The 3 Dimensions of Business Growth™ - 1: Creating Predictable Profits & Cash Flow

Posted by George Sandmann on Jun 13, 2020 6:00:00 AM

Building on thinking that was first introduced in 2017 - and which has been evolving ever since - we are ready to share a new process. This process applies to all client businesses, including those seeking to recover from the COVID crisis, those looking to make their business easier to run, those looking to grow, and those looking to sell. In short, this process applies to your clients.

Let’s start at the beginning. What do we know? CEO’s care about growth over all other business goals. And when a CEO says ‘Growth’, they mean revenues and cash flow. So if you want to connect with CEOs and get their attention, you need to show how you will help them grow.

My friend Jon Best, reformed CFO and credentialed Business Coach, puts it this way:

“What are all of our clients in business to do? Make money. And to make more money this year than last. And if we can show them we can help them do that, do you think they will buy our services? They will. They’re wired to. So why are you sitting on the sidelines? What are you waiting for? Talk to them about growing.”

CoreValue CEO George Sandmann has spent almost 800 hours this year alone, and has historically written almost 60,000 words, developing Growth concepts. Market feedback and hundreds of hours of discussion with advisors and consultants has confirmed that there are 3 Dimensions of Growth. These dimensions are the basis on which CoreValue-powered Growth Consulting will evolve.

If you're using the International Growth & Exit Planning Association's terrific Growth Planning Index before you use CoreValue 'Discover', the '3 Dimensions of Growth' will guide your consulting engagement as you move from planning to doing.  

We’ve discussed that CEOs are generally deaf to ‘value growth’. This is  important because getting the CEO’s attention requires speaking to their “Why?” - which is growth - thereby empowering your own practice’s growth.

It’s true that Equity Value is the ultimate measure of business success, and that the fundamental role of the CEO is to maximize shareholder value. Trouble is, most middle market CEO’s don’t care. Should we therefore ignore equity value? Heck no. But we need to work our way to that conversation. Start where they hurt, and build from there. As we'll see, working on growth makes equity value actionable.

The 3 Dimensions of Business Growth will be central to how we deliver training and technology and to driving the evolution of consulting to middle market companies. The 3 Dimensions of Business Growth are:

  1. Predictable Profits & Cash Flow
  2. Predictable Growth
  3. Predictable Equity Value

Read that again. It’s an instant practice descriptor, an instant ‘elevator pitch’: “Our clients rely on our expertise to create predictable profits and cash flow. They then have a foundation for predictable growth, and for predictable equity value to fund their family wealth.’ Imagine being able to say that. Wow.

Why can you trust that this message is relevant? Because both senior professionals and middle market CEOs agree. Here’s what CEOs are telling us through over 25,000 CoreValue analyses:

  • 59% of CEOs want to grow
  • 19% want to make their company easier to run
  • 17% are preparing to sell their company --only to find out that their business will not net enough capital at sale to fund their family’s long-term wealth. Ergo, they need to grow.

75% of CEOs want Strategic Growth Consulting

Let’s look at how the 3 Dimensions of Business Growth satisfy these goals. First, we need to line the dimensions up in logical order. A foundation of Predictable Profits & Cash Flow creates the foundation for Predictable Growth. And as business advisor and M&A Intermediary Steve Duke puts it, “Without predictable profits there is nothing to sell.” No value, no access to the market. So Predictable Profit & Cash Flow are also a predicate to converting private company equity into cash. You're so right, Steve.

Creating Predictable Profits & Cash Flow should be the foundation for any engagement that seeks to (1) make the company easier to run, (2) create growth, or (3) maximize equity value.

 

Growth Consulting, Strategic Planning

We have vetted the 3 Dimensions of Business Growth with several thought leaders. Two conversations stand out.

The first is a discussion with Garth Tebay of GBQ, a thought leader on growth and valuation. This conversation teased out the need to create not only predictable profit, but also predictable cash flow -the first does not necessarily deliver the second. Have you ever heard a CEO say “We’re profitable, but we’re broke”? I’ve been that executive. Cash is often trapped in the balance sheet, and a critical piece of Growth Consulting is creating the systems to deliver cash to the business engine; this especially if Predictable Profits & Cash Flow are to be the foundation on which to build Predictable Growth and/or Predictable Value. To drive growth in a healthy way, you’ll need to calculate how much growth the business can afford.[1] [2]

We also spoke with the great Ed Wandtke, who is well known to many of you. Ed added two comments:

  1. Business Owners often look at historic trends to predict the future, but they should actually be looking at the documented processes and procedures that create documented predictability...
  2. The basic question therefore is “What actions cause revenue to occur?” Increase the effectiveness of these actions, and you create revenue predictability.

OK, so how do you create Predictable Profits & Cash Flow? You need to understand your client’s business engine. To recap well-plowed ground (see previous blogs), think of a business as an engine...

