‘Growth is good’ is the mantra, as UK plc surges forward with confidence in 2015. But is all growth good, and what potential pitfalls await companies on the growth path?
There’s good news ahead for British business. In August 2015, the Confederation of British Industry upgraded its forecast for business growth, saying that it expected steady growth, along the lines of the 0.7% recorded in the second quarter of 2015, until at least the end of 2016. With domestic markets buoyant and the international reputation of UK business strong, the path to growth looks clear for British companies.
There are no set parameters for growth rates, or what might be considered ‘good growth’ – some sectors are more likely to see their turnover increase rapidly than others. In life sciences and medical, for example, where particular intellectual property is being developed, it can take years to go into profit, but once a treatment is proven to work, or a technology adopted by major organisations, a company can go from zero sales to boom time almost overnight. Software and tech businesses also operate in a high-growth sector.
A measured approach
What is important for all types of company is making sure your business can absorb the pressures brought by increased trading. David Roper, a partner with accountancy firm Smith & Williamson, says: “The SMEs that take a measured approach reap the rewards. There are plenty of high-profile stories of entrepreneurs who have ‘flown by the seat of their pants’ and done very well. But controlled growth minimises the risks and stresses, while increasing your chances of building a robust, sustainable and profitable business.”
When your company is in a growth period, you might consider investing in its property, or increasing sales and marketing activity. You might look to expand and improve its technology platforms, or to start exporting. Without giving yourself some financial headroom, you are taking a risk by heavily increasing your outgoings, as it may take a while for the higher incomes to flow. Cash flow is king.
“Funding growth is often a key issue,” says Jonathan Boyers, who leads KPMG Enterprise in the North of England. “Unless you’re in a sector that’s extremely cash-generative, growth will absorb cash, so the business looking to grow needs to think about how they’ll go about it. It’s often said that more businesses go bust after a recession than during it – you have to be careful not to overtrade.”
Stay on top of housekeeping
Help is out there – any business can harness technology to keep on top of housekeeping. Most major professional advisers now offer products to assist SMEs, such as BDO’s cloud-based InTouch system, which connects users to their current accounting and financial data, as well as delivering the historical information businesses are used to. PwC offers an accounting service called My Financepartner.
To some extent, growth spending can be funded by cash reserves, calling on resources the business has built up – the war chest, if you like. But that’s not necessarily the best way, and nor is it the case that standard bank lending will be the most effective method. Companies might look to bring in equity investment, or use products such as asset finance or invoice finance. There are a host of options.
Find the right people
People are at the core of any business, and one major issue faced by a company in a growth phase is putting in place a management structure that will make it robust, enable it to seek new business and reach maturity. It can be a wrench for the entrepreneurs and founders who have built up a business to let go of key functions, but let go they must. Boyers says: “The MD can’t do everything. As businesses grow, you’ve got to fill those key functions with good people – a finance director, operations director, a sales director.
“Entrepreneurs often aren’t good at delegating, and getting the structure right can be painful – whether that’s the first tier of management or, for businesses further along the growth path, a second tier. A bad recruitment decision can be a disaster, but so can mishandling delegation. Along with funding, not getting management structure right is the biggest risk faced by growing businesses.”
Recruiting for senior positions isn’t easy and it takes time – often, your chosen candidate will have to work a long notice period. Developing staff who have grown with the business is also a challenge; it may turn out that long-serving team members don’t have the abilities you need. Equally, there can be underexplored talent within the business that may relish the chance to grow, given the opportunity.
One area businesses are seeing as fertile for growth is in international trade. In July 2015, it was announced that UK Export Finance, the UK’s export credit agency, is to broaden the eligibility of its export working capital product to include the direct supply chain of exporters. It’s the government’s latest policy commitment designed to encourage manufacturers and service providers to enter new territories.
In the March Budget, for example, the chancellor confirmed that UK Trade & Investment would receive a further £7.5m to promote trade with China, where UKTI had already identified £1.3bn of opportunities for UK exporters in the next year.
Going international is not without risk. Besides the financial outlay, business owners must also factor in the time commitment – they or a senior colleague will need to be away from the business for lengthy spells while relationships are developed and structures put in place.
Boyers has some words of advice: “On balance, it pays not to do too much too soon – going direct to customers is a large step and, often, working with distributors is the most effective way to look at this.”
If an SME is serious about growth, it should plot a course, just as it did when presenting its initial business plan when launching. Rather than taking on too much too soon – one of the biggest dangers of fixating on growth – it could pay to remember the old saying ‘slow and steady wins the race’.