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- Making the Decision
- Why Expand?
- Risks and Rewards
- Getting Ready
- Plan For Growth
- Expansion Strategies
- Financing Growth
- Managing Growth
- Borrowing & Credit
- Evaluating the Results
Family relationships are intense and deeply felt. They can tear the company apart or create the glue that makes it a joy to go to work. Like any small business, a family business must plan, structure and develop strategies for its growth. But internal relationships complicate the dynamics. Here are 5 basic points to consider in building a family business that you can pass on to future generations:
Keep everyone informed from an early age onward, whether they’re active in the business or not.
- Develop an early pride in the family business – have children write histories, do odd jobs, participate in discussions about current business issues.
- Talk money – don’t make it a taboo. Make children understand the value of dollars spent and earned.
Allow grown children to take on exclusive territories when they are ready.
- Give them a piece of business to run by themselves if possible.
- Encourage them to work elsewhere if they feel they need their own space – they will return when they’re ready.
Consider how to deal fairly with family members who will not participate in the business.
- The business may not support all your children’s families, or they may not be interested.
- Don’t let jealousies tear the family apart.
- Consult family business experts for possible estate strategies.
Prepare for your premature departure as leader.
- Protect your legacy from the loss of its only leader.
- Start executing a succession plan in your mid-fifties to early sixties.
- Identify your successor. Don’t make it a mystery. Who has the fire in their belly to run a vibrant business?
- Hand over authority slowly and watch how it is handled. Enlist trusted outsiders as mentors or trainers.
Hold regular family business meetings that include everyone, even non-active participants.
- Everyone has an interest – only their roles are different.
Risks and Rewards – Things to Consider
Will greater size give greater efficiency?
Will economies of scale bring greater profitability, growth pays for itself. If size and economies can also limit the number of viable competitors, growth is even more attractive.
Will customers and resources remain loyal?
Make sure customers will stick with you through the transition period, either out of loyalty or inconvenience of switching.
Will you have to finance growth yourself?
If you can’t borrow on reasonable terms or attract new investors, internal financing will determine the pace of growth.
Can you take the heat?
Your tolerance for stress and discomfort – financial, personal and physical – is a limit on growth
With the decision to grow, your company enters a new phase that is no longer business-as-usual. Many changes will occur in all functional areas in order to keep pace with the sales growth that is coming. In order to prepare for these changes, you must remove the barriers to grow in these key areas. What can you do to help you “break through” the barrier more smoothly, in a more controlled fashion? It’s all about preparation in the key areas of business that must keep up as you grow sales.
Management: Conflicting Vision
To keep its eye on the target during these times of change, management must have only one target. Discuss the vision with key managers. State the vision – together. Only managers who believe in the vision should participate in the inner circle. A single vision is crucial – you cannot drive with double, triple or quadruple vision.
Limit the key management group to those who buy into the vision. Key managers must be capable of contributing to the accomplishment of the vision.
Work together on the vision statement (see: Planning for Growth) – agreement on the purpose of being in business is essential and revealing.
Operations: No Plan
Staff can work toward expectations only if there is a written plan that states what the operational goals are. Include equipment purchases and additional staffing in goals and plans. Make sure everyone knows the plan.
Without a written plan, existing staff have no way of knowing what’s expected and you cannot know whether your expectations are being met.
- Know what staff and equipment can actually produce at full capacity each day.
- Prepare a plan with goals, objectives and a time frame. If you will expand production and service capacity, include equipment and personnel targets in your plan.
Cash is the air supply for growing companies. More production and sales means more cash is needed for inputs, inventory and equipment. Make sure financing is in place, watch cash flow like a hawk and hire or outsource the best financial help you can get. The most devastating barrier to growth is cash shortage. Cash is like air for the growing business.
- Project your cash needs, control costs, monitor cash flow and preserve some credit capacity for emergencies.
