Saturday, December 28, 2013

The Bigger They Are The Harder They Can Fall

There are entrepreneurs who win all their battles but still manage to lose the war. A new company that experiences an abnormal growth spurt may sound like a dream come true, but unless the owner/manager is prepared ahead of time for such sudden success it may become a very bumpy victory indeed! The Greeks called it a Pyrrhic victory; a victory that almost costs more than defeat. The kind of victory an entrepreneur can’t afford to have if he or she wants to nurture his or her business into a solid, stable enterprise.

Of course, there are those entrepreneurs who relish the high seas of uncertainty and the piratical gamble of unstructured and unsupervised growth, thinking such things are recognized world-wide as a sure sign of success; but this kind of operation almost inevitably succumbs to the workaday realities of the business world and then founders, leaving investors and employees high and dry.

What are the specific challenges a new, fast-growth company faces in today’s business climate? Gary Kunkle, a research partner at Evolution Capital Partners, has done extensive research on thousands of swift-growing companies. His data base is now enormous, and his conclusions are far-reaching and thought-provoking. Here, in a nutshell, are two of them:

· The staff can’t keep up with newer, more complex demands. When a company really takes off and its sales and services increase exponentially, the staff that could easily handle a hundred sales orders per day may not be the staff that can just as easily handle a thousand orders a day. Logistics can change in the blink of an eye, but people tend to go slowly into new territory, sticking to the tried and true methods that worked for them yesterday – not realizing that old methodologies can’t handle new challenges.

Some entrepreneurs are cold-blooded enough to simply let such staffing go, but the really smart operators are aware of the time, effort, and money it took to train their original staff in the first place, and do not want to let that talent leave – to possibly work for a competitor! So instead they train their staff from the get-go to prepare for “second-tier staffing”. This means that the current logistics manager is aware that at some future point an ‘executive’ logistics manager may be appointed, to take some of the more complex procedures off of his or her hands. The smart employee at a new company will understand this concept, and be grateful for it. According to Kunkle, it is one of the best ways to prevent high employee turnover in a new company that experiences fast growth.

· The cash flow conundrum. Let’s say your new startup strikes a bonanza when a major corporation or government agency contracts with your company to provide a huge amount of product and/or service. In order to meet this new and potentially lucrative commitment you immediately hire an additional 30 people. They go to work and soon your startup is producing the promised outcome – but you are not going to be paid for this excellent work until it is completed, finished. And that won’t be for six more months. In the meantime, where are you going to get the funds to pay those 30 new employees?

According to Kunkle, it is surprising how often a new business owner will become mesmerized by future profit potential without bothering about current fiscal needs. Such unwary entrepreneurs grow themselves into a financial bind that may end their entire company. Always anticipate the need for cash infusions, says Kunkle.

This means keeping your line of credit open and healthy, and flexible, with your bankers. Also be on the lookout for other investors who may be interested in investing in a sure thing when you can show them the big, fat contract you have just signed. And finally, there’s nothing wrong in asking your new client for a down payment for future product and services, especially if it is a government contract. Government agencies are notoriously dilatory in paying their final bills, because of the vast amount of paper work they must wade through, and, of course, the always imminent threat of another Sequester. 

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