How to Manage Growth? Company Level View Jari P. Angesleva Project Manager IFC

How to Manage Growth?
Company Level View
Jari P. Angesleva
Project Manager IFC
ROSS 11.6.2004
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The Growth Dilemma…
Business growth can be a two-edged
sword. When it is controlled, it usually
leads to financial success. When it is
uncontrolled, it can lead to financial failure.
Why? Because growth:
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• Eats cash fast, especially if you extend credit to
individuals or customers and must cover their
payment float while also financing your expansion;
• Requires a company to "stretch" beyond their
current capabilities. Sometimes this stretch can get
to the breaking-point and bring a perfectly viable
company down;
• Requires new investment in resources--be it labor
or equipment--which will invariably not be operating
at full capacity and paying for itself immediately.
You, the Owner!
But most importantly, it requires the owner to
change the way they think about both their
business and the way they operate it.
Over time, companies evolve, in the same way that
individuals grow. What worked in your first stage of
business, will not work in later stages. You, as the
owner, will need to develop new skills and stop
being the "doer" and start being the MANAGER and
eventually, the LEADER!
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Leading vs. Managing –
Two Different Animals
Are you a manager or a leader? Although you may
hear these two terms thrown out interchangeably,
they are in fact two very different animals complete
with different personalities and world views.
By learning whether you are more of a leader or
more of a manager, you will gain the insight and
self-confidence that comes with knowing more
about yourself. The result is greater impact and
effectiveness when dealing with others and running
your business.
Leaders and Managers
First of all, let's take a look at the difference in
PERSONALITY STYLES between a manager and
a leader.
• Managers - emphasize rationality and control; are problemsolvers (focusing on goals, resources, organization structures,
or people); often ask question, "What problems have to be
solved, and what are the best ways to achieve results so that
people will continue to contribute to this organization?"; are
persistent, tough-minded, hard working, intelligent, analytical,
tolerant and have goodwill toward others.
• Leaders - are perceived as brilliant, but sometimes lonely;
achieve control of themselves before they try to control others;
can visualize a purpose and generate value in work; are
imaginative, passionate, non-conforming risk-takers.
Leaders and Managers…
Managers and leaders have very different attitudes
toward GOALS.
• Managers - adopt impersonal, almost passive,
attitudes toward goals; decide upon goals based on
necessity instead of desire and are therefore
deeply tied to their organization's culture; tend to be
reactive since they focus on current information.
• Leaders - tend to be active since they envision and
promote their ideas instead of reacting to current
situations; shape ideas instead of responding to
them; have a personal orientation toward goals;
provide a vision that alters the way people think
about what is desirable, possible, and necessary.
Question?
Are you a LEADER or MANAGER?
If you are running your own business, you must develop
management skills, whether they come naturally or not.
However, what do you do if you believe you are, in fact, a
leader - a diamond in the rough? What can you do to develop
as a leader?
Throughout history, it has been shown again and again that
leaders have needed strong one-to-one relationships with
teachers whose strengths lie in cultivating talent in order to
reach their full potential. If you think you are a leader at heart,
find a teacher that you admire - someone who you can
connect with and who can help you develop your natural
talents and interests. Whether you reach "glory" status or not,
you will grow in ways you never even imagined.
And isn't that what life is about anyway?
What Are Some of the Potential Problems
That Occur When Sales Soar?
You are understaffed and HIRE IN HURRY!
• How do you select the right person for your
business?
• There is no perfect answer, but the interview
process can be a tremendous help if you use it
effectively. In other words, you must have
completed all of the other steps in the hiring
process in order to get the most out of the interview
process.
What Are Some of the Potential Problems
That Occur When Sales Soar?
You hire people who are not properly screened and
trained. Or maybe the employees that you've had in
the past, just aren't cutout for the "new" business,
and they NEED TO BE REPLACED!
• Few supervisors and managers savor the idea of being good
at firing people. Nevertheless, you need to know how to
terminate employees in a way that preserves their dignity
while meeting your organization’s needs. Even the most
experienced managers will experience stress and anxiety
when they go through the termination process. Having a clear
idea of the process won’t make it any more pleasant, but
could prevent you from making costly mistakes.
The Importance of Cash Management
Definitions first:
• WHAT IS CASH?
