The ultimate guide to scaling your businessAddressing the leadership challenges of business growthIt is one of the greatest questions facing a business leader: how do I achieve sustainable growth for my business? Growing a business or scaling a company presents an array of complex problems. Scaling up has consequences for the team, business structure, finances, sales/marketing strategies, and more. Show
It’s exciting, yet very challenging. As the facilitator of MD2MD meetings, I see these challenges at play first-hand. Our members get value from discussing the issues they face in scaling their enterprise, and we engage in real problem-solving for a variety of sectors and industries. Whilst there are nuances to every business, I see a set of common challenges that can hold back effective growth. This comprehensive article will talk about the following areas:
Setting the scene: exponential growth of complexityMost businesses start when one person has a product or service idea. Their idea solves the problems of others so well that they are prepared to part with their precious cash in exchange. Whilst the solution itself is critical, often the key driver of business success is the sheer passion, drive, and pace of the entrepreneurial start-up leader. What do we mean by the entrepreneurial start-up leader? We’ve hinted already: they’re focused on the success of a business and driven to overcome obstacles with unbreakable determination. They aren’t always inclined towards calm rational analysis, because there is no time for that. They have a belief in what they offer, and will make it succeed. Analysis, processes, systems, and structures will not slow them down and naysayers will not get in their way.
Entrepreneurial start-up leaders control everything themselves. For good reason: They want the customer to be satisfied and will move heaven and earth to ensure this happens. They make all the key decisions and as cash is usually tight, they delegate very little. The relentless focus on solving customer problems, direct control of everything especially cash, and a forceful drive to deliver revenues is often why a start-up grows fast. These characteristics are a determinant of success in most cases. So far, so good. But then the business plateaus. Growth begins to level off and even decline. The business may start to fail, despite the continuing entrepreneurial drive to succeed. Why does this happen? In simple terms, the challenge is that when you scale a business, you bring new actors into the equation: new staff, new customers, new partners, new suppliers, and perhaps new investor stakeholders. In mathematical terms there is an exponential growth in communications. I explain this problem in more detail in my short article why businesses get stuck and stop growing. Even if your business is simple, the sheer amount of communication and shared knowledge you need means it cannot rest on one person to drive everything. The very characteristics that enable success soon become shackles. The best team members value autonomy, and don’t wish to be controlled. Trying to manage everything without processes becomes chaotic, ad-hoc, and unreliable. Communication without structure quickly becomes confused and complex. This is why establishing appropriate management structures and systems is critical to successful and sustained long-term growth, even though doing so anathema to most entrepreneurial start-up leaders. With this in mind, let’s start to explore the major pain points for business leaders who are looking to scale their enterprise. 1. Leadership and managementPeople are at the heart of every business, and usually represent the single biggest investment. Granted, you have a modern Goliath such as Airbnb which is globally operational with just 130 staff. But this is the exception – not the rule. Your business will be driven at its core by human behaviour; people will be pulling the strings in processes and guiding automated activity. Consequently, as you grow, the success of your business will be more and more a consequence of your approach to leadership, management and the culture you create. The beliefs, values and behaviours of your people will be what determines business success. So in this section I’ll explore the ‘people problem’ of business growth – and share some thoughts and tips on the core landmarks of the human resources (HR) landscape. Tips and thoughts about leadership and management, recruiting and retaining, engaging and motivating good staff, and about developing a high performance culture. 1a. Leadership and power* For a comprehensive look at leadership and power, check out my article: Leadership Best Practices: Your Guide to Success * MD2MD is about helping managing directors and CEOs become even better leaders, often during critical stages of scaling their business. Above all, I believe that great leaders are the ones that create willing followers. The most successful leaders are those that have a clear vision of where they and the business are going and have an ability to engage and motivate others to pursue that vision relentlessly. This is somewhat different to the stereotypical ‘boss’ as an autocratic control freak demanding results from subservient employees. I accept that this approach can work for small, simple businesses in which the boss is heavily involved. It can also work in larger businesses for a limited period of time. However, this approach to leadership cannot be sustainably successful in today’s world. This is a world in which people have a choice about who they work for. In most cases, they have a choice about how they do their job. Sometimes, they also choose where and when to do their job. The boss cannot define and supervise every detail of what needs to be done. In other words, this is about what people choose to do when the boss leaves the room. Do they do what the boss asked with passion and vigour, or do they pay lip-service and do as little as possible? I would argue that this is a key cultural difference between a business that grows successfully and one that plateaus or fails entirely. It is about how people with a choice behave in response to different forms of power. One analysis, echoed in my deeper article on the subject, suggests that there are three sources of power:
Which of these do you assume is most powerful? Traditionally, hierarchical power is assumed to be the way things work – but in today’s world expert power usually trumps hierarchy. And the greatest, respect power – doing things because you respect the person who is asking – is what really works. Theoretically and academically, there are many different leadership styles. I won’t pick these apart in great detail here. However, it’s safe to assume that whichever style you choose, having respect from your followers is the greatest superpower that a leader can acquire. When I talk about ‘creating willing followers,’ you will see the implication that you also need to create something to follow: a shared vision, a common goal, and way of working. This is why a clear and transparent shared direction must be communicated by your leadership team. Willing people are people who are engaged, enthused, and accountable.
1b. What matters most? Activity, results, or decisions?One of the biggest challenges for any leader is their shortage of time. That’s completely understandable and indeed in many ways appropriate, for reasons I discuss here. If you’ll allow the literary discourse for a moment, the leader feels, to quote Alice in Wonderland that “it takes all the running you can do, to keep in the same place.” They then make the mistake of believing her mantra: “if you want to get somewhere else, you must run at least twice as fast as that!” They end up handling people like the White Rabbit: “I’m late, I’m late. For a very important date. No time to say hello. Goodbye. I’m late, I’m late, I’m late.” Being busy is a natural consequence of history. At risk of oversimplifying, workers are usually measured by the volume of their activity – how many hours they work, or how many pieces they make. Managers are measured by the value of their outputs – the revenue or profit they produce, and it’s appreciated if they can find a more efficient way that requires less activity. So, whilst it is natural for the leader to continue what got them to the top, being busy ‘as the hero’ by solving problems is the number one trap that catches otherwise great leaders. It’s a trap that feeds our ego – being busy makes you feel useful and important: “isn’t it great that they all need me so much?” But it’s a trap that keeps us away from leading effectively. So how are leaders measured? By their activity or their outputs? The most obvious answer is that leaders are measured by their outputs: profit or cash. Or being more altruistic, the number of customers whose problems have been solved. Generally, they are measured on the extent to which the organisation achieves its purpose. But as I’ve already said, delivering outputs is the role of managers. Undoubtedly, a leader has to do a certain amount of managing. So how does leadership differ from management? In the previous section, we discussed the need to create willing followers and noted that this implies having a vision. With this in mind, a leader has to know where they are taking the business. They have to have a strategy. A direction and a vision of the future that is engaging and worthwhile. I suggest that the key difference between a leader and a manager is that the leader has the responsibility for deciding upon the right strategy and deciding what actions to prioritise in implementing that strategy..
