20080312 Bq Sustainable Growth

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This is a quick overview of key concepts of business growth sustainability. It explains how the financial structure of the business affects growth and shows options for better managing business growth.

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20080312 Bq Sustainable Growth

  1. 1. What growth level can your business sustain? Understanding business growth & adopting ways to manage more of it better
  2. 2. What you need to know 1 2 3 Case study: the QuestCo corporation Conclusions
  3. 3. About sustainable growth… <ul><li>Why is the assessment of sustainable growth relevant? </li></ul><ul><li>What is sustainable growth today? </li></ul><ul><li>How does the financial structure affect sustainable growth? </li></ul><ul><li>What if you proactively managed resources for growth? </li></ul>1
  4. 4. Why you should assess your maximum sustainable business growth <ul><li>Elementary management foresight & planning </li></ul><ul><li>Fundamental to define your financial policy </li></ul><ul><li>Critical to the allocation of financial and non-financial resources </li></ul><ul><li>Fundamental to adequately set expectations of personnel and key partners = credibility of management </li></ul><ul><li>Helps you discuss financial solutions well ahead of the time when you may need them for the business </li></ul><ul><ul><li>Credibility with your financial partners </li></ul></ul><ul><ul><li>Better ability to negotiate terms </li></ul></ul><ul><li>Your financial structure sets the limits of your investments in future business growth </li></ul><ul><li>Failing to optimize the use of your resources means you will loose investment opportunities, place unnecessary financial strain on your business and put jobs in danger </li></ul>1
  5. 5. What is sustainable growth today? <ul><li>Sustainable growth is defined by limitations in </li></ul><ul><ul><li>Financial resources </li></ul></ul><ul><ul><li>Access to talent both internal and external </li></ul></ul><ul><ul><li>The ability to attract customers </li></ul></ul><ul><ul><li>The effectiveness of the network of key suppliers </li></ul></ul><ul><ul><li>The competitive responsiveness of the business </li></ul></ul><ul><ul><li>The use of natural resources, esp. in context of growing pressures to tax use of scarce environmental resources </li></ul></ul><ul><li>Sustainable growth is far more than the result of elaborate financial calculations, yet quantitative limits are key </li></ul><ul><li>Sustainable growth means growth that strengthens the business and the system to which the business belongs , including the environment, suppliers, employees, local communities… </li></ul><ul><li>Focus of this material is on the financial assessment of sustainable business growth </li></ul>1
  6. 6. The financial structure of your business affects sustainable growth in a major way <ul><li>The financial structure & cycle of your business affects maximum sustainable business growth </li></ul><ul><ul><li>Money tied in your inventory </li></ul></ul><ul><ul><li>Money tied in the commercial cycle as accounts receivable </li></ul></ul><ul><ul><li>Available cash (pure liquidity of business operations) </li></ul></ul><ul><ul><li>Implicit credit by suppliers as accounts payable </li></ul></ul><ul><li>Some investments are compulsory & absorb financial resources </li></ul><ul><ul><li>Maintenance of machines and software costs money </li></ul></ul><ul><ul><li>Replacement of productive equipments to continue operations </li></ul></ul><ul><li>Discretionary investments only after the existing financial cycle and compulsory investments are funded </li></ul><ul><ul><li>Discretionary investments are usually based on a specific business case and on the corporate investment policies </li></ul></ul><ul><ul><li>How will growth affect existing business activities? </li></ul></ul><ul><ul><li>How reliant is your future growth on (limited) natural resources? </li></ul></ul>1
  7. 7. Structure of balance sheet and sustainable growth: the most quantitative assessment Tangible assets Assets = uses Liabilities = resources Intangible assets Inventory Cash Accounts receivable Equity Long term debt Retained profits Short term debt (arising from operations) Accounts payable Working capital Net working capital Increase of net working capital absorbs financial resources 1
  8. 8. Structure of balance sheet and sustainable growth: the most quantitative assessment Working capital Increase of net working capital absorbs financial resources 1 Fixed assets = committed to long term use by the business Assets = uses Liabilities = resources Current assets of business operations = working capital Long term financial resources Net working capital Current liabilities (arising “spontaneously” from operations)
  9. 9. Funding requirements stemming directly from the growth of existing operations Net working capital Growth  increase of current assets  need to fund growth of net working capital 1 Fixed assets = committed to long term use by the business Assets = uses Liabilities = resources Current assets of business operations = working capital Long term financial resources Working capital Current liabilities (arising “spontaneously” from operations)
