KYN Know Your Numbers

KYN: Asset Turnover

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In this edition of KYN: Know Your Numbers™…

The Asset Turnover Ratio is one of my favorite metrics, especially when working with farm businesses. Despite what one may infer by the name, this ratio is not a promotion of turning over assets any faster than they already are. Quick turnover of assets is a major contributor to profitability challenges and cash flow challenges in the farm space.

In brief, the Asset Turnover Ratio is a measurement of how efficiently a business uses its assets to generate revenue. The calculation indicates how many dollars in revenue are generated by each dollar invested in assets. Higher is better.

The classic (textbook) version of the calculation is “Total Revenue” divided by “Average Total Assets.” So if your business generates $2.5million in revenue with $1million in average total assets, then your Asset Turnover Ration (ATR) is 2.5:1.0 (or for simplicity, just 2.5).

Here’s what I don’t like about Asset Turnover Ratio:

  • It uses “average” total assets. I have never liked using average; I feel “average” is way to make substandard performance look acceptable.
    But more to this case specifically, how do we “average” the total assets in your business? If you just take the total at the beginning and the end of the year and average those two figures, you will get an “average,” but how accurate is it? Should we be measuring assets each month and average 12 measurements? What about assets that are acquired then disposed of very quickly between measurement strike dates? I’m not a fan of average.
  • There is no clarity between which value to use when measuring assets (I.E. market value or book value)
  • The calculation does not, by definition, include leased assets (leasing has become quite popular.)
  • To be truly meaningful we must recognize that each industry has different Asset Turnover Ratios that are considered acceptable; sometimes the differences exist even within a similar space. Consider retailing: online retailers would have significantly lower investment in assets than retailers with brick & mortar store fronts. Online retailers would have significantly stronger ATR accordingly.

Once we clarify how we will approach the Asset Turnover Ratio, and maintain consistency in that approach so as to accurately trend your ATR metric over time, the ATR becomes a strong indicator of your business’ efficiency.

  1. Determine how you will value your assets:
    – when will you measure the asset values (frequency, date(s), etc.)
    – eliminate confusion and ambiguity…do two calculations, 1 with market value of assets, and 1 with book value
    – do not exclude assets under a capital lease, it will provide a false positive. Assets under a true “operating lease” can be excluded.
  2. Understand how your ATR applies to your industry. If there is a deviation in your results versus industry, is it stronger or weaker; what is causing it?

What I like about Asset Turnover Ratio:

  • it creates a stark illustration of how well a business utilizes its assets (which is a MAJOR draw on capital)
  • it is a key driver of ROA (Return on Assets – a KEY profitability ratio) and OPM (Operating Profit Margin – a KEY efficiency ratio) both of which need to be monitored closely
  • it shows the DOWNSIDE of asset accumulation (which, in the farm space, is a difficult conversation.)

Trending performed over many years by advisors with experience durations that are multiples of my own suggest that grain farms and cow/calf operations have ATR in the range of 0.33 to 0.17. Feedlots and dairies typically range from 1.0 to 0.5. User beware: these measurements are using the classical textbook definition.

Plan for Prosperity

As with any financial ratio, evaluating only one ratio does not tell the whole story. As with any financial analysis, how the numbers are quantified will have a profound effect on the results. This is not permission to ignore these important financial indicators, but more so a call to action to understand how each one affects your business so that you can make the informed decisions that will lead to profitable growth.

Not understanding the factors that affect your business is no excuse to ignore them…especially when they are within your control.

growth kills

Growth Kills

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We’ve all heard the anecdote “Speed Kills” as it was used to advise drivers to slow down. Former Canadian Football League (CFL) player Jason Armstead had “speed” and “kills” tattooed on the back of his left and right calf; as one of the fastest players in the league during his playing days, Armstead’s speed as a wide receiver and returner could kill the opposing team’s chances of winning.

But who has ever heard of “Growth Kills”?

I have written about it in this commentary and spoken about it at industry events: business can grow itself to death.

When a business pursues expansion at a pace that exceeds:

  1. Management’s ability to manage the growth,
  2. The business’ ability to finance the growth, or
  3. The market’s ability to consume the growth…

…we have an entity that has likely grown itself to bankruptcy, or the very brink of bankruptcy.

We’ve all seen it. A couple years of back to back successes, and owners feel invincible! The next thing you know, there is new equipment and buildings being added to the operation, fancy vacations being planned, and new personal expenditures (like houses, RV’s, and vehicles) being made like the lotto has just been won. Everyone who sees this opulence must surely believe that this business is very successful.