1c. Creating space and timeCritical to making the right decisions is to have the discipline to create space and time to think. This was really brought home to me by this conversation between Bill Gates and Warren Buffett, two of the most financially successful business leaders ever:
One of the key reasons I’m such an advocate of business leader peer groups such as MD2MD is that I made this mistake myself. I was good at managing businesses and spent my corporate career getting promoted for doing so. What I never realised, but now understand, is that throughout my main business leadership career, I was focused on ‘doing things right’ and running businesses well. I wasn’t unaware of strategy. I had an MBA after all, but I didn’t place enough emphasis on ‘doing the right things.’ I was insufficiently focused on scanning the horizon to ensure we were in the right market at the right time. Consequently, twice I had to lead large redundancy programmes to ensure the business survived. Whilst we did that well and professionally, it wasn’t a pleasant job. Looking back, maybe I should have spent more time looking ahead and making strategic decisions to ensure we weren’t in the wrong market at the wrong time! 1d. Strategic leadershipThis personal experience, and observing the behaviours and results of others since, convince me more than ever that leaders need to have the discipline to take time out from the business to see the wood for the trees, to work on the business not in it, and to ensure they make great strategic decisions. Seeing the bigger picture is critical – yet surprisingly difficult. It is essential for a business leader to be able to step back and see beyond the relentless churn of what needs to be done now. To be really successful, a leader must break away from these shackles and work ON the business not IN it if the business is to scale-up effectively. Some business school academics argue that ‘culture eats strategy for breakfast.’ They suggest that with the right culture, an organisation can do anything. That may be true for the global corporate that has the resources to choose a market, attack it strongly, and even disrupt it. Personally I think at the business unit level, getting strategy right is the priority. I have many times observed badly run businesses being successful because they are in the right place at the right time. Many well-run businesses are struggling because they are not. It’s not enough just to do things right – as I learnt to my cost during my career! Being in the right place at the right time is critical. Being well-run builds upon and sustains that success. Strategy and strategic decisions are, in my view the most critical success factors for leaders of scale-up businesses. But I want to follow rapidly by highlighting that culture is a vitally important topic too: a close second to strategic decision making.
1e. CultureThe problem with culture is how to get a hold of it and how to influence it. Culture seems to be something ambiguous, floating above the day-to-day: difficult to grasp and challenging, although not impossible, to measure. It’s one of those things that we all recognise when we see it, but which we struggle to define precisely – never mind change. Nonetheless, it is critical to manage culture during the process of scaling. So how can we do so? The best approach I know is one developed and promoted by good friend Steve Simpson, which uses a concept called UGRs or Unwritten Ground Rules. UGRs exist in every organisation on the planet. I have published a detailed look at UGRs on MD2MD.
In summary, the idea is that every organisation has its rules: the written rules and the unwritten rules. The written rules (policies and procedures) are set out by the leadership and management to guide how the organisation is supposed to operate. But note the word ‘supposed.’ In reality, most organisations and most people in them, are actually more powerfully guided by informal, undefined, normally undocumented and unwritten ground rules (UGRs) of behaviour. ‘The way we do things around here.’ Otherwise known as culture. 1f. Managing the Unwritten Ground Rules (UGRs)UGRs are usually most visible to new joiners. They soon learn how they are supposed to operate in the organisation through looks, gestures, body language and quiet words at the coffee machine. “Didn’t you know he’s a Spurs fan? I’d keep out of his way when they’ve just lost to Arsenal.” “If you want to keep your job, don’t disagree with her in a meeting.” “If you want to get that done by Fred, have a word with Joe. I know it’s not his job, but he plays golf with Fred and if he asks Fred, it’ll get done.” In this way, UGRs underpin the workings of your business. They can get messy and troublesome as the business grows, so it’s important to get a grip on them quickly. But how? It’s not easy. In practice, it will require skilled, open/engaged leadership and management. However, in concept the process is quite simple, and I will outline it in this article. Then you can either choose to follow the process yourself, or this is one of the areas where a strong independent facilitator with expertise can help guide the process without the baggage of the internal perspective. Essentially it is a process of uncovering, understanding, agreeing, and living to a set of desired behaviours. As a result, company culture aligns with a tangible set of shared values. The five key steps are:
1g. Lead by exampleHowever you manage culture, the most important principle is well established – just ask any junior member of staff – the need to lead by example. The old saying ‘the fish rots from the head’ reminds us of the way that a leader’s behaviour cascades through an organisation. Leadership isn’t about shouting a lot, putting more hours in than anyone else, and expecting the staff to do as they are told. Instead, the leader has to be a role model for the behaviour they want from their team. They have to adhere most strongly to the agreed rules of behaviour. And, most importantly, they must have the humility to be able to accept a challenge with grace, and apologise and adjust when they fail to live up to the high standards of behaviour set for everyone in the business.
1h. Management and delegationHow do you get the best out of your team as it grows in line with the business? Clearly, the key is to be able to delegate. But being able to do so effectively is a real challenge for many who have been successful as a worker by doing things well themselves. There are many books and articles on delegation, so in this article I’d simply summarise with two key points: 1. Delegate responsibility for achieving the desired the outcome: You shouldn’t, if you are delegating to the right person, need to get bogged down in explaining how. If you’ve hired the right people (see later for tips on this,) you should be able to trust staff to find a route to success. Good managers emphasise the desired outcome, and give autonomy (within reason, rules, and law!) for the team to determine the best methods to succeed. Closely aligned to that is the need to measure your staff by their output – their results – rather than by the number of hours they work. 2. Coach patiently: As the boss, you usually have the most experience. This means that you’re not only the main authority, but also a goldmine of information. You could spend your days telling others what to do, or you can encourage people to think for themselves. Rather than dictating methods, encourage problem-solving. If a team member comes to you with a problem, ask them what they think is the best course of action. Nine times out of ten, they know the answer. You simply have to support and encourage them to feel able to make the decision – and be accountable for it. Which means a culture of learning from, not punishing, mistakes. Great management is about encouraging autonomy and fostering accountability. Remember, this has wider positive repercussions. Accountability isn’t just about taking responsibility for mistakes; it is also about owning the successes and having pride in the work. By giving the team autonomy to deliver and fostering initiative through coaching, the workplace will be happier and more collaborative as all share in feeling they have willingly contributed to shared success.
1i. Recruit the best* For more detailed advice about hiring the best people, take a look at my recent article: Recruiting for Business Growth: Key Tactics & Strategies * Good management requires effective delegation. In order to delegate key tasks, you must hire talented people who you can trust. This helps avoid the temptation to micromanage and force staff to look over their shoulder every time they take initiative. This can be a challenge for the start-up entrepreneur who succeeds in getting going on a tight budget by recruiting low-grade staff who do as they are told. To scale your business from small to medium, you need to change your approach to recruitment. Instead of recruiting people to do jobs that you can do yourself, your own role is to become the conductor of the orchestra. The conductor is not the best at playing every instrument; indeed they may not be the best player of any instrument in the orchestra. They are the best conductor not the best player. You need to be the best business leader with the best team playing for you. Rather than just recruiting people who can do what you do cheaper than you, you need to recruit people who are better than you at roles you maybe couldn’t do yourself. These are often roles that you’d have done simplistically yourself in the early days. For example, nobody would suggest a small self-financed start-up needs a full-time finance director, and few would suggest the £200 million listed group could go without one. The same goes for HR directors, and other roles. The only question when scaling up is “when?” When is the right time to recruit for these roles? A subject for another time, perhaps. Given that recruiting, developing, motivating and retaining great people is critical, how do you recruit the right people to join your elite band? ii) Treat recruitment as central to your business. In a recent straw poll of MD2MD members, 40% said that recruiting good staff was a bigger barrier to growth than traditional sales. For many more, it’s a close second. Don’t treat recruitment as a distraction or hire in an ad-hoc way via low-standard agencies. Treat recruitment as a core process in your business. In today’s world, where good staff are scarce, employees have a lot of freedom to choose where they work. Indeed the best candidates are interviewing potential employers! Sometimes explicitly so. Why should I want to work for you? So, in addition to selecting the best candidates, you need to sell your business to them. This is a sales and marketing process in its own right. What is your brand positioning for employees? How do you raise your brand awareness as an employer? How do you convert the right candidates into employees quickly and effectively?
