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Forewarned is Forearmed: Understanding the Small Stages of Business Growth-Part 1

In our experience, business owners tend to approach growing their company as one long continuum from the day they open to the day they retire.

And, while growing the business may seem like a foregone conclusion for most entrepreneurs, they soon find out that the reality of growth is much more organic, much messier and far more likely to create new challenges that will stress the owner and his or her management team in ways they never imagined.

We often have the opportunity to see this firsthand as we help restorers grow their businesses by turning on their “marketing engine.” Even so, we are emphatic that “handling the new business will be harder than getting the new business.”

Given the fact that most restorers find growing their business in today’s market one of their biggest and most difficult challenges, they have a hard time accepting this statement. Perhaps they are so focused on having found a new way to grow that they figure that handling the growth will be a nice problem to have and they’ll figure that out as they go along.

This is a problem. They fail to realize there are distinct stages of growth, with different challenges, stressors and potential outcomes. Growing companies can greatly profit from advanced knowledge of the challenges they are likely to face at each step.

Facts of business

Before we get into these distinct stages, let’s look at some general truths about growing companies. The most important is that “growth increases complexity.” What most owners do when confronted with increased complexity is to throw people at the problem, meaning that they simply hire to add the necessary capacity.

But what is the real effect of this strategy? After all, the point of growing a business should be for the company to produce more net profit. If the increased gross profit — and therefore net profit — of a growing business is simply consumed in the salaries and related overhead expenses necessary to handle the growth, then all that a business owner has accomplished is to create a bigger, more complex set of headaches for the same net profit as before.

So, while some new labor resources may be required, the reality is that growth and its attendant complexity requires changes in the way the company operates — a new paradigm that requires new processes, systems and procedures and new ways of measuring and thinking about the business.

All of this requires a transition away from the old, comfortable, safe and yet moribund paradigm that got the business from Point A to Point B, but will not take the company from Point B to Point C, something that is likely to be extremely uncomfortable for the owner and many employees who simply may not be able to make the transition.

Another truth is that for companies to grow, the owners and management team will have to learn new skills to support that growth. Companies embarking on a growth strategy must consider how they will gain this education. There are several industry specific consultancies and programs that can help dramatically, but an intensive self-study program is highly recommended, starting with Peter Drucker’s “The Practice of Management.”

This new, more complex, more demanding paradigm will require not only a revision of all of the company’s processes but also a way of codifying those new processes and integrating them into “the way we do things around here.”

It will also require running the business “by the numbers,” and an owner and key managers must have job and overall profitability numbers in near real time in order to insure that margins are met. For this reason, growing restoration contractors simply must be looking at “enterprise” software solutions as the software backbone to support their growing companies.

There are many theories and models of small business growth, and one of the classic papers on this topic was published by Neil Churchill and Virginia Lewis in the Harvard Business Review. Understanding the stages of small business growth helps owners understand what to plan for, what changes there will be in the company’s structure, the owner’s responsibilities and focus and can serve as a way of diagnosing problems that arise.

This month, we will look at the first two stages of growth, and next month, the final three.

Stage 1: Existence

This is the start-up phase where the focus here is almost exclusively on getting enough business to start your business model.

Overhead costs will be, or should be, at a minimum because the owner will be performing most tasks personally with the help of a few employees of average skill. There will be few, if any, formal systems or planning processes as the business will be run largely “in the owner’s head.”

In the very beginning, the company’s very minimal requirements and nascent capabilities often allow the company to generate business relatively easily. This is especially the case if there is an existing business (such as a carpet cleaning operation) that can support the basic needs of the owner as he begins his foray into the brave new world of restoration.

The first crisis for a start-up will likely be managing cash flow. This is often the biggest problem and impediment to growth, causing owners to develop skills in accurate estimating, efficient management of company and sub-contractor labor so that jobs are profitable, negotiating with adjusters and policyholders for payment, understanding the impact of customer service on getting paid, etc.

This is an extremely demanding phase for any business, but perhaps even more so for restorers given the peaks and valleys nature of the workflow and the challenge of keeping a solid team on staff to do the work properly and profitably.

It is easy for restorers at this stage to want to move too fast in terms of growing their organization without putting into place the necessary systems, processes and procedures.

The people selected may be chosen more for industry familiarity and the “show up” factor (they just showed up on my doorstep — must be serendipity) than possessing the necessary management or other skills that the company will require to grow.

This can also be a time of really challenging stress for business owners, especially if they don’t have a carpet cleaning or other business to fall back on.

Stage 2: Survival

The good news here is that the company’s basic premise has proof of concept. The crisis is now one of generating a necessary profit as the company grows to the next step.

Owners are likely putting out fires on a daily basis and the toll of the start-up phase may have drained them of energy and financial resources.

If the business is growing, the problem becomes a very serious one — can the company generate enough cash flow to stay in business and add the necessary fixed expenses (equipment, trucks, technicians, first managerial position such as Project Manager) as well as maintain the current capital assets and replace them as they wear out?

Again, in the restoration industry this can be dramatically exacerbated by unforeseen circumstances like “The Winter That Wasn’t of 2011-2012″ where the expected work from frozen pipes, ice dams, etc., never materialized.

