Finding the “Right” Growth

Growth in general is highly sought after in business. Unfortunately, it has also become a term thrown around much too loosely, and without context, growth, in and of itself, can hurt businesses at times much more than it helps. At Fintrepid Solutions, a phrase we repeat often is “growth breaks things”. We have seen it time and time again. We are proponents of intentional growth, where deliberate thought has gone into the goal itself and why it matters, and equally important, what it will take to get there, including potential pitfalls along the way. So the aim then becomes, how do you find the right growth for your business? Here are some considerations to contemplate.

Defining it – What does growth mean? Is it growing market share? Revenue? Margin? Profit? Something else? These are all very different goals that have different requirements for success. The CEO and leadership team need to have clarity around this. The answer could be to grow revenue by 15% and hold profit margins. It could be to keep revenue flat and grow gross margins. Both could be great answers, but simple growth overall can be unclear and problematic.

Intentionality – As referenced above, the key is to understand what the goal is and more importantly why it matters. A company can grow revenue by 10% but see profits stay flat. Is that successful growth? The answer is again maybe. Perhaps the company needs to grow to be competitive in the marketplace just to maintain its position or to achieve the same buying power. On the flip side, if there is not an ancillary benefit beyond what shows up in the financial statements, this kind of growth may not be desirable as the business may have added more people, more volume, more complexity, and more headaches to achieve the same net result. What is the desired growth goal and why? Start there.

Current Assessment – A very stark look at current reality is essential. Where are you now? What led to growth historically? What has hindered growth? Evaluate the good and the bad, the great choices and the mistakes. These answers can provide great context for what is ahead. What can be leveraged further and what is needed once that goal is clearly defined? Too many companies have simply compounded or repeated past mistakes by not evaluating the journey thus far in establishing future growth goals. All dreams have some basis in reality. The same applies in business.

Resources & Capacity – This is often overlooked in evaluating growth. Growth is stepped. As the diagram below shows, while revenue growth for example might be a line, the capacity, and resources that a business has will fluctuate over time. Growth is a constant toggle between capacity and investment. Often business owners think of capacity in a manufacturing setting, but this could be any combination of people, equipment, or just general infrastructure. Capacity is a key issue to understand in all businesses. Each time an investment in resources is made, the businesses capacity should grow, that spend can then slow while the capacity is absorbed. This process then continues on the next step. In the diagram, there are three companies, A, B and C. Company A may find itself in a situation where its revenue growth is unstable as it is outstripping the resources to support it, possibly leading to systems issues, an overtaxed workforce or quality control concerns. Company C is growing revenue too slowly for the investments made and is investing resources while capacity likely still exists. Company B is in a place of greater stability, utilizing capacity effectively over time and investing in line with growth.

Cash, cash, cash – Cash is the lifeblood of any business, the gasoline in the fuel tank. Driving too far and too fast can cause the car to stop suddenly. Growth typically uses large amounts of cash, so even if the net profit in a business is increasing, the cash position can be getting even worse. Larger orders from vendors may be needed, terms from new customers may be less favorable, more money can be tied up in people – cash often comes down to timing. We have seen companies grow themselves out of business as a result of cash shortfalls. Understand the impact of the growth goals on cash before getting too far down the road to ensure there is enough fuel to get there.

The trickle-down effects – What does the desired growth mean financially? What does 20% revenue growth mean for gross margins? Will they be consistent? Is there an opportunity to get better pricing from vendors due to volume and margins could improve? Perhaps an investment in a sales team is needed now to hit the 20% in the following year, meaning profit will potentially decline in the coming year before growing in year 2. Understanding the interplay unique to each business with revenue, gross margins, EBITDA, net profit and free cash flow will ensure alignment in the growth plan.

The market – A final gutcheck is looking at the broader market. Is the competitive landscape so intense that growth could be hindered, or is it wide open? Is there an opportunity to modify a product to increase margins? Or could larger sales opportunities be more profitable. Could growth land the business on the radar of larger competition? We have seen many instances where growing businesses have faced downward pricing pressure over time as competitors begin to take them on more seriously. Understanding the broader headwinds or tailwinds can and often should alter growth planning as well.

