Notes from the Road – Weathering the Storm
During the holidays I was driving on the East Coast in a snowstorm, thankful that the vehicle I had leased had four-wheel drive. The storm quickly became a whiteout and the road ahead almost completely disappeared. Traction is nearly pointless when you cannot see the road ahead. Fortunately, the storm that started suddenly stopped just as quickly, and I was able to complete my journey with good visibility and traction.
A few days later, I arrived in Portland just in time to witness the first winter storm of the season. With snow and ice covering the runways and roads into town, everyone was doing their best to adapt. Luggage was delayed as crews were sent to deice the planes, and the line for a cab was over an hour. Snow is a minor distraction in the northeast where people are prepared for snow and ice but a huge issue in a town that deals mostly with rain in the winter.
SMART Business GrowthSM
Driving a car is not unlike running a business. It’s all about maintaining traction and gaining speed while maintaining control on the road ahead, or hiring a high-performance driver and giving them proper guidance on where you want to go and how quickly you need to get there. SMART, high-performance drivers take calculated risks and get further faster. Why? They have experience, they are skilled, they keep looking ahead, and they anticipate road and traffic conditions. They also select the proper vehicle and equipment for the anticipated conditions.
Speed, Traction and Capacity
The difference is that businesses need to generate their own fuel—cash—for speed and growth: Growing sales is not necessarily enough to generate that cash. Fuel and traction are needed to grow fast and stay on the road. Fuel, available cash to grow, is generated by profits; profits build with traction—your contribution margins, how much each dollar of extra sales brings in the door after you pay the incremental cost of sales, commissions, and materials, for example. How much fuel you need depends on how fast you are going and how quickly your vehicle consumes fuel—that is, how much overhead you are paying out to maintain your workforce and facilities.
Calculated Risk and Anticipation
As global uncertainty and the recent stock market downturn had financial analysts debating the future of the economy and the prospects of US firms, talk of profitable growth and value were all the rage this week on CNBC as 9 companies, including Nike, outperformed expectations. You cannot control the market conditions, but you can anticipate and select the markets, product mix, cost and financing structure for your business to grow in good and bad times. Your pricing leverage and cost structure, how quickly you add on capacity through employees and space versus outsourcing to maintain flexibility, are key to having traction regardless of market conditions. Your pipeline, revenue streams and pricing strategy, are key to gaining speed and using different gears to get in the fast lane.
This is particularly true for fast-growing and aspiring mid-market businesses. Grow too fast and the top line grows but those may not be profitable sales or worse yet, your fuel consumption may be too high. Hit a snowstorm (that is, a downturn) that slows down sales and you still have to pay for the overhead. Fail to think ahead, and you may hit that snowstorm unprepared. For example, recently at the top of Inc. magazine’s fastest growing companies in Oregon list, The Clymb was recently sold at a significant loss to investors. Similarly, Go Pro’s recent layoffs and market devaluation follow significant revenue shortfall attributed to lower sales volume due to mispricing in a competitive market and lack of new product options.
Call to Action – Inspired by recent conversations with clients and creditors, here are key markers that every aspiring fast growing mid-market company should be gauging and acting on:
- Speed and Traction: Are you chasing profitable sales or spinning your wheels?
- Increasing sales volume and revenue per employee are evidence of increasing speed;
- Increasing contribution margins per sale and increasing profit per employee are evidence of increasing traction;
- Increasing cash reserves and asset turnover are evidence of both.
- Capacity and Calculated Risk: Are you wasting time and opportunities because you lack capacity or do you have a higher performance vehicle than you can handle?
- Overtime, increasing lead times, quality issues, bottlenecks and increasing sales without profit can be evidence of reaching capacity or misguided sales growth.
- Increasing sales dollars but decreasing cash flows can indicate more capacity (overhead) than can be filled or inefficiency.
- Outlook and Options:
- What is your customer and supplier market outlook in the face of growing uncertainty?
- Do you have a sales mix and pricing strategy to get in the fast lane while giving you the option to weather a storm?
- If you are growing fast, do you know your true costs, are you generating enough cash flows in good weather and setting up reserves to get through a storm?