  • The gears inside the engine drive growth and equity value - measuring the gears allows you to understand a company’s ability to generate revenue and profit going into the future
  • The gears need to be strong individually, and to work in concert with the rest of the engine
  • Weak gears are bottlenecks to growth and equity value
  • Seasoned pros Paul Menig and Larry Prince also recommend identifying business strengths, which CoreValue does nicely. Look for an article on this later this Summer.
  • The gears are Growth and Equity Value Drivers™, and CoreValue measures their strength
  • Once you understand strength and weakness, you can work on the key drivers and help you client reach their goals

 

Not all 18 of the value drivers are relevant in every engagement. Their relevance depends on the CEO’s goal. The concept of prioritizing Growth and Equity Value Drivers based on these goals was first discussed in detail in the January 2019 article ‘Improve Engagement Results: Setting Priorities Based on CEO Goals’.

Here are the Growth and Equity Value Drivers that are a high priority for creating ‘Predictable Profits & Cash Flow’. Strength in these areas makes a company easier to run, increases equity value, and is the foundation for Predictable Growth. Your engagement starts with measuring your client against best practices; your engagement should then create and operationalize these best practices.

Chart 3 Dimensions Pred Profits

Let's recap. Here are the elements of the growth and equity value-driving areas from Dimension 1. Having a high score in all 8 growth drivers means you can be highly confident that you are creating the launchpad for phase 2: Predictable Growth

  1. Recurring Revenue: Your company can rely on a portion of future revenue from contractually committed customers.
  2. Margin: Your company enjoys gross and net margins greater than the industry norm.
  3. Financial Statements: You produce both an income statement and balance sheet monthly by the 15th of the following month; You run cash flow statements weekly. Further, [forward-looking] operating reports are routinely generated and used by management to review your company's performance and make operational decisions.
  4. Sales: You have a sales plan and repeatable sales process to deliver your company's revenue goals that are well-developed, managed, and executed.
  5. Operations: Your company has the ability to deliver on the sales promises made to the marketplace and to do it in a systematic and process-driven manner.
  6. Customer Satisfaction: Your company tracks and uses key measures to meet customer expectations at all levels.
  7. Senior Management: Your company has a leadership team/individual in place to realize the company's vision and mission while helping the shareholders reach their objectives. 
  8. Human Resources: Your company has the ability to find, develop, and retain quality individuals that enables success in all aspects of your business.

Example of Analysis that drives Business Consulting Engagements. Here’s what the analysis from the CoreValue software reveals. We'll use the example of 'Financial' to illustrate: (and 'oh-by-the-way' your client's potential ROI for hiring you just to work on this one area is $1,030,000, putting your fee in equitable perspective)

From the CoreValue 'Deep-Dive Analysis:

Let’s unpack this analysis as an example, then discuss CoreValue’s suggestions to help your client. 

  1. All High Priority drivers must score ‘7’ or more out of 10; less than 7 is a bottleneck; this client scores 2.8
  2. There are aspects of ‘Financial’ best practices that are not a high priority for creating Predictable Profits & Cash Flow. For example, while audited financials are important to monetizing equity value, an audit is not a worthwhile investment for this CEO who is simply seeking profits -nor is it they required for Predictable Growth.
  3. Financial Reporting is a high priority: start by developing a deep understanding of the state of your client's financial and operating reports, then create and implement processes to bring them in line with best practices. 

Financial Reporting: check out these excerpts from the CoreValue Analysis. You can see that this business is not being managed using the Big 3 reports, so there’s no routine review of P&L and Balance Sheet (where cash is trapped); and no regular review of the cash flow statement... financial reports are not the primary source for measuring business performance.

 

Operating Reports: these are used in part to track leading indicators, and are therefore critical to creating predictable  results. For this client they are run infrequently, do not contain relevant information, and are not used to manage the business.

How does the engagement play out? Over time you will work to create best practices in all 8 of the described areas. The CoreValue software, business consulting system, community, business intelligence training, and education through the NACVA and IGEPA will help.

Through this process you will have educated your client about best practices, succeeded in having THEM tell YOU (important psychology) that they do not have best practices, and identified the project areas for your consulting engagement proposal, strategic plan, and have an executable project plan for strategic 'doing', or creating results.

Imagine creating and implementing 2 of the 8 high priority areas per quarter. In a single year you will help completely transform your client's business. Here's a timeline for a 12 month engagement during which you will help create Predictable Profit & Cash Flow, showing current growth driver scores, interim goals, and target scores; plus the client's ROI for undertaking the engagement. 

Project Gantt Chart

We've covered a lot of ground, so let's recap: no matter your client’s ultimate goal, start by (1) analyzing all of the gears in the business engine, (2) creating and implementing best practices for the High Priority ‘Growth and Equity Value Drivers’ delivering Predictable Profits & Cash Flow, and (3) if needed, introducing on-demand subject matter experts to supplement and/or coach the Senior Management Team. By achieving this goal, you are creating the foundation on which to build growth, or maximize and capture equity value. You'll be your client's hero.


We'd love to know what you think! Please comment below or email blog@corevalueforadvisors.com.

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Next: '2. Creating Predictable Growth' - you will learn which Growth and Equity Value Drivers must be activated to help CEOs reach their top goal: #drivegrowth. 

[1] Organic Growth is growth driven internally, without M&A or outside capital. For more check out the Investopedia discussion here.

[2] You can calculate the rate of growth your client can afford, here's an article on point.

Topics: Business Consultant, Consulting Practice In a Box, Growth Advisor

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