Bruce Werner specializes in governance, strategy, finance and M&A. Author & Experienced Outside Director. Kona Advisors LLC.
What is a growth flywheel, and how do you get yours spinning fast?
A growth flywheel is a virtuous cycle of behaviors that creates significant value for business owners. Simply put, it asks and cohesively answers questions like: Where are we going? How do we get there? Who do we need to get there? How will we pay for it? How do we stay on course?
I often say it is best to start with the answer and work backward to where you are today. This is the essence of the planning process. Define success and then build each of the steps necessary to get there.
Where Are We Going?
This is the responsibility of ownership. What do you want to do with the asset you own? Double in value or just be a cash cow? If you are the CEO, do you really want a lifestyle business or do you want to change your industry? The right answer is the one that yields the outcome you actually want.
With this, define what the profit and loss (P&L) will need to look like to realize this expectation. Will margins hold up, are they under pressure or do you have a plan to disrupt the industry? Remember, your selling, general and administrative expenses (SG&A) should grow more slowly than your revenue growth rate.
After thinking through these issues, build the P&L for the next three to five years to get a sense of how fast you need to grow to get to the desired outcome.
How Will We Get There?
What products do you intend to sell to whom and at what prices and margins? Is this realistic or do you need to get creative?
You will need to examine your product portfolio, development pipeline, industry trends, sales and marketing organizations to make some top-level judgments on this situation. It doesn’t need to be perfect, just a workable model that hangs together. Note: Hope is not a plan.
Who Do We Need To Get There?
Growing businesses require talent and capital. Can you project what you think the organization chart needs to look like in year five? Not the names, but the functions and titles in the boxes? Then compare that to today and assess where you can grow your own talent, and if and when you need to recruit a few key players to the team.
How Will We Pay For It?
Speaking of capital, how much do you need to fund growth in excess of free cash flow? Your current cash flow is used to pay taxes, service debts, compensate staff and owners, fund growth and some should go into a rainy-day fund.
What margin of safety do you need for your cash flow to make sure this does not limit your success? Depending on what your current balance sheet looks like, what options do you have? It takes time to raise capital, so align that process with your other growth initiatives.
How Do We Stay On Course?
Accountability is always an issue. Sometimes the staff is the problem, other times, ownership or leadership does not stay focused. Do your top-level goals trickle down through the organization to individual contributors? Do people have SMART goals, meaning they are specific, measurable, achievable, relevant and time-bound? Do you have a performance management system that works?
Accountability should be driven by management, but at a certain size, a board of advisors or a fiduciary board may be needed to provide more formal oversight.
Wash, Rinse And Repeat
This list of questions represents the first turn of the growth flywheel. As you make adjustments, you start the second turn of the flywheel. While we measure in quarters and years, the work gets done every day. All of this assumes you have a management system that ties together these five questions.
Most businesses develop their own management systems, but these often fail to tie everything together—or end up reflecting the leadership’s personality more than a deliberately designed process that connects goals, behaviors and results.
There are numerous management systems, such as the Entrepreneurial Operating System (EOS), that you can install or have a consultant design for you. I don’t advocate any particular one, just pick one that works for you and stick with it. Much of the benefit is in the discipline of using it.
If you are not sure if your system is doing a good job, ask around. Speak to friends whose businesses you admire and ask them how they manage it. They may have a few useful tips.
Large private companies have elaborate systems to coordinate sprawling organizations with internal tensions. Most private companies under $500 million in revenue are driven by just a few individuals who are facile with the details of their business. Simple plans, well executed, are often the key to success. By keeping the top-level vision simple, it is easier to ask and answer the five questions that drive your flywheel. Get spinning.
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