High Growth Company CaseTechnology Company BackgroundThe client is a company founded by an exceptional engineer who understood needs in the marketplace and adapted new and existing technologies to fulfill the perceived market needs; the market had a positive reaction to the company, who in the first five years of operation grew its sales close to 100% annually. As the company grew in sales and complexity the lack of business management expertise in the founders became evident in the financial results of the company. The company develops niches by adapting new and existing technologies to existing products and markets; the R&D development is made in the United States then sourced from China. The company has developed strengths in China sourcing, quality control, vendor qualification as well as engineering and technical development.
Business Improvement Project ObjectivesBetween 2007 and 2008, the client increased sales from $4.5 to $8.0 million, overhead from $1.7 million to $3.2 million and outstanding bank line from $1.7 million to $3.0 million. With this increase came $950K in losses. In addition to poor financial performance, an independent audit revealed the company had critical internal control failures and serious financial process deficiencies. Our objective with the client was to improve financial performance, establish appropriate strategic processes, and implement adequate operating structures to support the company’s strategy.
Business Problem DiagnosisThe company’s focus on rapid growth led to undercapitalization and underperformance. In our root cause assessment, we detected a lack of an executive team and limited business management experience within the current staff. The business model was poorly defined, which led to unclear strategic goals and objectives, and an ineffective organizational chart. As a result of ineffective organizational charting, the company did not have defined departmental functions or divisional heads. In addition, the company lacked job descriptions, job responsibilities, and performance expectations. The consequence of poor organizational structure led to a lack of employee accountability and concentrated decision-making within the two managing owners. Symptoms of poor organizational design were evident in the company’s financial performance and uncontrolled operational processes. The lack of departmental and divisional visibility, combined with focus on rapid growth, created a set of inefficient “on-the-fly” business processes. Additionally, the weak and outgrown financial software was not being used properly, or implemented to its full extent. The result of undefined responsibilities, a lack of accountability, missing performance evaluation metrics, and a weak financial software system was unreliable financial data, poor internal controls, missing decision support systems, increased overhead, and an unhealthy balance sheet.
Business Improvement ImplementationThe first phase was to work with the managing owners, and employees, across the company to better understand their business model, business context, company, industry, strengths, and weaknesses. After this was complete, we established internal controls on cash disbursements, collections, and inventory. At the same time, we implemented a 13-week cash flow forecast and worked to stabilize basic business processes in order to obtain reliable financial data. Once the immediate stabilization phase was achieved, we were able to obtain a true image of the company’s financial position. Next, we recommended an immediate headcount reduction based on the discovery of duplicated duties. Afterwards, we engaged in negotiation with the largest vendors in China to obtain more favorable terms. To resolve the capitalization issues we suggested retaining a firm specializing in equity and debt financing. At the end of the stabilization phase we proposed restructuring the organizational chart, which provided visibility to divisions and functional departments, as well as defined positions, roles, duties, and responsibilities. In the change management phase, organizational restructuring took place and we moved to create analytical data to support long-term strategic and management change. Additionally, we created the framework to develop organizational skills required to support the emerging strategy. Within this stage, we began to create in-depth, detailed value mapping of the most inefficient business processes, with the objective to improve productivity and implement a COSO-based system of internal controls. The team orientation of these projects not only improves productivity, but can also be used as an employee training tool. On the management side, we assessed the skills, strengths, and weaknesses of the managing owners as well as the duties they enjoy performing. As a result of this exercise, we recommended that the founder focus on R&D and product development, while the minority partner focuses on sales and marketing. We persuaded the ownership group to postpone their focus of growth for the consumer products division until the company achieves a healthy equity structure and sufficient working capital to absorb another large customer. Our next step was to perform a financial and strategic assessment by division which gave visibility to a P&L by division with three investment centers and one shared cost center. As a result of this exercise, the ownership group was persuaded to eliminate $70K per month in overhead across the company; furthermore, we were able to prove the company was attempting to sell unprofitable products, which required high overhead, to markets where they were not competitive. At the same time, we developed a valuation model for new projects and established a set of rules for like minimum order amount, minimum profitability, and acceptable price density to name a few. At the moment, we are still in the change management phase and working to increase gross margin, improve decision support systems, and create formal strategic processes to allow the company to identify and adapt to changes in the marketplace.
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