- Manage money smartly: hire or outsource expertise in collections, receivables management, cash management and foreign currency management, as necessary. You will also have more bookkeeping and accounting obligations.
- Build good relations with sources of funding. Let them know your plans and how you’re doing.
- Cash is king. Profitable businesses can go bankrupt if they cannot meet bill payments.
Plan for Growth
To approach growth strategically, you must begin with a plan that contains three elements:
- Mission Statement – the long-term vision
- Goals and Objectives – the intermediate goals that work toward the mission
- Action Plan – the immediate tasks to reach your goals
This is where you put your vision on paper. It’s the ultimate destination, the long-term goal, the imaginary place you are trying to make real. Usually, it lasts for the lifetime of the business. It addresses:
- What type of products or services you offer
- Who your customers are
- What benefits you offer to customers.
For example, a home decorating store’s mission statement may be:
“To enable first-time home buyers in this city to create functional, tasteful and inexpensive interiors using a combination of their existing furniture and fittings matched with new or used materials provided by our company.”
Goals and Objectives
This is the route you intend to take on your mission – the strategies. Usually, you will update them annually. The goals and objectives must:
- Be specific and measurable (sales, market share, cost reduction, profitability…)
- Be achievable and realistic
- Include a time frame.
A sample objective: “By the end of this fiscal year, we will increase sales to homeowners by 20%.”
This is the list of tasks that will take you to your goals and objectives. They simply describe the action to be taken, including a deadline, such as: “Complete sales staff hiring and training by end of October.” Like a household list, they’re checked off when they’re achieved and new tasks are added.
There are four ways to grow sales:
- Market Concentration
Every business has viable customers it has not yet nailed down, customers that also buy from other businesses, and customers it has lost. So there’s great potential in finding ways to increase sales in existing markets.
Here are a few ways to get customers to buy more:
- More frequent use
- Become a habit – change displays or special offers frequently, offer novelties or events, advertise that regular use reduces long-term problems
- Offer frequent-buyer rewards
- Improve convenience – longer hours, faster preparation, children’s play area, book-ahead reservations, easy payment options for regular customers.
- Larger quantities
- Offer incentives for bulk purchases or combination buys
- Encourage stockpiling – package in larger-than-needed quantities or increase size of servings.
- New uses
- Invent different purposes – new ways to use your product, in the same way that baking soda is used as an odor-eater or soups are used to make sauces.
Customer: “Can I put a down payment on this?”
You: “Maybe I should offer a payment plan.”
Employee: “I’m so tired of people who call a lumber yard asking whether we build fences.”
You: “Maybe I should provide qualified tradesmen.”
Supplier: “We sure are selling a lot of Oriental sauces lately.”
You: “Maybe I should offer a Chinese fried rice dish on my menu.”
Tactics for introducing new products within existing markets:
- Change appearance – new colors, packaging or styling can re-energize a tired product line
- Change message – focus on current trends to emphasize eco-consciousness, safety or multiculturalism
- Change technology – go digital, introduce e-commerce, offer organic ingredients
- Add optional extras – use the airline model and offer different levels of service, or use the kitchen product model and offer a dispenser or holder.
- Customize – personal service, individual consultation, non-standard orders.
- Use special occasions – holiday, celebration or special occasion versions of your product, such as Christmas editions, Heritage Day portraits or “election” burgers.
Offer accessories – stock add-on items of interest to customers who buy your product or service, such as designer fountain pens in bookstores.
Completely new items
Extend your brand – capitalize on goodwill by offering new items over your name
Cross-sell – offer a wider menu of services either supplied by you under license from others or supplied by others who pay a commission to you.
If you have saturated your local market, the most obvious answer is to reach out to new buyers.
The risk is that you move before you’re profitable in your first market and cannot financially withstand the learning curve you will experience with new customers, or weather the new competition you will face.
Some means of penetrating new markets:
Extend current segments – use market research to find new segments that could use your product: men/women, high-income/medium-income, and car owners/boat owners.