If owners (managers) are ill-equipped for the rapid success they’ve enjoyed, there is a likelihood that less-than-ideal decisions will be made in the future. As Marshall Goldsmith titled his bestselling book, What Got Your Here Won’t Get You There. Management has to keep up with the change that sustainable growth requires. This could include new knowledge/strategy/execution in areas like cash management, human resources, marketing, etc. Growth kills when management’s ability is stagnant in the face of growing complexity in business.

As sales grow, there is a need for more investment in the business (Eg. property/plant/equipment; labor; technology, etc.) to support the demand. That investment requires capital. Whether the capital is borrowed or sourced from within the business (usually taken out of working capital) has a major effect on the sustainability of the investment. Growth kills when, without a “home-run” or two, investment is pursued to the point that financing is maxed out and working capital is depleted.

What happens when more product is produced than the market can consume? A shift is made, and what once may have been a specialty item is now offered at a lower and lower price until supply has been consumed (see the “model year blowout” and virtually every car dealership every year.) A business that has enjoyed significant growth may decide to increase production based on past sales growth. Such a decision usually requires investment in the business (see the previous paragraph) and investment in inventory. Whether that inventory is raw material, or finished product remaining unsold, it is tying up working capital. How long can a business hold inventory before it converts that inventory to cash? If working capital is been reduced (see paragraph above) the answer is: not long.
Maybe the business is in a service industry. While there likely isn’t any inventory to have to manage, ramping up capacity (hiring & training staff, acquiring tools & equipment for staff, etc.) requires investment. These investments also carry an overhead expense (salaries & wages, utilities, depreciation, etc.) which becomes harder to pay for when market uptake is satiated. Growth kills when we assume the market will sustain our rapid growth for us.

Plan for Prosperity

What led to the recent success in business? Was it deliberate, planned, and executed…was it intentional growth? We recently discussed the ramifications of unintentional growth. Maybe this article should be titled (Unintentional) Growth Kills, but that probably would not have captured enough attention for you to even read it.

Growth Kills when the growth was unintentional and leads the ownership/management group to ignore the reality that (almost) all industries are cyclical. To say timing is everything does not give credit to important factors like strategy and execution, however an adequate strategy will give consideration to timing (to implement the growth strategy.)

It’s all connected. There is no magic bullet; one thing alone does not make success, and if it does, it’s “luck” and it’s short term because luck isn’t sustainable.

Bubbles2

Bubbles

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One of my investment advisers forwarded an article to me recently that contained an especially compelling paragraph. The entire article is US focused, penned by a US writer and published in a US publication (reprinted in Canada in the Financial Post.) Still, the applications of these two sentences are broad and deep:

“…it (recent economic growth) is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption.”

– Steven Pearlstein, June 15, 2018

The comparison was being made to the US housing crash that kicked off the global financial crisis in 2008. We all know what happened there; no need to rehash it here.

Yet here we are, barely 10 years later, standing at what some people feel is the precipice of another recession.

“Those who cannot remember the past are condemned to repeat it.”

– George Santayana (Ref.)

The statement from Pearlstein referenced above does have application locally: the recent rapid appreciation of farmland has provided a financial backstop to farm businesses that would have otherwise found themselves painted into a very tight corner. The present consumption, elevated operation costs and living costs driven by high priced equipment and higher living standards, is what, in this space, is leading to the sacrifice of future growth. Here is what I mean…

Les Henry recently penned an article titled Saskatchewan Farm Income and Land Prices which was published in Grainews. He compares farm income and land prices having converted both to 2018 dollars to quantify his position. An example Henry uses in the article describes how a friend of his purchased a brand new loaded Lincoln in the mid-1070’s and how the equivalent number of bushels of wheat, the staple crop in those days, was approximately 1,500 bushels needed to purchase that car. My dad used to make the same argument using the example of the only new tractor he ever bought: a 1974 CASE 970 that arrived in the yard with the plastic still on the seat. The qualifying statement was that it only required 2,870 bushels of wheat in 1974 to buy it; about 7 bushels per acre on his small farm. What does 7 bushels of wheat get you today on your farm?

Les Henry believes that current land prices are unsustainable. If he is correct, then we are almost certain to experience a bubble, even if it is a small one simply because of the amount of “equity” being used to backstop present consumption. Equity is in quotes because it was not earned equity from retaining profits in a business, but rather windfall equity from land value appreciation (similar to what set off the US housing crisis.) The rise in land values created the equity that, in many cases, has been turned into debt. Should land values pull back, lenders will be quickly re-evaluating their security and making some difficult phone calls where warranted.

If there is a bubble happening here, all that “equity” that was converted to debt has certainly helped create it.

