Growing Pains

Many founders of successful giftware design and manufacturing companies unexpectedly find themselves reaching a frustrating point in their company's development. Statements like "I'm not having fun anymore" or "I thought sales growth was all I needed to be successful" often accompany this frustration. In extreme cases, uneasiness is fueled by cash flow or credit pressures, customer unhappiness over poor service, and employee dissatisfaction.

It is normal for a company to encounter problems as it moves through various stages of growth. Issues arise as market demands disrupt communication and work flow among the company's internal departments, and exert pressure on scarce resources. If you find yourself encountering such difficulties, don't take it as a personal failure. Instead, view it as an opportunity to reset your company's direction and put plans in place for future success.

To start with, you need to take a respite from day-to-day activities and, together with trusted advisers from inside and outside the company, address these questions:

• As founder of a company, have you made the mental shift from focusing on technical expertise to evaluating situations from a general management perspective?
• Does your management team have the skills necessary to help the company grow?
• What are the most profitable growth opportunities available to your company?
• How much growth can your company sustain, given its current resource base?

The first question is of paramount importance. In the gift industry, most company founders come from a design or product development background. In fact, a new company's success is primarily dependent on the ability of the founder to deliver an exciting new product. However, as the company grows, the founder must transition from a strict product development focus to a general management perspective. If the founder doesn't want to make the transition, or finds his or her skills are lacking in this area, the company's future management structure must be organized in a manner that addresses the company's projected needs. Frank, honest dialogue among the management team is the only way to successfully negotiate this challenge.

Once the future role of the founder is clarified, an assessment of the company's management needs and current capability must be undertaken. Growth places stress on all areas of a company, and requires that key personnel display the ability to innovate in finding solutions to problems. You should evaluate your company's professional capability in marketing, product development, sales, operations, and finance. Assess current issues facing the company and its ability to generate successful solutions to those challenges. Move on to analyzing management's ability to develop and implement a business plan for the future. Determine whether future needs can best be filled by existing personnel, new permanent hires, or qualified outside assistance. Keep in mind the "fit" factor. Critical employees must know how to sense an organization's norms and modify their behavior in a manner that optimizes their contribution. Training can overcome a lack of skill, but attitudes are difficult to adjust. Complete your assessment by establishing a one-year staffing plan that includes key personnel changes and an implementation schedule.

A company must grow profitably in order to maintain vitality. The difficulty comes in determining which of many potential directions represents the best growth opportunity. In the gift industry, the size of the product line (the SKU count) is the most significant expense driver. Even though increasing the number of products you offer is a logical development direction, line size and profitability per product must be closely monitored to prevent cannibalization of sales among products. Evaluate the alternatives to increasing line size (e.g., improving sales and distribution) in order to maximize product profitability.

A word of warning about growth: As growth targets are being set, before your plans are launched, carefully estimate the cash required to support the new direction and ensure that the company either has or can obtain financial backing to support the planned growth. Growth doesn't typically generate cash; it consumes it. Conventional financing options available to manufacturers (based on using accounts receivable and inventory as loan collateral) can support a reasonable rate of growth if the company maintains profitability. A general rule of thumb — provided that the company's current profitability is acceptable and any new financial requirements are consistent with the existing business — is that an organization can finance a growth rate close to its historical rate of Return on Equity without dramatically altering its debt structure. Of course, rules of thumb always have exceptions. Before you finalize your growth plans, construct a financial model, and, if necessary, seek an outside financial review.

The process of thoughtfully addressing and resolving current business problems can turn a difficult situation into a positive exercise that sets the stage for successful future development. Take full advantage of the opportunity!