Re-focus current segments – find new uses or applications to capture new customers – as baby shampoo is also marketed as shampoo for sensitive skin.
Advertise – place ads in select media in new markets, preferably where little competition exists.
Go for catalog sales – band together with other producers of related products to publish a catalog and solicit mail-order sales.
Minimize overhead – open new stores, warehouses or factories, but centralize head office functions (buying, accounting, administration, personnel) at old location.
Use temporary locations – if it makes sense, try kiosks or temporary office space first.
Register with databases – Overseas databases list companies seeking new markets or suppliers for foreign markets.
Get expert assistance – use Bahamian embassies and trade consuls in foreign markets
Attend trade shows – quick exposure, easy planning and excellent targeting, plus current market information and immediate knowledge of local competition.
Get financial aid – Regional & Local loan programs and other funding mechanisms. Check trade offices and Web sites like the Inter-American Development Bank & BAIC site for details.
Pursue education and mentoring – many inexpensive programs exist for new exporters, such as the RBTT Sponsored Small Business Training Course held at the College of The Bahamas. Contact your nearest RBTT office for details.
Rod McQueen said it best in The Last Best Hope: “Volume is vanity, profit is sanity, and cash flow is reality.”
Growing companies pursue new revenues, but volume isn’t the same as profitability. There’s also the question of whether the company can pay for the assets – current expenses and capital property – it uses in achieving growth.
The income statement tracks revenues and expenses over a period of time – a month, quarter or year. A pro forma income statement is simply a forecast of expected revenues and expenses.
Revenue: Sales and other income
Expenses: Expenditures made to generate revenue
Net Profit: Revenue minus expenses
Each growth strategy has an impact on the relationship between these three crucial items.
Growth strategies can sometimes have negative effects on income statements.
Increases in revenue may not offset changes in overheads or the increased risk of higher accounts receivable. Even if per-unit overhead costs remain constant – which is not often the case – volume rises may not be sufficient and net profit falls.
Example: A specialty coffee shop sells 1,000 cups of coffee every day at $2 each. Each cup of coffee costs $1.50 for the ingredients and cup, so they are making 50 cents on each cup or $500 a day in gross profit. If the owners decide to lower the price by 10% to $1.80, they are now making 30 cents on each cup. They must therefore sell 1,667 cups of coffee each day to maintain their $500 profit (assuming constant overhead costs, which are unlikely.) That’s an increase of 67% in sales to offset a 10% drop in price.
Depending on your profit margin, you may need to substantially increase your sales volumes simply to maintain your profit level, so carefully consider whether you’ll be able to make up the difference either through increased sales or through after-sales options and add-ons.
Marginal outlets can bring down the whole chain at the beginning. Shared overheads can reduce net profit for the chain to less than that of the flagship outlet. The second danger is a general downturn in sales – marginal outlets quickly drain the chain’s resources.
- Management Rule #1: Develop a strong management training program – don’t base the assignment on who’s been around longest.
- Management Rule #2: If you are manager of the flagship outlet, you must become chain manager and hire a manager for the first store. You are not ready to branch out until you find a manager for your flagship store.
- Management Rule #3: Set high minimum profit expectations for new outlets. It’s incorrect to assume that revenue from lower performance outlets drops directly to the bottom line due to shared overheads.
Shipping, warehouse and travel costs can wipe out new revenue.
Define objectives: Treat the new market as a start-up and do a complete costing.
Set timelines: Taking too long to establish the market can endanger long-term profit and cash flow.
Be strong locally first: If you can’t focus on your expansion, neither old nor new locations will be successful.
Product Line Expansion
Track cost of new-product sales separately to determine if it is worth the resources it consumes.
Becoming a Manager
Interestingly, the successful growth of a business is generally reflected in the personal growth of the entrepreneur. It’s not just “yours” any more, but you still have a huge influence on company performance through the team you build. The ultimate achievement: true leadership.