Plan for Prosperity

We have dedicated a lot of space to discussions on growth here recently. It saddens me to think that future growth may have been sacrificed for current consumption. However, unless the wolves are near the door there is still opportunity to right the ship. Profit opportunities can be found, but it will take work, intention, and likely having to answer some uncomfortable questions.

The last five weeks we have discussed business cycles, elasticity of demand, the power of a network, intentionality in your business, and your vision in your business. It is no surprise that each of these topics, if parlayed into tangible action within your business, translate into a stronger entity that would likely provide a view from high on “success mountain” looking from a safe vantage point well above the “precipice of economic recession.”

If you want some ideas on how to climb higher up onto Success Mountain, please call or email.

 

goal planning

Intention

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It has been said that whoever enters the room with the greatest intentionality will win.

While I disagree emphatically with any win-lose proposition in business, the heart of the message shines through: intention wins the day!

What type of growth has your business experienced over the last 5 years? Was it intentional, or did it just happen? We have stated in recent commentaries that accidental growth is not sustainable, and the reason it is not sustainable is because more often than not the credit for the success is misplaced.

My friend, Tom Stimson from Dallas, TX, works exclusively with audio-visual companies and writes a newsletter he has titled Intentional Success®. 

“Does your business grow or decline seemingly outside of your control?

Do you wonder whether there will be any profit left at the end of the year?

Is success something you hope for, or are you actually doing the things that cause success to happen?”

-Tom Stimson, owner of The Stimson Group

Prophetic words.

So, to decipher whether the growth your business has recently enjoyed has stemmed from intentionality or luck, one must do a post-mortem.

A project post-mortem is a process, usually performed at the conclusion of a project, to determine and analyze elements of the project that were successful or unsuccessful.

Source: Wikipedia

This definition assumes that there was a specific project involved, which would have had goals, objectives, parameters, and timelines all clearly defined. Such a project would illustrate clear intentionality. In the absence of such a project with its defined benchmarks, how do you conduct a post-mortem?

(HINT: It is pretty tough to find what you don’t know you’re looking for.)

Suffice it to say that if we don’t know what to look for to conduct an accurate post-mortem, then our growth was most likely unintentional.

My big questions regarding unintentional growth are:

  1. Who/what gets the credit for the success?
  2. How do you replicate this success if you don’t know what led to it?
  3. If attempts to replicate the success fail, what gets credit for the failure?

This circles back around to the most simplistic of questions that many entrepreneurs have difficulty answering: Why are you in business? What do you want your business to accomplish?

These two questions are foundational in my work with privately held businesses. Without the clarity these questions provide, setting direction and establishing growth goals, is quite difficult.

Plan for Prosperity

Intentional growth requires a number factors to be present:

  1. Specific outcomes declared.
  2. A plan to achieve those outcomes.
  3. A review of actions and outcomes to determine if expectations were met or not, and why.

To satisfy these factors, simply have a vision to establish goals, build a business plan describing what you’ll do to achieve those goals, and maintain a system to compile information along the way so that you can measure your progress.

In the absence of those factors, growth is, at best, accidental.

Adding Value

Sub-Topics of Growth (Part 3)

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In this final installment of our discussion on the multifaceted growth opportunities that exist in your business, we will touch on Information Management and Management Capacity. One more time, here is another look at the graphic that has laid out the basis of our conversation.

Facets of Growth 1 Information Management

This refers to the information that you need to run your business day to day, month to month, year to year, production cycle to production cycle, project start to project end, etc. Whatever the scope and duration required for your specific business is subjective and will be determined by you and the needs of your business. Have you given much thought to the type of information you need, what form you need it in, and how often you need it? Far too many businesses have not given this question sufficient thought.

How does a business make important decisions without sufficient information? Has your lender ever granted you new or additional credit without sufficient information? Of course they haven’t! Doing so increases risk, and banks are exceptional at managing risk.

Depending on your business and the industry in which you operate, the information you deem most critical will be different from others. For example, a business in the service industry may need to track client contacts per employee per day whereas a business in the construction industry may want to track re-work (work that needs to be redone because it wasn’t right the first time.) Critical information that is industry agnostic would include current and accurate information on liquidity, productivity, and profitability.

What systems do you currently use to compile your business information? Remember, systems do what they were designed to do, so if your system is not providing you with the results you want then there is a flaw in your system! Taking a look at the graphic below, your management information system(s) should collect raw data from business operations (whatever business, whatever Information Managementindustry) and produce the data into a useful form, typically a report of your preference, so that management can analyze the results of what has happened in your business over the last period of time (week, month, quarter, etc.) Business decisions get made which affect operations, and those decisions get made anyway, even if out of necessity. So why not make informed decisions that are impactful, progressive, and positive?

