During periods of rapid growth, entrepreneurs are often called upon to react to unpredictable events in their own organization and market. If it is to manage in such times, a company must ensure that its processes, systems and strategy are flexible, and adaptable to various conditions that may develop. This challenge raises an important question: Is there a basic business infrastructure that can be established during the startup- and rapid-growth phases that supports the execution of a flexible strategy? This article addresses this question by commenting on the findings from interviews performed with over 50 rapidly growing firms based in the greater Chicago area.
The data from these interviews were reviewed with a view to finding insights that could help build a basic business infrastructure to support strategic execution. The analysis identified four activities that a number of successful entrepreneurs paid considerable attention to: financial control, data collection, skill-set enhancement and strategic planning. Together, these activities helped a number of firms form a basic business infrastructure. More importantly, this infrastructure proved to be scalable in a number of cases, providing considerable ongoing support for the businesses. While these activities cannot be said to form a definitive list of what might benefit a rapidly growing firm, they were common among a number of firms that enjoyed sustained growth and profitability. The analysis and examples suggest that building a basic business infrastructure enables an entrepreneur to make more effective decisions and increase the chances of building an enterprise that will endure.
In a company’s initial growth phase, cash is often a scarce commodity. When an entrepreneur needs cash to finance growth, the sources are often confined to personal savings, credit cards and friends and family. While these sources can be accessed, the amounts available are usually limited, a fact that makes internally generated revenue so precious and financial controls so critical. Some companies interviewed demonstrated exceptional financial controls by managing cash effectively, monitoring financial information, containing fixed costs and maintaining operating margins. Effective controls enabled these companies to limit unnecessary expenditures and maximize the amount of internally generated cash flows.
Cortland International is a firm that performs executive search, outplacement and retirement-planning services. Scott Robertson, a founding partner, described his fellow partner Brian as “one of the best cash managers I have ever seen.” The company’s philosophy is to manage costs aggressively while making only value-adding investments. Brian is continually trying to squeeze out unnecessary costs while channelling savings into productivity-enhancing investments. For example, he was able to reduce the company’s expenditure on cellular phones by $29,000 per year by buying from a more competitive supplier (all currency in U.S. dollars). This and other savings enabled the company to invest in software that improved a key efficiency ratio by 56 percent.
Cortland International used an effective financial information system to support its cash-management efforts. While recording cash receipts and disbursements accurately, the system helped to monitor the health of the business and identify problem areas. Monthly reports showed revenue, margin and working capital trends by business unit. Negative trends in these areas pointed to operational, financial and/or strategic issues affecting cash flows that needed to be addressed. Being able to address these issues in a timely fashion enabled the firm to avoid or effectively manage many of the financial difficulties that plagued other companies in the sample group.
Effective financial information systems need not be expensive or complicated. When they launched the firm in 1990, Cortland’s founders started by using off-the-shelf accounting applications Quicken™ and Quick Books™. They were still using the applications in 1999, when revenues had reached $7 million.
Bob Bhar is the owner and founder of Bhar & Company Integrated Marketing. The company specializes in creating integrated marketing communications programs for medium- and large-sized businesses. Bob founded the company in 1987, using a $60,000 home-equity line of credit. He was not able to secure a business line of credit until 1994, though the company was profitable and growing. Bob was able to finance his growth internally by maintaining strong operating margins and containing fixed costs.
Maintaining strong operating margins can be difficult for a rapidly growing firm. In the rush to grow revenues, entrepreneurs often lose sight of the profitability of the products and services they are selling. In its earliest years, Bhar & Company was happy to take on any client. However, as the company gained credibility and expertise, it focused on selling value-added services to larger clients rather than lower-margin services to smaller clients. This meant that Bhar & Company had to sacrifice immediate growth opportunities in favour of cultivating more profitable clients. The strategy paid off, enabling the company to increase its margins considerably over the following year. Combined with diligent cost controls, the strategy greatly enhanced the company’s cash flows.
A critical factor in Bhar & Company’s success was its ability to manage costs. While it managed variable costs effectively in much the same way as Cortland International, Bhar & Company also paid considerable attention to managing the growth of fixed costs, which were kept in check by making incremental investments in both human resources and office space. Bob Bhar spent a great deal of time deliberating hiring decisions, making sure that the business pipeline justified the additions to his team. He also found office space in a building that had excess square footage. He secured a first right of refusal on the extra space, which allowed him to expand the offices as the company grew.
As cost structures in our sample differ, the methods for managing fixed costs vary greatly. A number of firms found ways specific to their businesses to keep fixed costs in check. These included outsourcing manufacturing, leasing equipment instead of buying, sharing assets with other firms, encouraging home offices, hiring contract employees and buying used, instead of new, equipment.
Entrepreneurs can be faced with a staggering number of decisions daily. While these decisions will invariably be based on imperfect information, every effort should be taken to ensure that the information available is timely, accurate and relevant. In smaller firms, managers and employees usually possess a great deal of data. But entrepreneurs can only collect and leverage this information if internal communications are effective. As a company grows, the need for more automated information systems increases. The key to effective communications for a rapidly growing firm is to maintain efficient interaction among employees, supported by an information system that is flexible and scalable.
Cortland International established effective information systems when it opened for business. It did not spend lavishly on sophisticated hardware and software, but identified what information would be needed on a regular basis and what method of data collection would be the most cost-effective and time-efficient. Once these questions were answered, it looked for ways to ensure that its systems would be scalable. The result was a combination of standardized, expandable computer hardware, off-the-shelf software, and monthly meetings with functional managers that addressed the key drivers of the business. As the company grew and technology improved, the size of the computer network was easily expanded, file-sharing software enabled greater internal communications, and more sophisticated modules were added to the off-the-shelf software. What remained were the regular meetings to assess the key drivers of the business and the collection of timely, accurate and relevant information.