Undertaking a significant growth strategy often projects an owner into an entirely new orientation. The focus is on what’s best for the business, not what the owner wants to do next.
The qualities that make entrepreneurs successful – determination, independence and individualism – can become liabilities. Bigger companies require different management skills, especially delegation, teamwork and co-operation.
To become a manager:
Separate yourself from the business:
- Treat yourself as an employee and take a vacation each year.
- Establish separate credit cards, accounts and phone lines.
- Strive for balance: Learn to pace yourself and become selective about what you do yourself. Time on one project is time away from another.
- Revisit goals regularly: Keep your eye on the target. Write down long-term business goals and review regularly. Don’t get lost in detail.
When businesses grow, the stakes become higher. Investors, employees, lenders and suppliers are often taking a considerable risk along with the owner.
- The owner therefore begins to act more like a manager.
- The focus of attention shifts to the business.
- Business objectives are strategic goals, not personal ones.
- Problem-solving is a controlled team decision, not an immediate directive.
- Decisions are researched and proactive, not intuitive and reactive.
- Managers ask how the business can work best, not what work needs to be done.
- Planning occurs backward from the future goal, not by projecting the present forward.
- Results are measured based on how well the customer is satisfied, not how best to produce things.
Evaluating the Results
Measures of Success
You have communicated the growth plan, secured adequate financing and sharpened the management of your company. Sales are on the rise. It’s time to evaluate results, not to label your efforts as success or failure but to guide you as growth continues and business environments change.
Growth is partly about building sales but also getting more out of what you have. In other words, building efficiency. Performance measurement gives your efficiency-building efforts a focus.
The first step is to benchmark against past performance and the performance of other companies. Identify key processes affecting performance.
- Compare with other companies or industry databases.
- Conduct gap analysis to find opportunities for improvement.
- Focus on high-priority processes.
- To measure, you need something to measure against. Benchmarking compares your company statistics against the performance of similar and better-performing companies.
Benchmarking not only tells you how well you’re doing over time, it also helps avoid “reinventing the wheel” by quickly zoning in on areas of difficulty and then learning from other organizations how to do better. It’s a quick and continuous way to research improvement.
Types of Benchmarks:
- Process: Measures work processes such as tool-and-die changes, order processing or customer response times.
- Performance: Measures outcomes of processes such as cycle time, percentage of repeat orders or positive resolution of complaint percentage.
- Strategic: Measures critical success factors such as customer satisfaction, market share, return on assets or gross margin percent.
- Identify key processes affecting performance – those that use a lot of people, cash or materials (warehouse order picking), generate high value (customer service), impact on risk (receivables collection) or highly visible to customers (call response time).
- Measure each part of process.
- Compare with best in industry.
- Misplaced priorities: You can’t measure everything – it’s wasteful and irritates employees. Measure what’s important to customers and things that have an impact on quality and service. It should not be a Big Brother operation.
- Busy with numbers: For some organizations, measurement becomes the job. Don’t forget to act on what you find out. Get everyone to realize the numbers are just the indicators to tell you where to look and what to do.
- Shallow measures, vague response: Measure customer satisfaction, but also find out what drives satisfaction and measure that. Quantify and be specific. If your surveys show delivery times are too long, measure them and target a reduction of 30 minutes by end of quarter.
- Forgotten soldiers: Don’t forget to measure employee satisfaction. Find out what they want, work on it and measure again. Grumpy employees usually make customers equally unhappy.
If you cannot find or prefer not to ask other non-competitive organizations for comparative data, commercially available databases contain plenty of information – especially for processes such as credit management that reoccur in many types of organizations. Check major consulting companies or those that specialize in your industry.
Finding the major variations between your data and data from other companies reveals the best opportunities for improvement. Focus on those with greatest impact on performance.
Are you looking for one-on-one advice on what pathway you should take? Connect with an RBC Relationship Manager in your area.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.