If working capital is tight, would it be helpful to learn that your customers take 3 weeks longer to pay that you thought? If profitability is not meeting expectations, would it help to know that profit margins have been shrinking? If productivity is under budget, would it help to know that employee sick days have been on the rise? What you think are problems in your business (tight working capital, shrinking profit margins, decreased productivity) are actually symptoms of the real problem (which in this case could be lengthy accounts receivable, poor inventory control, or lack of staff morale…)

If you are going to step up from trying to treat the symptom by first learning what actually is the problem, then you need good management information.

Management Capacity

Coming from the farm and having spent most of my professional career working in agriculture, I often get asked a specific question by people who grew up on farms in the ’50s or ’60s but have left the farm as young adults and never got involved in farming. They ask, “These farms are getting bigger and bigger; how big is too big?” My response is, “I can tell you exactly when. It’s when the farm has expanded beyond the owner’s/manager’s ability to manage it! For some, that is 40,000 acres; for others, it’s 400 acres.”
**NB: Not looking at corporate city limits but actual development, 40,000 acres is slightly less than the size of Regina, Saskatchewan. In contrast, 400 acres is approximately the area used by the Tor Hill Golf Course.

Management Capacity Business owners/managers (these roles are not synonymous, by the way) must be proficient in many different aspects of their business. One might say that business owners “need to wear many hats.” Being an expert in the work your business does is important, but if that is where your capacity ends, then you surely have “fallen prey to The Fatal Assumption” that Michael Gerber wrote about in The E-Myth Revisited. Just to name a few, strategist, controller, marketer, recruiter, trainer, collector, innovator, and leader are but a smattering of the hats a business owner must wear at some point or another. If your capacity while wearing any of those hats is less than “expert”, then you might be inhibiting growth!

“Do what you do best, and get help for the rest™” is a cornerstone of my advisory work with clients, and as such, I’ve trademarked it. If we spent our entire lives trying to improve on our weaknesses, we would reach the end of our lives with a bunch of strong weaknesses. However, if we spend our lives utilizing our strengths and utilizing the strengths of others in areas we are weak, then we create a synergy that provides incredible leverage not only for our business, but for ourselves and the people we have hired!

Take a moment this week to perform a self-audit on where your capacity is reaching its limit. Growth is about breaking through limitations, and this becomes an exceptional opportunity for growth, both in your person and in your business.

Plan for Prosperity

Growth is about more than just size and scale, but it is about expanding. Growth is expanding our view, our skills, and our attitudes. Growth is about expanding our network, our credibility, and our place in the market.  We’ve just completed a three-part journey that coursed through the many facets of growth. In summary:

  • Your customers give your business a reason for being. How do you find them and keep them?
  • Your product or service can be your boom or bust. Are you innovating how your deliver your product/service? Where is your link in the value chain?
  • Pursuing growth from a position of financial weakness is a recipe for disaster. Are your finances putting in the position for growth, or are they hindering growth opportunities?
  • How are you investing in your people? Are they being trained? Are they provided with increasing responsibility? What type of culture does your business have?
  • Accuracy of your management information is critical. Is your information system up to par? Are you making critical decisions with outdated or inaccurate information?
  • If you are the heart and soul of your business, is your capacity in any of the critical management functions you perform a limiting factor in your business’ growth?

You business is like a tree: if it is not growing, it is dying. But unlike a tree, your business has many ways it can grow. Always grow, and grow all ways.

Adding Value

Sub-Topics of Growth (Part 2)

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As we continue our discussion on the many facets of growth (which is about far more than just “size and scale”) we will look this week at two types of capital: monetary and human. Here is another look at the graphic which provides the basis of our conversation, which, again, is not an exhaustive list within the conversation of business growth.

Facets of Growth 1Finance and Cash Flow

One of the first questions I get asked during interviews with prospective clients is usually related to cash flow or financing. As many business experts have written, these are the symptoms not the problems. Before we can understand how cash flow and financing have become an issue, we need to clarify your desired business goals.

Too often, financing is a reaction to a need or to a problem. When financing becomes the reaction to a want is when the business is beginning to create its own problems. “Needs” should be mapped out as part of a business’ 3 Year Plan. “Problems” need to be anticipated (as best as possible at the time) so that contingencies can be considered in advance. Reckless management of financing and cash flow hinders growth.

