Setting a Foundation for Business Growth
The strength and performance of any edifice depend on a sound foundation. Your business may not be a physical structure, but your growth strategy needs the same type of well-constructed foundation in order to succeed. As a business owner, building a strategic growth roadmap that pinpoints where you are and where you are going will help you achieve the future you want for your company. But first, you have to know where you are to know how to get to where you want to go.
There are four critical areas to assess when creating foundational metrics for business growth:
- Processes (financial operations)
The goal is to define metrics—key performance indicators (KPIs)—for ongoing reporting and assessment that will inform strategy as well as day-to-day decision-making, uncover gaps or problems, and identify opportunities that support growth. If you can tell your company’s story through metrics, you know your company pretty well.
This area includes company culture as well as your organizational chart. Assess the talent you have now as well as the potential talent pool if you need to hire. To do this, you must develop distinct measurables. This can include productivity, tasks on time, recommendations for improvement, error rates, revenue per head, etc.
For example, what if your business is small, and you currently have no human resources (HR) department, but you want to acquire a company that has 100 people? That completely changes your model. You will have to start building an HR department, so what do you need to do that?
Think in terms of core operations like financial processes. This phrase really encompasses people, technology, and processes all wrapped together, which is how they function within your company.
Look at the big picture. Where are the risks, technology interactions, and people interactions you can improve upon to create faster, more efficient processes? Go beyond documenting the steps of each process (e.g., record-to-report, procure-to-pay, order-to-cash) and look for ways to improve efficiencies and drive greater value.
Look at controls and the metrics associated with them:
- How do you receive your money? What is your days sales outstanding (DSO) and what does it tell you about how quickly cash is flowing into your business? How much working capital do you have?
- How do you pay? What is your days payable outstanding (DPO) and are you being strategic about how you pay for things? Whether you are writing checks and making payments that add up to hundreds of thousands or multiple millions of dollars, you need oversight of where that money is going. Credit card review, for example, ensures people are not making inappropriate or even fraudulent charges.
- What is your current ratio of liquid assets to liabilities? This is a good metric for general financial health. Asset utilization is another one and can tell you how efficiently you’re generating revenue and producing profits. It is calculated by dividing revenue by average total assets.
- Knowing your debt-to-equity ratio helps in understanding one area of financial risk you may be overexposed to.
How do you purchase while ensuring you do not create compliance problems? What is your inventory turnover ratio so you can understand whether you’re managing your goods efficiently?
- How do you record and report financial data so you are accurately prepared for audits and also have the information needed to make operational decisions that support your growth strategy?
Do you have the appropriate systems for your size and industry norms? If you are using QuickBooks, are you getting what you need out of it with reporting and metrics? Or do you have Quickbooks and several other software pieces that are distinct in function but are not integrated? There are many options to look at from the small niche industry software to the integrated enterprise resource planning (ERP) solutions, all of which have pros and cons associated with interoperability and costs to operate. It truly is valuable to look at resource efficiency, total costs, and reporting to fit what you need now and how it fits into your growth strategy.
Technology should help improve and track all aspects of the business from commercial and back office operations, including controls, and compliance reporting.
You want to know your margins and run rates, but that is not all. The most useful KPIs depend on your type of business, and they should include both financial and people-related metrics. Common examples include:
- Revenue per head
- Revenue per salesperson
- Revenue per back office
- Overall revenue and growth
- Cost of goods sold
- Widgets per day or per head
- General throughput or OEE (Overall Equipment Effectiveness)
- Growth metrics like month-over-month or year-over-year comparisons for customers, revenue, costs, etc.
You can look at everything from a micro perspective in certain aspects of the business like customer profitability, but you also have to take a more holistic view of the metrics driving the bigger picture for your business. These could be metrics designed to look at gross margin, EBITDA, or Net Income growth for certain companies to make sure they are constantly looking at aspects of revenue and costs of goods, along with knowing cash and non-cash effectiveness.
Additional aspects could be more of a macro view with market share, penetration, and growth within certain customers or segments, or growth into new markets/metro areas. Defining metrics that inform your strategy also serves to pinpoint red flags and the kinds of fixes required.
Focusing first on assessment in these four areas will help you clarify where you are currently, what needs to be done to achieve your business goals, and the best metrics for tracking progress. With that, you will have a sound foundation for pursuing your strategic growth roadmap.
Kory Boyer, MBA
Kory Boyer is a director in the M&A advisory practice area. He partners with companies in numerous industries to assist in areas including inorganic and organic growth strategies, along with the full spectrum of mergers and acquisitions from target identification, due diligence, transaction management, and integration. Kory also helps clients evaluate operations and processes, to help drive improvements through performance improvement and optimization strategies. He completed his undergraduate studies in Mechanical Engineering at the United States Military Academy and earned his M.B.A. in Finance at Gies College of Business at the University of Illinois at Urbana-Champaign. Kory joined Redpath and Company in 2021.
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