GEARING UP FOR GROWTH — November 2015

This topic concerns financial management.

A critical challenge facing the CFO of a high growth small business is to have a framework in place that sustains profitable growth, while capitalizing on burgeoning demand. This effort entails growing the finance function from one of bill paying and score keeping to a full fledged financial planning and analysis team led by the CFO. Several important steps are involved in this process. In this post we address a framework for managing growth, key attributes of such a framework, and how the CFO works within the framework.

As a company encounters and capitalizes on growth opportunities, it needs a framework to keep it on course with the plan; to minimize the costs of mistakes; understand what went wrong; and how to get back on course. The CFO must take the lead in developing this framework, while remaining aligned with the CEO’s goals and strategy. This is a continuous and circular process.

The process starts with evaluating the trends in the market. The first question to ask is whether the strategy is still relevant. The answer is often yes, unless the initial strategic assessment was wrong, poorly analyzed, or something in the business environment changed dramatically. If the answer is no, the CFO, with the CEO’s assent, must modify the goals and assumptions. Next, base and stress financial scenarios are prepared and stress financial scenarios and then build the funded initiative into a one to three year plan.

If the initiative is progressing as expected, the CFO must determine the size and timing of additional funding needs and adjust the original plan if necessary. As efforts to realize the strategy proceed, progress must be measured and monitored with the key metrics and financial information updated weekly. As the events unfold, trends are continually evaluated and the process begins again.

We believe there are several attributes for such a framework that will allow rapid, profitable growth to occur. One is the ability to aggregate data from many sources, convert it to useful information, and present it in a manner the provides clarity for decision makers. Team members should not be afraid to challenge key assumptions. Constructive debate is often necessary and enlightening.

Another important attribute is to follow through on measurement of performance versus the goal and an analysis of WHY performance was better or worse than expected. The analysis should be presented in a clear format to provide the information that enables those implementing the strategy to understand why the project performed as it did.

A third attribute is the ability to utilize non-financial data often found in other parts of the company. This data concerns customers, suppliers, end market users, and industry data. Effectively presented, this data will let leaders develop tools to refine competitive strategies.

The fourth attribute is responsiveness to information from the field. This is crucial Field personnel are often the first to see trends develop and affect the business. Accordingly, the CFO’s team must understand the business drivers to be monitored and what product lines they affect. Then they must present the relevant information in a manner that simplifies the data and brings matters to their essence. Doing so will allow the decision-makers to make the most optimal decision for the firm and its owners.

Very rapid growth will require that the CFO and the finance team members have the ability to be comfortable with constant change; perform tasks beyond their job description; and build part of the new infrastructure on their own. Simultaneously, the CFO must manage the expansion of roles within the finance function. As a result, the CFO must anticipate the right time to bring in new people with the specific skill sets to keep ahead of the business’ growth. As it grows, the finance function must continue to give decision makers in other parts of the business information they need when they need it. In building out the finance team, it is critical the CFO hire the right people who have values that are aligned with the firm’s mission.

When growth is rapid, the executive management team, including the CFO, must prioritize which opportunities to pursue. In our view, it is best to focus on opportunities that become profitable in one to two years rather than opportunities that are intriguing but also can be slow in developing. During the latter stages of growth, opportunities that will take longer to become profitable can move up in priority. With the right people and metrics in place, the firm will be able to capitalize on several large payoff opportunities at the same time. As always, it is crucial to effectively manage costs during these windows of immense opportunity.

Choosing the right funding strategy is also very important during the rapid growth stage. When seeking capital, whether from investors, lenders, or both, brevity is critical. The CFO must be able to get to the heart of the business fundamentals; opportunities; and forecasts quickly. Lenders and investors see many opportunities each day, so those seeking capital do not have the luxury of long presentations.

In rapid growth environments mistakes are going to happen. While it is not wise to encourage mistakes, the CFO must foster an environment where people are not guilty of “paralysis by analysis.” Nor should the organization make the perfect solution the enemy of the good solution. If one waits for perfection, it will be a long wait.

To effectively grow in a thriving market, the CFO must help construct a robust execution plan and monitoring system to measure how well efforts are progressing. If something is not working as expected, the CFO’s team must determine why and help find a way to fix it. Therefore, it is important that the finance team not operate in a silo. It must keep good relationships with non-finance personnel realizing that everyone is working towards the same goal.

A critical challenge facing the CFO of a high growth small business is to have a framework in place that sustains profitable growth, while capitalizing on burgeoning demand. Much of this entails growing the finance function from one of bill paying and score keeping to a full fledged financial planning and analysis team led by the CFO. Several important steps are involved in this process. These are: establishing a framework, ensuring the framework exhibits certain key elements, and how the CFO manages growth within the framework.

For additional information please see:

http://www.cgma.org/Magazine/Features/Pages/AllFeatures.aspx

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