Where does your cash inflow come from? Whether it be from the sale of a product or service, or a little of both, it is important to make this obvious distinction. While it is obvious to you as the owner/manager of your business, is that obviousness directing how you invest your other resources (time, expertise, people, etc.)? At what stage of your sales process do you collect all, or part, of the payment from your customers? Does the timing of your cash inflow match your obligations for cash outflow? Insert financing…

Seeking financing when you are short of cash is reactionary. Because of the time it takes to go through the levels of due diligence that lenders must utilize before granting credit, reactionary Finance and CashFlowborrowing is challenging for everyone, borrower and banker alike. In general, seeking financing from a position of weakness usually doesn’t achieve the desired results.

The appropriate financing strategy can reduce costs (interest, fees, etc.), increase efficiency (pre-approved credit, overdraft protection, etc.), and reduce stress. Does your business have sufficient financing available to not just get you through the next production cycle but more than one production cycle? Is your business “borrowing from Peter to pay Paul?” If so, then cash flow and financing are two exceptional opportunities to seek growth.

Human Capital

We have all heard it before: hire for skill and you will fire for attitude; hire for attitude because you can train for skill. Anecdotal, yes, but incredibly accurate. Some things cannot be taught. Have you amassed a staff of people with the right skills or the right attitude? Ideally, it is both!

More anecdotes?
Middle Manager: “What if we train all our people and they leave us?”
CEO: “What if we don’t train them and they stay?”

Investing in your people is a growth strategy that is often overlooked in small business, but is par for the course in large corporations. Many large enterprises have made it a part of the corporate culture to invest in the skills of their employees. As business owners, we are often told that the best investment we can make is in ourselves, and if that is to be true, then the second best would be in our employees. How much training do your people need? Are you paying them fairly based on their experience, skill, and attitude relative to the competitive marketplace? Remember, the soon to be largest segment of the workforce, millennials, are said to place less importance on rate of pay. How are you adjusting your overall compensation strategy?

Human Capital matrixResponsibility and accountability are hallmarks of a great staff member. Most people crave it in their work. Sadly, many small business owners are reluctant to “let go of the reigns.” If you have managed to find good people only to wonder why they eventually left, consider how you allowed them to take on more responsibility. If they felt like they were held back, it is no wonder they would seek out a different opportunity elsewhere.

 

Peter Drucker has been credited as saying “Culture eats strategy for breakfast.” This means that even the best planned and executed strategy will fail without the appropriate culture in place. What is the culture in your organization? Is it one of respect and accountability, or is it a culture of mistrust and blame? The way to tell is to observe how people in your business respond during a time of crisis. When observing the behavior and acknowledging the type of culture in your business, remember the culture is an extension of you, as the owner/manager/leader because the culture is either from what you have tolerated or what you have set as an example in your own behavior. But do not despair! A poor culture can be changed, it just takes a lot more work and an incredible amount of consistency.

Plan for Prosperity

This week we touched on the two most powerful growth opportunities in your business: monetary capital and human capital. In reflection, remember these important points:

  1. Manage things. Lead people. Your people are not to be managed, but led. Then watch them perform.
  2. If your leadership skills are lacking, then make an investment in yourself right away. Or relinquish leadership from your duties and hire someone to do it for you.
  3. Get the right people in place before adding property, plant, or equipment. It’s far cheaper to be overstaffed for a short time than to under-service clients at anytime.
  4. Acquiring financing from a position of weakness will always be more difficult than during the execution of a strategic plan. Proactive vs. Reactive.
  5. Do not underestimate the impact of the right culture in your business. Spend a little time online reading about corporate success stories from implementing a specific focus on culture. If it can work in a large entity, it can work for you because you are much more agile as a small-to-medium sized enterprise.

 

Growth subtopics part 1

Sub-Topics of Growth (Part 1)

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Last week, we opened up the discussion on the many facets of growth, and then touched on the many sub-topcis of those different facets. This week, we’ll being digging deeper. Here is a graphical reminder of what we started.

Facets of Growth 1

Customers

A foundational rule of the investment advisor world is KYC: Know Your Customer. When I was a part of that world, it was paramount that Know Your Customer protocols were religiously adhered to. The main tenet of this requirement was that an advisor could not offer proper investment advice without first knowing some very important information about their client: age, retirement goals, income, risk profile, and net worth are but a few of the critical details that must be signed off. No exceptions. By offering advice and/or selling investments to a client without proper KYC, the advisor is risking his or her career. Yes, it is potentially that severe.

Who are your customers? What do you know about them? Do you know enough about them to be able to anticipate their needs? Is their business growing? What are their challenges?

Who are your potential customers? What do you have to do to find them, attract them, keep them? This is a lot like dating; pursuing a courtship you might say…

The list of anecdotal evidence as to the importance of customers is long, as is the list of reasons why keeping your existing customers is easier and less costly than constantly finding new ones.

