Question: Despite significant efforts, we are obtaining some improvements in sales, but cannot generate the correlated Positive Cash Flow?
Answer: There is a high probability that this is due to what we refer to the Costs per Transaction Barrier (“CPTB”). As companies grow, they may achieve two major levels where the company is no longer generating the normal correlated EBIDTA or Cash Flow from the Sales transactions.
For different industries, these levels of CPTB are at different milestones. Generally, they exist at the $10 - $12 million barrier and the $25 - $30 million barrier. In summary, what happens is each transaction within an organization requires a certain amount of cash. This amount of transactional costs is absorbed by revenue, efficiencies, optimal financing, and processes. In other words, the administration surrounding a second deal is cheaper on average than the first deal. You have economies of scale, efficiencies, processes in place and knowledge of the results. However, at the a fore-mentioned CPTB, the expected marginal cash from each transaction is no longer being generated. This happens to every single business entity. Why?
The organization can no longer absorb the number of transactions, or the complexity associated with the growth of the company. The “fixed costs” are no longer fixed – in a short term. The key factor being a different set of skills are required for the number of complicated transactions.The table below illustrates a typical scenario.
Surprisingly, we noticed that distribution companies and service firms have a much lower CPTB than manufacturing entities.
Given the above scenarios, the problems are:
- Albeit the growth is anticipated and expected – the additional support is not strategic or proactive.
- Number #1 problem is that senior management resist the change. Generally, the senior managers are the owners and leaders within the organization and have done virtually each and every phase of every process. The change in culture and change in processes is not always accepted. After all they created and institutionalized the present set of processes and teams. And in some defense of this senior management, their processes and team got them to the CPTB mark - so why change?
- Support the next level of business (greater than CPTB) requires outside financing capitalist, banks, new partners, and creative equity / debt structures. In some cases, different ownership with different objectives. The bank and investors definitely have a different goal than the owner of this business.
- Change in corporate culture . You may not get to know all your clients on the same basis as you did when you had 15 clients versus 45 clients. Just because a culture or set of processes are GREAT for an $8,000,000 company, this culture and / or processes may not work for a $24,000,000 entity.
- Most small businesses try to use the same team that was able to accommodate a handful of transaction to the next level – the skills are different. You reach a point where professional managers are required.