At the end of last week, with another rainy weekend in prospect, I had the following exchange of emails with two of my sons, ages 25 and 26, regarding our scheduled landscaping work-weekend at our summer home in Maine:

Will: Given that the weather is looking fantastically bad with rain on both days, are we looking to make the trip and shake our fists at the sky? Or change tactics and live to fight another day?

Dad/Brad: Rain? What rain? Of course we’re on. [Terrible Weather Service Forecast follows.] Sounds like a perfect weekend to me. The dirt will be all soft and diggable. I’ll have beer and cold cuts available for your arrival around 9:30 p.m. Friday. Beef on the barbie on Saturday eve? Howe [sic] can we go wrong?

Chuck: Excellent! We’ll shoot to leave by 7. Everything you suggested – beer, beef, dirt – sounds right on. See you tonight!

Some personalities never change: the reader might guess that in Pop Warner football, Will was the quarterback and Chuck was the middle linebacker. I – no surprise – was the unofficial coach.

In the years since then, I have been the unofficial coach of scores of small companies. As I grubbed around in the good Maine dirt last weekend, it occurred to me yet again that there are many parallels between growing healthy plants and healthy companies.

To avoid the obvious analogies, let me simply mention current work with several clients to weed and cultivate their corporate landscapes:

The Weeds:

1. In our regular management meeting last week, the ops manager of a medical device manufacturer acknowledged that there was an 8x difference in productivity between two employees working on the same unit. Given the strong “measured pace” culture in the company, were we to establish the production rate of the faster employee as the standard, and hold the production team accountable, that employee would likely be ostracized by the group as a “rate-buster.” The root of the problem is the lack of production standards in the company.Weed out: Unproductive employees. Management will establish challenging standards and then teach the production team how to meet them, getting rid of those who ultimately fail to measure up.
2. A U.K.-based client with a Boston office provides international educational experiences to U.S. college students and invoices the home universities for tuition, room, and board. Final payment is due 30 days prior to enrollment, but numbers of customers (the universities) are delinquent for up to 90 days post-enrollment.A little digging revealed that the sales-oriented partners of the company are reluctant to antagonize their customers by holding them to terms, even though every well-run university in the U.S. requires payment in advance of registration.Weed out: Delinquent customers. “Dear Controller,” starts the letter that will be sent next week to more than 50 colleges and universities, describing a new policy to improve the irrigation flow to my client’s own “garden.”
3. A distribution company client has for years significantly volume-discounted its product prices to maintain its business with its largest customer (25% of its business), in turn benefiting from volume discounts from its supplier. Recent financial spadework, however, unearthed a gross margin (net revenue minus direct cost of goods) from this customer that is insufficient to offset the customer’s indirect costs.Such costs include six-day-a-week delivery, special packaging, extensive daily telephone time (sales and purchasing), plus billing, collections and payables costs.Weed out: Unprofitable customers. With the management team free to devote just a third of its freed-up time to more productive ends, the rest of the customer base will come to full bloom.

The Flowers:

4. A Florida-based technology client lost its Director of Sales (and sole salesman) in February after his six-month battle with cancer. Reluctant to replace him while there was still hope, the Company lost revenue momentum and will report an operating loss for the first half of 2006. As a result of the Company’s careful cultivation of both customers and suppliers over the years, however, the financial team has successfully managed the resulting short-term cash crunch.By offering accelerated payment discounts to its continuing customers and regularly informing its stretched vendors of its financial situation, the company has avoided lay-offs and has a full sales pipeline for the next six months.Cultivate: Every possible personal relationship in the finance and accounting area of both customers and vendors. The lowliest accounts payable clerk occasionally can make the difference in your receiving a check tomorrow, or next week, or later.
5. Together with the CEO of a pre-revenue start-up technology company, we have been involved in developing an integrated three-year financial projection – income statement, balance sheet, cash flow. This spreadsheet file incorporates the strategic and tactical assumptions that took root in management discussions.Changes in revenue or expense decisions in June ’06 ripple through to the cash position for December ’08 and validate the economic model and, potentially, the exit strategy.Cultivate: A long-term financial plan, with written assumptions, quarterly reprojections, and a commitment to make the bottom line happen.
6. A local developer/builder of medium-priced homes has been a client for the past two volatile years in the housing industry. He hedges his risks by obtaining long-term financing for land acquisition as well as by getting purchase commitments up front before his shovel goes in the ground.Equally important, his is a lean machine – four full-time employees generate high seven-figure annual revenues, as he out sources the bulk of the hands-on work.Cultivate: A periodic reassessment of all of your expenses, starting with personnel. If protecting the bottom line is the highest priority, you must continually seek ways of achieving your goals at less expense.

