Building a successful business is tough – 80% of start-ups do not survive
beyond their first two years and 80% of the remaining businesses close by
their 10th year of operation. If you don’t plan for growth, the competition
may overtake you, but rapid expansion could put so much strain on your
resources that the whole business comes crashing down. Strategic thinking,
forward planning and building flexibility into your company are key to
ensuring that growth is steady and manageable.
The first thing to remember is that the skills that make a good entrepreneur
are not necessarily the same as those that an enterprise needs to grow.
Kevin Horne, chairman of the National Federation of Enterprise Agencies,
says that once a business is established, good teamwork becomes essential.
Entrepreneurs should surround themselves with a talented management team.
“If you fail to build a team with the varied skills you need, you are likely
to fail to make the leap from a small enterprise to a medium-sized one,” he
adds.
Toby Stephenson, partner for growing business at accountancy and business
advisory firm PKF, agrees: “As the company grows, entrepreneurs have to
learn how to stand back and delegate. If the entrepreneur is always
interfering, then it disenfranchises the employees, but by letting them get
on with the job – and maybe also giving them bonuses or stock options – they
really become part of the business.”
Having a business plan is crucial to secure the all-important finance to fund
growth. “Planning is the key,” says Tim Rigg, head of Bank of Scotland
Corporate, northwest. “You have got to look at the current state of the
market, decide where you want your business to be within that market and
then look at the opportunities and the risk to the business.”
Simon Briault, spokesman for the Federation of Small Businesses, agrees. “You
have to have a solid business plan – one that looks three to four years
ahead,” he says.
Independent advisers or nonexecutive directors can help plan and drive
strategy and update it in response to market conditions. Spending more on
marketing can help a growing business expand further, but companies must
ensure they are on a firm financial footing: a successful marketing campaign
can bring a rapid upturn in sales and the firm has to be able to cope.
While the global credit crunch may be making it more difficult to raise
funding, money is still available for those who can prove they have a strong
business case.
Funding falls into two rough categories: debt or equity financing. Debt
financing could be a bank loan, a mortgage or an overdraft, where the amount
borrowed has to be paid off over a period of time. Equity financing involves
selling a stake to a business “angel”, a venture capital company or private
investors.
Stephenson says: “A lot of entrepreneurs find that selling a stake in their
company – which many see as their ‘baby’ – is unpalatable. But you have to
work out what’s best for you and, in the case of equity financing, would you
rather have 100% of something small or 70% of something much bigger?” With
outside investors such as venture capital companies, the important thing to
remember is that they are looking to make money, so will always be thinking
of an exit strategy. Will you be prepared for this further down the line?
And although credit could be harder to come by at the moment, companies should
still shop around to get the best deal, says Briault. “Introducing a bit of
competition to the proceedings means you could come away with a better deal.”
Raising finance can be a daunting prospect, and is probably best tackled with
outside assistance. Horne says: “Go to a top-quality chartered accountant
with experience in raising finance. It will cost, but it’s worth paying
for.” A detailed business plan will only help your case.
If your business is to survive, managing your cash flow is just as important
as raising extra finance, advises Rigg. “Businesses fail when they run out
of cash. You might be getting contracts or selling products, but the money
will take a while to come in.” Invoice discounting is a useful way to
improve your cash flow. Rather than waiting for an invoice to be paid, you
can borrow a certain amount immediately against the value of that invoice,
usually up to 80%. However, all debts must be serviced, and the more
leveraged a company is, the more its income will have to be used to pay off
its debt.
When a company is looking for rapid growth, it can be tempting to rush out and
grab as much business as possible, but this, too, carries risks, says Rigg.
“Rapid growth may sound great, but it will stretch every bit of the
business. Fast growth will highlight the inadequacies of the business much
more than organic growth.”
The last thing a company wants is to find that it has not got the raw
materials, or the staff, or the capacity to meet demand. “If you can’t
fulfil on orders that you’ve taken, then you will lose that customer
forever,” Rigg says. “It is very easy to damage your reputation,” Briault
adds.
Conversely, it is also a huge risk if a company invests heavily in capital
projects – employing more people, buying a new warehouse – without having
the necessary business to back it up. “You have to ‘what if?’ your plan,”
says Rigg. “If you gear up your business incrementally, by extending your
premises bit by bit, for example, rather than buying an expensive new
facility, or taking on two new staff rather than 10, then you can still grow
fast but it is more staggered. This means you can turn the tap off if there
is a blip, such as a downturn in the market.”
Once again, it comes down to preparation, preparation and more preparation.
“Expanding too quickly just means that you are not prepared for it,” says
Horne. “Some companies could find that they can’t cope with a growth of just
5%, while others can happily cope with 50% growth because they are prepared.”
Sometimes opportunities come along unexpectedly, he adds, and it is vital to
be able to access more staff or more capacity at a moment’s notice. The
successful companies will be the ones able to take advantage of these sudden
opportunities.
But never forget the most important thing: profit. “It’s no good being a busy
fool,” says Rigg. “Taking business on at low margin and undercutting the
opposition might not actually be making you any money.”
Maintaining growth may not be as dull as it sounds to the entrepreneur hooked
on the thrill of the start-up. Horne says: “True entrepreneurs should focus
on things that will keep their interest alive by leaving the day-to-day
operations to people on the ground and instead making the deals and getting
the buzz and the energy of taking the business forward.”
IOR
FOR office design company IOR Group, the impetus behind its rapid growth lay
with its customers. The managing director, Mark Randall, right, explains:
“We started in 1989 by supplying furniture to commercial outlets. We grew
steadily but we really took off when our clients said that they wanted us to
move into designing and installing their premises ourselves.”
IOR, based in Richmond, southwest London, now has some of the largest
corporate clients in the world, including ABN Amro, Lehman Brothers and the
Russian energy giant Gazprom. Turnover shot up from £6m in 2001 to £15m last
year, and profits have increased by 15% over the same period.
However, with growth comes restraint. The company recently turned down four
projects and Randall says IOR is quite selective about which jobs it takes
on, in order not to dilute the quality of its work.
Turnover is predicted to reach £20m this year, and Randall is working on a
growth strategy with consultants Baker Tilly.
Loch Fyne
A company that is celebrating its 30th anniversary this year might be
considered an odd choice to demonstrate fast growth. But Loch Fyne Oysters
has come a long way since starting life as a roadside stall on the west
coast of Scotland.
The firm supplies seafood, meat and game to restaurants, hotels, delicatessens
and private customers across the world. Annual growth is 20%-30%, with a
£500,000 profit on turnover of £14m last year.
“Our problems are nice ones,” says Bruce Davidson, left, the managing
director. “It’s about how to handle the growing demand while maintaining the
quality of our products and services.”
Davidson, 57, has put together a three-year business strategy to link the
group’s different expansion plans, which include a processing and
distribution plant near the M4/M25 junction.
The Loch Fyne restaurant chain, sold to Greene King for about £70m last year,
is also booming. There are now 38 outlets, with more planned.
