Managing growth
In the first year or so of your business, most of your efforts will be focused on making your relatively small company efficient, dynamic and most importantly profitable. If your plan is working, the next challenge is to manage growth.
There are three areas that you will need to consider:
- the financial issues surrounding cash flow
- the impact on the infrastructure
- the potential affects on the culture of the organisation.
There is an assumption in most of the business world that you must strive for growth at all cost. Certainly some is essential to ensure that your business can generate sufficient income for you to maintain its real value. However, it may not be your first priority. You may have “lifestyle” goals, which include motivation to manage your own family income with a more balanced way of life. In which case, driving for growth may be less of an issue.
Where it is highly attractive, is for those business owners who seek increasing financial rewards and potentially a lucrative exit some years down the line. If this is the case, your three-year plan probably reflects some growth objective to both your income and profitability.
Financial issues
Usually the most critical concern about growth is how to fund it. Bankers seem almost as obsessed with “overtrading” as they are about their bonus culture. Overtrading is generally defined as a situation in which a business is growing its sales faster than it can finance them. It is associated with unmanageable increases in the level of amounts due from customers and owed to suppliers which in turn compound overall liquidity. This concern ought to be easily addressed provided that the business is growing profitably not eroding margins and by applying sufficient resource to ensure that debts are still collected promptly and securely.
If you have already outsourced your debt collection, this will be helpful, as almost by definition they have the ability to handle more of the specific task they are performing for your business. You can also choose a second outsource company for that specific task if the situation justifies it.
At Ubevco, we experienced quite exceptional increases in turnover within just a few years of formation. We were delighted to achieve sales of £6.7m and make a profit in our first calendar year, but this level of trade was soon to become a distant memory. Led by Red Bull but with strong growth across the whole of our drinks portfolio, we quadrupled turnover in just two years to £23m and we then almost quadrupled it again the next year with £90m of sales.
The arrangements we had made when setting up Ubevco came into their own. Red Bull were happy to continue with a consignment stock arrangement whereby they retained the legal ownership of the stock until the point that Ubevco sold it, we would pay them each week for the previous week’s sales. This gave them a good quick cash flow and we were always able to pay them because through our factoring arrangement we were always able to borrow, if we needed to, an amount equal to 80% of what we sold the previous week. Included in the value of what we sold was VAT and our own margin. We would always have enough money to pay our bills, as long as the factor company were able to grow with us, and as the sales were profitable they amply covered any extra interest and factoring costs we had to pay.
To put the levels of funding in context, at the end of our first year of trading we were borrowing amounts in the region of £200,000 but just four years later these levels needed to be as high as £10 m. If we had financed the business any other way, we would have had to renegotiate countless times with heavy banking fees and risk a weaker negotiating position rather than a stronger one as we grew.
But for our factor company, growing with us was an absolute no brainer. Our customer base of around 400 invoicing points did not change significantly as the sales exploded, the number of orders did increase but most of the growth was in simply bigger orders. Moreover, most of our customers were credit-worthy, nationally known names and so the quality of the debtor book was generally first class. We were as good a piece of business as any factor company could wish for.
Now that it’s not to say that every business can mirror the circumstances that we were able to enjoy, but the roots of our solution lay in our original decision to involve the key suppliers in our funding chain. If you address such issues ahead of time and are appreciative of each other’s problems and concerns, you can often find a creative solution that helps all parties deal with the financing.
If you already have growth planned into your long-term plan, you need to think about how you will manage the funding and especially the cash flow.
Growing the infrastructure
Availability of finance is not the only part of your operation that comes under strain as you grow.
- Can you physically supply the extra quantities of your product or service that your business is providing?
- Will you be able to adequately deliver to your customers?
- Will you need more employees to deliver the extra business?
You need to be considering in advance if there any constraints to these supply issues and you need to factor in the increased costs to the business, especially if the costs are fixed in nature. If there are limitations on how quickly you can grow, you need to manage this. Letting customers down by a failure to supply can soon ensure that your rapid business growth turns into rapid decline. As far as solutions are concerned, once again good planning and problem sharing with your suppliers and business partners is the key.
The benefit of outsourcing again shines through in growth situations as much of the increase can be absorbed by your existing outsourcers or by adding additional ones.
As we have already discussed, all the Ubevco product storage and delivery was outsourced.
The strategy served us well logistically especially when we started to grow quickly, through the use of good quality business partners. That is not to say that things stood still and we changed some of the companies we used a few times to help improve costs and service efficiency.
When the growth of Red Bull began to accelerate, we needed to make a major change to the logistics model. The initiative involved moving to a rail solution, which helped both the Red Bull company and us reduce costs, by moving to a rail-linked warehouse in Daventry. It was a sight to behold as the weekly train from Austria carrying nothing but silver and blue cans pulled alongside the warehouse to be unloaded directly by forklift truck and readied for its return journey. It just went back and forth through the channel tunnel from Daventry to the Austrian factory – the only pity being that it usually went back empty.
