The publicity around the speed at which companies like Slack, Groupon, and Xiaomi have reached their $1 billion valuation is enough to leave any startup feeling inferior. However, it is important to remember that these companies are still in the minority. The majority of startups still fail within two years, and those that don’t will likely never reach unicorn status. Not that this is really any more reassuring, but it’s important to understand the scale of the challenge and what needs to be done.
One of the primary reasons startups fail is that when they hit the kind of rapid growth a company like Slack navigated so successful, they fail to scale up correctly. They are unprepared and the processes that once worked so smoothly begin to fail, supplier payments fall behind, banks want repaying, and it all goes to pot.
According to CFO Centre Chairman Colin Mills, such issues start to become a problem when a company hits around the £1 million sales revenue mark or a minimum of 10 employees. Finance leaders are a vital part of ensuring their company stays on track through this difficult period, and they need to develop a different set of skills and ways of working to their counterparts at companies with less aggressive growth if they are to be successful.
This requires a significant change in mindset. Traditionally, the CFO’s primary responsibility has been to manage risk. This has not necessarily changed entirely, but in a hyper-growth company they don’t just need to ensure that growth is sustainable, they also have to add a thicker layer of optimism to their pronouncements than may come naturally and look for opportunities to scale and identify when resources are needed quickly before the company outgrows its capacity.
We asked four finance leaders from some of the world’s biggest organizations how FP&A could best prepare their organization for a period of rapid growth.
Johnny D Patino, FP&A at Virgin Mobile Latin America
While Finance Leaders are intrinsic in creating the initial growth plan, their most important responsibility comes at moment of execution or inception of the company into the new country, this is when they will have to be the most cautious and most alert to market stability. At the onset of operations, they need to ensure their finance team is closely tracking all the different KPIs and macroeconomic variables that were set during the prior arduous months of planning.
It’s also critical that Finance Leaders share all their knowledge of the local business environment with their team so that the financial analysis produced is richer and more in line to accurately describe market forces that are impacting the company’s performance.
As a last resort, there should be an exit plan in place to stop any irreversibly financial distress that drags down the company’s other subsidiaries. Consequently, it’s important that Finance Leaders calculate the worst-case scenario, point of no returns and have the ejection cords ready to mitigate further unrecoverable losses. For a global company having an exit strategy is not giving up, it just represents losing a battle instead of the war.
Matt Armstrong, Director of FP&A at Expedia
Ensuring that enough investment in a scalable infrastructure can support the necessary growth – i.e. IT for a set of B2C systems, sales/account managers in the right regions for B2B business development, and overindexing on shared services. Having the appropriate infrastructure allows for the company to manage this growth without being cogs in the wheel when orders are bursting the company at the seams!
Michael Kaplan, Former VP of Finance at Activision
In terms of helping to drive this growth, we finance leaders need to focus on ways to determine efficient allocation of capital and resources, and not just focus on cost reductions. We should also ask questions that push the business leaders to not just think incrementally, but rather think of creating new products or bringing the product to a new market. One other way to help to drive growth is to focus on flawless execution of a strategy.
Cristina Tate, Senior Finance Director at Hewlett Packard Enterprise
Finance leaders can provide analysis to pinpoint where the growth opportunities are and encourage focus. Whether it’s historical trend analysis, predictive analytics or market assessment, Finance can provide fact-based data to guide business leaders. We can also provide a voice of reason to make sure cost structures are sensible and flexible, so that we can respond quickly if there is a change, either external or internal. It’s a dynamic environment, so agility is critical.