Growth is exciting. It is part of the entrepreneurial DNA. The right growth leads to sustainability and increased value. The wrong growth has caused businesses to severely stumble and even fail. Being thoughtful, intentional, and clear can make all the difference.


Budgeting Process Best Practices

It is the time of year where budgets are a frequent discussion point. This year of course with all the uncertainty in the economy, many businesses are struggling with how to start or how to have faith in planning for the new year. However, with a good planning process, budgets can be developed with confidence in any season.

First and foremost, the key word is process. Too many companies establish budgets without an intentional process. This can lead to poor assumptions, confusing comparisons to actual results or a focus on the wrong numbers in the business. For small and midsize businesses, there is no one size fits all approach, so relying on best practices to help shape the best process for each business is a great approach. So, what exactly does that look like?

An often-overlooked area of the planning process is learning from the prior year. Not just where were numbers missed, but why? Was the assumption bad? Was there an execution miss, or was it a broader economic issue? The answer here is essential to plan forward. And a benefit out of the pandemic and economic disruption was that it created something of a laboratory learning environment for many businesses – exposing unseen weaknesses, providing a testing environment for new initiatives and strategies, and reassessing operating structures. There is a wealth of information to be relied upon in these current market conditions. Ultimately, there should be far more questions asked than answers provided, especially in the early stages of the process.

There are a number of approaches and styles to deriving numbers - top down, bottom up, and others. What matters most is that the budget is based off the drivers of the business. What really moves the needle? Is everything a trickle down function of revenue? Are the bulk of the costs above gross margin, meaning volume could be the key driver? What about customer mix or headcount? Do contracts, either customer or vendor, play a huge role? The drivers may not show up directly in the P&L. Many times, businesses are focused on areas that don’t ultimately drive the desired impact – for example, growing revenue without realizing it will require a lot more overhead, or spending disproportionate time on areas of spend that have little impact ultimately on the bottom line. A year like 2020 demonstrated the importance of understanding drivers as a business changes.

Understanding the impact of different scenarios is also critical. Using the drivers above, what happens if revenue is 10% higher or lower? What if it requires more marketing spend to generate the same dollar of revenue? After the set of initial questions in the process, the question of “what if…?” is one of the most powerful any business can ask. While briefly mentioned as an example above, a deeper look at mix can be very impactful. Certain customers can have a different margin profile. It often makes sense to look at the top 5 to 10 customers or segments of customers. How does a shift in volume affect overall margin and profitability? For many companies, this mix changed as a result of the pandemic. Look at mix – what if it stays consistent or reverts – what is the impact either way? Move numbers around, look at the impact. This will provide confidence in the bounds in which the business will operate. Very few businesses are going to nail their budget across the board next year but understanding the lanes of opportunity and impact is even more valuable long term.

We have always been advocates of 2 sets of numbers in many businesses. For example, a more conservative budget that expenses are planned off of, and a more aggressive top line and or margin forecast. With this approach, a business is far less likely to spend ahead of the revenue, ensuring increased rigor around profitability and cash, especially during times of uncertainty. Then as the conservative targets are met or exceeded, it affords the conversation around adding further spend, but in an intentional manner.

The budget process is by nature continuous and fluid. It does not stop once the plan is on paper. Budgets should be reviewed, at least quarterly, and at times monthly. What new learnings have developed? Given all the economic uncertainty heading into the new year, new plans may need to be developed as information is gathered over time. This does not mean the budget is thrown out the window by any means. It is still a crucial baseline with which to evaluate business performance, so revisions are more of an “and” than an “or”. Perhaps a large new customer emerges, perhaps a current one shrinks materially. Or perhaps there are positive or negative competitive pressures. These can warrant revisions to aid in decision making as the year goes on.