On Boys’ Weekend in Maine, weeding and cultivating resulted in our getting totally soaked and grubby on Saturday, as expected. But our efforts bore fruit: we survived to see the sun on Sunday, we completed our landscaping list, and I solved my clients’ issues with every weed that I pulled.

Alligator Bites

The best concise description of the process of growing a company costs $6.00 and is available through Harvard Business Online . More than twenty years ago, Neil Churchill and Virginia Lewis published the results of their recent research, identifying five distinct phases which characterized the development path of a great number of smaller companies. Published first by the Harvard Business Review in May-June 1983, “The Five Stages of Small Business Growth” remains a classic and has been one of the Review’s all-time best sellers.

For each stage – Existence, Survival, Success, Take-off, and Resource Maturity – the authors describe the key hurdles to be surmounted before the company can successfully transition to the next stage. In particular, they focus on Stage III, dividing this phase into III-Disengagement and III-Growth.

At III-D, they say [in part], “the company has attained true economic health, has sufficient size and product-market penetration to ensure economic success, and earns average or above-average profits… Organizationally, the company has grown large enough to, in many cases, require functional managers to take over certain duties performed by the owner. The managers should be competent but need not be of the highest caliber, since their upward potential is limited by the corporate goals.”

On the other hand, for III-Growth, “the owner consolidates the company and marshals resources for growth. The owner takes the cash and the established borrowing power of the company and risks it all in financing growth. Among the important tasks are to make sure the basic business stays profitable so that it will not outrun its source of cash and to develop managers to meet the needs of the growing business.”

After identifying the attributes of successful Stage IV and Stage V companies, Churchill and Lewis note that “the potential entrepreneur can see that starting a business requires an ability to do something very well (or a good marketable idea), high energy, and a favorable cash flow forecast (or a large sum of cash on hand). These are less important in Stage V, when well-developed people-management skills, good information systems, and budget controls take priority. Perhaps this is why some experienced people from large companies fail to make good as entrepreneurs or managers in small companies. They are used to delegating and are not good enough at doing.”

Draining the Swamp

When you’re up to your ears in old financial records, it can feel like a protective blanket – soft and warm and reassuring in case the IRS auditor ever comes calling. But quicksand, too, is soft and warm and reassuring, at least until it gets up to your ankles. If you’re beginning to feel the undertow, here’s the general guideline on records retention from The Tax and Business Alert:

Record TypeRetention Period
Copies of filed tax returns	Permanently
Tax & legal correspondence	Permanently
General ledger	Permanently
Annual financial statements	Permanently
Contracts & leases	Permanently
Real estate records	Permanently
Corporate minutes	Permanently
Bank statements & deposit slips	6 years *
Sales records & journals	6 years *
Other records relating to revenue	6 years *
Employee expense reports & travel & entertainment records	6 years *
Cancelled checks	3 years *
Paid vendor invoices	3 years *
Employee payroll records	3 years *
Inventory records	3 years **
Depreciation schedules	At least asset’s tax life plus 3 years
Other capital asset records	At least asset’s tax life plus 3 years
Other expense records	3 years *

 

* From the later of the tax return due date or filing date

** Longer if you use LIFO