5 Do’s and Don’ts For Profiting From High Growth
I have the pleasure each month of working directly with over 50 small and middle market manufacturing company business leaders. Through my company Peer to Peer Advisors the leaders meet in smaller groups and help each other. A recent conversation in one of those groups revolved around the joys and challenges of handling high growth. Here are some of the do’s and don’ts that came out of that conversation.
Do negotiate multi-year exclusive supply agreements with your customers. Include in the agreements exit penalties if the customer terminates early. The ability to accomplish this reflects on the strength of the relationship with the customer. The customer depends on the supplier. The supplier depends on the customer. Solidify the dependency in writing.
Do provide for adequate working capital. Negotiate as soon as possible with your bank for working capital and capital investment credit lines. The bank will depend on past performance and projected performance. Solid multi-year customer agreements will support the projected financials.
Do establish long term pricing deals with key suppliers. Depending on known costs as much as possible eliminates variables that can negatively impact contribution margins.
Do provide incentives to all key employees given the pressure and additional responsibilities that will be put on them. Agreements with customers is the revenue side. Agreements with suppliers is the cost side. Bringing it all together are the employees. They need to be involved in the developing of solutions to meet customer needs and demands. Without their integral engagement it can all fall apart quickly.
Do take care of existing customers. The current base of customers are essential to achieving breakeven and reaching the projected profits associated with the growth. Consider splitting off existing business internally and resourcing it properly.
Don’t make inventory, equipment, or people investments without firm customer commitments. The revenue source needs to come first. Without it you are building capacity unnecessarily.
Don’t accept an order without validating the direct costs to deliver that order. It is a terrible feeling to realize, after an agreement is signed, that costs to deliver are miscalculated and margins levels you thought you were getting are now lower. It forces painful adjustments throughout the business.
Don’t let a customer be more than 50% of your business without rock-solid agreements to protect your down-side. Large customers who dominate your financials exert external controls on your business. When they are happy things are good. If they become unhappy sleepless nights ensue. If they leave real problems occur.
Don’t try to buy equipment on the “cheap” unless you have lots of time and money to lose. Manufacturing equipment takes a beating, running anywhere from 8 to 24 hours per day. When the equipment is down it’s like opening the floodgates for money to escape. Delivery time frames are not met. Customers get angry. Contract clauses are violated. Repair and maintenance costs increase. None of this is worth the short term savings investing in cheap equipment.
Don’t hurt small customers by focusing on the big customers only. Small customers, in aggregate, pay the bills (or at least a good portion of them). The company’s financial position relies on minimally achieving breakeven, and smaller customers are as important to reaching that level as larger customers.
There are some obvious themes throughout the do’s and don’ts.
- Customer relationships need to have clarity and mutually beneficial aspects to them. If both parties are not winning, the loser will exit.
- Employees need to be part of the solution for handling high growth. The employees deliver on the growth and promises made.
- Know your numbers. The allure of a big deal makes sense only if the actual numbers of the deal make sense. Don’t take a deal assuming it will get better. It almost never does.
Handling high growth is never a straight line. There will always be issues and challenges that arise. Focus on the customer relationships, supplier and partner relationships, and employee relationships. Understand the numbers that support all of them. From this position decisions may not be easy, but they will be very well informed.