Now is a great time to re-examine the planning process in the business. Adding these best practices to the process can provide more clarity, confidence, and ability to respond to changes in the future. The seas will continue to be choppy. By plotting the course carefully and intentionally, a safe, successful journey can be made much more likely.


PPP Forgiveness – What Is a Business To Do?

We have seen firsthand how the cash infusion from the Paycheck Protection Program, or PPP, has kept companies afloat since the pandemic struck. However, as just about every business has experienced, the goalposts on the program have been constantly moving, and as we sit today, there are far more questions than answers, particularly around forgiveness. So, what should a business with a PPP loan be doing right now? 

A Little Context

  • Coverage Period - The PPP Flexibility Act was passed in May and increased the coverage period with which businesses could spend qualified PPP loan funds and still be eligible for forgiveness. So, for the vast majority of businesses, the period through which they will be evaluating forgiveness will be 24 weeks from when they received their PPP loan, and for early recipients, that timeline is fast approaching. And there is no requirement to wait the 24 weeks if all the funds are spent.
  • Bank Applications - A majority of banks are still holding off on accepting forgiveness applications pending further guidance. Some banks are accepting applications while others are notifying customers of simply what to prepare.
  • SBA Status – As of right now, the SBA forgiveness portal is open, but based on our understanding, applications are just sitting in the queue and none are currently being processed for forgiveness.
  • Additional Legislation – A broader COVID relief package continues to stall in Washington. However, there has been bipartisan support for additional changes to the PPP, including automatic forgiveness below a dollar threshold (thought to be $150,000), as well as further streamlining of forgiveness for businesses with loans under $2 million. Discussions continue and forms of this legislation could still pass separate from a larger bill.
  • There is no requirement to make payments on the loan until the SBA issues a decision on forgiveness of the loan.

Actions You Can Take
As we sit, there is still a good bit of uncertainty, however, there are steps to take until the dust settles.

  • Be Patient – The goal is as much forgiveness as possible. There are some cases where an answer on forgiveness is needed ASAP, for example in the case of a business sale. But for the vast majority of companies, there is very little downside to waiting. Best case scenario, the forgiveness process becomes easier to qualify for. Even if no change, waiting will prevent the intensive effort to compile every piece of information, complete applications, etc. when requirements could change. Few businesses find themselves with tons of spare time – resources are likely better spent elsewhere.
  • Your Lender – Talk to them. Understand where they are at in the process. Many inboxes are full of different educational resources. These can provide good info, but remember, as with initial loan applications, loan forgiveness is being administered through your bank. Their requirements are the ones that will ultimately matter. You may have been receiving updates from them already but reach out to your lender and find out their approach. It may allow you to start preparing some information to get out ahead of things. It is also an opportunity to ask questions about your specific situation. They may not have all the answers yet, so check in periodically. They are one of your best sources of information. Be cautious to take action based on what other businesses are doing – their lender, and situation could be far different.
  • Be prepared with basic forgiveness calculations and supporting information. The PPP guidelines do require that records be maintained even after forgiveness is granted. Most payroll companies have canned reports related to PPP that can be pulled. Have a copy of your lease agreement, mortgage statements and other documentation handy. This should not require a material amount of effort, and then once more guidance is obtained, fine tuning can occur.
  • When it does come time to submit, make the submission as easy as possible to understand. Spell things out clearly, provide the required documentation – the volume of applications for forgiveness will likely be high. Once you do understand exactly what is needed, make it as easy as possible to grant forgiveness.

Just like with the original PPP loans, it is in the best interest of the bank for their clients to achieve forgiveness. The process is still very fluid. Both banks and the SBA itself do not have the resources to manage through an extensive forgiveness process. As such, it would seem more changes to simplify the process are coming. What we do not know is what and when. While not easy, an educated waiting game is likely the smartest, least disruptive course of action.  

















Two Details Your Lender Is Asking About, and You Should Too

There are a lot of words to describe the current economic environment, uncertain is one of them. And while many companies may not be seeking new financing in the near term, there are a number of reasons a business owner and its lender will be having conversations soon if not already – 1) a renewal of an existing loan 2) terms were modified as a result of COVID-19 impact 3) quarterly or annual covenant or other performance requirements.

