Managing through growth

Managing Through Growth’s Unexpected

Challenges Christopher Masters, CPA

Doeren Mayhew

Look for the warning signs:

Turning No Project

Down SLOW

Capital Shortages AHEAD

Customer Complains

WARNING

Losing Sight of the

Competition DISAStER

Reactive vs. Proactive

Mode DISAStER

SItE

Ignoring the Small Costs DANGER

Addressing the Challenges of Growth


• Cash – You’ve got to know when to hold ‘em!

• People – Who are all these new faces? • Systems – How does a balance sheet not

balance? • Focusing on the KPIs Quality – Do we have to deliver on our

promise? Pricing – It never used to cost this much!


Cash You’ve got to know when to

hold ‘em!

Obtain Cash

Buy Raw Materials or

Pay Employees

Make Product or Provide

Service Sell Product or Service

134 Days!

60 Days

30 Days 30 Days

14 Days

Cash Management

Cash Management

• Plan on funding at lease 4 months of operations!

• Virtually every business experiences times when there is a cash-flow gap

• With that in mind, projected growth should be managed within known cash-flow constraints … and if external funds are required, this needs planning in advance

• Managing cash flow is critical to navigate the first challenge of growth

Cash-Flow Fundamentals

• Many businesses don’t realize that when you begin to grow, cash flow will actually be extremely tight

• This makes a cash plan for growth essential • The easiest way to get out of control is to not

follow your well documented plan • 4 fundamentals …


1. Budget • Is an essential cash-flow management tool • Is only useful if you update it regularly to reflect

actual spending • Should tie into and support business goals (if you

can’t demonstrate how an item enables a goal, question its merit)

• Should be examined line by line


2. Cash-Flow Forecast • Is created with your budget as a starting point • Reports the net increase or decrease in cash for the

business • Factors in the cash inflows and outflows of daily operations,

asset purchase, sale proceeds and financing activities • Both 13 week and 39 week cash flows can be useful • Highlights potential shortfalls in advance (i.e. payrolls,

equipment purchase, insurance payments, taxes) • Can look at it on a project by project basis


3. Manage Expenses • Should be tracked by keeping accurate expense

records, which can be automated with your accounting software

• Can be examined for ways to reduce day-to-day operating expenses

• Outsourcing – stay flexible in growth HR Payroll IT support


4. AR/AP Process Review • Credit/Reference checks • Deposits/Early pay discounts • Aim for zero-defect invoices to reduce scrutiny by the

customer • Adhere to a tight invoicing sequence to prevent payment

delays: Consider billing upon completion of sales vs. on a standard

monthly date Try to make partially completed work billable Email/Fax invoices Tracking and collections on aging receivables

Example $20M staffing company grew to $30M Constant line defaults due to poor

projections Bi-weekly pay periods 60 day collection cycle Monthly tax payments were always a

surprise

Cash Management Best Practices

Example $30M apparel company grew to $50M Purchased cloth from China Prepaid all purchases 2 months in advance

of receipt 6 month collection cycle Had to create cash reserves

Cash Management Best Practices


People Who are all these

new faces?

Hiring

• Determining the need • Allocating or reallocating tasks among

available staff • Part time/full time? • Working with management on the idea • Finding the right fit

Determining the Need

• Document hours being spent or hours needed for each task

• Consider realigning tasks with available resources

• If there is a need, determine if it’s part time or full time, temporary or long-term

• Determine if business cash flow can sustain hiring

• Look to your competitors to get a general pulse on hiring in your industry

Document Hours Spent/Needed

Can You Realign Tasks to Fill Need?

Yes No

Part Time/Full Time? Long-Term/Temporary?

Risks of Not Hiring

• Not billing the customer timely • Collections not happening • Expedited freight due to purchasing issues • Quality is sacrificed • Overtime and double time that will ruin the

budget • Not meeting bank requirements

Risks of Not Hiring

Example • Multi-million dollar international manufacturing

company • Doubled the monthly buy and didn’t add anyone • Purchasing agent became a firefighter

No bulk discounts No lead time on materials Expedited freight

• Projects delayed

What Hiring Isn’t an Option?

