The rapid growth of your business is a dream come true, right? For many SMBs, the dream turns into a nightmare because of their poor execution, or total lack of, a fast growth strategy.
Insolvency is at historically high levels. According to recent ASIC figures, there’s been a 16.7 percent increase in companies entering external administration in the first quarter of 2012 compared to 2011.
The March 2012 quarter is the third consecutive quarter in the current financial year in which external administrations exceeded 2,500 per quarter. We are seeing more and more companies in trouble putting their hands up for help.
Ironically, while Queensland and WA are the fast growth states because of the mining boom, these states also have the highest insolvency rates.
The fact that the boom states are also the leading “bust” states can be attributed to fast growth issues along with the eventual collapse of businesses that suffered from the onset of the GFC and have defaulted on their ATO payment plans. We are increasingly seeing fallout from companies reaching for the sky, because when their management skills, staffing structure and financial facilities don’t keep pace, this manifests in poor customer service, high staff turnover and a decline in profits.
Businesses are rapidly expanding to service certain sectors – in particular, the mining and resources industry, and can be so focused on new revenue and clients that they do not put in place the “scaffolding” that will support their growing enterprises. Being too successful can get you into strife. On average, one-third of our clients have actually been growing at 30-to-50 percent year-on-year. They come to us because they’re growing too quickly to handle.
Steps to deal with fast growth
There are practical steps businesses can take to ensure their fast growth is a success, not a sob, story. It is critical as a business grows that management increase the sophistication of financial modeling and internal systems and controls. Owners and managers usually see this as a cost centre and not vital. They put it in the too hard basket because it’s not as exciting as winning new work.
To keep control of the reins as you grow, it’s crucial to lay the groundwork to support a larger enterprise. Ways fast growing companies can reduce the risk of crash-and-burn include:
- Consider what parts of the business are crucial to upgrade. If you only have an accountant and are growing quickly, you may need to put in place a financial controller or even a CFO to deal with the changed circumstances.
- Focus on a six to 12-month plan, mapping out key risks and milestones and outlining growth forecasts and cashflow.
- Ensure your capital structures and facilities are adequate to deal with your planned growth, so that cashflow is not adversely impacted.
- If you are in high growth mode you need a clearly defined strategy to manage stakeholders. It’s important to invest sufficient time in maintaining and strengthening relationships with all key stakeholders – staff, suppliers, customers, banks, shareholders and, if applicable, community groups. Don’t neglect any of these. Too often businesses with cashflow crises put their head in the sand and avoid talking to creditors, which diminishes confidence in a business.
Struggling for AIR
A great example of a fast growth crisis and how it can be turned around is a company Vantage Performance worked with, national equipment hire business Australian Industrial Rental. This work won Vantage, and business owner Simon Mair, awards at the annual Turnaround Management Association presentations.
Based in Adelaide, Penrith, Mount Isa and Townsville, and specialising in renting air compressors, power generators and light towers, AIR went through a rapid growth phase at the worst possible time: the lead-up to and aftermath of the Global Financial Crisis. The business had grown too quickly and had a $2million cashflow requirement and a bank debt of $12 million across seven financiers, six of which were in arrears.
Their highly leveraged and under-utilised equipment had created the cash “hole”. The directors (and owners) of the business were very stressed, with their personal property on the line. Management financial reporting systems were put in place, and branches that were incurring trading losses and draining cash from the business were identified.
AIR was able to put in place strict cashflow management and aggressive stakeholder management, as we helped them negotiate payment plans with major creditors, restructure their branches and refocus the business around the boom mining sector. AIR’s cashflow crisis had become all-consuming and debilitating. Cashflow was micro-managed so that every invoice payable and every receivable was forecast week by week for a 13-week block – meaning each week they knew what the business could afford. Creditor payment plans and a repayment holiday we negotiated with AIR’s bank for two months helped to give them breathing space.
With a new focus on revenue and plant utilisation, AIR’s revenue increased 60 percent in 14 months and its business valuation increased from $9.7 million to $15.5 million in 18 months. The group was saved, and continues to grow.
Stress testing your way to success
Conducting thorough stress testing, through detailed financial modeling and ‘what if’ scenario testing, can help avoid business failure when you are in fast growth mode. This can be done in-house or reviewed by an external advisor.
Ensure you are putting initiatives in place to bulletproof the business from a range of risk impacts. Stress testing puts businesses in a stronger position if they need to negotiate with financiers, by showing they are prepared for change and able to handle challenges. It also enables a business to act swiftly and make wise decisions in response to change.
As part of a stress test, management or the business owner must ask:
- What if the credit markets seize up (again) and you are unable to roll over your banking facilities?
- What if the economy continues to slow? What impact will that have on your revenue and what is your new break-even level?
- For those businesses with a customer concentration issue, what is the impact on revenue and earnings if you lose a major customer?
- How is cashflow impacted if your customers take an extra 10-to-15 days to settle?
- Could there be a breach of banking covenants and how would you respond to financiers’ concerns?
- What changes will you require to your banking facilities and what would be your banks attitude to an increase in lending?
- What overheads will you reduce and what CAPEX plans must go on hold to preserve cash?
- Are sales or production levels too low to remain viable and is a merger/ strategic partnership needed to maintain critical mass? Who would you approach? Is your business ready for such a process or will you need six months to prepare?
- Are you able or willing to approach an investor as a means of strengthening your balance sheet or to fund a merger/acquisition?
It’s possible to embrace fast growth and ride the wave successfully, but please pay attention to setting the correct scaffolding for your business to handle swift success.