Critical mass

For the early stage enterprise

The most important question facing the investor in a small enterprise is whether it is fit to significantly expand. In order to do so, it must have either reached or is clearly able to reach a stable state (which some term the business platform) where the majority of early stage problems are resolved (or nearly resolved).

Many enterprises fail to achieve stability for a wide number of reasons, through personal choice, market circumstance, resource failure, or general lack of understanding of business demands.

Ibis has developed two model plans – Castellan for the established business and Fungistat for the early stage enterprise to illustrate the integration of the various components. These plans are supported by checklists for plan review to ensure that they are as complete as possible, and to ensure the best chance of success.

Each planning template attempts to answer the three basic planning questions:

Where are we?

Where do we want to be (and when)?

How are we going to get there cost effectively?

 

The early stage plan checklist applied to Fungistat

Element

Importance

Evidence in plan?

Accounting principles

Conservative accounting principles are vital for ensuring the closest adherence to a cash based measurement of company performance

GAAP rules followed

Action plan

Clear understanding of required actions and timelines for progress

Each KC reports

Action standards

Important that enterprise agrees on clear targets for performance in key operational areas

Separate topic in plan

AER

Important that early stage enterprise controls administration costs

KPI

Appraisal

Regular reviews of employee performance are especially essential in early stage enterprises to develop common goals and objectives

Organisational review

Arbitration

Legal costs can ruin an early stage company while arbitration provides lower cost and speedier resolution

In plan

Assumptions

All enterprises need to list their key assumptions and ensure that they are realistic

Separate topic in plan

Authority/responsibility

Decentralisation of authority enables the enterprise to grow more rapidly, respond better and provides a key motivational and retention tool

KC structure

Average sale

As enterprises develop their average sale value should increase; if it does not it is a worrying sign

KPI in marketing KC

Balanced scorecard

The focus on key short, medium and long term drivers is essential to guide the enterprise

Separate topic in plan

Barriers to entry

High barriers to entry will affect enterprise returns

In strategy

Benchmarks

Essential to compare enterprise with peer group performance

Linked to KPI in KC reporting

Bonus systems

Need to be broadly based, focused on balanced scorecard, not cash, deferred for senior staff

Organisational review

Bottom up planning

Basing a plan on specific customers, products, regions, suppliers and projects creates a far more stable and reliable future

Key products, projects, regions, customers, suppliers separate topics in plan

Branding

Long term branding adds value, competitive moat

In plan

BEV

Break even values should reduce as percentage of sales as enterprise grows

BEV trends in plan

Budgeting

Minimum of control over fixed costs, project finance

KC responsibility in plan, KPI budget ratio for each KC

Business model

Overview essential to understanding of enterprise strategy and whether  it has effectively analysed external and internal environment

Separate topic in plan

Business strategy

Clear strategic focus essential – tools include SWOT/TOWS, P.I.M.S, value chain, BCG

Separate topic in plan

Capacity utilization

Essential that early stage enterprise does not push limits of production with consequent quality and delivery failure

KPI

CFROI

High rates of cash generation on investment is a clear sign of enterprise health

KPI

Capex

Essential that the enterprise continues to invest in improving productivity

KPI

Certification

Regulatory clearance essential

Separate topic in plan

Clustering

Research suggests that clustering enhances success – better suppliers, employees, finance providers

Location in science park with other biotech companies

Code of conduct

Expectations drive outcomes, with code of conduct essential for growing enterprise

In plan

Communication

Established external and internal communication

In plan

Competitive advantage

The creation of competitive advantage is an essential step for critical mass

Separate topic in plan

Competitive moat

Long term development requires the ability to protect competitive advantage

Discussed in competitive advantage in plan

Competitive reaction

How existing competitors will react to new competition affects long term profitability, period of grace

Discussed in competitive advantage

Complaints

Well run complaints system builds customer loyalty and repeat purchase

Each KC lists complaints and management

Contingency planning

Control through reaction to events vital for stability

Each KC, separate topic with major items

Corporate governance

Research shows a clear link between good corporate governance and higher rates of survival/return