ii) Recruit the best. If you want to grow your business, you need to find a way to recruit and retain the very best people. This is essential to enable you to delegate effectively. If you hire people who are better than you in their specialist area, you don’t need to spend time supporting them on a daily basis. Without this in place, your ability to scale will be limited by your lack of time for the key strategic decisions necessary. Given that the world is competitive and we can’t always get the perfect candidate, how do you select the best fit? Let’s assume that you have an effective process that brings broadly suitable candidates to interview. The obvious selection criterion is whether they have the skills required to do the job. Then, the next step is to look at the candidate’s personality – do they have the right attitude towards work? In an ideal world we would undoubtedly want to recruit someone who is a perfect match: with the right skills, attitude and aptitude, and available when we want them within our budget. But in my experience, the perfect candidate rarely (if ever) exists. Not least because if they meet all the criteria they probably want the next job up the ladder, which will offer them the stretch they need to develop their career. Generally, we have to compromise. But what do we compromise on: skills or attitude? The usual unconscious temptation is to recruit the person who appears to have all the skills without really focusing too much on their motivations. If they’ve done the job before, surely that’s the safest option? Unfortunately that’s often not the case… Ask yourself: If they’re doing the job already, why are they moving? They might have a good reason, of course – like a change of location or family considerations – but there could be a more concerning explanation for why they are leaving their previous position. Plenty of companies would be happy to see the back of employees who have the right skills, but combine them with a poor attitude – laziness, apathy, or lack of commitment to the business. So, during the recruitment process, we should be looking closely at the candidate’s personality and motivations as much as their skills. Skills are relatively easy to assess and if they later proves to be lacking they can often be taught to the motivated employee. On the contrary, if there’s a problem with the person’s motivation, their drive, or their raw ability – that’s much more difficult to address. When skills are lacking, someone with the will and the ability to learn can be trained. A bright and energetic individual will pick up the knowledge and apply it quickly in their new role.
2. The importance of integrated Sales and MarketingSales and marketing represents the start of the customer’s journey with your business. In my mind, sales and marketing must be closely aligned and integrated. Inbound marketing (doing things that cause potential customers to approach you) and outbound marketing (approaching potential customers) must also be closely aligned and integrated. These days, there should be no chasm between online and offline marketing. Each must contribute as part of an integrated customer acquisition and retention strategy. For example, ‘content marketing’ is usually seen as an inbound activity whether online (e.g. blogging) or offline (press coverage). But branded content also supports outbound tactics such as emails, cold calls, networking and most critically referrals. There is a lot of evidence that the response to an outbound approach is heavily influenced either directly (“I’ll Google them before I respond”) or indirectly (I’m familiar with them/their brand) through the inbound activity. The inbound creates or reinforces the credibility of the outbound. Furthermore, the sales team have insights into prospects and customers that no market research technology can get. You might rely on word of mouth – the most powerful (and cheapest) form of marketing. Yet, without creating an online presence to support the referral, prospects may not follow through and place an enquiry. So sales and marketing tactics need to be more integrated than ever, and this needs to be reflected in the structure of your teams and the distribution of your budget. 2a. Marketing modelThere are so many different marketing models out there, and each has its merits for different industries and situations. There are different schools of thought for what to use in which industry, and what to use at different stages of growth. For simplicity I favour the operatic acronym AIDA and ask how do we create Awareness, Interest, Desire, and Action.
No matter how fast you’re growing or how hectic the business gets, it’s important to consider this simple framework. Whilst your chosen model may be more developed, if you fail at the basics of AIDA you will not be feeding the pipeline with leads. Without leads, there will be no sales. Without sales, there will be no cash to collect. Without cash, there will be no business. This business development flow is a core business process. You will have others to deliver the product and service to the client effectively – which is a core business process for operations. And for the successful business, both are underpinned by effective support processes. This is covered later. Top takeaway: Find your preferred model, but remember the basics of AIDA. 2b. Brand positioningBrand awareness and brand positioning are critical as you grow the business. A cohesive brand voice, message, and visual identity is essential to growth. I have to admit, I was wrong about the importance of branding. In my earlier career as a business leader, I would not countenance a marketing campaign that couldn’t fund itself from the leads it generated. I was wrong. And I became convinced when an MD2MD speaker shared the following exercise with me: “I want you to think back to your corporate life. Your boss has said you can have a new company car and asks you to give four brands you’d like to consider. What are they? And by the way, I have my prediction of what you’re about to say written here.” I won’t name these brands as that’d put us on the wrong track, but suffice to say he accurately predicted three of the four brands I listed. Why were those brands on my list? How could he know? It’s obvious – they’ve successfully established an association in my mind between their brand and my self-image and aspirations. And it’s not difficult to guess the desired self image (at least in car brand terms) of an ambitious business leader. I accept that may be a male centric metaphor, but it may not be and whatever there will be parallels for leaders of all genders. Perhaps a less gender influenced analogy would be to suggest I have a 50/50, maybe better, chance of predicting your answer to the question “what is a well-known fizzy soft drink?” Branding is a comprehensive issue. Far too detailed for a short section of an article, so I don’t wish to get bogged down. But the key is to ask: “who are we relevant to, why are we relevant, and how do we want them to feel about us?” Target a narrow niche, and remember the rifle is more accurate than the shotgun. Ensure you have high visibility within your chosen narrow market, and that you’re well known in that market for the right things. As more people join the organisation and your operation (and product range) gets more complex, it’s more important to get your ducks in a row and ensure the brand scales effectively. 2c. Customer acquisitionAs mentioned above, there are simplistically only two ways of acquiring customers. Inbound: them approaching you because you deliberately or accidentally came into their mind when they needed something they think you can supply. Outbound: you approaching them because you believe what you is of value to them and them accepting that approach. Inbound: Which inbound channels have they used to get to you? Has the success of these plateaued recently? Are you looking to take the next step by becoming visible to new customers through other routes? Outbound: The content produced for inbound marketing can be used as collateral for outbound marketing provided it is personalised and made relevant to the recipient. And regrettably (in many ways) outbound remains an important source of business for many businesses. Compelling needThe reason outbound remains important is that there is a critical difference between a need and a compelling need. A need is usually something we think we want. A compelling need is something we have to have –now! We have too many things we need too much of the time. In consequence we might express an interest in something now, but then be too busy to progress or prioritise investment. It is usually only when we have a compelling need – when we need it NOW that we will progress things! Which is why outbound marketing is still relevant. You need a process to raise awareness of the need and your potential solution. And then from there, the process must extend to maintain, nurture and develop the relationship such that you are front of mind when the need becomes a compelling need.
2d. Customer retentionA brief word here about customer retention… To grow a company, you need to keep customers or encourage them to come back for more. I will steal a brilliant phrase here from one of our MD2MD speakers, Barnaby Wynter. He advises that we “treat customers like paid prospects.” The truth is that your customers are real prospects for your competitors. If you pay them less attention than prospects and take them for granted, they will soon smell the greener grass elsewhere.
