Corks fly. Moderately-priced champagne drips from the ceiling. You started from the bottom and now you’re here – PROFITABLE.
You and your team sacrificed, bet the farm, lost a lot of sleep, held on to that blind optimism, and the ‘entrepreneurial spirit’ buried somewhere in your tattered body pulled you through. Today, you wake up leading a bigger business, and for the first time in a long time (maybe ever), you’ll generate at least a dollar for every one you put in.
Congrats! You’re screwed.
The “new-profit” stage is a perilous phase of the business cycle. Lacking glamour, newfound profitability is largely ignored by the media and in thought leadership. As is the case for the middle of any race, you will not win on this lap, but you sure can lose if you crash or run out of gas.
Further, new-profit does not mean fat margins – the margin of error is often thin. Just a momentary lapse or an act of over-aggression, and you may be into the wall.
But fear not, you are not alone! Many of the businesses with whom I’ve worked are right here or on the verge of reaching new-profit. A myriad of financial and management challenges await, a few of which I’ll tackle by offering some tips on navigating this period en route to your business goals. To wit:
- Everybody wants a raise (which they probably deserve, starting with the entrepreneur)
- Leaders have new demands, but are back-filling roles where there is not yet a budget/need for full-timers
- Most leaders are where they are for the first time
- Further growth often means incremental investment requirements
Milestone Compensation – Buy Yourself Accountability, Momentum, and Time
Everyone wants a raise, and probably deserves one. If you can’t afford it now, a little visibility for your team goes a long way in maintaining momentum.
New-profit is viewed as a victory, representing an important business hurdle and a requirement for survival. It’s only fair to expect rewards for victories, and emotions run high as team members compare themselves against each other.
Ratcheting up base compensation is difficult, especially if there are risks to your new profitability. Perhaps revenues are lumpy, certain customer relationships are at risk, or expense increases are on the horizon (rent and service charges have a tendency to only go up). Base salary increases are also tricky to reverse.
One way to avoid paralysis and keep the team engaged is to provide visibility through milestones. These can be applied to both 1) individual goals and 2) overall business performance. The latter is critical because, if designed correctly, it allows you to project with more confidence – if you end up paying out that compensation, you know you have the financial room to do so.
The Advisor Trap – Focus on Doers, Not Tellers
When you’ve never been somewhere before, the natural solution is to find an advisor who has. However, there’s a massive difference between guidance and execution – know which you’re buying. Ideally, both.
Caveat Emptor. There is no shortage of advisory and service offerings out there, at a variety of price points. There’s something to be said about you get what you pay for, but you better be sure what it is you’re buying. The onus is on you to figure out your own need, and not rely on the sales pitch from the other side of the table.
New-profit companies need doers, not just advisors, because the team is stretched and may not have the bandwidth to incorporate additional to-dos. When selecting third-party solutions, focus on those that bring incremental capabilities to day-to-day business management and/or establish foundational processes that will support your growth through proactivity (looking forward), consistency (maximum uptime), and risk management (cross those Ts).
Although my firm’s expertise is in finance, the nature of the P&L and financing of the business puts us in the cross-hairs of optimizing every corporate function (operations, sales & marketing, accounting, IT, HR, etc.). We’ve worked with a variety of solid service providers who can customize solutions to maximize the present and future-state. Leveraged appropriately, these services can supercharge your efficiency and help you stay focused on the big picture.
Eyes on the Road – Look Through the Windshield, Not Just the Rearview
‘Unprofitable You’ was the star quarterback – audibling at the line and putting the team on your back. ‘Profitable You’ is the awkward teenager attending a new school. What worked before may no longer make the grade.
Many leaders of new-profit businesses are there for the first time – first time running a business of this size, first time delegating critical responsibilities, first time building a formal sales team, first time developing bonus policies, lots of firsts. Management gets more complicated with bigger operations and larger teams. Recognizing the need to adapt and evolve is the first step towards plotting the course.
New-profit business leaders fear the negative surprise – getting caught by something they didn’t see coming. Not only do you have the financial and operational ramifications of a shock, but resources are drained as the team enters fire drill mode to control the damage. Businesses can lessen this risk through two areas: enhanced reporting processes, and increased business projectability.
Harnessing data is critical to the new-profit enterprise. Whether holding teams accountable to goals, diving into financial/operational performance, or building projections from underlying business drivers, new-profit businesses must invest in becoming more forward-looking and proactive. Preventative techniques minimize panic, and if/when things do go awry, you fix them faster and more efficiently.
Growth Investments – Not Just ROI, Risk-Adjusted ROI
You’ve taken big risks before, but now you prefer better odds than the roulette wheel. It’s time to get more conscious about the size of your bets relative to the expected pay off.
Return on Investment (ROI) is a familiar term to most business leaders. However, new-profit leaders are often (still) cash-strapped, limiting the number of capital allocation options available and magnifying the negative impact of a misstep. Enter the “Risk-Adjusted ROI” framework.
Everybody loves swinging for the fences, but the new-profit stage is a great time for singles and doubles. Consistent contact (successful ROI) provides a buffer to pursue more investments, whereas a big miss could mean you no longer have capital for any opportunities at all.
Risk-Adjusted ROI is essentially scenario analysis – understanding one opportunity relative to others, and the impact of both success and failure. Although intuition is no less valuable than before, now is the time to quantify return expectations for your investments as well as the impact of a failure on your overall financial health. Structured assessments help you act with confidence while sleeping more soundly, two things we greatly value.
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The new-profit stage is a major fulcrum point for growth. The themes for success are business visibility, proactive decision making, risk management, and structured capital allocation. One trait shows up consistently in the successes we’ve seen – leaders who recognize the way they need to manage is different for where they want to go versus where they’ve been. Get ready to evolve.
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Ben Lehrer is Founder & CEO of First Water, the one-stop finance shop connecting teams with data and companies with capital through Relational Finance. We help aspirational businesses leverage finance to drive clarity, visibility, and execution in pursuit of their goals.