.  Good admin is a solid foundation for a thriving business.  In my mind this is the key issue in a business failing in it’s potential.

Payroll is a great example of how lack of documented process can cause this inefficiency and high incidence of errors in a business and especially as staff numbers grow.

Unless the payroll officer has set rules on how to deal with the information that arrives for processing, errors will generally be made, as in not processing consistently.  This often happens when leave is taken and no one knows what sort of leave it was.  I’ve seen companies make decisions for the employees on what leave will be used because the employee didn’t advise at the time and wasn’t consulted because the pay had to be done and there wasn’t time to chase them up.

There needs to be mechanisms where under certain circumstances, particular action will be taken, where the supervisors are aware of their responsibilities in reporting in to payroll, where employees are aware of what will happen if they don’t provide necessary information to be able to process the pay properly.

The business also needs to be confident that all aspects of the payroll are meeting the regulatory obligations and award requirements.  The costs of not doing things correctly can be high.

What is a good example of when a process can create efficiency?

A good example is supplier payments.  If you manage a large creditor list and you have to make payments regularly to suppliers, you would benefit from scheduled payment runs.

Picking a certain day in a week or fortnight or month to do your payments allows you to follow other processes as well as keeping the payment task to a minimum time.

If you pay as things come up then you are prone to making errors, over paying because you are reacting rather than planning and potentially screwing up your cash flow for unplanned outflows as well as the constant interruption to other processes.

With processes such as supplier statement reconciliations, payment reviews and even authorisation steps, you save time, aid cash flow planning and should greatly reduce errors.

Another good example is debt collection.  Having a simple 4 step process for example of 1st week gets a reminder email, 2nd week gets a phone call, 3rd week gets escalated to boss and 4th week gets sent off to debt collectors.  If that process is followed every week you stand a much better chance of reducing debtor days and improving cash flow.

What are some hidden aspects of not having policy and procedure that could cause serious problems that can potentially send a business broke?

Fraud.  Fraud is a hidden item that doesn’t get thought about much but happens more than we’d care to think about.

From really little things like stationery theft to potentially crippling things like embezzlement, fraud takes on all sorts of disguises.  Think of leave taken but not recorded.  Think of stock items going missing.  Think of supplier payments going to a bank account that isn’t the supplier’s.  Think of an employee who has left the business but for some reason is still being paid.  Think of an invoice being raised and sent to the client and the client pays cash but it never arrives in the business accounts.

When there are processes in place that include authority steps you stand a much better chance of avoiding this.

We’ve all heard the stories about the business that was advised by email from the supplier that their bank account had changed and they make a substantial payment to that supplier based on that email and lost their money to scammers.

If the business had in place a simple step of confirmation when a supplier changed their bank account this would have been avoided.

Q & A with Jeanine Purdie

what are the warning signals that a debtor isn't going to pay... and when do you know it's time to do something about it?

At the start of your relationship

  • Reluctance to sign your terms and conditions
  • Wanting to set their own payment terms

When payment is due/overdue

  • They aren’t answering your calls any more or your number is blocked.
  • Ignored communications, whether by phone, email or mail.
  • Returned to sender mail.
  • Repeated requests for details of how to pay the account – buying time
  • Declined direct debits or credit cards
  • Rumours from others in the industry that the debtor owes other people money.
  • Disputed debt or amount when it hasn’t been disputed in the past.
  • Alerts from Credit Watch or other credit reporting agencies

The time to act:

You should have a company policy on how you are going to manage bad debtors… who the follow up is going to come from, whether it be from a director or CEO or CFO, and the time frames; eg anything over 30 days, 45 days, 60 days, goes across to a collection agency or earlier if there are disputes, or you’re hearing the previous warnings.

A clearly defined policy makes the whole process much easier.  This is particularly important in a fast growing company where things can get out of hand really fast, and even small debts can add up fast.

What's the minimum amount that's sensible to send for collection, or what do you write off?

$300 per debt or from the same debtor, a minimum $300 in total. Some collection agencies won’t work for less than $1000 or if they do they hold onto the money for a month so make sure that you look for an agency that pays out within a reasonable time frame after they have received the payment. (At Repaid we pay weekly)

What are the criteria to look for in a good quality collection agency?
  • Professional memberships: e.g the Institute of Mercantile Agents, or the Australian Institute of Credit Management.
  • Look for testimonials and follow up with previous clients
  • What type of technology they use, how secure their technology is
  • how often they repay you
  • What rates they charge
Can you keep working with a client once you have sent a debt out for collection?

Absolutely, if you use a collection agency who operates in an ethical and respectful manner. One of the best testimonials for a collection agency is when a debtor then hires them to collect debts on their behalf.

Look for an agency where the staff are mature and understand business. They’ve got to have some idea about bookkeeping and banking procedures, a bit of legal knowledge as well.  They’ve got to understand lots of industries.

We had a client recently who said…I can’t pay you because I have clients who owe me over $100,000. He was really impressed with how we had followed up with him so now we’re working on collecting those debts.

What information would I need to provide you if I was getting you to collect a debt for me? And will my information by safe?
  • Invoices.
  • The full history of the debt and any background information about the debtor.
  • Any communication that proves the debt exists.

Our systems are backed up and information is stored in a cloud and also offsite.  Make sure that whoever you use keeps your information secure.

How can I minimise the risk of bad debtors?

Spending time and developing good practices and policies to minimize risk as your business grows is a must for any business.

Before offering terms to a new client…have you checked their credit worthiness? A credit rating bureau or agency is a good start rather than checking with their supplied referee.

Ensure that you have up to date terms and conditions, which are specific to your business practices.

They must also include a default clause, so that costs of debt collection can be added to the debt.

Consider either a penalty for not paying on time, t or discount for paying the total bill on time.

Consider having a dedicated account’s receivable manager.

Be consistent, showing your debtors that you are professional and that you have a clear process to follow.

Make sure you got a good bookkeeper and accountant who are engaged and that can assist in the reporting there as well.

Meet the host

Stewart Clark, Founder and Principal coach of SCS Performance

SCS performance is a specialist consultancy firm delivering a specially designed range of coaching programs to the small to medium business market - to drive bottom line return.

Stewart is an energetic and experienced business adviser with many years of experience coaching, advising and supporting small and medium sized businesses across Australia.

Leveraging a lengthy career in finance and corporate business, Stewart has worked "in" or "on" a range of businesses and industries Australia wide.

Possessing a people-oriented style and a keen eye for detail, Stewart is well versed in strategic planning, financial analysis, sales delivery and business improvement. Stewart is also a published author of “It’s not what you make, but what you keep” and is a regular speaker.

Unlike a traditional business coach, Stewart focuses on enhancing the mechanics of a business – its people, its process and its systems – to achieve long-term business success.

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