Which leads neatly into the final most critical part of Sales and Marketing – the delivery of the promise… 2e. Service deliveryAs a process this must be a natural and carefully managed continuation of the sales and marketing activity. As you scale the business, remember that it’s the emotional engagement of customers that matters in most situations. Forging a connection beyond the transactional relationship matters more than anything. This takes effort and careful positioning, but will distinguish your brand from competitors and ensure your acquisition channels are effective and sales discussions aren’t solely about price – unless that is your chosen differentiator. 2f. Repeatable and reliable customer serviceMost entrepreneurs start by moving from one day to the next, without documenting the processes or defining a way of working. As the business grows, this becomes painfully obvious. Most eventually recognise the need to capture their business processes through some form of documentation. The majority also recognise they must begin to employ managers and specialists. In other words: accept overheads! Something entrepreneurs rightly hate. The risk then is of getting bogged down in bureaucracy, where over-analysing the processes actually threatens their effectiveness. So how do we find a balance between ill-defined processes and overly complex processes, to ensure that products and services are delivered consistently and reliably to agreed quality standards? The key is to focus on the goals and outcomes of the processes whilst retaining flexibility as to how they are completed and being ready to adapt and improve rapidly, as we live in a fast-paced world where both markets and technology change quickly. So when documenting processes to achieve reliable and consistent operations, bear in mind that the how of the step-by-step processes might change in the near future whilst the why – the desired outcome of the process is likely to be more constant. Detailed instructions on how fast becomes redundant. But the goal remains the same. It’s also important to remember that, even without technology change, we want our staff to be continuously improving their ways of working. Those changes would normally improve the efficiency and effectiveness of how we get stuff done, without changing the outcome – a consistent, reliable product or service for the customer.
2g. Continuous improvement and measurementWhilst for reliable long-term operations, you need a clearly documented and understood process, it is important to balance the consistency and reliability of keeping things the same with a drive to keep improving both efficiency and effectiveness. And there are two key points to remember here… Firstly, measurement and monitoring. You cannot know how you are doing without some measure of success. And you can’t tell if you’re really improved things without seeing the impact it has on your success measure. Too many people think “this or that sounds like a good idea, let’s do it!” and then make the change without being able to determine whether it did actually improve things. Whilst I am a fan of improvement ideas, I am also a fan of a rigorous assessment of the real impact of those ideas. The market has taught me again and again that what I like and the way I like to see things done isn’t necessarily the way my customers want things. So, it is essential to measure the effect of changes to systems and processes. This applies at every level of the business. That leads naturally on to the second key point. Don’t make more than one change at a time. If you do, you won’t easily be able to tell what worked and what didn’t. Was it change A or change B that lead to the improved or reduced performance? Or was it change A improved performance and then change B reduced it a bit, so that overall we’d be better without B? This is best illustrated with a story… I used to manage training centres that had 500 attendees every day. We had a feedback form for every person, and this volume provided us with a quantifiable and meaningful average score for each centre. We knew reliably if a centre normally scored average 7.8 or average 7.9. We could see the impact of unforeseen events on these scores. For example, when the air conditioning broke, the average went down. When we gave authority for the centre manager to buy ice creams without the delay of getting approval, the scores went back up again the next time. One day, we spotted an opportunity for significant cost-savings. Our centres had traditionally had toiletries like after-shave in the bathrooms and, after analysis, we realised that most people weren’t using them. In fact, the only time they needed replacement was when the whole item was stolen by an opportunistic attendee. So we decided that most delegates didn’t value having these toiletries available, and we didn’t see the point in funding the thieves from our tight budget. Consequently, we stopped providing them. Suddenly, the quality score of that particular centre went down by a whole two points. What we had misunderstood was that it didn’t matter if people were using the toiletries; just by their presence, they had nurtured a perception of quality. By removing them, we lost this value and the overall experience was downgraded. This highlights the importance of constantly measuring feedback and using that feedback to guide decisions.
3. The offer: what do you sell and deliver?I’ve already said that the most important driver of success for a Managing Director is to make the right choices and take the right actions. This is most critical in the decisions about what the business does, and what it doesn’t do. It’s tempting to grab all the business on offer and say yes to the money. Indeed, I wouldn’t dismiss this approach in the early days, as many businesses end up being successful after pivoting from their original intent. This is usually because an entrepreneur has listened to feedback and spotted a different opportunity. An extreme example is Facebook, which pivoted from a type of dating website. As the business scales, I suggest a narrower focus. This is essential for both marketing and operational reasons. Operationally, trying to do too many things for too many different customers becomes exponentially complex and costly. From a brand perspective, customers need to understand what you do for them, and when to approach you. If you can do ‘anything,’ you’re no longer special. If you’re really good at a certain set of things, you will remain front of mind when that need arises. This message was brought home to me when I sat on an investment panel alongside experienced venture capitalists (VCs.) They were dismissive of business plans that said “we only need 0.01% of the market to make money” and would favour a proposal that said “we need 20 clients in year one, and we have a list of 200 that we know will benefit from what we have to offer.”. So, there are marketing and operational benefits to being focused. I’ll illustrate this with a short story… 3a. The taxi driver storyI go into a local pub in Freeland, and I meet a taxi driver. I ask him where his marketplace is. “Don’t be stupid, I can drive anywhere!” he says. “I can serve the whole of the UK.” That’s a huge marketplace, containing roughly 65 million people. I ask him what his marketing budget is. “About £2,000 per year.” Ok, so that’s £0.00003076923 to spend on each prospect. Pretty tight! After a bite to eat, I leave and go to another pub, where I meet another taxi driver. To compare, I ask him what his marketplace is. “Freeland!” he answers. “I’m the specialist Freeland taxi driver.” His marketplace contains around 500 people. With a £2,000 budget, he can afford to spend £4 on each prospect in the area. He spends this on local leaflets, which highlight that he can be at your door within five minutes of a booking. Which of these taxi drivers will be successful? It’s obvious. However, this isn’t always apparent to entrepreneurs who love to grab every opportunity with both hands. Some think they need to go for success in a massive market. They think they only need 0.1% of a large market. This may be true, but in my experience it’s much better to go for 30% of a smaller marketplace. This approach is both more powerful in marketing sense and more economic. You can spend more per person, and make the message more targeted. The appeal is far more personalised and relevant than with Mr. Bloggs’s nationwide taxis. Plus, operationally it is also more efficient. Clients are nearby. If we look at the biggest companies in the world, they succeed through focus on a very specific niche. The geeks at Google could have built software to do anything, but they expanded their global reputation on the very narrow target of being the world’s best search engine. The same goes for Facebook; lots of smart technologists that could have built anything. But they didn’t build a CRM system, an accounting system or even a search engine. No – they pivoted slightly from their original idea and then grew as a social network. That said, it doesn’t mean you need to say no to expansion, as long as it sits within a strategy. Now hat’s not quite the end of the story. Having a narrow focus doesn’t actually prevent you being flexible and taking opportunities are they arise. I explain this by using my “dartboard model”… 3b. The dartboard modelIf someone comes up to the Freeland taxi driver and asks him to take them to Heathrow, he’ll say yes. It’s not the bull’s eye, but it’s useful income and is a related business in a way that most would expect. The bull’s eye is where you get most of your revenue, and the rest of the dartboard is where you score points. You miss the jackpot, but you still benefit. Of course you can miss the dartboard. No points. The Freeland taxi driver is experienced with a vehicle, but if someone offers him money to change their tyres he’d probably say that was not his business. (Although I guess he might do it almost as a favour for a favourite little old lady customer who uses him every day.) As a business, you need to be clear about where your bull’s eye is. What is acceptable, what is not? You could have multiple dart boards with multiple bull’s eyes. This works because the client for business A won’t see business B. These might be separate brands under the same umbrella, leveraging the marketing and operational power of a bigger entity. For example, a company might make high-quality windows for historic listed buildings. Every window is slightly different and needs advanced design to work. They may also develop a second stream of business to make custom windows for renovation builds. Another premium sector. But they cannot (or should not) take mass orders from housing developers for 10,000 windows at £50 each. They simply aren’t geared up to make money from that seemingly-attractive order. That needs a different type of operation with a very different structure and a very different culture. This would be considered as missing the dart board. The product portfolio must be developed with core competencies in mind. 3c. Innovate or dieThe term ‘innovate or die’ is used often. What does it really mean? I see companies waste a lot of energy and money doing too many things. It’s generally better to do fewer things, and do them really well. Innovation doesn’t just mean constantly developing new products. It also means innovating in processes to deliver better value to the customer at a lower cost to the business. You need to innovate or die, but not necessarily with a product-centric mindset. Innovation is fundamentally about delivering better value for less cost in some way. To achieve this, you need to get constant feedback from the customer and truly understand their motivations, pain points, and changing needs. Lean engineering doesn’t just mean a reduction of costs – it also means matching customer needs tightly with what you actually deliver. Doing what the customer values and not what they don’t. The key questions: What do we do that customers don’t value? What don’t we do, that they would value? Can we cut down on irrelevant actions and add new relevant ones? A great example here is instruction booklets. Nobody ever looked at them. In some cases, the instruction booklet cost more to produce than the product itself. These days, we have online videos for consumer products. Instructions are still needed, but there’s a better, more flexible and efficient delivery method. 