Surviving Explosive Growth
Sales are booming--so why are profits sagging? The company president looks up wearily from his cluttered desk and says to the chief financial officer (CFO), "I don't get it. Sales are booming. Each year we see gains of 25% to 35%. We're three years old and already we're the darling of our industry. So--how come we're not making more profit?" Such a conversation, or one very much like it, is not that unusual at fast-growth companies. Most entrepreneurs know that success is elusive in the early years, but few realize the danger when revenues soar suddenly. This article examines the symptoms of dangerous corporate growth and offers remedies that accountants can prescribe to their clients or employers. ORGANIZATION STRUCTURE Companies undergoing explosive growth often have flat organizational structures. For example, it's not uncommon for the company president to have direct control over 10 or even 20 employees. Everyone reports directly to the company head--sales, marketing, purchasing, finance and accounting, warehouse, manufacturing, shipping, receiving, human resources. As a result, the president becomes a major decision bottleneck. Procedures that worked well when annual sales were $10 million break down when sales suddenly explode tenfold. Crucial decisions stagnate in endless bottlenecks waiting for one overloaded manager with authority to focus and act. A case in point: The CFO of one fast-growing company allowed accumulated compensating bank balances to balloon to $3 million more than the agreed minimum. It wasn't because the CFO was incompetent or neglectful; he simply was overloaded and had failed to delegate this responsibility. The first step to take to remedy the problem is to reorganize management into a conventional pyramid--one in which management responsibilities are delegated to second- and possibly third-tier managers. That single step gives the president time to think, plan, oversee and advise--which is what the top manager should be doing. On paper, the solution looks simple, but getting people to buy into it can be difficult. If it's so good for the business, why do so many people resist such a change? The first obstacle is the boss. He built the company from scratch. The management structure during that successful period was simple: everyone reported to him. The question now is: Can he get his ego out of the way and recognize that, although he may have been the reason for the business's initial success, now he's overcommitted and has become the cause of chaos? If he can't, such a company--even if sales continue to soar--may collapse into bankruptcy. If a company can get past that initial obstacle, it's ready to tackle the second one: resistance from middle management. In a fast-growth company with one line of reporting, that may include nearly everyone in the company. Most managers will resist suddenly reporting to a second-or third-level manager, viewing withdrawal of their once free access to the president as a demotion. Overcoming their objections will take time and patience. Top management must understand that their stated objections may camouflage their real concern--which is loss of direct access to the boss. STAFF QUALIFICATIONS People don't always grow at the same pace or in the same direction that a business grows. Too often loyal managers who started with the company are given duties beyond their skills and experience in the hope that they will grow into their new jobs. But if they are overworked, they may not have the time or energy to learn new skills. To close this gap, management must more rigorously evaluate key players, assessing their professional credentials and experience. If employees are found to lack the skills needed to function in new jobs, management must either offer training programs to bring them up to speed or move them out. In addition, it's important that every critical job has a backup person. …