That’s not a clarion call for print bosses to invest in glitzy mega-casinos and opulent skyscrapers, or indeed stand for political office. But in terms of business growth, The Donald may have a point. Why think small? Why not shoot for the stars?
As a mature market, print is a far from easy sector in which to achieve accelerated success. So, what is the secret of rapid growth? And is it always a good thing?
“Innovation in terms of product and approach is the key to rapid growth,” says Will Tyler, chief executive of Octink, which features among the top 20 performers measured by sales growth in the PrintWeek annual Top 500 rankings, having posted a 30% year-on-year rise. “It is not always a good thing if the innovation proves a distraction to the main business. Planning the expectation and modelling different scenarios is also key.”
Dave Broadway, Managing Director of CFH Docmail agrees that it is vital to develop new, innovative products, adding that it is also a necessity to market them well in the context of a sales-driven strategy and provide excellent customer support. Adhering to this approach has helped CFH increase sales by 37% year-on-year. Broadway also advises anyone looking to emulate such a strong performance not to focus on cost cutting. Growth requires investment.
Indeed, to spend you need money. And fast growing businesses, picking up ostensibly lucrative new contracts and striking deals left, right and centre, can still be vulnerable. The promise of payment is a far cry from actually having the cash in your business bank account.
Cashflow issues have undermined many fast growth oriented businesses. Taking your eye off cashflow, especially at a time when capital is required to cover investment in new products, equipment upgrades or site expansion risks taking even profitable businesses to the brink – and potentially even into the abyss.
Cashflow is king
One of the basic rules of business is that inability to meet your financial obligations, for instance not having enough money to pay your employees’ wages or suppliers, equals insolvency. So as not to be taken by surprise, it is vital to plan ahead by producing a cashflow forecast and monitoring cashflow on a weekly basis.
Broadway has some trenchant views on cashflow matters, including when to play hardball: “If you are dealing with a bank or any larger business that wants to use your money to fund its business, get rid of them. It’s always best to be selling products that the customer needs you to keep providing, and where there are barriers to obtaining them quickly elsewhere. That way you can apply pressure to get your cash in. If you are selling a common product, obtainable quickly elsewhere, then protect yourself contractually – and be ready to take the customer to court!”
Plastic Card Services, which has enjoyed strong annual growth for the past six years was nearly derailed at the start of this major development programme half a decade ago. At the time, recalls managing director Rob Nicholls, PCS was using invoice discounting.
“When a huge new overseas contract was won it took just three months to be in a situation where we were going to the bank to ask for the amount we could draw down to be increased,” says Nicholls. “The complete lack of flexibility and initial refusal by the bank at the time to extend the facility as they felt nervous with the change in our circumstances created a worrying squeeze on cashflow which only abated when we managed to convince the bank of our genuine and positive position.”
Increased investment in stock, phasing in more regular deliveries, increased staff wages with more employees and people working more overtime, possible increases in customer payment terms, increased VAT and corporation tax demands means that it is essential to plan financing at least six months ahead, Nicholls advises.
Helen Dale, director at Grant Thornton UK, which helps compile the PrintWeek Top 500, apologies for “reverting to type” but says as a trained accountant she can’t help but fall back on basic mathematics. Rapid growth in a business where its cost of capital is in excess of its ROIC (return on invested capital) is more likely to destroy value in the longer term, she asserts. Overtrading can lead to working capital and cashflow constraints.
Yorkshire-based Leach, which this year is celebrating its 125th anniversary, has grown organically at between 10% and 20% every year for the past seven years, most recently posting a 20% year-on-year rise in sales. The key to delivering such strong growth sustainably, argues managing director Richard Leach, is finding a clear point of difference from rivals, which at the same time makes a difference to customers.
“From there you need to have the ambition to grow and a plan to achieve it,” says Leach. “In our case, having the capability to design, manufacture and install graphic display structures that require replacement graphic images in the future is our point of difference. The package we offer de-risks and de-hassles the purchase process for our customer while it is different to our competitors in that it crosses traditional industry boundaries.
“I take the view that growth can be too rapid to be good, as it can put strain on your people, structure and finances. So we set a continuous year-on-year growth target of 10%-15%, which allows for sustainable, controlled growth. Even at this level of growth, organisation and management structures need to be regularly reviewed, adapted and increased in sophistication to cope with the challenges of increased scale.”
Rare breed
It goes without saying that few companies are able to sustain rapid growth over an extended period of time and in order to do so, funding is required. Scale-Up UK: Growing Businesses, Growing our Economy, a report from the business schools at the universities of Oxford and Cambridge, spearheaded by Barclays, highlights that most SMEs experience zero or little growth. By contrast, the so-called ‘gazelles’, companies that grow turnover by 20% for three consecutive years, are much talked about but are in fact a rare species: they are responsible for most of the SME growth but they amount to only 2% to 4% of SMEs.
A key finding of the report is that the UK needs more venture capital funds that focus on funding scale-ups. Thomas Hellmann, professor of entrepreneurship and innovation at Saïd Business School, University of Oxford, and co-author of the report, adds: “In a stable or declining market, often you have to grow by taking share from someone else or via acquisition. But in the print sector there is also scope for growth through innovation such as utilising new digital technologies.”
However, diversifying into new markets can also be highly risky. When you don’t know the product or market well, the prospects of success diminish.