3d. New product development and new market developmentAt some early stage in growth, the leadership of the business will come across or invent new products, or innovations, and variations to existing ones. Usually such refinements are the role of the Managing Director, yet sometimes they come from the sales team, or perhaps an engineer that develops technology in a new way. Although, the common theme is that it is usually an informal role alongside another main responsibility. It’s fairly typical for the product portfolio to develop in that informal way until the business reaches say 50-100 staff. At some stage though (probably between 100-1000 staff,) this must evolve into a proper professional role, with someone – ultimately a team – responsible for ensuring a company has the right products in the right market, at the right time. Typically there are four growth opportunities:
Of course, number one carries least risk and number four carries the most. Effective product portfolio management is about determining the best approach. 3e. Product portfolio managementA business usually starts with one core product. This is a natural beginning. Indeed, it is good to be focused. However, as just discussed businesses usually develop multiple products or services as they grow. Consequently a bulging product portfolio is gets created on an ad-hoc basis, without a considered long-term strategy. This leads to the biggest challenge I have noticed in product management for small growing businesses: businesses keep adding new products, but forget to kill (or retire) old products. I sometimes meet companies who have hundreds of different products, some of which they sell one of per year. Clearly this is not efficient or effective. At some stage you need professional product portfolio management. A function ensures that the business has the optimal set of products for their marketplace now but identifying, developing, launching, promoting, enhancing, revising and retiring products in a structured and planned manner. Too often, leaders don’t realise that they need this function and continue the business with far too many products in the range. Sometimes it takes a financial crisis to draw attention to the problem. Indeed, it is often the resulting change of management that causes the problem to be addressed. The new arrival (very often because of the financial challenge – a numbers person rather than an ideas person,) asks why the company is selling 10,000 different widgets when 50 of them generate 80% of the revenue. A good question, but the numbers person doesn’t always get to the right answer, as I’ll explain shortly. Top takeaway: Product portfolio management becomes an important specialist role as you grow. 3e. Product portfolio managementA business usually starts with one core product. This is a natural beginning. Indeed, it is good to be focused. However, as just discussed businesses usually develop multiple products or services as they grow. Consequently a bulging product portfolio is gets created on an ad-hoc basis, without a considered long-term strategy. This leads to the biggest challenge I have noticed in product management for small growing businesses: businesses keep adding new products, but forget to kill (or retire) old products. I sometimes meet companies who have hundreds of different products, some of which they sell one of per year. Clearly this is not efficient or effective. At some stage you need professional product portfolio management. A function ensures that the business has the optimal set of products for their marketplace now but identifying, developing, launching, promoting, enhancing, revising and retiring products in a structured and planned manner. Too often, leaders don’t realise that they need this function and continue the business with far too many products in the range. Sometimes it takes a financial crisis to draw attention to the problem. Indeed, it is often the resulting change of management that causes the problem to be addressed. The new arrival (very often because of the financial challenge – a numbers person rather than an ideas person,) asks why the company is selling 10,000 different widgets when 50 of them generate 80% of the revenue. A good question, but the numbers person doesn’t always get to the right answer, as I’ll explain shortly. Top takeaway: Product portfolio management becomes an important specialist role as you grow. 3f. Nuances: Before You Make Big ChangesIt’s often a good strategy to sell 50 rather than 10,000 products. But this isn’t always the case. You need to be careful before making big changes. Sometimes, the reason why a customer chooses your brand is due to the vast range of items on offer. Even if they don’t spend their money on those items, the freedom to choose can be an attractive prospect. The supermarket example is a good one in this regard. Above all, product portfolio management should be seen as a conscious strategy, driven by data, customer research, and competitor research. Your business must test effectively. Assess the portfolio at regular intervals and decide which products are an opportunity (to sell more or more profitably) and which are not. Rather than blindly expanding or cutting, the product-market-fit must be proven. One way or the other, you need to have a strategy to ensure your business has the right product set for the marketplace. Marketplaces change, and you need to stay ahead to not get caught out by disruptive innovation; like Kodak when digital photography appeared. Product portfolio management is one of the most powerful roles at some organisations, especially in retail and eCommerce where fashion plays a significant part. It is a key driver of profitability, and therefore must be at the heart of most decisions.
4. Organisation* For a comprehensive look at organisation and scaling operations, check out my article: How to scale operations when growing your business* 4a. Management communicationOne of the key jobs for the leader of a scale up business is to think about how communication happens across the business. What meetings are required, when, who should attend, and what is the purpose of the meeting? The whole idea of having meetings is an anathema for many start-up entrepreneurs, who are used to just ‘getting on with the job’ and hate wasting time discussing trivia (as they see it.) So why bother? A clear system of communication is important – indeed critical – once a business gets beyond 10 or 20 staff. Put simply, building communication structures and processes doesn’t increase overhead; it reduces it. Without a clear structure for coordination the overhead to communicate increases exponentially with the number of staff (and customers, projects, products, and suppliers.) For example, with four staff there are six two-way communication channels. With five staff, there are ten channels, and by the time you reach twenty people you have 190 two-way communication channels. At that scale if everyone in the business spends 10 minutes per week communicating with each colleague, there is no time left for the real impactful work. As these figures demonstrate, discussing and developing a clear system of communication is simply non-negotiable if you want your business to grow and be successful. 4b. Structures and hierarchiesWhen there’s just one person in the business, you don’t need any structure or hierarchy. But it’s likely that you left that behind many moons ago. As I outlined in the last section, a growing business must develop structure to ensure communication works effectively. Your structure and hierarchies might be suitable for the time being, but are they optimised to scale with the business? We all know that a structure is needed, but when is the right time to implement it, and how do you ensure that you don’t leave it too late? Traditionally businesses are structured by function: sales and marketing, operations, HR, finance, etc. I don‘t think that is necessarily the best approach. Too often that structure leads to organisational silos, and even worse, battles between them. How often have you heard operations blaming sales teams, and vice versa? Or perhaps it’s the finance team that are the problem – they’re often referred to as ‘the sales prevention team.’ This is certainly not the right mindset to allow constructive working relationships. Instead I would argue for a better structure, based on identifying core processes. Managing direct interaction with the customer, from sales to delivery and support for the product or service – and organised into business units, focused on delivering from start-to-finish. An example for a bank might have a local business unit in the branch or centralised handling clients up to £5m revenues, the corporate business unit handling clients from £5m to £50m revenues, and an Enterprise business unit handling clients from £50m upwards. And each business unit will deal with all aspects of the need of that client set from winning business through to ensuring it’s delivered effectively. These business units are then supported by support processes such as HR, IT, and Finance. They are encouraged culturally to regard the core business units as their customers, and to run their own processes to support their internal customers. Whilst this business unit structure is more complex than the traditional structure, it reduces the risk of silo working and encourages collaboration between the different units, resulting in more effective operations.