Cash is ready money in the bank or in the business. It is not
inventory, it is not accounts receivable (what you are owed),
and it is not property. These might be converted to cash at
some point in time, but it takes cash on hand or in the bank to
pay suppliers, to pay the rent, and to meet the payroll. Profit
growth does not necessarily mean more cash!
• A lesson that all entrepreneurs learn is the difference between
profit and cash. Profit is the amount of money you expect to
make if all customers paid on time and if your expenses were
spread out evenly over the time period being measured.
However, it is not your day-to-day reality. Cash is what you
must have to keep the doors of your business open, while you
are busy trying to make a profit. Over time, a company's
profits are of little value if they are not accompanied by
positive net cash flow. You can't spend profit; you can only
spend cash.
What Kind of Cash Flow is Good?
• POSITIVE CASH FLOW
If the cash coming "in" to the business is more than the cash
going "out" of the business, the company has a positive cash
flow. A positive cash flow is very good and the only worry here
is what to do with the excess cash. Like good health, a
positive cash flow is something you're most aware of if you
don't have it.
• NEGATIVE CASH FLOW
If the cash going "out" of the business is more than the cash
coming "in" to the business, the company has a negative cash
flow. A negative cash flow can be caused by a number of
reasons. For example: too much or obsolete inventory or poor
collections on your accounts receivable (what your customers
owe you) can cause you to be short of cash. If the company
can't borrow additional cash at this point, the company may
be in serious trouble.
How To Manage?
Cash flow projections
Time horizon
Short-term
(weekly, monthly)
Purpose - How used
o
o
o
Long-term - Annual (12 months)
o
To show how much cash will be needed to run the
business in the coming year.
To determine where the cash will come from.
To determine seasonal variations in cash flow.
To estimate annual borrowing requirements, ability to make
repayments.
Supporting information for loan application.
o
o
o
o
To support strategic planning.
To determine equity needs.
To estimate borrowing requirements.
Supporting information for raising equity capital.
o
o
o
o
Long-term - Strategic (3-5 years)
To determine short-term cash position.
To plan amount of cash that can be put in short-term
investment account (money market).
To estimate working capital requirements.
The Importance of Cash Management
There are many techniques available for helping you to improve your cash flow. Some of these techniques
are:
1.
Sell for cash or credit card rather than on terms if your industry practices permit.
2.
If you do sell on terms, establish good credit policies
3.
Bill promptly and before customer check-writing cut-off.
4.
"Age" accounts receivable monthly.
5.
Use aggressive collection techniques.
6.
Add late charges and fees when possible.
7.
Tighten customer credit requirements.
8.
Pay bills only on due date (or later if possible) unless there is a discount for early payment.
9.
Regulate payments to your suppliers to your advantage (spread out during the month).
10. Reduce your inventory to the most necessary items.
11. Dump slow moving items at cost.
12. Lease instead of purchase equipment.
13. Pay no more estimated taxes than necessary.
14. Make bank deposits promptly. Never leave customers' checks in a desk drawer. Not only will you be
losing potential interest, it might even be unsafe.
15. Work your cash. Put excess balances into interest bearing accounts whenever feasible (consider your
short-term cash needs).
16. Purchase equipment, supplies, and inventory wisely.
17. Use tax losses or credits.
18. Consider prudent borrowing.
19. Increase sales.
20. Increase prices.
The Negative and Positive Benefits of
Leverage
• Leverage is an important concept to understand as an
entrepreneur. Leverage allows you to expand beyond the
limits of your own resources by using the resources of others.
It is usually used in talking about capital (using your collateral
as assets to "leverage" capital from other sources).
• Eventually, it becomes impossible to operate your business
out of your own personal resources. You must seek outside
capital and borrow money to finance growth. If you are
already practicing GOOD CASH MANAGEMENT
TECHNIQUE and have POSITIVE CASH FLOW, your
chances of obtaining outside capital are greatly improved.
• However, you should be careful to not get too highly
leveraged. That occurs when your level of debt service
exceeds cash flow. It is why bankers and investors are so
concerned with the debt to equity ratios of a business.
The Benefits of Different Capital
Sources.
Understanding Money Sources
• Never enough money! How many times have you said that?
You need capital to get sales, buy inventory, pay your
employees, purchase assets, pay taxes, you name it - you
need money for it.