• Inexperienced or unqualified people May not be time for training

• Putting people in tasks they don’t want to take on Student body shift

• Throwing bodies at every bottle neck Don’t just hire anyone

Communications Best Practices

• Listen to management and their departments!

• Understand what is needed and why

• Set an expectation of when the benefit will be realized

• Meet with the departments regularly – don’t just send an email

• Challenge the status quo and prove it in a way that others can understand Examples – commission program; performance bonus plans


Systems How does a

balance sheet not balance?

Accounting Systems

“Our accounting system needs to share data with our

spreadsheets and other software.”

“I want reports to show data the way I want to see it.”

“I’m tired of making our business procedures

fit our accounting system.”

“We have too many systems that don’t

work together.”

Signs Your System is a Hindrance

• Staff keying in the same data more than once • Recurring issues that aren’t resolved each month • Too many hours spent reconciling between systems • Use of Excel spreadsheets vs. system-generated

reports • Not enough control • Not providing reliable information • Month-end close takes more than five business days

Key Considerations

Currently working with more than one system to

generate financials

Noticing redundancies in processes

Consider compatibility or

replace with fully integrated

software

Consider revisiting processes and

making changes to improve efficiencies

Key Considerations

• Do you have sufficient resources to replace existing software? Staff Technology Budget

• Have you or your management team ever gone through a system implementation?

• Are you capable of overseeing the implementation?

System Considerations

• Will the system capture all operating processes or will you have to find “workarounds”?

• Will the system produce real-time, effective reports to monitor the business?

• Does the system offer advanced security levels for users?

Pain Points & Best Practices

System • Assist in the assessment and determine

software that has the “best fit” Dual processing – manual entries Amount of “workarounds” and Excel reports Data capacity System capabilities Cost Support Evaluate functionality


Process • Review workflow chart processes and identify

weaknesses within the process • Recommend best practices: What processing obstacles are creating bottlenecks or

rework? Are there processes not being captured in the system? Are there processes incorrectly configured?

People • Evaluate skill set of employees entering information

into the system and recommend whether additional training is required: Identify individuals who create bottlenecks in the system Identify individuals who “work around the system” Recommend or assist with training to facilitate a better

understanding of the process


Implementation Cost/Benefit, Purchase ROI

• Use the 1% rule – estimate of revenue on total spend for new system (i.e., annual revenue $25 million, budget = $250,000 for new system)

• Analyze cost of consultant(s) and employee resources • Consider cost of software – package, licenses,

maintenance • Consider cost of hardware • Determine if annual cost moving forward is appropriate

for the business • Quantify the cost of man-hours saved

Client 1: Optimize Existing System • Plastics manufacturer for oil/gas industry • Implemented system on its own, resulting in problems:

No real-time reports or dashboards

No accurate job costing

Lengthy month-end close

Lost sales opportunities

• Evaluated the system, outlined recommendations and helped the company implement changes

• Result: Estimated reduction of 550 hours and $28,000/year

Example

Client 2: Implement New System • Service company looking for new system to better

integrate with Microsoft Access database to alleviate: AP issues

Billing errors

Double entry

• Researched software options, weighed costs versus benefit and assisted in implementation

• Result: Estimated reduction of 875 hours and $23,000/year

Example

Words of Wisdom

• When planning your system assessment remember the inter-relationship between the variables: Cost – inexpensive/expensive Time – least amount of time/maximum time Quality – low/high

You really can only choose two of the three, as the third variable will always be affected

by the other two. Choose wisely!

Remember …

• It’s important to understand the numbers • Once you know what’s going on, you can

investigate likely causes • Never assume anything—a good

management information system is worth its weight in gold and will prevent errors in judgement from costly guesswork!


Quality Do we have to deliver on our

promise?

Pricing It never used to cost this

much!

Learning to Rely on the Numbers

• As the business grows, management begins to lose the “intuitive” feel they once had about the business: Don’t “know” everyone anymore Don’t understand what all these numbers mean No longer able to gauge employee productivity Business becoming more department-oriented rather

than individual-oriented

These growing pains are just a few signs that it is time to take a higher-level approach to

financial management

What should I look at?