4c. Outsourcing for growthThe term ‘outsourcing’ has negative connotations like ‘high risk’ and ‘loss of control.’ With care though it can be done responsibly and effectively, resulting in a win-win for all involved. In the context of scaling a business, there are two main types of outsourcing:
If you are ambitious to grow quickly you may well outsource back office activities to external providers and that is a sensible approach to facilitating high growth. That said, I would – in most circumstances – encourage business leaders to keep core (customer-facing) processes in-house. Likewise because today being able to recruit, retain, develop and motivate great staff is critical, I would also normally encourage retaining the lead for managing those critical people activities internally, even if elements of the activities are outsourced. Outsourcing internal back-office capabilities:There are pros and cons to outsourcing vs. hiring internally. It’s good to build internal capabilities, but outsourcing the back-office enables you to focus your time and resources on the critical parts of the business that directly serve your customers. If you develop good partnering arrangements, outsourcing enables you to leave the challenges of operational back-office support to others. A good outsourced supplier should be able to provide more specialist skills and a more powerful, flexible and scalable infrastructure and processes than you could achieve yourself without distraction from the core business. So what might you consider outsourcing?
Outsourcing customer or client work:If your business is expanding rapidly, you might consider this to take some pressure away from the core team. It might be temporary, or might be part of your long-term structural plan. In either case, it should never be rushed. Due diligence is paramount, even when you are outsourcing relatively low-value tasks to external service providers. You can’t afford to make the customers’ perceptions of you dependent upon your suppliers unless you are totally confident they will do a great job. So whilst it is possible to outsource (or subcontract) client work, take great care and only use trusted partners who understand your customer, your culture and your goals, especially as in most cases they will be dealing with the customer as if they were part of your own organisation (sometimes known as white-labelling.)
4d. PartnershipsPartnerships can be a valuable way of scaling your business quickly. Of course, you will have entertained plenty of different partnerships during your career. Service swaps, lead referrals, and perhaps others. In this context, I am referring to working with another company where you have complementary value in the marketplace. Put simply: selling each other’s products or services. As an example, let’s say you manufacture and sell crafted wooden doors. Your customers might be interested in custom steel door-handles. You don’t have the infrastructure to build them, so it makes sense to partner with a custom steel door-handle manufacturer. Perhaps you can sell each other’s products directly, form a network of merchants, or maybe you partner to combine advertising or marketing budgets. Naturally, the nature of the deal depends on many factors. Regardless, the key is to search for sustainable win-win scenarios. This mindset is key when investing in partnerships. The arrangement should always be set up as win:win (and lose:lose) as otherwise the partnership will not sustain once the losing party feels taken advantage of.
4d. PartnershipsPartnerships can be a valuable way of scaling your business quickly. Of course, you will have entertained plenty of different partnerships during your career. Service swaps, lead referrals, and perhaps others. In this context, I am referring to working with another company where you have complementary value in the marketplace. Put simply: selling each other’s products or services. As an example, let’s say you manufacture and sell crafted wooden doors. Your customers might be interested in custom steel door-handles. You don’t have the infrastructure to build them, so it makes sense to partner with a custom steel door-handle manufacturer. Perhaps you can sell each other’s products directly, form a network of merchants, or maybe you partner to combine advertising or marketing budgets. Naturally, the nature of the deal depends on many factors. Regardless, the key is to search for sustainable win-win scenarios. This mindset is key when investing in partnerships. The arrangement should always be set up as win:win (and lose:lose) as otherwise the partnership will not sustain once the losing party feels taken advantage of.
4e. Supply chainAs you grow, the supply chain will also change. You might be ordering more goods from a particular supplier, or you might be working with different suppliers. When you get a big order, you need to be sure that you can deliver it. For this, you need a trustworthy supply chain. Due diligence is obviously paramount. You need to audit your suppliers’ ability to deliver. That may involve looking beyond your immediate partner to understand what they rely on to get the job done. Are there dangers lurking in the background, further up the supply chain, that could impact their ability to service you and thereby limit your ability to service your customer? An article by American Express looks at three ways to upgrade your supply chain management as you grow. Firstly, it recommends having alternative vendors on-hand. This is easier said than done, because of the nature of supply chain relationships. Nevertheless, you should attempt to keep your options open as a safety net. Secondly, it’s important to do risk management. Even if a supplier is performing consistently, you need to have a backup plan. This needs actionable steps in case of specific events. Lastly, the article quotes James Hixon from Black Hound, who recommends getting stuck into the data: “Companies need to be looking for a software or data services solution that can provide the right data in real time, so their key performance indicators can alert them to potential problems long before it results in an inventory shortage or other serious situation. We have to use precise forecasting of our sales and projects, in order to really dig in on our supply chain needs and think five steps ahead.” In an article for Forbes, Dave Evans talks about baking your values into your products and the whole supply chain as you grow: “Along with issues such as price and lead time, it’s critical to choose supply chain partners who share the same values as your company. If innovation is core to your product, ensure that your supply chain matches this value. If your brand promises transparency, get proof from your partners that their claims match with what they deliver. Overall, source partners who can not only infuse your values into current product requirements, but can also offer flexibility as you create <new versions – this is fundamental for any growing company.” Top takeaway: Consider the structure and reliability of your supply chain in minute detail. Always look beyond your immediate partners. 5. Money5a. Money and purposePeople start and grow businesses for a variety of reasons, sometimes consciously and in many cases by accident as a by-product of events. Some people are very focused on creating wealth, and others are more driven by the challenge to make something happen. Sometimes it’s as simple as the need to prove a point. In all cases, money is the result of a successful business venture. Whatever your primary driver, it is important to understand that income and wealth are the consequences of a successful business and are not usually the driver of it. Sustainably successful businesses make money by solving customer problems conveniently, reliably and economically. Your business solves a customer problem effectively, and the customer happily (or relatively happily) pays you for doing so. This principle is the complete opposite of the stereotypical commercial mindset: thinking about who has the money and how to get it from them. Whilst that may work on occasion, such an approach usually leads to a culture with a short-term view. The aim will be to gain as much cash as possible, from as many people as possible, as quickly as possible. Even if short term gains are achieved, the business (and sometimes the industry) will ultimately be ‘found out’ and run into trouble in the long-term. Look at how banks have gone from being the respected advisor of most business leaders, to being a focus of suspicion and even anger. Banks are now having to work extremely hard to rebuild trust, which costs money. At the same time, their whole future is threatened by regulation and by upstart challengers with a different heritage, who have a truly customer-first culture and who are growing rapidly despite the regulatory barriers. If you really want to create significant wealth, I’d strongly encourage you to think about a significant problem for a significant number of people that you have the knowledge, expertise, and drive to solve. Successful entrepreneurs spot a problem and develop an effective solution. The pursuit of solving this problem better than anyone else is what drives wealth. Top takeaway: Financial rewards result from being a business that solves problems for customers so quickly, easily and economically that they’d rather have your solution than have the pound in their pocket 5b. Financials: KPIs, revenues, and profitsAs they say, money makes the world go round. Without this fuel, your business cannot scale. Unfortunately, money comes and goes all too easily. Managing directors and CEOs make financial decisions all the time, on a daily or weekly basis, and often worth thousands, tens of thousands or millions of pounds. This carries inherent risk, which is why running a business can be challenging. With that in mind, let’s consider profits. Boards spend a lot of time talking about profit and loss accounts. By definition, these reports look backwards. Whilst a look at the profit and loss account and balance sheet is important, paying them too much attention is like driving a car by looking through the rear view mirror. Instead to run a business successfully you must look forward. Cash flow forecasts and Sales forecasts are important, and most useful of all are some leading indicators of what is going to happen in the future. These are generally known as Key Performance Indicators or KPIs. KPIs should be include measures of things like orders, production and shipments as well as measures relating to sales and marketing activities aligned with the AIDA model that I mentioned earlier such as enquiries, calls, meetings and quotes. Some examples of KPIs include:
