At least 90% of the CEO’s who hire me as their banking & financing consultant do so because they want to grow and they need bank capital to pull it off. Obtaining financing to achieve growth is one thing, executing and being successful with the growth plan is another. Lots of people have cutting edge growth ideas. So let’s step back a bit and talk about growth.
Here are some general reasons why CEO’s want to grow:
- Some of their key customers are growing and in order to retain their business they must grow with them. This might mean more employees, more equipment, more inventory or a larger office/commercial building that they will have to invest in.
- To attract and retain productive employees. CEOs’ recognize that there is of lot competition in the work force for “good people”.
- To attract them they must grow to be able to afford paying talented people competitive salaries and providing competitive employee benefits.
- To achieve economies of scale. Doesn’t always work but it’s nice when growth requires increased production which lowers the average cost of each unit produced.
- To become the market leader in their niche. Having an increased market share will help CEOs enhance their company brand and image.
- Growth is exciting, it is a metric of entrepreneurial success and hopefully growth will translate into more profits.
Here are some critical issues about growth:
- Not all businesses really have the potential to grow significantly. There may be industry trends or competition issues that a CEO missed in their growth plan which could sabotage growth.
- Sometimes a business can grow too fast. Too much growth might make it difficult to attract bank capital.
- Rapid growth might outstrip the CEO‘s skill set to manage the operation.
- Growth does not always scale. Service companies providing “High Touch” client service might fall into this category.
- Growth will put a strain on monthly cash flow especially if the company extends terms and has account receivable.
- Growth will make it harder for a company to maintain quality control. If there is a drop off in customer service or product or service quality it might hurt a company’s brand that they work so hard to make positive by past actions.
In order for a CEO to achieve growth in sales and profits they must be cognizant of the critical points listed above. In addition to that, a CEO must do their research to determine precisely what additional assets they will need to purchase both human and physical, to hit the desired growth targets. Next they must determine what portion of these new assets/purchases will be funded by their own cash sources and what portion by bank debt. Finally they must prepare detailed P & L projections that demonstrates that the sales/profit growth will be sufficient to service that new monthly bank loan payment.
As you can see achieving growth is not easy, there are a lot of factors to deal with.