• Typical trouble areas Overtime Freight Less obvious costs Utilities Rent Property taxes Capital expenditures

Focusing on the KPIs

• Key Performance Indicators (KPIs) Provide insight into the numbers Benchmark against prior reporting periods Track performance throughout the growth Assist in identifying potential problems And more …

Be sure to explain differences and changes, not just note them …

What’s a KPI?

• A measure of how well a process or area in the overall business is performing

• Can measure processes in dollar or quality terms • What can be measured?

Operational performance – a straight measure of an activity

Financial performance – results comparison, i.e., period vs. period, your business vs. others in your industry, plans vs. actual

Product/service quality – warranty issues

Customer satisfaction – loyalty to your product/service

Employee satisfaction – turnover, salary comparison or morale

Pricing tool – labor rates, overhead rates

Purpose & Benefits of KPIs

• Facilitate better management

• Provide more than a scorecard of performance

• Help to identify existing or emerging problems, as well as negative trends, before they become a problem

• Measurement assists in clarifying and improving existing processes

Purpose & Benefits of KPIs

• Serve as change agent • Alignment of long-term goals with short-term

performance • Provide milestones while working toward

long-term objectives • Promote understanding of areas critical for

success A way to get non-accountants to pay

attention …

KPIs & Critical Success Factors (CSRs)

• You must always get them right • They are measured by KPIs

Sales Order Fulfill Order Documents to Invoice

Invoice Prep Invoice Sent Cash Collections

Obstacles

• Data Entry Errors • Poor Quality Control • Missed Target Shipping Date • Inadequate Inventory

• Data Missing • Invoice Sent to Wrong Address

KPIs & CSRs

To identify CSRs, ask which processes: Are vitally important to achieving your vision/

maintaining your differentiation or competitive edge?

Are most important to the customer?

Have the greatest impact on cash flow?

Have the greatest impact on ROI?

Directly impact team morale?

Example: Cash Flow as CSR

KPI 1 Days in Accounts

Receivable

KPI 2 Clients Lost to

Aggressive Collection Policies C

ash

Flow

Measure Both Sides

Financial Non-Financial

Levels of KPI Reporting

Enterprise-Level (monthly reporting): Ex. – profit and cash flow

variance from annual budgets

Business Unit-Level (daily or weekly reporting):

Ex. – average transaction value, transaction count, number of complaints received

Operational-Level

(daily or more frequent reporting): Ex. – weight of coffee beans roasted per hour, number of sales calls made per day

Defining KPIs

• Who should be involved in defining your KPIs? Those who: Own the process Are accountable for the process Can respond to unfavorable trends

• 3 musts: 1. The owner must understand the business strategy and

how the business processes contribute to it 2. The KPI must describe the targeted performance in

measurable terms 3. The KPI must be actionable

Where Should KPIs Be Used?

• Within all the major CSR areas: Finance Business processes Customer relations People development

Where Should KPIs Be Used?

• Pricing Direct labor hours

Direct labor dollars

Fixed overhead

Variable overhead

SGA %

• Quality On time delivery

QC rejects

Returns

Lead times

Cost overruns

As You Grow

Example • Manufacturing Company Grew from $50M to $140M in 3 years Experienced negative gross profit Expanded from two plants to five Significant capital expenditures Lost ability to shrink if needed

As You Grow

Watch the numbers: • Revenue per employee • Days in working capital – break into sections • Average revenue per sale • Concentrations with customers and vendors • Overtime – in total and as a percentage of

revenue • Backlog

As You Grow

Watch the pitfalls: • Cash-flow crunches Pay attention to key ratios Use cash-flow projections Use budgets

As You Grow

Watch the pitfalls: • People Hire vs outsource Be flexible

• Systems Can my current system handle growth Create the process

As You Grow

Watch the pitfalls: • Customer service failures Create the KPI’s Is my pricing accurate? Monitor customer service metrics Quality suffers when systems and people are

stressed!

Thank You! Questions?

Christopher Masters, CPA Shareholder 713.860.0264 [email protected]

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