There are consistent themes emerging with lenders, so it is best to be prepared for the questions being asked, but it is just as critical in managing the business itself. While an overall assessment of the business is always key, there are two key lines of questioning where visibility is essential – monthly trending and liquidity.

Monthly Trends
The Lender
The value of timely, reliable monthly data is never more critical than in times of significant disruption. Lenders are diving in deep and scrutinizing monthly trends to understand what the impact of COVID-19 had on their customers. Results from one month to the next can provide key data that could lessen cause for concern from a lending perspective. They are not assuming just because numbers were great prior, that this will revert automatically. They are looking to see an upward trend after the economy has begun to re-open, and that the short-term trends can be explained by what is going on in the business.

Isolating the noise is essential as well. Lenders are partnering with their customers in a very active way, but they are still very mindful of risk. You may be in an industry with a gloomy near-term outlook, yet your business could be an outlier in a positive way. Disruption could create an opportunity to gain market share or purchase failing competitors for pennies. Being able to present a picture to the lender that demonstrates this strength could not only make the lender feel more comfortable, it could even result in additional financing if needed, being easier to obtain.

Lenders are asking questions around this to manage their risk and assess how much debt the company can support.

The Business Owner
For business owners, this detailed look at trends is crucial to make decisions. So first and foremost, every reasonable effort needs to be made to ensure that timely, accurate monthly data is available.

Do the trends make sense? Did payroll come back and not revenue as expected or was there any expected lag and revenue came back a month later. Are margins doing what they should be? The worst thing that can happen is to not have explanations for movement in numbers. With the world changing so quickly, having information to make quick, informed decisions is paramount. And this means your financials need to be accurate enough to form reasonable conclusions.

What is your business telling you versus the headlines? While lenders want to peer through the noise from a risk perspective, you want the same clarity to identify signs of an opportunity or challenges. Do the trends show that customers are buying where it may make sense to add more payroll? Or are results not yet there sustainably and cash needs to be conserved for another month or two. And just because the industry overall or even competitors are moving one way, your business may be telling you something different through its performance.

The Lender
The other key area lenders are seeking clarity on is liquidity. What is the company’s cash position now and in the future? For a lender, this is simple – can my borrower repay the loan they have? And one step further – can they do so today, tomorrow and 6 to 12 months from now. Of course the further out a projection goes, by nature, it will be less accurate. However, lenders are absolutely expecting some sort of cash flow forecast out 90 to 180 days and even a full year. Even a solid attempt at this will go a long way in providing confidence to your lender that you are monitoring cash and being proactive.

You are likely to be asked about some of the details behind expected cash flow as well. Are customers paying on time? How much of your payables are deferred save cash in the near term? How does cash change as the market improves?

The Business Owner
Cash is the lifeblood of your business. What does your runway look like? How do you know? What impact does it have for you if a key customer pays late? Do you have enough cash to add staff in 60 days? PPP money is likely spent, what is happening to your cash balances in the future as a result? How much cushion do you have? Businesses that cannot answer these questions are at risk of running out of cash without even knowing it.

Understand your options. Having a cash flow forecast on paper allows a management team to evaluate what happens if a key assumption does move around. If a key customer pays late and creates a $100,000 cash shortfall, what options could you move around to make that up? And remember, cash flow is about timing, so it could be accelerating other receivables, deferring payments to vendors, or waiting to hire until that customer pays its invoice. It is much easier to avoid a car accident when you can see out your car window up ahead and react. Looking forward into your cash flow is no different. And evaluating possible scenarios on paper adds confidence to decision making, even during chaotic times.

The bottom line is that businesses will be asked by a lender to provide this information at some point. By being proactive, you will be prepared, but more importantly, a deep look in these two areas on a regular basis could guide essential decisions that could avoid potential pitfalls, increase profits, and protect the business long term.

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