• Your need for capital is a continuing one. Expansion
opportunities or a chance to purchase cost-saving equipment
can also create a need for extra capital.
• To just stay in business or to expand, the small business
owner needs capital, but where do you get it?
How the Need for Capital Arises?
As your business grows, so does your need for more and
more capital. Remember there is more than one way and
more than one place to raise the money you need. You need
to understand the reasons that additional capital is needed -this will play an important role in choosing the right form of
additional capital for your business. There are many factors
that can create a need for additional capital. Some of the
more common are as follows:
• Sales growth requires inventories to be built to support the higher
sales level.
• Sales growth creates a larger volume of accounts receivable.
• Growth requires the business to carry larger cash balances in order
to meet its current obligations to employees, trade creditors, and
others.
• Expansion opportunities such as a decision to open a new branch,
add a new product, or increase capacity.
• Cost savings opportunities such as equipment purchases that will
lower production costs or reduce operating expenses.
How the Need for Capital Arises?
• Opportunities to realize substantial savings by taking
advantage of quantity discounts on purchases that will lower
production costs or reduce operating expenses.
• Opportunities to realize substantial savings by taking
advantage of quantity discounts on purchases for inventory, or
building inventories prior to a supplier's price increase.
• Seasonal factors, where inventories must be built before the
selling season begins and receivables may not be collected
until 30 to 60 days after the selling season ends.
• Current repayment of obligations or debts may require more
cash than is immediately available.
• Local or national economic conditions which cause sales and
profit to decline temporarily.
• Economic difficulties of customers that can cause them to pay
more slowly than expected.
• Failure to retain sufficient earnings in the business.
• Inattention to asset management may have allowed
inventories or accounts receivable to get out of hand.
Combination
• Frequently, the cause cannot be entirely attributed
to any one of these factors, but results from a
combination.
• For example, a growing, apparently successful
business may find that it does not have sufficient
cash on hand to meet a current debt installment or
to expand to a new location because customers
have been slow in paying.
Short- and Long-Term Capital
• SHORT-TERM FINANCING is most common for assets that
turn over quickly such as accounts receivable or inventories.
Seasonal businesses that must build inventories in
anticipation of selling requirements and will not collect
receivables until after the selling season often need short-term
financing for the interim. Contractors with substantial work-inprocess inventories often need short-term financing until
payment is received. Wholesalers and manufacturers with a
major portion of their assets tied up in inventories and/or
receivables also require short-term financing in anticipation of
payments from customers.
• LONG-TERM FINANCING is more often associated with the
need for fixed assets such as property, manufacturing plants,
and equipment where the assets will be used in the business
for several years. It is also a practical alternative in many
situations where short-term financing requirements recur on a
regular basis.
Available Sources of Capital
In order to secure the capital they need, small
business owners must understand the various
sources of money that are available to them such
as the following:
•
•
•
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Capital generated internally
Capital available from trade creditors
Borrowed money
Sale of an ownership interest in the business to equity
investors.
Each of these capital sources has unique characteristics.
These characteristics must be fully understood by the small
business owner so that he or she will know what sources
are available and which source is best suited to the needs
of the business.
Internal Sources of Capital
There are three principal sources of internal
capital:
1. Increasing the amount of earnings kept in the
business.
2. Prudent asset management.
3. Cost control.
Increased Earnings Retention
• Many businesses are able to meet all of their capital needs
through earnings retention. Each year, shareholders'
dividends or partners' draws are restricted so that the largest
reasonable share of earnings is retained in the business to
finance its growth.
• As with other internal capital sources, earnings retention not
only reduces any external capital requirement, but also affects
the business' ability to secure external capital. Lenders are
particularly concerned with the rate of earnings retention. The
ability to repay debt obligations normally depends upon the
amount of cash generated through operations. If this cash is
used excessively to pay dividends or to permit withdrawals by
investors, the company's ability to meet its debt obligations
will be threatened.
Asset Management
• Many businesses have non-productive assets that can be
liquidated (sold or collected) to provide capital for short-term
needs. A vigorous campaign of collecting outstanding
receivables, with particular emphasis on amounts long
outstanding, can often produce significant amounts of capital.