Keeping a talented crew together at this point to handle the peaks in the work is extremely challenging, and many companies at Stage 2 are unable to keep everyone working on a full-time basis. This creates a quality problem as well as massive training problems, as there can be a revolving door of technical talent.

The Project Manager at this stage is a key employee, and owners typically do everything possible to keep this person in place, often ignoring whether or not they have (or can develop) the necessary managerial qualities that will help the company grow.

At Stage 2, the company is still relatively simple; systems are still rudimentary at best, requiring the involvement of the owner in practically every decision. Planning will mostly revolve around cash flow forecasting and it is now critical that the company utilize a basic accounts receivable process to get paid as quickly as possible.

The crisis of cash flow at this stage also creates a dangerous potential pitfall for restorers. When a company is desperate for cash, it is easy for the emotional demands of running the business to spill over when negotiating payment with adjusters.

If Stage 2 companies manage their challenges effectively, they may grow to Stage 3. However, many Stage 2 companies do not meet these challenges and stay in a perpetual crisis where the owner wonders why he ever got into the restoration business in the first place. Given the boom and bust cycles of the industry, he may lurch onward from one fortuitous job to the next, hoping that the lean times in between doesn’t exceed his ability to cover payroll and stretch his suppliers.

Our experience is that many restorers can stay in this place for a long time — even 20 years — never doing what is necessary to understand and break free of Stage 2 and move on to Stage 3.

But if they are able to get past Stage 2… they will find Stage 3 quite interesting. Stay tuned for Part 2, Coming Soon!

Why I Love Alamo

After my (ahem) review of my Thrifty in New Mexico, I thought I should pass along a completely different experience that I had at Alamo in Atlanta.

As I was standing in line, a manager came up to the man in front of me, shook his hand and started chatting. I assumed that they were acquaintances and didn’t give it another thought. That is, until he turned to me, reached out to shake my hand and say hello in a very friendly and sincere way.

He saw that I had a reservation printout in my hand and asked if I would like to use the kiosk (just like those you check in at the airport with). I went to the kiosk, breezed through the process in about two minutes, then asked for directions to the cars.

Again, in a very friendly, non-phony way, Nathan Woods (I was so impressed I asked for his name) directed me.  As I entered the garage, another employee greeted me with great enthusiasm and directed me to exactly where I would find cars in the class I had selected.

I walked past all the Jeep Liberty’s : and chose a Hyundai Santa. I jumped in the immaculate car, drove to the exit gate, was quickly and courteously processed through and I was on my way.

Thank you, Alamo, and thank you, Nathan Woods, for respecting me as a customer and a person. It restored my faith in business and in the power of individuals to make each other’s day just a little bit better by making a mundane business transaction a great, human experience.

I have used Alamo a lot in the past but somehow had gotten away from choosing them, probably because I have focused on the lowest price, not the best value.

This experience taught me the cost of saving a few bucks. Whatever extra Alamo cost, it was worth it to be able move through quickly and easily through the rental process while dealing with such friendly, helpful people. Alamo will be my choice going forward.

Perceived value is just important to contractors. Once you deliver the work, you have to work to deliver the intangibles that create value and happy customers. They’ll not only return when they need your services, but they’ll tell others how good you are.

Why I Hate Thrifty

I hate Thrifty. No two ways about it.

I recently took my first family vacation with my wife and toddler. Because I have only flown once with my now two-year old, this trip caused me no little anxiety and I did a lot of pre-planning to try and get it right.

When it came to the rental car that we’d be using for eight days, I used the Travelocity feature and got the lowest price for the class of car I needed for the dirt roads in North Central New Mexico, a Jeep Grand Cherokee.

We began our trek and everything went great all the way to Albuquerque. At the car rental counter my son was running around joyfully (with my wife hovering close by) while I waited to deal with the car.

I wait patiently in line. When I finally get to the counter, fully expecting to get my Grand Cherokee, I’m told they don’t have my Cherokee but they do have a Jeep Liberty.

My comment, “Isn’t that smaller?”

His answer, “It’s built on the same frame.” A non-answer if I ever heard one!

He then said, “Well, how many people do you have, five?”

First, that’s none of his business. Second, that’s not the point! The point is that I was promised a Grand Cherokee or similar size vehicle and no amount of “lip judo” is going to convince me that getting a smaller one is going to be a positive experience for me. 

Well, I thought, at least the smaller Liberty would be cheaper. 

Nope. The two are the same price. But the only other choice was a minivan, which, of course, was no choice at all.

In reality, that’s not much different from any other car rental company. Some are better than others, of course, but they all operate on a first-come, first-served basis. Like airlines, they overbook to cover the inevitably high number of no-shows.

That’s not why I hate Thrifty.

I hate Thrifty not just because I was essentially made to pay more for less, but because I was left with the distinct impression that they didn’t care how I felt. In fact, I got the feeling that this is the way Thrifty does business, that it’s an acceptable way to do business, and that I was being unreasonable for expecting them to deliver what they promised.

Well, there are plenty of other car rental companies out there that will be more than happy to take my money. Thrifty, I’m voting with my feet.

How many of your customers hate you? How many are voting against you with their feet? And what are they saying about you to others?

There’s only one way to know: Ask them!

If you’d like a free, amazingly easy-to-use tool to get the kind of feedback that will prevent your company from becoming a Thrifty, just send me an email.

©Copyright 2011 Business Development Associates, Inc.