As the economy turns the corner, the era of enforced fiscal prudence may be coming to an end.
But, as many business owners prepare to put the champagne on ice, a critical question remains: have UK businesses forgotten how to grow?
John Rosling, CEO, Shirlaws (UK) Ltd, outlines how if you want to stay small, focus on profit. But if you want to grow, focus on asset.
The global economy is at the cusp of a significant, and potentially sustained, upturn. But, after years of fiscal restraint, efficiency drives and seemingly endless restructuring, are UK businesses ready to make the journey from austerity to prosperity? The jury is out.
As the recovery begins, it’s a sobering thought that, reconditioned by a common batten-down-the-hatches approach to recession, very few companies are likely to be engineered for growth now that the shackles are being released. And the repercussions could be fatal.
As the economic clouds lift, the danger is no longer ‘boom and bust’ – it’s boom and rust. The most proactive organisations will undoubtedly grow, but the more pedestrian businesses risk stumbling into terminal decline. There is the real possibility that business owner/managers remain stuck in a risk-averse mindset and preside over an organisational paralysis that not only prevents growth, but also allows competitors to seize market share while their own operations stagnate. Boom. And rust.
After five years of surviving in a drag economy, it’s an understandable response. But it leads to an uncomfortable truth: many UK businesses have forgotten how to grow.
Profits of doom
So how do businesses harness the rising economy? As the stereotypical ‘green shoots’ begin to take root and mature, what can businesses be doing – right now – to reinvigorate their operations and create a platform for growth?
The answer will come from looking not at what companies should be doing, but rather what they shouldn’t. And experience of how businesses have traditionally responded post-recession suggests that, in all likelihood, a high percentage of companies will currently be guilty of doing the very thing they should most avoid: they’ll be focusing solely on profit.
The alternative approach will no doubt send chills down the spines of accountants the world over. But it works. It’s a contentious concept that, at face value, may appear to defy common business logic, but the best advice for aspirational business owners seeking growth through the upturn is simple: don’t just focus on profit!
This startling suggestion is far from lunacy. Let me explain.
There are tried-and-tested ways to keep your business small and stressful – and the most common is to obsess about profit as the markets recover and hold on too tightly to the P&L. This approach will keep you on the operational hamster wheel of your business and prevent you from creating the headspace to innovate and grow. You may well stay profitable, but you’ll also stay small. And all the while, the more proactive competitors around you will be growing. The focus on profit is a false economy.
Layers of valuation
So where should you be focusing? In the longer-term, the most successful businesses will facilitate a fundamental shift from a focus on profit to a focus on ‘multiple’. They’ll look at the long-term value of their business and switch attention from the P&L to the balance sheet. And crucially, they’ll shift their focus from income to assets. After all, income follows assets.
At this point, it’s not uncommon for people’s eyes to glaze over. Everyone knows about assets, don’t they? Perhaps not. The standard definition of ‘assets’ is well understood – but it’s also incredibly myopic; a broader and more sophisticated view exists. There are traditional ‘balance sheet’ assets, and there are intangible – off-balance sheet – assets. And the key to long-term growth – and driving the value and multiple in a business – is to focus on the intangibles.
Intangible assets generally boil down to the culture, talent and systems within an organisation. They’re the people and processes that drive the equity value in your business, and that combine to form your Intellectual Property (IP). They’re the rocket fuel in your business. But they can be very hard to find.
For the business owner, the challenge is to structure your business culturally and organisationally so that it drives value, grows sustainable revenue streams and supports your long-term personal ambitions. Creating, and subsequently building upon, the right cultural platform to empower staff to deliver these common objectives – leaving senior management to climb off the hamster wheel and plan for tomorrow – is critical. So how do you do this?
First of all, you must understand a specific hierarchy of intangible assets and develop them systematically, fully and in the right order. Success depends upon following a formulaic approach that looks at seven distinct Layers of Valuation – each of which is proven to increase the worth of a business by a particular multiple. These layers begin with establishing the optimal organisational culture and aligning staff around it. It then moves towards empowering employees to innovate, to leverage new ideas and extend the business into new markets or across different channels. In other words, create a platform for growth.
The economic upturn should present a clear catalyst for growth – but business owners must not allow their desire for short-term profit to dictate a caution for long-term planning and investment. Now is not the time for ‘logical’ product innovation and extension based on an understanding of today’s marketplace: baby steps are not enough and they will only keep you small. Today’s green shoots represent the teenage years – and to exploit them, businesses need to break out of the recessionary period with bold innovations to capture whole new markets and appetites.
To progress, owners should consider pursuing an asset-based strategy. The challenge is to understand the rocket-juice in your business: the core ‘intellectual property’ that powers your current product and channel. This will not be as obvious as you might think, but once you truly identify it, you’ll be well-placed to innovate into radical new product areas and channels that are both far more lucrative and far less competitive. And therein lies growth, value and scale – rather than the sustained stresses of remaining small.
But developing an asset-based strategy to power your business can’t be done alone. The most successful companies at this point in the economic cycle will always be outwardly-focused – and they will look for partners that can help stretch and stimulate their thinking. Eric Schmidt, Chairman and CEO of Google, once famously said that the best piece of advice he ever received was to “get a business coach.” It didn’t harm him. Business coaching can provide an independent perspective on how companies can engineer new services and invigorate their core intangible assets to drive value, increase their multiple and stimulate sustainable growth. But the most effective business coaches will have first-hand experience of running private businesses from the very top, and proven tools, formulae and methodologies that can help transform organisational performance.
In reality, there is a formula for everything. There are indeed tried-and-tested ways to keep your business small and stressful – the most common being an obsessive focus on profit. But there are also innovative ways to engineer it for growth. The best is to concentrate on intangible assets, and to work with a partner that offers a clear formula to help you revitalise your company and create new platforms for growth.
After years of austerity, UK businesses may well have forgotten how to grow. But they need to get their memory back – and quick.