How do you market to your existing clients? Your future clients? Anecdotal, but it is amazing how often you can hear it said from an existing customer, “Oh, I didn’t know you had that!” Do your clients know about all the products and services you offer?Customers matrix

People appreciate being appreciated. Often as simple as a Thank You note, appreciation cannot be undervalued in your eyes. Convert your clients to “raving fans” and they will do your marketing for you by telling others about how good you are. Give them a hat or jacket, and they become a mobile display of your branding.

Service sells. It sells more products. It sells more service. It sells an incredible number of books. Often times it can even sell a crappy product…several times over! Most importantly, service creates loyalty. What are your service standards? Do you have an established procedure for how you provide service?

There are many ways to segment customers, but for this conversation the important distinction we will draw on is whether your customers are relationship customers or transactional customers. One isn’t better than the other. Wal-Mart has built a global empire on doing business with transactional customers. Other retailers try to create relationships with their transactional customers by implementing loyalty programs (Ref. Canadian Tire money, PC Optimum Points, etc.) Again, it is not that one is better than the other; what is important is that you know which space you play in. If you are a relationship business but treat your customers as transactional, you are probably losing customers and wondering why. If you are in a transactional business but you treat your customers as relationships, you’ve probably got incredibly happy and loyal customers which might confuse why your net profit margins are so poor.

To toss out one more anecdote, “Customers are your reason for being in business.”

Product or Service

Whether your business deals with products, services, or both, it is best to know what you do best, which of your offerings is most profitable, which is least profitable, and where to dedicate your time. This can only be done with accurate data on business performance (we will discuss more about Information Management in Part 2.)

Where does your product or service fit on the value chain? Do you manufacture from raw materials? Do you retail to the final user? Do you provide logistical solutions? Are you providing ancillary services somewhere along the value chain? Every step in the process is important, some more than others. If the link you occupy can be internalized (consider Wal-Mart (again) which owns its own trucking fleet) or eliminated altogether, taking some time to examine your business’ future would be advisable.

How do you market your product or service? Is your marketing reaching the right audience? How do you know? As mentioned above, if any of your current or future customers says, “I didn’t know you had/did that!” then marketing offers tremendous growth opportunity!

I cannot recall where I heard it, so if any readers of this post know who said it first, please let me know so I can provide attribution:

“Innovate or die.”

-please help me fill in this blank

Any product or service that is not under consistent evaluation for opportunities to innovate will find itself on the trash heap of great ideas/products that failed to keep up! Apple was making a runProduct_Service matrix at being the largest company (by market capitalization) in the United States, if not the world, from consistently introducing a new product that was nothing more than innovation to an existing product (which an innovation of a previous products….and on and on…) In this day and age where the consumer has an insatiable appetite for the new & improved, latest & greatest, “give it to me right now”…well, innovate or die takes on a very important meaning.

What is the return you are achieving on the investment you have made in your product or service? Keep in mind, your investment is more than monetary; it also includes time. The time you spend on low profit products or services will leave you less time to invest in the higher profit products and services that you offer. Remember, this time investment must also include family time lost (or otherwise allocated.) Obviously, businesses cannot just ignore anything that does not provide the highest profit, but knowing where your best returns are stemming from will allow you to maximize your return on investment.

Plan for Prosperity

Last week we offered six facets to growth; this week we delved into two of them and provided nine sub-topics, each of them a growth opportunity. By looking into any of these subtopics and leveraging the growth opportunities you have available, can you improve your entire business by 1% this month? If you can do that this month, can you do it every month. An improvement in your whole business of 1% per month means that your business will have grown by 12.68% more than if you had done nothing. That’s 12.68% better than you would have done, 12.68% better than last year, 12.68% straight to your bottom line.

Who’s ready to get growing?

 

facets of growth

Facets of Growth

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It’s been said that we should think of our business like a tree…
“What is a tree always doing?”
“Growing.”
“If it’s not growing, what is it doing?”
“Dying…”

The analogy ends there. A tree can only grow one way: bigger. Our business must grow many ways.

“Better is better before bigger is better.”

-Danny Klinefelter, Professor and Extension Economist, Texas A&M University

Over my nearly 15 years as a lender and business adviser, I have seen dozens of examples of businesses that grew in only one way. These businesses are not industry specific, they are quite agnostic actually. From construction to farming, from trucking to consulting, many businesses drive themselves straight into the arms of failure simply because they overlooked getting better before they rushed out to get bigger.

Facets of Growth 1The graphic represents a snippet of the numerous facets that drive growth. All have a significant effect on the success of growth aspirations. This graphic is certainly not exhaustive; we are merely dipping our toes in the water. However, each spoke in that wheel has numerous sub-topics, and like a diamond, the many facets have varying purposes, importance, and brilliance.

