For most companies, the periods of greatest growth are also the periods of greatest risk. Even well-funded startups don’t often survive, and those that do rarely make it to the threshold revenues that allow them to thrive in the long run.
Some of these businesses lack compelling business models and products, while others fail to effectively reach niche target markets. For the most part, however, obstacles to sustainable growth are common across all industries.
From poor planning to a lack of human resources to inadequate cash flow management, these problems plague almost every successful company at some point. The difference between those that fail and those that flourish is how they address them. Here are a few of the most important lessons we’ve learned from high-growth companies, including the several that we and our colleagues have built together.
Planning for Material and Human Resources
Ideally, infrastructure and development will always be ahead of revenue – but that’s rarely the case for fast-growing companies. As a firm grows, a lack of in-house resources can make it all but impossible for employees to properly service clients. And, even when money isn’t a constraint, the time of executives and key personnel always is.
To avoid this bottleneck, companies must plan for both material and human resources well before they run short. For the most part, materials are easier to plan: provide enough physical space, computer hardware and software licenses for a growing group of employees. Exact requirements are tough to determine, but erring on the high side is a safe bet when revenues are already rising.
The real difficulty is securing sufficient personnel. There’s always a lag associated with hiring (and firing), and it may take six months or more to onboard and train new employees. Earlier-stage companies typically have higher turnover or failure rates on hiring because the requirements of the roles are less well defined and evolve rapidly, managers may be inexperienced at hiring these roles or levels, and the environments can be extremely demanding. In the meantime, clients will have to wait, and growth can quickly come to a halt, or worse. Growth is exciting, and few companies have the discipline to slow expansion when demand continues to ramp up. An adverse mismatch between capacity/capabilities and customer demands often leads to errors, deteriorating customer service response, declining customer satisfaction, and in a socially networked world, can rapidly destroy brand, reputation and the company’s future. There are a plethora of options to address these growth and transition phases as they relate to people issues – consulting firms, interim financial management services and the like can be an on demand source of individuals who have operated on and in high growth companies in virtually any technical, sales or creative capacity. Accessing these types of firms can be an effective palliative to employee burnout while giving companies the time to execute a thoughtful hiring process.
As the saying goes: hire in haste, repent at leisure.
Employing People with Financial Skillsets
A particularly pressing and most often insufficiently attended area relates to finance and accounting roles. High-growth companies are often populated by entrepreneurial engineers, marketers, and creatives whose experience and interests do not include the design and implementation of scalable accounting and financial infrastructure. Management time and financial resources are most often focused on driving product development and revenue growth, which drive valuations and market share. As companies scale and secure successive financing rounds, at some point, often after a C round raise, implementation of a truly scalable accounting system as well as associated reporting and controls often becomes the most urgent and important priority, because the lack of these becomes a barrier to future financings (both debt and equity), and can create immense issues with respect to day to day processing of transactions. Our view is that the best time to build out scalable financial planning and analysis infrastructure, which is a foundation for a stable sustainable enterprise, is before the house is built or at least before a too large or too complex business is built on an unstable foundation.
Setting Up Viable Financial Systems
Organizations need to have infrastructure that provides not just for the company’s current size, but for its projected growth. Companies with nine-figure revenues all too often rely on QuickBooks for their accounting operations, and migrating to more sophisticated financial systems becomes far more difficult as revenue increases.
This change is better accomplished late than never, of course, but companies should begin implementing new technologies as soon as they reach eight-figure valuations. A scalable ERP takes months to put into place, and implementation will require at least some of a finance team’s attention that at too large an enterprise scale will be urgently required to keep the company running.
Creating Long-Term Cash Flow Forecasts
As a grizzled advisor to one of our companies once told me, the number one rule in business is never run out of cash. The costs of building a new business can quickly drain available funds, and without additional financing, a delay in income can wipe a company out. The best solution to that problem is to create a detailed, continually updated 13-week cash flow forecast as a minimum. One-, two- and three-year flow projections are also useful, not only to stay head of and plan for financings before they become urgent, but also to help manage organizational stress associated with negative cashflow. Companies burn cash when they launch; it’s a lot less disconcerting when leadership can refract actuals through a plan or forecast.
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About the Author
David Lewis has been the CEO or founding partner of 5 companies, including a 600-person family business, three successful startups and a venture capital-backed software development firm. His last startup scaled to a 300-person consulting and executive services firm, which served companies ranging from Fortune 500 firms to venture-backed startups. David has deep functional expertise in the creation and implementation of accountability systems, planning, finance, talent acquisition and executive coaching. David is currently the CEO of 8020 Consulting, which applies its team’s intellectual capital, technical expertise and energy to address a range of financial projects for clients ranging from Fortune 50 companies to middle market and venture-backed firms.
