The Entrepreneurial Company
The starting of a new business and a time of plenty of spending and very little revenue. Financing is primarily of an equity nature; money put up by the founder and his or her family and friends (in some cases funds provided by a venture capitalist or another company may also be involved). Financial measurements relating to income are negative. Progress is best evaluated in terms of progress towards the business plan (there may be a formal plan with timelines and benchmarks or an informal plan based on the founder’s vision and expectations). Either way there is a plan and a race. The race being to become a going concern before going broke.
The Rapidly Expanding Company
A business with product and market opportunities that have not yet been fully developed, but are getting there. Operating cash flow is negative to minimal because the physical facilities must be brought up to full scale and working capital must be provided to accommodate sales growth. Also good employees must be found and trained and the hoped for customers have to be reached in some way, it’s a busy time and it takes money. If the marketing and pricing practices are sound and the proper cost controls are guided into place the business will cross its breakeven line and become, happily, a profitable endeavor.
Financing as needed will come from bank borrowings and increasingly from internal cash generation. Another option, sometimes available, is an issuance of stock, private or public, thus bringing in additional equity capital. As to financial measurements year to year trends are of great importance along with the always important comparisons to the business plan.
The Nearly Full Potential Company
This is a successful company that has been around for a number of years. The business facilities are well utilized and those with a need for what the company has to sell are now to a large extent its customers. Revenues have leveled off but random sales, output, and cost containment opportunities will still come along and when acted upon will provide a small but steady stream of profit enhancements.
The business is consistently profitable (although somewhat subject to the ups and downs of the economy) and all cash flow related measures are positive. The company should be paying dividends as well as providing internally generated funds to extend the life of the business and for the pursuit of new ventures. Also debt reduction should be a priority.
Planning, budgeting and analysis are quite refined by now and are very important, the company does not want to slip from slightly growing into decline. Charts and metrics reflecting year to year trends are always important as are comparisons to business plan. Peer company comparisons (if the information is available) are also insightful.
A successful company over its lifetime will be all three of the above at different times and so the key for you is to be aware of the kind of company you are working for and to recognize a change, a progression, to a company with a new context when it happens.
Why not just call the ‘rapidly expanding’ company a growth company? Because a ‘growth’ company may be growing all or in part by mergers and acquisitions, the rapidly expanding company is growing strictly from within.
As a practical matter it may be that a company is a combination of all three contexts. This is good. Consider a aluminium boat company which has been up and running for many years, everything is in place and basically orders are taken and the boats are built and shipped. This would be a near full potential company and good earnings and cash flow numbers are to be expected. Now say this same company has set up a department, which is just getting started, to produce and sell kayaks to go along with their fishing boat business. Also they have another department underway to use their expertise and facilities to produce aluminum assemblies for industrial use. They already have several customers for this and there are other customer possibilites on the horizon.
In the first instance the reporting and evaluation of the financial results for a year or a quarter is straightforward, actual results versus expectations (plan) for a near full potential business. In the second case the reporting is not so clear-cut. The financial statements reflect the results of the near full potential business plus an entrepreneurial business (kayaks) and a rapidly expanding business (assemblies) all netted together. Expectations for income and operating cash flow are different (lower) in the second instance because all three contexts are combined in the results.
What you hope to report in the second case is that the proceeds from the boat business are at least in part being used to develop the kayak and aluminium assemblies businesses, thus extending the life and size of the company. But beware, lower cash and profit results are to be expected but don’t let this be a cover for poor management performance. Fortunately you have all of the information behind the financial statements at your disposal. You need to evaluate each of the three businesses separately. Are all three meeting expectations? If so that is what you report but if not you need to highlight the problems and put the full story out there for the owner and his or her staff to see (they, including you, have work to do).
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