From Small to Medium: The turning point

A business is a personal journey that is unique; nevertheless, each business faces an initial transition that starts with what I like to call the “maturity turning point” (MTP). The MTP is usually the first big cash flow problem the company faces after it surpasses the survival stage. The turning point usually comes as a result of a major investment that does not result as expected, and it shows the entrepreneur areas of improvement. This situation reveals 2 principles that the entrepreneur needs to embrace going forward. The principle is

The transition from small to big is a transition from a hands-on approach to delegation, and

Delegation without standardization, processes, and continuous training does not work.

Creating a company is a hands-on approach, especially at the beginning. The entrepreneur has his “hands” in every aspect of the business: finance, operation, customer service, and so on. The guiding principle is survival. The “hands-on” approach means there is no delegation or internal processes because the survival stage leaves no room for planning. Concepts such as standardization, processes, and informational systems are distant and unknown. In Finovalis, we have seen that what brings these questions into the interest of the entrepreneur is the MTP.

One of our clients decided to increase sales by opening a new store (with more capacity) in a new location. This was the first major investment in its history, and it required an important amount of capital. The MTP for this company came from the overbudgeting of the investment. The owner miscalculated the adequation costs of the store, and it turned out to be 140% of the initial estimation. This overinvestment created a cash flow problem because it was financed through banks.

The immediate result was financial, but more importantly, it revealed a serious problem in the purchasing department. ¿Why is it that overspending in a project reveals a problem in an unrelated area? This is exactly what MTP reveals. When you have overall cash flow problems, it forces you to analyze in detail each area of the business. Our client was struggling each month to pay its bills, but more importantly, the situation forced the entrepreneur to take a closer look at the outlays. It turns out that there was no KPI for the purchasing department. When we started the advisory, we had to calculate the Inventory Processing Period from the beginning. The challenge was not to calculate the number but to recruit and train the people to update it periodically.

The ultimate role of the MTP is to teach the entrepreneur about the importance of delegation, and how delegation without standardization, processes, and continuous training does not work. The entrepreneur will face new challenges in the future, but he/she will have a more comprehensive framework to face them.