  10. 10. Biggest managerial impact is through allocation of resources: priorities matter a great deal! 1 Liquidity at start of FY Labor Materials General expenses Maintenance & replacements Discretionary investments Inventory Accounts receivable Liquidity at end of FY Retained earnings Taxes Interests Equity returns New resources New capital New debt Resources Uses Key
  11. 11. What can you do to proactively manage resources for growth? <ul><li>Manage and optimize your net working capital: </li></ul><ul><ul><li>Offer payment terms to customers in accordance with their strategic importance to your business </li></ul></ul><ul><ul><li>Make sure customers pay on the agreed terms </li></ul></ul><ul><ul><li>Negotiate the best possible payment terms with suppliers </li></ul></ul><ul><ul><li>Keep inventory under control </li></ul></ul><ul><li>Optimize your cost structure </li></ul><ul><ul><li>Keep fixed costs under control as they affect break-even and use of cash </li></ul></ul><ul><ul><li>Negotiate service level and cost with key suppliers </li></ul></ul><ul><li>Prioritize investments </li></ul><ul><ul><li>Compulsory before discretionary </li></ul></ul><ul><ul><li>Discretionary investments with best expected return first </li></ul></ul><ul><li>Negotiate with financial partners to be assured to fund all growth opportunities adequately </li></ul>1
  12. 12. What you need to know 1 2 3 Case study: the QuestCo corporation Conclusions
  13. 13. Introduction to the QuestCo case study <ul><li>QuestCo is a software development company that markets own software products and offers IT development services </li></ul><ul><li>Totally self-financed </li></ul><ul><li>High-growth resulting largely from exceptional commitment of founders and early joiners </li></ul><ul><li>Weak management of net working capital and “intuitive” allocation of financial resources </li></ul><ul><li>Key questions to assess: </li></ul><ul><ul><li>how much can the business grow given its financial structure? </li></ul></ul><ul><ul><li>what are the options of management to enhance sustainable growth? </li></ul></ul>2
  14. 14. QuestCo’s Financials & Sustainable Growth Number of Operating Cash Cycles = 365 / OCC = 2.23 SG per OCC = Cash generated per sales dollar / Cash required per OCC = 12.51% Sustainable year on year growth = 27.8% 2
  15. 15. Option 1: Speeding Cash Flow A 5.8% drop of current assets… … causes an 8% drop in days of cash tied up… … and an increase of sustainable growth to 30.2% up from 27.8%, i.e. an improvement of almost 8.5% 2
  16. 16. Option 2: Reducing Costs Reducing cost of sales by 1.9% and operating expenses by 1.5%… … dramatically improves cash generation… … which pushes sustainable growth to 33.7% up from 27.8%, i.e. an improvement of over 20% 2
  17. 17. Option 3: Raising prices Raising prices by a mere 1.5%… … dramatically improves cash generation… … which pushes sustainable growth to 33.1% up from 27.8%, i.e. an improvement of 19% 2
  18. 18. What if all options were combined? Improved cost efficiency, higher prices and reduced current assets… … dramatically improve cash usage & generation… … which pushes sustainable growth to 36.2% up from 27.8%, i.e. an improvement of almost 30% 2
  19. 19. What you need to know 1 2 3 Case study: the QuestCo corporation Conclusions
  20. 20. Key lessons to take away <ul><li>Optimal management of available financial & business resources can give your business an extra boost </li></ul><ul><li>Managing your cost structure tightly is essential and will also affect your break-even point </li></ul><ul><li>Measuring key aspects of financial structure helps you identify options for achieving more with existing assets </li></ul><ul><li>Options to consider depend on your position in the market </li></ul><ul><ul><li>Negotiating position vis-à-vis suppliers </li></ul></ul><ul><ul><li>Negotiating position vis-à-vis customer </li></ul></ul><ul><ul><li>Intensity of competition </li></ul></ul><ul><ul><li>The differentiation of your business relative to competitors </li></ul></ul><ul><ul><li>Price sensitivity of your customers </li></ul></ul>3
  21. 21. Sustainable growth also depends on non-financial factors, e.g. talent, natural resources… Growth Company A Financial limit to growth Human capital limit Environmental limit Company B Financial limit to growth Human capital limit to growth rate Environmental limit Company A sustainable growth Company B sustainable growth 3
  22. 22. Bibliography <ul><li>Janet Kiholm Smith and Richard L. Smith, Entrepreneurial Finance , 2004, John Wiley & Sons </li></ul><ul><li>Neil C. Churchill and John W. Mullins, How Fast Can Your Company Afford to Grow? , May 2001, Harvard Business Review, vol. 79, no. 5 </li></ul>
  23. 23. Where quests of people yield value for business ® Helping your business grow better

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