Two critical aspects of fast-growing small businesses are constantly running a kind of tortoise-and-hare race: sales and operations.
Many companies become so consumed by sales that they fail to see that if operations fall too far behind, it can lead to disaster. Mark Lehew, SAP’s national VP of strategic growth enterprises, told me recently, “You’re hiring a lot of people to meet demand, but you don’t have good business processes in place,” he says. “The more you scale up, the more inefficiency you create. And suddenly you can’t see across the business, so it’s harder to keep control over everything.”
And that’s when the hare runs out of breath. “You start a company, you sell 100 widgets, and you think you’re going to be rich,” Marty Metro, founder and CEO of UsedCardboardBoxes.com, told my colleague Rob O’Regan recently. “At the end of the month, you find that you had 29 days of record sales—but you can’t pay the rent. That’s when I realized that sales don’t pay the bills; profits do.”
How to deal with this issue? The answer is not to stop selling; it’s to keep operations in the race. But rather than reacting to sales increases after the fact, when it’s more difficult for operations to catch up, better to anticipate the operations needs beforehand and get them moving before things reach a crisis point.
The easiest way to do this is to use revenue thresholds to signal the need for operations changes. Here are three thresholds that matter, according to our experts:
- Threshold #1: $10 million. This is when businesses face a much-maligned but important aspect of growing up: middle management. Companies can’t act like startups anymore, with everyone scurrying around trying to do everything. “It’s time to build a real organizational structure,” says Karl Stark, managing director of Avondale Strategic Partners, a firm that advises high-growth business clients.
Of course, there’s a tradeoff here. In return for better-structured, more efficient processes, costs can begin to get out of hand. “After you invest in middle management to get to the next level, you’re kind of in no man’s land in terms of profitability,” says Grant Fraser, CEO of Navigator Business Solutions, a technology solutions provider that targets SMBs. “You’re paying for that extra layer of management, so now you have to jump from $10M to $25M to cover the costs.”
There’s another major investment needed at this level: operational systems, which are much more expensive than PCs and spreadsheets. The guiding principle here is visibility—the company needs to invest in systems that enable it to pick up trends in growth and spot potential problems. “As a CEO, when you start to lose visibility into the field, that’s where systems become more important,” says Fraser. “You’re not involved in every transaction anymore, so you have to have data and systems in place to tell you whether things are going up, staying flat, or going down. By the time you realize what’s happening, you’re six months into a trend, and it might take you another six months to change it.”
- Threshold #2: $20 million. Gone are the days when the CEO could be involved in every transaction from office supplies to cold calls. At $20 million, he or she can’t even be involved in every major deal. That means it’s time to surround him or her with grown-ups who have the business chops to add the strategic discipline needed to drive sustainable growth—in other words, professional management.
- Bob’s Discount Furniture, a Northeast-based company, had to confront this reality in the mid-2000s, when founder Bob Kaufman and his three partners saw that their abilities to both grow and manage the company were starting to lag. They made a decision to sell to a private equity firm, which they knew would bring in some new management.
The first to arrive was Bill Ballou, the company’s CFO, in 2005. Six months later, they hired a new operations executive to run warehousing and distribution. Six months after that, the board brought in a new CEO, Ted English, the former CEO of the TJX Companies.
Ballou’s first task was to rebuild the financial and operational reporting structure. “We formalized warehouse operations reporting, store level reporting, and the assessment of potential properties to open up new stores, with all the financial metrics behind a new store,” says. “That had not really been done before.”
The changes had a big impact: Bob’s had launched 18 stores during its first 15 years; in the six years after being acquired, the company grew to 43 stores.
- Threshold #3: $75 million. Speed and intensity are the main ingredients at this level. The business is really beginning to scale and diversify into multiple products, business units, customer segments, and geographies. Getting the company’s supply chain to respond to all these new demands is a major challenge. Having a sophisticated talent management process to build the company and hang onto key people is critical.
What do you think? Have you seen these thresholds in your business? What would you add?