Grow Smarter, Not Bigger: How to Create Real, Sustainable Growth
Growth isn’t always a good thing.
Or rather, not all growth is good. And wild, out of control growth very rarely tends to be a good thing.
That might seem like an odd thing for a strategic business advisor to say, especially as we often talk about taking clients beyond. Getting out of ‘business as usual’ and achieving extraordinary outcomes (and huge growth) is why we’re here.
However, like that slump after a sugar high, or the brutal hangover after a great night out, it’s also possible to have too much of a good thing. Sustainable growth is growth that is managed. Sometimes that involves moderation – actually slowing down the rate of growth in order for a business to thrive. All businesses are different, but ultimately the aim is to avoid the hangover.
It’s an all too common scenario – business people believe the myth that because sales are increasing, cashflow will follow. Or the concurrent one that we also see is the idea that if they’re making a profit, then surely they must have cash. However, this isn’t always the case. As we were reminded recently when we hosted former banker and financial guru Steve LeFever from Seattle, Washington, it is very much possible for a company to grow itself out of cash. You can, quite literally, ‘grow broke’.
The team, and many of our clients, covered a lot during Steve’s Profit Mastery course (and I thought I presented fast!). Steve’s sense of humour and charismatic delivery made two full days of finance far more palatable, as did the fact that the material was all centred around finance from a management perspective (as opposed to an accounting/compliance one). It was the stuff that leads to empowered decision-making for those driving the bus.
A prevailing theme was that good management is mission critical to successful and sustainable growth. For countering the ‘speed wobbles’. But what sort of management is required to be able to thrive through a period of growth? Or – put another way – to take you beyond where you are now without the wheels falling off?
Cashflow over profit
The first important thing to understand is that just because money gets to the top line, doesn’t mean it will get to the bottom line. In fact, when sales go north, often cashflow goes south. In virtually every business, more sales means more stock and receivables – and due to the cash conversion cycle of most businesses, fast-growing companies can find themselves continually running out of cash.
Profit doesn’t equal cash. And just because your EBIT goes up, doesn’t mean that the cash position on your balance sheet does the same. We see this scenario all the time; businesspeople scratching their heads, unable to figure out why it all feels so tight when business is booming. It seems somewhat counter-intuitive. However, profit and cash live in different worlds, with different drivers and, as we can see, they don’t behave in the same way within a business.
While profit is driven by sales and affected by operating expenses – the stuff that’s all taking place on your income or profit & loss statement (P&L) – cash is hanging out on the balance sheet being affected by how much inventory you’re carrying, your accounts receivable and your fixed assets (all those things that you have/own in order to create sales). While most business owners favour the P&L for a picture of their business, the balance sheet is arguably more important for a company that is trying to grow. Even better is understanding the way the two work together.
Key measures to understand growth
However, there is understanding and then there’s knowing what to do with it. It doesn’t help to pull a lot of data if that information doesn’t help you plan any better. As Steve said, “if you follow a lost horse, you don’t get home.” Understanding the principles of the way that money flows through your business and the ways that your cash and profit cycles are different helps you see things differently, but you also need a couple of tools in your toolbelt.
Firstly, there is huge value in being able to plot and project your cashflow – in any business, but especially one experiencing growth, even if it’s just a seasonal peak at a particular time of year. A cashflow projection, done correctly, pulls information from both your P&L and your balance sheet. It creates a clear picture of your financial standing throughout the year and the relationship between sales and cash, sales and profit, and profit and cash in your business.
There was something hugely powerful about plotting this exercise to give us a visual – and remove any illusion that sales, profit and cash follow similar lines. It is Steve’s belief that the ideal or sustainable rate of growth is when profitability is enough to offset the growth slope (as happened in March-April in this example, when the rate of growth slowed. If managed well, this would allow for you to generate enough cash or capital to pay for your growth as you go.
Secondly, there are a couple of key ratios that help you determine both your stability (or staying power) as a business. If you consider that ratios really just signify relationships, the ones that provide a picture of stability will be those you find on the balance sheet. There were three key scores to consider here:
· Your ‘current’ ratio – or ability to pay the bills, which is calculated as
· Your ‘quick’ ratio – or ability to generate cash, which is calculated as
· And then your ‘Debt-to-worth’ ratio, which is what a banker would look at to determine their level of risk if they were looking to loan to you. This is calculated as
Beyond these key ratios, and a couple of profit metrics, are your asset management measures – the ones that demonstrate your working capital cycle. These latter ratios bring numbers from both the balance sheet and the P&L together and determine how long it takes your business to turn over stock, how quickly you are being paid, and how quickly you are paying cash out of the business. These numbers provide significant clues as to your cashflow situation and which levers you could pull on to make growth more feasible.
Looking at these measures both at any given moment in time, as well as tracking how they change over time with your previous year or two of data, is a hugely valuable exercise. As was working out the breakeven point of your business – a hugely powerful tool for business decision-making – and completing a financial gap analysis to see where you’re sitting currently in terms of being able to invest back into growth. It’s possible to obtain benchmarks in each of the above ratios from other similar businesses in your industry, which indicate how your business is performing amongst its peers. We have access to this benchmarking data and can provide it, free of charge – or help you work through determining any of these numbers for your business – just get in touch.
I love these metrics not only because I can see how looking at the numbers with this set of eyes helps you understand what you need to do, but also because I’m a big believer in measuring and managing key elements that improve the performance of the business. It’s fairly simple really; what gets measured gets managed, and what gets managed gets done. That’s where the magic happens.
Going beyond with your financials
According to Steve, this sort of financial planning should have the same quarterly rhythm as we advocate for strategic planning. In his years in both his own businesses and in banking, it has been Steve’s view that financial literacy is generally both poor and backwards looking. We see this in our local market too. When times are good and relatively easy, that might be all businesses need – but when they’re not, it’s vital that you know what you’re looking at.
Unfortunately, many business people don’t – which is why we bought Steve over. In the same way that we help clients see what others can’t and do what others don’t, Steve is teaching what others aren’t. Those who understand their financials in this way have an edge – they’re able to go beyond.
If you want to grow, you are going somewhere that you’ve never been before. And, to do that, you have to be someone you haven’t been before. We love that our clients are prepared to grow with their business, as opposed to being outgrown by it.
As well as his oft-quoted mantra that “metrics matter and management matters”, Steve had some other great parting words as we neared the end of day two. He said “when you’re going faster, there’s less room for error. What matters then is how good are you and your advisors? There is huge value in external advice and someone to ask the hard questions.”
I couldn’t agree more, Steve.
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