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 triggered when the company faces the first big cash flow problem after it has surpassed the survival stage. The problem usually comes after a major investment that does not result as expected, and it reveals two fundamental principles that the entrepreneur must embrace:

First Principle: The transition from small to medium size is a transition from a "hands-on" approach to delegation.

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

When the company starts, the entrepreneur wears many hats: marketing, operations, product, and so on. It is a "hands-on" approach. The reason the entrepreneur does everything is because the company is at a survival stage. There is no room for planning because the main focus is to keep the company afloat. At this stage, the commercial aspect of the company takes the whole energy of the entrepreneur, so delegation, medium - term planning and standardization are not in the inmediate sphere. In Finovalis, we have seen that what brings these topics to the interest of the entrepreneur is the MTP.

One of our clients decided to increase sales by opening a new store (to increase capacity) in a new location. This was the first major investment in its history, and it required a significant amount of capital. The MTP for this company came from the overbudgeting of the investment. The owner miscalculated the remodeling costs of the store, and it turned out to be 140% of the initial budget. This overinvestment negatively impacted the cash flow 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 to pay its bills each month, but more importantly, the situation forced the entrepreneur to take a closer look at the outlays and the processes. It turned 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 as a medium size company, but he/she will have a more comprehensive framework to face them.