• Similarly, inventories can be analyzed and those goods with
relatively slow sales activity or with little hope for future fast
movement can be liquidated. The liquidation can occur
through sales to customers or through sales to wholesale
outlets, as required.
Fixed assets can be sold to free cash immediately!
Cost Reduction
• Careful analysis of costs, both before and after the fact, can
improve profitability and therefore the amount of earnings
available for retention. At the same time, cost control
minimizes the need for cash to meet obligations to trade
creditors and others.
• Before the fact, a business can establish buying controls that
require a written purchase order and competitive bids on all
purchases above a specified amount. Decisions to hire extra
personnel, lease additional space, or incur other additional
costs can be reviewed closely before commitments are made.
• After the fact, management should review all actual costs
carefully. Expenses can be compared with objectives,
experience in previous periods, or with other companies in the
industry. Whenever an apparent excess is identified, the
cause of the excess should be closely explored and corrective
action taken to prevent its recurrence.
Equity Capital and Share of
Ownership
• Unlike debt, equity capital is permanently invested
in the business. The business has no legal
obligation for repayment of the amount invested or
for payment of interest for the use of the funds.
• The equity investor shares in the ownership of the
business and is entitled to participate in any
distribution of earnings through dividends, in the
case of corporations or drawings in the case of
partnerships.
• The extent of the equity investor's participation in
the distribution of earnings of a corporation
depends upon the number of shares held. In a
partnership, the equity investor's participation will
depend upon the ownership percentage specified in
the partnership agreement.
What Type of Capital Does Your
Business Need?
What does your business need? - Equity, debt or
alternative financing?
• Too often business owners look for financing in the
wrong place!
• So, where is the “RIGHT PLACE?”
Back to Basics…
•
•
When an individual or an institution "invests" in your
company, they are making a capital contribution to your
business. In return, they own and have control over some
portion of the business and will get repaid through profit
sharing or when the company is sold. What next?
The business has to have the following characteristics in
order to be attractive to investors:
1. High profit margins to provide attractive profitsharing income (dividends) to the investors.
2. Product or service must have significant market
appeal and show the potential for rapid future
expansion.
3. Potential for a significant return on investment
through an “EXIT STRATEGY" such as "going
public" or acquisition by a larger corporation.
What are Investors Looking for?
1. Better returns than they could get on a portfolio of
blue chip stocks but less than professional
venture capitalists look for.
2. In addition to financial gain, they also look for
"psychic income." Based on their background,
many investors want to contribute their expertise
as well.
3. Investors are looking for good management and
industry potential.
What deal do I Offer Them?
• When most people are faced with asking friends and family and other
private investors for capital, they have very little knowledge on how
to approach the deal to make it favorable for both the entrepreneur
and the investor. With investor financing as opposed to conventional
financing, you can be creative and flexible for the needs of the
business. For example:
•
•
You could structure an agreement that has both debt and equity elements.
Offer to repay the principal of the investment like a loan over a certain period
of time. Because the investor has offered to risk his/her capital on your
business, it is often required that you provide a "kicker" as well. This "kicker"
could be a percentage of profits for several years. In the first year or so there
may be no profits and therefore no "kicker". However in the ensuing years the
investor may reap extra income as your business becomes profitable. Many
people want to structure an agreement with an investor so that there is a
timely exit for that investor. Many people do not want an investor involved in
their business forever, but want to ensure they are paid off and out of the
business in a reasonable period of time. Likewise investors want to know
when they can reap their investment.
Be sure and consult with an attorney and get her to help you make all the
necessary disclosures, etc. -- even though you are working with a private
offering it requires careful analysis and legal agreements.
Some Hints and Tips…
Here's some suggestions for communicating with potential
investors:
• 1. Have a carefully designed business plan with a two or
•
three page investor prospectus.
• 2.
•
•
•
•
Investor prospectus should include:
how return on investment will be calculated and distributed
guarantees (if any) to reduce risk
exit requirements for the investor
length of time for the terms of the prospectus
Conclusions
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•
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Plan professionally
Aim for transparency
Aim for solid corporate governance practices
Seek assistant whenever you need it!
Realize your own skills and lack of them as well!
Don’t look instant gratification – rewards will be there!
Hire when needed, fire when needed!
Underpromise and overdeliver!
Thank You!
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