For me, the outstanding order book is the single most useful measure of the health of a company. It represents the amount of secured business that hasn’t yet been turned into value in the accounts – but which should be soon. In some ways, it’s a representation of the buffer between the activities of Sales and Marketing – whose job it is to grow the order book by securing more business and more orders – and activities of Operations whose job it is to empty the order book by converting orders into shipments and invoices. Not forgetting the role of credit control in collecting the cash. Many miss a trick by forgetting that cash collected is actually more important than recorded revenues – because an uncollected invoice will ultimately, when written off, not be recognisable revenue. A final point on revenue: don’t forget that in almost all cases, recurring income is much better for the business than one-off sales – for a whole range of reasons. Ideally, your customers will be contracted to that recurring income but even if not, contracted income that is demonstrably recurring is more valuable than income that may not come through the door again! As an extreme example, Tesco doesn’t have a contract for customers to buy baked beans, but they do know pretty accurately how many will be sold every day and their business is valued on the basis that such revenues are highly unlikely to stop overnight. So wherever possible, develop products and services that you can build as a recurring sale. As far as possible, regard one-off sales as the icing on the cake – but not the cake itself. That’s especially true if you have a vision of selling the business one day. When you come to sell the business and exit, recurring income will be valued more highly than one-off income.
5c. Business planning: overheads, scaling, and staffingAs your business grows, overheads tend to increase. Frustratingly, the tendency is for them to increase more quickly as the business grows. A start-up often has no ‘overheads’ – everyone is dedicated to selling and doing stuff for customers. Nobody worries about admin hassles like employment contracts, employment policies or even customer facing things like contracts. But as the business grows, it needs to ‘grow up’ – and ‘do things properly,’ which costs money. Offices and overhead staff start to appear, and so do increased legal fees, advertising spend, equipment and supplies – even company cars! So a few pointers. Firstly, with regard to costs that relate to the core operation of selling and delivering… I’ve observed that different people with different drives and different risk profiles approach this differently. Neither is right or wrong, although they do lead to different styles of business. In simple terms, this comes down to your philosophy of running a growing business – and indeed to your priorities as a person. The key question with whether you invest in the capabilities early and sell afterwards, or do you sell first and invest in capabilities afterwards? At one extreme there is the ‘sell, sell, sell’ and we’ll worry about how we’re going to deliver it after we’ve won the contract approach. That model can work and can make a lot of money, providing you like living on the edge, talking yourself out of difficulties and providing it is the sort of business where you can somehow ‘make it happen’ if you need to. This sort of business can get going quickly and grow quite fast for a while, but ultimately will, in my view, reach it’s limit. Either because it reaches a scale where it isn’t possible to manage in this way, or because the brand becomes tarnished by the many situations where the business fails to deliver on its promise. Though our clinic can offer several methods of treatment of erectile dysfunction, our doctors prefer to start with prescribing Viagra. The glory of this drug goes far ahead of it. There’s probably no adult person on this planet who has never heard about the miraculous ability of this medicine to return male potency. We know what we’re talking about. At the other extreme, which is where I personally find myself, is the business that plans what it’s going to do and how and the precise value to customers before it sells it. That feels much safer, and is less of a rollercoaster. But as I know to my cost, it tends to lead to lower profitability because of the time spent preparing for sales that never happen. It also leads to slower growth for much the same reason. Then again, it’s a rather less stressful way of leading a business, if you’re considering your own sanity as well as business growth! Of course the reality is that there is an optimum in the middle. Sufficient planning and sufficient clarity to sell and deliver well, without too much delay and overhead through planning. My tip for this would be to spend quite a bit of time and effort getting really clear on your offer. Who you want as customers, what you do for them, and why that is valuable for them? It’s what you do for whom that matters most.
Whilst you need to know how you’re going to deliver, focus on how you’ll do it now and in the immediate future. Unless you have to for an external party, don’t get too bogged down in trying to predict how the business will grow in the future. Don’t spend time building a detailed three year business plan showing what machinery, systems and staff you’ll need and when. You can worry about that when you need it. Your plan will never be correct anyway, because none of us have the ability to predict the future.
A related angle is to think about whether you want to invest ‘ahead of the curve’ or “behind the curve.’ Do you take on a new sales/ops person to grow an extra revenue stream of £x, or do you wait until you’ve grown revenues by £x by driving the existing team so hard they’re about to crack? The latter is more profitable, but is taking a risk on them cracking. The former is safer but certainly less profitable. Another angle to remember in planning your business is that the top-line (revenue) is nearly always a prediction – a forecast – and therefore not guaranteed. Overheads on the other hand are closer to fact. They are more controllable. You can decide to spend or not to spend. The top-line isn’t guaranteed, but overheads can be controlled. So for safe short-term achievement of bottom-line profit, you need to control costs carefully – as that is all you can guarantee. On the other hand, to grow you need to invest. By not investing, you may miss an opportunity to grow profitably and fast – and cutting costs can cause a business to fail by falling into a spiral of decline. These judgements can only really be made by the owner or investor as the decisions are consequences of the risk and return (and stress vs control) choices they want to make. The key message here is that controlling costs nearly always gives a more certain outcome, but at the expense of missed opportunity. Revenues and cash flow are more volatile. Therefore, in order to maximise security it makes sense to control what you can most easily control: overheads. Finally one of the biggest challenges facing any ambitious business leader is judging when to invest in overhead staff. Hiring a Finance Director or HR Director – or indeed any other Director – is not cheap, but nobody would suggest that a large listed company should operate without a Financial Director to ensure that financial risks are carefully managed. The challenge is when and how to invest in each role. Likewise a self-funded start-up is unlikely to want to build overheads early, but a VC-backed start-up with big ambition must scale quickly and minimise risk at the same time. It’s tricky to put senior roles in place before revenues are realised. Judging when to appoint which role is critical, and must reflect the ambitions of the business leaders. As a business leader owner, you know your own ambition and your own willingness to take risks. Consider what matters to you and make a conscious and wise choice.
