Growth Creates New Challenges

 

Growing companies change like in fast-forward mode. Companies that grow are faced with the following five key challenges, that we can address together:

 

1. Profitable Growth

Growth alone is not enough for entrepreneurial succes.s In order to make commercial sense, growth must be profitable and have a return-on-investment that is higher than the cost of capital, otherwise it's a zero-sum game or worse. Growth without profitability is like gluttony or cancer. It leads to overweight or disintegration.

 

2. Selection of Leaders

Growing companies are like a pressure cooker and very few people have the personal development potential to be the perfect manager in every growth phase of the company. Therefore, the selection, and when necessary replacement, of leaders and managers has to be done with utmost care. It is key to select leaders and managers that have already proven in similar growth situations, that they can create traction and results. Industry experience is not enough, it's about experience with fast growth.

 

3. Delegation

A company that is growing undergoes substantial organizational change in a brief time and this also requires ongoing change in the management style. The key question here is, whether the founders and managers are able to grow and develop with the company and can start to delegate the majority of their tasks to others, in order to effectively manage and lead the fast-growing company in its increasing complexity.

 

4. Cash Flow

In the short and medium term, growth is not going to create cash for most companies, but will be a drain on cash resources. This is typically the case, because, depending on the development phase of the company or business unit, you either have to invest in research and development of products and services before you can bring them to the market, or in marketing and sales to make sure that you have rapid market penetration or in the industrialization of production in order to satisfy the, hopefully, quickly growing demand for the products and services of the company.

 

In most cases the cash flow of the company or business unit that is growing is negative, at least for the first growth phases, because the additional sales from the growing business cannot cover the costs of growing.

 

But "Cash Flow is King" and without liquidity a company cannot survive. Therefore it is a critical task of management to make sure that enough liquidity is available to finance the growth during  a commercially reasonable period of time, until the company reaches cash flow breakeven.

 

4. Systems and Organization

Growth puts higher demands on an organization than cruising speed. Therefore it is of high importance, that all organizational systems are well prepared for the growth challenge and are scaling well with the growth of the business.

 

5. The Core Business Must Stay Profitable

In many cases the preferred source of financing for growth are the cash flows (hopefully) generated by other units of the company. These cash flows will often come from a more mature core business. It is therefore critical that this core business stays profitable, in order to make sure that this external cash flow source for the growing business is not running dry.

 

Source: M. Hirt,  Critical Considerations for Boards of Fast-Growing Companies (Worauf ein Aufsichtsrat bei schnell wachsenden Unternehmen achten muss), Aufsichtsrat aktuell 2015, Linde Verlag

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