John Colley, professor of practice for the Strategy and International Business Group at Warwick Business School makes the point that rapid growth is nearly always fraught with high risk as it gives the firm a number of issues to manage. “First, you run out of management very quickly indeed. Good quality management is notoriously hard to find, and if the firm grows rapidly, it grows beyond the capability of the managers in place. So you don’t have the bandwidth to cope with the growth. Often in a small business, there are only three or four managers and as the business grows beyond their capabilities they can’t keep on top of it.”
Another problem, Colley adds, is you don’t have the systems, processes, manufacturing capability or service production to cope with the increasing demand so they need to be expanded. This is of course expensive, and it can take two or three years to build the extra capacity. By which time demand may have diminished. Cash is the big problem; as the company grows it needs more working capital: debtors, stock, and creditors all increase, and you have to fund it all one way or another.
Grant Thornton’s Dale says businesses often try to deliver their future growth ambitions while relying on their existing operating models. “It isn’t the fun stuff, but dynamic businesses need to be agile both in innovation and in their operations: their governance, their systems, people and processes, etc. The administrative headaches are often the enablers that help your people deliver on a daily basis. They can be major causes of value erosion if they are not fit for purpose.”
Finally, how can businesses maintain momentum after early success? For CFH’s Broadway, the answer is clear. “Key to continuing success is product and product support that leads your customers to recommend you to others. Around 30% of new customers to our Docmail hybrid mail product are gained through recommendation. We have tended to focus our product sales on vertical markets, hence gaining expertise in what the customers within those markets need, and building our product development and marketing around those needs. To grow further, add and develop another vertical market.”
TOP TIPS ON GROWTH
Growth through acquisition
Only buy businesses in markets that you know and understand. If the market is unfamiliar – such as another country – do your research and/or seek expert advice.
Treat all of your staff well and cultural differences can be overcome and absorbed.
Always have a plan for the acquisition, and a fall-back plan if that fails.
Bear in mind that while M&A is perceived as a the fast-track to growth, it is a risky undertaking. A failure rate of 70% is regularly cited, with some studies going further and suggesting only one acquisition in 10 lives up to expectations. So take care and choose your deals wisely.
Ensure that the cash generation of your core business can support the funding of the acquisition if the acquisition fails to perform.
Spend as much time as necessary checking both your sale/purchase agreement, and what contracts the acquisition is committed to.
Use a good solicitor and carry out detailed due diligence.
If buying out of administration - be prepared to do the above in 48 hours!
Fit and chemistry are vital. Relationships may make or break an acquisition.
Have a clear strategy covering how much and how you intend to unite different cultures.
Show respect for the business you acquired and the people who work there – after all, presumably you wouldn’t have entertained making the acquisition if there was no inherent value in the target.
Identify the most important members of the business at any company you consider buying. What is your talent retention strategy? How do you encourage the top performers to stay put?
Employee engagement has become a much overused term, but seldom is clear, proactive communication with staff more important than during and in the aftermath of a merger or takeover. Make sure that you are communicating with staff at both businesses and that the tone and messaging is consistent.
Part of your due diligence should explore the relationship the target company has with its customers. Are they likely to remain loyal?
If you are relying on synergies, then both physical and cultural integration is paramount. A failure to realise synergies is often the result of a failure to identify and to deal with cultural differences between two firms or organisations. Business strategies can often look watertight on paper but people (rather than businesses) actually create value – and people don’t always fall into line with what your deal team wrote in your plan.
Cost-savings post M&A may involve making staff redundant. Frequently, however, it is the more experienced and more capable employees that take up the offer of redundancy.
Growth through business development
Give careful consideration to how you will pursue and measure new business areas. Using the same management processes and measurement criteria as for your core business may not be appropriate.
If you are looking to grow through innovation, take care to minimise your risks. Books such as Discovery-Driven Growth by Rita McGrath and Ian MacMillan offer good advice on reducing up-front costs and eliminating unnecessary missteps when exploring potential new opportunities.
If you are thinking about breaking into new vertical markets, weigh up which are a logical and efficient extension of your current business.
Have a point of difference which is sustainable over time or can be adapted to keep you ahead of the game.
Retain and develop your existing major accounts over a period of years so that you do not need to rely on winning a huge proportion of new business every year to keep your top line moving forward.
Identify your competitive strengths in the eyes of your customers. Then use these strengths to drive growth.
Building on a sound financial base
A thorough grip on your financial situation is imperative. Plan how you will finance your growth at least six months ahead.
Rapid growth is very likely to be unsustainable in the long term where the cost of capital is higher than the ROIC (return on invested capital).
Be clear on the distinction between top-line growth and cash generation.
Your cashflow forecasting must be rigorous and you should monitor your cashflow closely. Cashflow problems have been the undoing of many fast-growing businesses.
Be mindful of overtrading – encountering liquidity problems as a result of expanding too fast.
Understanding your financing options is critical. Many high-growth businesses fall foul of mainstream banking covenants, in particular those relating to debt service.
Businesses who deeply understand their cashflows can better structure their financing to support their growth plans. For example, where growth is capital intensive and cash available for debt service is scarce, a facility offering a “bullet repayment” rather than an amortising profile could mean the difference between success and failure.
General advice
Ultimately, maintaining rapid growth over several years is likely to require multiple sources of growth. Businesses need to invest in their growth-making capabilities - in their discovery, their learning, their experimentation with and their execution of, growth.
A large order book is only a good thing if you are able to satisfy it.
Stay close to your customers. Direct interaction with your customers will build their trust in you and provide you with greater insight into their business needs. Look to translate your closeness to customers into offerings that appeal to the marketplace.
Adhering to your vision and objectives is vital. However, that does not mean sticking slavishly to your business plan. Remain alert for new opportunities.