RE: Customers – How can you grow your customer base? What do your customer like about you? What do they dislike? How do customers find you? How do you find them?

RE: Product/Service – What is your product or service? Is demand growing or shrinking? Which is your link in the value chain (IE. do you manufacture the raw product or do you retail to the final user, or somewhere in between?)

RE: Finance/Cash Flow – Are you financially strong enough to support and sustain the growth you desire? Will the growth you desire help or hinder your cash flow? Can you access the financing you need?

RE: Human Capital – Have you built a team of highly valuable people who drive results in your business? Will your business operate just fine in your absence? Do you people have the ability and desire for more responsibility?

RE: Information Management – Do you have systems in place to provide you with current and accurate information readily available anytime, specific to working capital, accounts receivable & payable, inventory, days to cash, etc?

RE: Management Capacity – Do you, as the manager, have the capacity to literally handle the growth you desire? What skills do you have that are better used in another part of the business? What skills are you lacking in your current role?

Seventeen questions related to six facets of growth; if you were to answer them with brutal honesty, is there room to improve on any of them? Is there opportunity “to grow”? If it is true that better is better before bigger is better (HINT: it IS true) then we’ve just provided you with six major factors in your business where growth can occur. There are more, but if you’ve looked after these first 6, the results will amaze you.

Plan for Prosperity

Growth is not a result or a destination.
It is a process.
It is a mindset.
It is a culture.
It is complex.
It is difficult.
It is worth it.

growth

Prerequisites for Growth

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Last week we began a discussion on Avenues to Growth, and in introducing the concept we described how employing tactics to achieve that growth is meaningless without first defining your business goals, “your WHY”. The reason: how do you quantify actions without a desired outcome with which to measure those actions against?

Just get in your truck and drive. Go. Which way do you turn out of your driveway, or at the corner? Where are you going? After driving for an hour, aimlessly, where will you be?

It may be anecdotal, but there is truth in saying “If you don’t know where you’re going, how will you know when you get there?” Every time you get into your vehicle to drive, you have a goal of getting somewhere. It may be to the rink, the bank, or the store, but the point is you have a goal of where you want to go. And somehow, quite amazingly sometimes, you reach your declared destination.

Your business is no different.

Pursuing growth in business without defining what it is you’re trying to achieve is as fruitful as getting into your truck and driving aimlessly for an hour. You will have used up valuable resources (time, capital, fuel/energy, etc.)  and found yourself somewhere you didn’t expect to be. Then you have the challenge of figuring out what to do when you’re there. Turning the truck around and heading home is much easier than doing the same in business. Metaphor ended.

Step 1. Define your business goals for growth.

 

 

To achieve your growth goals, you will need sufficient resources. This opens up a plethora of subtopics that is suited to a separate discussion. For today, we will look at only one: financial.

Part of the activity in defining growth goals is to include discussion on the business’ financial resources. Does your business have, or can it acquire, the resources required to successfully implement the tactics that will achieve your goals?

Ask any banker, any financial analyst, and you’ll probably get a response akin to the importance of cash to your business. Cash is critical, often suggested that “cash is king.”

“Cash is not King…it’s the Ace!”

-Phil Symchych

To suggest cash is king would indicate that something else is the ace, meaning something else is more important than cash, and I’m here to tell you that cash is the lifeblood of your business and draining the cash from your business is similar to draining the blood for your body.

It’s true, cash is not king…it’s the ace.

“Growth, however, is king!”

-Kim Gerencser

By letting growth be the ace and cash be king, you’re placing growth ahead of cash; this is incredibly dangerous. Many aggressive businesses have grown themselves to the brink of bankruptcy by making this mistake. I recall dealing with some young farmers who pursued growth so rapidly that their working capital couldn’t keep up. They began borrowing more and more operating credit to keep the business afloat and found themselves using their operating line of credit to make their term loan payments (HINT: bankers get real squirrelly real fast when this happens.) This business didn’t have sufficient cash when pursuing their growth actions. They had no defined goals, only (what now appears to be) reckless abandon. They might have one year left, and if that year isn’t stellar they could be forced into liquidation.

Step 2. Compile (or acquire) sufficient resources for growth.

 

 

Because of my work in agriculture, I often get asked by non-farming people “How big is too big” when it comes to the size and scale of modern farm operations. My reply: I can tell you exactly when a farm is too big (as the audience waits with baited breath)…it’s the moment that the farm has outgrown the management ability of the manager! For some it’s 40,000 acres, for others it’s 400 acres. It all comes down to management capacity and ability.