Many business founders admitted that they lacked certain business skills, primarily in the legal, accounting and general management areas. A number of entrepreneurs felt the severe consequences of this inexperience. For example, a steel fabricator was investigated by the Illinois Equal Employment Opportunity Council and was found to have minorities inadequately represented in its work-force. The investigation resulted in a $580,000 fine, plus $80,000 in legal fees.
While the steel fabricator re p resents an extreme case, most entrepreneurs face a variety of obstacles. Some of the m o re common result from contract disputes, poor financial controls, working capital pressures, operating inefficiencies and impractical or unrelated investments. Seasoned businesspeople can help entrepreneurs predict, prepare for or avoid such obstacles. Moreover, legal, accounting and insurance professionals can often provide critical insight into their areas of expertise. It is clear that inexperienced entrepreneurs who tried to enhance their skill sets benefited dramatically, as is illustrated by the case of Bob Bhar.
When Bob decided to start his marketing company, he had extensive experience in integrated marketing communications, but lacked basic business-management skills. One of his first steps was to establish an advisory board of experienced business executives and professionals. The five-member board included an attorney, a marketing director from Unilever, the CFO of a medium-sized company, the owner of an independent sales organization, and a VP of sales and marketing at an event-planning company. All of the members were trusted friends or colleagues that Bob had met over the course of his marketing career. The board proved to be a key resource for Bob, who realized early on that his primary weaknesses were in accounting and legal procedures. The advisers, who were each paid $1,000-2,000 per annum, enabled Bob to fill these skill gaps without giving up control of his company. Bob credited this arrangement for helping him avoid many of the typical traps that entrepreneurs fall into.
While an advisory board worked well for Bob Bhar, other entrepreneurs supplemented their own skills in a number of ways by using mentors, consultants, professionals, boards of directors and peer groups. It was clear that the entrepreneurs who supplemented their skills in one way or another were more likely to avoid the common obstacles that can cripple a young and growing business.
While many of our participants scoffed at the thought of planning, with the comment, “Who’s got the time?” a number of them in fact had implemented effective strategic planning systems. These companies shared a pragmatic approach to planning; the objective was not to establish rigid end points and strict directions, but to focus on more general goals and monitor progress.
GMI Inc., an information technology-services company founded by Greg Merry, provides an exceptional example of a rapidly growing company that implemented an effective planning process (GMI Inc. grew at a 39-percent compound annual growth rate for the nine years ending 1999).
Early in its life, GMI Inc. adopted what is called a “312” planning process, one that involves three year, one-year and biweekly reviews. Every three years, the company reviewed its overall long-term goals and objectives. These covered a number of areas including growth targets, mission statements, customer and employee satisfaction and community service. Each year, the company reviewed a plan that provided more detailed performance measures. Biweekly reviews provided progress checks in which the management team asked, “Are we on track? If not, why not, and what adjustments need to be made?” Greg stressed that the plans are not rigid; they are a starting point and a focal point that itself can be changed. The review process forced him and his managers to think about where they wanted to be, how they would get there, and if what they were doing daily was helping them get there.
PAYING THE PRICE
The steel fabricator’s story provided an example of a company that experienced a setback caused by a lack of regulatory knowledge. There was one firm in the sample, however, that provided an excellent illustration of what can occur if all four of the activities discussed are ignored. This example chronicles the story of Al Jackson, who can only be described as a classic entrepreneur.
Al dropped out of college after one year and found a sales position at a blueprint company. Once he started interacting with his customers, he kept thinking of product ideas that would make the customers’ work more efficient. His bosses at the time continually turned down his ideas, so Al maxed out three credit cards while he financed an initial production run for one of his product designs. Within five years, Al’s company, DesignLine, was generating $3 million in revenues at 75-percent gross margins.
While DesignLine was a remarkable success, Al neglected to build a business infrastructure. Financial control was not a priority. He spent lavishly over the five years on luxuries such as airplanes and all-expenses-paid trips to resorts for employees. Al did not like numbers and preferred to spend his time developing and selling innovative products. As a result, he outsourced his bookkeeping to a service that provided him with annual statements three months after his year end, providing little financial information on which to base management decisions. Moreover, data collection and internal communications were ineffective, further limiting the amount of information available to decision-makers.
Al was not a seasoned business operator and did not seek to enhance his skill set. As a result, he incurred unnecessary expenses caused by inadequate re c o rd keeping, insufficient insurance coverage and salaries that were above the market. DesignLine had no planning process in place. Before long, it was blindsided by the introduction of a technology that made substantially all of its products obsolete. Al simply did not have the basic business infrastructure he needed to support sound decision-making and the efficient allocation of resources. The company ceased operations in its sixth year.
While DesignLine suffered an untimely demise, Al was able to learn from the experience. He salvaged enough resources to start a new company called BluePrint Inc., a company that converted paper blueprints into electronic files for printing and storage. BluePrint had the benefit of a full-time comptroller, automated information systems, a group of legal, financial and insurance advisers and a fairly regular planning process. The company’s forecast called for it to generate $6 million in revenues in 2000.
Financial Control, data collection, skill-set enhancement and strategic planning are the four activities that are key to building a basic business infrastructure that supports the execution of a strategy. Designing a business infrastructure may not be the most exciting undertaking for entrepreneurs, who often prefer having animated discussions centred on their vision of the future. However, it is a project that warrants considerable attention from founders and managers of rapidly growing companies, especially those who wish to grow and endure.