5d. Cash flowMost businesses go bust not because of revenue or profit problems, but because of cash flow problems. A business only really makes its money when someone actually collects the cash. Beware of the lag effect: the most critical document is your cash flow forecast, not your profit and loss spreadsheet. As you grow and interact with more customers, clients, partners, and suppliers – the risks of not being paid get greater. Most importantly, you must be wary of taking large orders at low margins from a company or individual that might never pay you. How do you ensure that you get paid? Well, that differs from case to case… Firstly, going back to our mindset and philosophy of doing business: create win-wins and deliver exceptional service, and by-and-large, people will want to keep paying you. But this doesn’t always work so amicably. To protect against maliciousness or resistance, I would suggest you consider investing in an invoice factoring or invoice discounting provider. This might seem like an avoidable expense, but when you account for the time, energy, and inefficiencies of chasing overdue payments on a daily basis – well, it might just be worth it. Think of your new-found peace-of-mind and your ability to reinvest those efforts into further growth.
5e. Funding your own growthMost businesses are cash-negative. This means that cash outflows are operating at a higher pace than what’s coming into the business – due to investments, overheads, or perhaps a mixture of both. This is a normal scenario, and often leads to new businesses looking for external funding from investors. If you’re in that situation, before you take investment like equity or loan, I strongly recommend you spend time exploring whether you can find a way of funding your own growth. How can you change your business model to make the business cash positive? Some businesses naturally are cash-positive. They generate cash from day one, and as they grow they generate more cash. Retailers are a classic example. Providing you can get a credit rating, suppliers are normally paid 30 days (or more) after delivery and staff at the month end. The customer who buys your product at the beginning of the month is giving you money to fund growing the business. A cash-positive business doesn’t necessarily need investors! So if you’re currently cash negative, have a think about how you can make your business model cash positive? Can you find a way to generate cash from customers in a new way? Can you invoice earlier, faster, or restructure your payment terms? Before seeking external investment, make sure you can’t actually fund internally. This might be a better choice for creating wealth than taking investment. It might be that your customers will pay you in advance or early in exchange for a lower price. Or they might pay a subscription at the beginning of the month. Or a deposit. Such options might be worthwhile in terms of avoiding a loan or diluting your shareholding, even if they mean you have to offer them a slightly more attractive deal. Can you build a positive cash flow model business?
5f. External financingThere are two main external funding options available: debt and equity. Debt is basically bank loans and other standard forms of business debt. Equity usually involves crowdfunding, family, friends, angel investors, private equity, and venture capital. In case you skipped it, let me restate the previous section. Having met lots of entrepreneurs who have later regretted giving someone else a degree of control over their business, it is my firm believe that you should first aim to fund growth without the help of external parties. This must be your first port of call. Equity fundingVenture capital and private equity funders expect the majority of their investments to fail or break even, but they cover poor performance in their portfolio by having a stake in a few hugely successful businesses. Often, private investors want to have a hand in operations to some extent. Some more than others, naturally. In many cases, the CEO who raises the funds is not the CEO when the business exit happens!. This is a common occurrence – worth noting! Debt fundingThe other main way to fund growth is to borrow. Usually from a bank, although a variety of other means are available. To follow this option, you need to ‘convince’ a bank to lend. Depending upon the nature of the loan and the terms, they may require a business plan, and may put in place a requirement for you to report financially to them and to operate the business within certain covenants – terms that limit your ability to take risks with the business until they have had their loan repaid. The critical point is to understand that subject to their assessment, the bank actually wants you to take a loan. That is how they make their money! When you take a loan, don’t forget they’re successfully selling their service to you! This is not “doing you a favour” so don’t expect the bank to assess whether you need a loan or to point out better alternatives. A good manager may do so, but may not. Likewise, you don’t necessarily have to borrow from your own bank. Discuss with other banks and other types of lenders. Finally, remember that whilst the bank is interested in your business plan and will look at revenues and profit, what really matters to them is security. How can they guarantee to get the loan repaid? If there is any doubt about their ability to force you to pay, they will ask you to sign your personal assets away as security. That matters much more to them than whether you’re likely to achieve your profit plan. Their primary interest is your ability to repay the loan with the agreed interest. 6. Corporate development6a. Mergers and acquisitionsI will discuss mergers and acquisitions from the perspective of the party who is taking affirmative action. If you are looking to exit a business, you might wish to be acquired. But if you have eyes on scaling your own operation and gaining market traction, it’s likely that your business will be the one doing the buying. 83% of mergers fail and don’t provide increased shareholder returns, according to KPMG. Too many acquisitions happen for the wrong reasons: due to founder/CEO ego, or because there have been promises made to the City. So why bother with an acquisition? There are many good reasons for acquisitions. The carefully-considered and well-implemented acquisition can deliver substantial profit growth through ‘strategic synergy’ in a way not achievable through normal organic growth. This is why many large firms pay a lot of money – far more than a business appears to be worth for an acquisition. They key is to understand where the additional profits will come from.
You might also want to acquire a competitor to prevent them taking more market share. This is a perfectly legitimate tactic, but personally I wouldn’t want to be in a situation whereby that was the best (or only) option. When we look at acquisitions, I also see three typical outcomes:
Naturally, the third outcome is what you want. Not only does this need strategic vision, but also deep attention to detail with regards to IT systems, processes, suppliers, partners, and more. To realise the value of an acquisition, you should have a successful strategy – but also a plan for successful implementation after the buyout. You need to retain the best staff, integrate complex systems and tools, and navigate two (or more) merging brands.
6b. ExitsIt’s likely that at some stage, you will want to exit the business. For fast-paced start-up founders, this might be within 5 years. Other business leaders might have an eye on early retirement. In either case, the business must be structured to operate effectively without you. Consider the end goal as you scale, and plan for your ideal route out of the business. It doesn’t play to our egos that one day we might not be needed. We’re all replaceable, and as we’ve seen – scaling a business is reliant on delegation and accountability. Realistically, you need to be able to go away on holiday for 3–6 months without fear before being ready to exit. Here’s the “picture-perfect” lifecycle of a business leader’s progression towards exit:
This might not be your precise route. Regardless, if looking to exit, you will need a solid management structure in place with systems and processes. You will also need to align the team under a shared vision and direction.
Joining an MD2MD peer group will ease your growing pains, and help you become a better leader.Are business ethics deteriorated?The good news, however, is that business ethics has passed its nadir and is now on an upwards trajectory. Values and ethics are increasingly being built into the weft and warp of organisations, but need regular checks and balances to ensure they are properly embedded and supported by an adequate regulatory environment.
How do you rate the company's ethical standards compared to other companies?The best way to measure the effectiveness of a company's ethical standards is to observe the results of employee actions. When the company is able to establish and maintain a loyal and satisfied customer base, management has a sure indicator that employees are treating customers ethically.
Why is it important for companies to be ethical?Business ethics enhances the law by outlining acceptable behaviors beyond government control. Corporations establish business ethics to promote integrity among their employees and gain trust from key stakeholders, such as investors and consumers.
Are businesses more ethical today than in the past?The Bottom Line
A company's ethics and corporate social responsibility matter more today than they did a few decades ago. Workers place a higher emphasis on the values of their employers, and have access to more information than ever before.
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