Too often, businesses feel they must expand to remain relevant. As such, they pursue growth before they are ready. This can lead to management burnout, employee dissatisfaction, and lost customers. Consider a elementary school aged child; if that child has not successfully exhibited sufficient competence in math, reading, and writing, the child should not (by rights) be advanced to the next grade. Doing so will cause the child to be unnecessarily stressed in the next grade from having to learn new concepts before the base knowledge has been established. Such a situation can lead to all kinds of issues better left to the educational professionals. There is great similarity in the abilities of the manager in your business to the example of the school age child. Asking management to manage a business that has grown beyond their ability is a recipe for failure.

Step 3. Perform an audit of management’s ability & capacity for growth.

 

 

Plan for Prosperity

Aspirations for growth are born out of the desire for prosperity. Both must be planned. Accidental prosperity from fortuitous growth is not sustainable.

Growth is exciting, invigorating, maybe even intoxicating…especially when growth happens systemically, systematically, and successfully.

Conduct the 3 Step Growth Audit laid out above to evaluate your likelihood of successful growth. If you need some guidance, give me a call or email.

 

Growth Avenue

Avenues to Growth – an Introduction

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There are many tactics that can be implemented to achieve growth in your business. Listing them right off the hop would be meaningless, because first we must understand your goals.

What is it you are trying to achieve in business? Why are you in business? As Michael Gerber wrote in The E-Myth Revisited, “the problem is not that the owners of small businesses don’t work; the problem is that they’re doing the wrong work.” Gerber has built a career and a successful enterprise on breaking down why most small businesses fail. In my opinion, it is summed up nicely in what Gerber calls the Fatal Assumption.

The Fatal Assumption is: if you understand the technical work of a business, you understand the business that does the technical work. And the reason it’s fatal is it just isn’t true.  The technical work of a business and a business that does that technical work are two totally different things!

Michael Gerber – The E-Myth Revisited, page 13

So, if the reason you’re in business is because you are an expert at the technical work being done in your business, you may be wondering why your dreams and aspirations of growth, wealth, and freedom haven’t transpired as imagined when you took the leap.

Business is complex. There are many facets to successful business, far more than simply “doing the work.”
Understanding that is the first step.
Asking for help is the second step.

Because if you are an expert at the technical work of your business, then is it likely you’ve struggled managing the business which does that technical work.

And growth has possibly eluded you…
Or, at least the potential for growth that your industry may present?

As a former bank lender, and having had several conversations with current bankers over the last half-dozen years since I left banking, the sentiments are the same. One banker was recently describing a client, who was a good client but could be so much better, by saying, “He builds a helluva road, but can’t manage his cash to save his life.”

Change the character to either he or she, and change the activity to almost any technical work. She/He:

  • Builds a helluva road,
  • Installs a helluva wiring system,
  • Designs a helluva house,
  • Welds a helluva bead,
  • Grows a helluva crop,

…the list can go on and on.

Just doing the work will grow your business to a point, but that point is reached when you, as the owner/manager, run out of capacity.

Dr. David Kohl spoke recently in southern Saskatchewan. He described how success requires alignment of your expertise, your capacity, and your market.
Clearly, you have expertise or you would likely not be in business.
If you operate in a market that is hungry for your product or service, then growth is ready for the taking.
Is your capacity is sufficient in ALL areas that need to be covered in order to sustain growth: management, finance, reporting, staffing, logistics, facilities & equipment, etc?
(**Did you notice that facilities & equipment was found at the END of that list?  That is symbolic.)

All too often, the “technician” owners put emphasis on the facilities & equipment because that’s where their expertise is found. It’s why the “technician” owners are more apt to fail. Getting additional equipment is the easy part; managing the cash flow, bankers, and staff is the hard part.

So in this Introduction to the “Avenues to Growth”, we have described that:

  1. You need alignment of your expertise, your capacity, and your marketplace;
  2. You need clarification of your reason for being in business; and
  3. You must define your business goals.

Plan for Prosperity

Over the coming weeks, we will be exploring the Avenues to Growth in greater detail. The explicit certainty in any growth plan is that growth must be intentional. Accidental growth or fortuitous growth is not sustainable unless the owners & management team conduct a postmortem on how and why the growth occured so that lessons can be learned, mistakes not repeated, and good decisions leveraged further in the future.

The other explicit certainty to growth: there are many avenues to get there, none are a straight line, and there is no “Easy Street.”

 

**The featured image is a screen shot from a Google street-view of Fort Wayne, Indiana. In a weird twist of irony, Growth Avenue in Fort Wayne is a dead end street.