The fact that this function was outsourced gave us the flexibility to initiate this change.
During the early years of your business there is much merit in retaining as much flexibility to your cost structures as possible. This will enable you to grow when you need to or indeed to constrict if the business environment hardens for any reason. The benefit of long-term business relationships in this situation are invaluable. You need to work with companies who will work with you during good times and bad.
The impact on the internal operation
Many of the individual tasks within your business may cope with the expansion more easily than you might imagine. You will find that the boost in morale from seeing some growth in the company will make the need to work a bit harder for all concerned easier to swallow.
In many ways, the hardest areas to manage will be at the very core of what you do; the strengths that you focused on when you started and designed your core proposition. With growth, it is likely that you will need to add resource to help you with the core tasks. It does not matter whether you are a very small business, with a handful of people, or a larger organisation, to be able to add such resource whilst maintaining the skills, style and culture you have established is one of the hardest parts of managing growth. We certainly found that to be the case.
As 1999 progressed, the Red Bull brand moved through that important point on the life cycle curve where consumer pull kicks in. As the rate of sale in current distribution increased, it became increasingly easy to bring on new distribution. By the end of that year, sales of Red Bull were up five fold on the previous year. A new set of challenges faced the business as Red Bull had changed from being one of six products in our portfolio to accounting for over 80% of the volume.
You would have thought that the relationships between our company and all our brand owners would have been exceptional. Sadly, that was not the case. Despite the strong growth on their brands the beer brand owners were increasingly nervous about the performance of Red Bull and its impact on the dynamics in the company. They were concerned that their brand would get reduced focus going forward. There seemed simply to be no pleasing the Red Bull Company either, but at least all our employees were happy. They had all earned six months’ salary as a bonus for their performance.
The issue related to our core philosophy. We set out to offer a small number of brands with a focused sales resource. The beer brands were worried that they would no longer get this, and Red Bull was concerned partly that it wouldn’t get enough resource, and partly that the resource in place didn’t reflect the company’s values. So Red Bull wanted more people and a different culture. The culture of the Ubevco team had been instrumental in achieving the success so far and so this was a difficult dilemma.
Managing the turnover from £6m to £106m financially and logistically had been relatively comfortable but the pressure from Red Bull to add people was less manageable.
A compromise was reached and we agreed to introduce a specialist soft drinks team starting in January 2000 of around 70 people and in return they improved our contractual term. However, managing this part of the growth was by far the most difficult issue we faced.
We suddenly had to move in directions that were culturally at odds with the Ubevco way. We could no longer as a management team keep everything very tight with a small and trusted senior team. There was inter-company rivalry regarding soft drinks versus beer people and, yes, the dreaded company politics began to creep in. Then, of course, there was the considerable management effort in the actual process of interviewing and hiring so many people in a short space of time. A recruitment agent was retained to help the process and suddenly we were into running assessment centres and personality tests – not to mention spending close to £400,000 on their fees.
So by mid 2000, we had a fully manned staff of around 130 people, all of whom of course needed paying and most needed a company car, phones, home computer and managing. This part of the growth was too fast and too costly. The distraction lost us sales rather than added sales and the extra costs were straight off the bottom line which is painful to recall, even though the company remained profitable.
Whilst we believed in outsourcing many key functions, the lesson we learned is that when it comes to the people who are going to work in your business, you need to retain control and manage as much as you can yourself. It had been an unrealistic expectation that we could successfully grow and restructure the number of employees at the rate we agreed to with Red Bull and it not only cost us lots of potential profit, it nearly lost us the true Ubevco spirit that we knew and loved.
Of course, in this situation the growth levels were unusually high. However, we believe that the type of problems we wrestled with over culture maintenance, expectation management and human resource issues are common ones that will occur at some stage in a business’ life.
As the owner though you are always able to make a choice and if you prefer to slow down growth to maintain other important facets of your business then you can. Equally, you can go with it and accept that cultural change may happen, even management and ownership change in the fullness of time.
These choices may be linked to your longer-term goals for the business. Some change is inevitable as your business develops and we will discuss this in more detail in the next chapter.
In summary
Growth is a good thing. There is a big condition though – as long as you stay in control of it. It may well be that the customer demand for whatever you are selling is greater than you expected. You cannot necessarily control this. But you need to stay in control of your business.
- Plan for the eventuality that your business will grow.
- Understand the financial impact and work out what options are available to you to fund the growth.
- If growth requires you to extend your operations in some way, try to build in as much flexibility as you can until such time that you have more certainty around the long-term position.
- Take great care not to lose the core essence of what makes your company tick. It is the successes of the past that are creating the potential for greater success in the future. So try not to throw the baby out with the bath water!