Guest Commentator: Dave Campbell, CPA, Director, Financial and Transaction Advisory Services, Siegfried Advisory, LLC
Why is it important for middle market firms to have financial plans and performance benchmarks already in place during periods of exponential business growth?
Running a business can be boiled down to a series of decisions; the strength and success of the organization are tied very closely to how effective those decisions turn out to be based on the events that follow. (The rest is luck.) So how can a business owner or manager make the best decisions and thus put their company in a position for growth and success? The answer is with planning and indicators.
Most good business plans start with a vision, which then informs goals that should be a combination of short- and long-term in horizon. As a company grows, the owners and managers will revisit these goals, which, if thoughtful and specific, will create the results that the shareholders require if achieved. Indicators are the measures that allow managers to track performance against the established goals; variances from expectations (whether favorable or unfavorable) tell managers what needs to be addressed and potentially changed. Is gross margin improving more slowly than anticipated as the company scales? There may be an opportunity for procurement to source more effectively or take advantage of vendor rebates. Are liquidity ratios worse than expected? Perhaps customer payment terms need tightening, or greater collection efforts are required. Is website traffic and engagement down? This trend may manifest as a decline in revenue and, ultimately, cash flow, and there may be a need to revisit SEO activities.
In addition to setting and measuring organization-specific financial and operational goals, incorporating industry and geographic benchmark data adds important context to aid in interpreting results. For example, during the first year of COVID, home improvement stores and deck builders saw double-digit sales growth in addition to volatile raw materials pricing. Without a benchmark of what is happening in the market, a business manager may fail to identify opportunities and risks facing the company, thus directly impairing that organization's outlook for success.
For companies that are pursuing growth and continuous improvement, comparing results to the prior year provides an incomplete picture of relative "success" and often masks economic or industry trends that are or should be affecting the business. A company that doubles its workforce in response to strong customer demand should likely not be satisfied with a 10% increase in sales, which in the absence of a budget and indicators (e.g., net operating income, revenue per FTE), may appear positive. How can we make better decisions? By being thoughtful, disciplined, and proactive.
More About the Middle Market Action Team
The Chamber’s Middle Market Action Team (MMAT) is a consortium of leaders driving rapid growth in companies with annual revenues between $10 million and $1 billion via targeted programs and strategies.
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