The ABC’s of controlling business growth

The ABC’s of controlling business growth

The most exciting time to be involved in a business is at a time of rapid growth. It’s also the most challenging and I believe that, like all leadership, strategic direction is there to provide the springboard for the production teams by removing obstacles.

Building the team and ensuring that everyone can play to their strengths – that strategic steer comes from strong operational controls.

It’s equally important to understand the various stakeholders and their motivations, to ensure you can deliver on the targets expected.

On the surface these are usually fairly similar – make us more money! Keep the clients happy! Keep the team happy! But – as usual – the devil is in the detail and at the heart of financial planning and business forecasting are three stand-out controls:

  • Growth
  • Margin
  • Risk

Growth

Growth is the top line growth – how do we achieve more sales.

In a services industry that also has a direct link to an increased team size. By selling more, you bring more revenue in which allows you to hire more people – and hopefully sell more. A self-feeding engine.

The associated danger with this is that by selling more and by bringing in more clients, your focus is naturally diluted. To compensate, the answer is typically to bring in Account Managers. The risk is that with every new hire, the personality of the company changes. The opportunity is that it changes for the better – but that’s not always true.

Recruitment and company culture is of paramount importance to ensure, as you build the company, it stays true to the vision and objective behind the organisation.

Margin

If your top line increases but your costs increase disproportionately more, then you become less efficient the more you grow. This is fairly typical as you move from lean, nimble startup to a more mature organisation so expectations need to be managed appropriately.

The ambition is that in time, the machine becomes stable and operational efficiency is increased as we get used to operating at that new scale.

The challenge around margin management is that sometimes monthly margin figures can be misleading. It’s important to understand your margin and cost of goods sold separate from your operational costs which can, by their very nature, by quite lumpy in where they fall in the year.

Risk

When you are a single entity beholden to no one but yourself, it is tempting to justify to yourself that the immediate story represents a long term sustainable vision. Bigger, older organisations are more experienced in seeing the various phases of growth and as such have metrics and controls in place to manage and identify times of change.

Risk management is necessarily part of that model and the challenge is that too cautious a risk management model results in a stifling of growth.

Fortune unfortunately favors the brave, so setting out conservative targets for revenue growth ultimately can be a self-fulfilling prophecy. Shoot for the stars and you may just hit the moon – but be careful about using reported versus internal targets as when you have a safety net, you lose the impetus the pressure to deliver can provide. Using these controls effectively is the key to managing your business.

One of the things I find useful when operational planning has been the following structure.  You can have two of these three elements prioritized but not three:

Situation A

Strive for top line growth and manage risk

This is my preferred way to manage a growing business. Sell the work, deliver it at scale and at a good level of quality without leaving yourself liable to potential large non billable costs.

This means leveraging a freelance market through trusted personal networks and handpicked recruiters who understand the type of people you look for and through strong, proven delivery tools to ensure consistency.

It does, however, come at the expense of operating margin – so expectation needs to be set early on. Once growth is proven, you can then focus on stabilizing and increasing operational efficiency (but that’s a different model).

Situation B

Strive for top line growth and manage margin

This sounds perfect – get the top line growth and make the maximum profit along the way.

Typically you do this in a services based industry by hiring your team in advance and then selling them in. You deliver the work through people who are embedded in the business and who you invest in over a long period of time. The challenge with this, is that it carries a huge amount of risk – you want to build a £10m business but you only have a team which can do £1m of work currently?

You then need to hire that team in advance and unless you have significant investment and commitment to large amounts of non-billable time that simply isn’t possible. The reality is, that achieving this model consistently is extremely hard unless you have a unique proposition and a clear gap in the market.

Situation C

Manage margin and risk

Managing multiple business streams inevitably shifts the focus somewhat towards predictability and sustainability. The objective becomes about consistent profit and minimizing risk to the business. This level of control however comes at the expense of significant growth.

None of these models is better than the other.

Depending on the immediate business objectives a model must be chosen, along with an understanding of the limitations as described above. Once the model is selected, a financial plan is needed to track performance against expectations and I’ve personally found that quarterly steering is the most effective way to manage the business.

Monthly, for me at least, is too close to the tactical changes to give effective management – you end up over steering, almost micromanaging the business to its detriment. Equally half yearly or annually allows too much time to elapse before action is taken. Quarterly seems a good balance between the two, where the target plan is paired with both a fall-back plan in case objectives are materially missed, and a more aggressive growth plan relying on more temporary resource immediately to ensure nothing is dropped should revenue exceed a reasonable target representing stabilization – I recommend basing this on the average of the last quarter.

Ultimately margin is best managed during times of growth in terms of absolute profit margin rather than percentage points. Providing profit is increasing overall, the focus on operational efficiency can come later as the baseline sustainable revenue becomes established, whilst retaining the growth model for elements of risk.

In terms of team planning there are also two growth models – one is a scalable model which grows proportionately in time, but I’ve found that this often leaves you weak in certain areas.

The alternative, is grow your top level team – your leadership and inspirational team managers – filling out the mid and junior layers as you bring in additional work.

You have to determine whether you are growing your work by adding more small projects or by taking on larger and larger initiatives. If it’s the latter, then you need the heavy hitters who are capable of planning and executing against projects on that scale. If it’s the former then you can certainly scale a team made up of individual project units effectively but your sales effort naturally grows in line and you are limiting the scale of individual project you are capable of handling.

The hardest part of this planning is often aligning the various stakeholders given their different objectives. These are models, approaches and guides that I’ve found useful to structure conversations around each of these aspects and explain what the strategy is aiming to achieve.

Once a model is positioned around an agreed strategy, it’s much easier to get buy in including around ongoing decision making as it plays back to an aligned point of agreement.

This post is part of our contributor series. It is written and published independently of TNW.

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