Separate topic in plan

Core competence

Enterprise must be able to deal with demands of market to survive and grow

Key employee profile

Cost management

Managing costs improves returns and stability

KC responsibility

Costing methodology

Vital that early stage enterprise properly costs products and services, cost plus, overhead recovery, activity based

In plan

Creativity

Problem solving techniques vital for early stage companies

KC reporting

Credit management

Poor credit management can destroy early stage companies

In plan

Critical success factors

Identifying CSF important for future growth

Separate topic in plan

Currency matching

Vital that costs and sales are not mis-matched

KPI

Customer churn

Levels of repeat purchase vital for long term expansion and stability

KPI

Customer satisfaction

Crucial to any enterprise – repeat purchase is essential

Part of balanced scorecard

Customer spread ratio

Reliance on a limited range of customers creates potential instability

KPI

Decision making

Formal methods of decision making essential – analysis, rule of eight, approval

In plan

DER

Debt creates potential instability – rule of thumb 40% of total funding maximum

KPI

Delivery cycle

Ability of enterprise to deliver on time and to specification essential for retaining customers and achieving higher volumes

In plan

Design for operational efficiency

Formal design integration into enterprise organisation produces significant improvements in productivity, competitive advantage, cost control

Each KC reports

Diffusion analysis

Identifying customers acceptance of new products/services speeds market penetration

In plan

Disciplinary code and grievance procedure

Legal requirement, and vital for smooth operation of growing enterprise

In plan

Distribution channels

Reliance on intermediaries potential strength or weakness

In plan

Diversity

A diverse team improves decision making and enhances retention

In plan

E- enablement

Research shows that high rates of e-enablement lead to higher growth

KPI

Elevator pitch

Management summary clarifies key direction and enterprise advantage

Separate topic in plan

Employee satisfaction

Early stage enterprises improve productivity and reduce turnover through understanding policy impacts on staff

KPI

EG/MG

Growing faster than the market is an indication of stability

KPI

Entrants

Potential new entrants can reduce long term profitability

In competitive advantage

Exit plan

Explaining how the enterprise will deliver value in the long term

Separate topic in plan

Experts

Formal appointment of external support staff improves stability

Separate topic in plan

Financial headroom

Potential access to additional funding essential in early stage enterprises

In plan

Financials

Cash flow, profit and loss, balance sheet actuals and forecast, graphics

Separate topic in plan

Focus

Concentration on excellence in one area is important in early stage development

Separate topic in plan

Forecast case

Vital that early stage enterprises use either conservative or ultra-conservative option (ABC)

Separate topic in plan

Forecast error

Forecasting variation against actual should decline with business maturity

KPI

Forecast grid

Understanding what forecast methods work should improve with business maturity

Separate topic in plan

Fraud

High impact on survival in early stage enterprises

Management in plan

FCF

FCF central to long term stability. If cash is king, FCF is emperor

Part of balanced scorecard

Funding plan

Long term funding stabilizes, reduces costs

Separate topic in plan

Golden circle

A combination of market penetration, market development and product development improves stability and growth prospects

In plan

Grants

Early stage enterprises can gain advantage through research into available grants

In plan

Gross profit

Survival period links gross profit with time, high margins show competitive advantage

Part of balanced scorecard

Health and safety

Legal requirement for established policy

In plan

Industrial relations

Effective industrial relations established early reduces labour turnover, improves productivity, enhances information flow

In plan

Insurance

Early stage enterprises particularly sensitive to disruption – customers, premises, employees

In plan

Interest cover

High rates of interest cover essential for early stage enterprise to ensure stability

KPI

Internal competition

Establishing intrapreneurial culture essential – access to project finance, employee suggestion scheme

In plan

Investment appraisal

Essential that key investments analysed with hurdle rate, IRR

In plan

Joint planning

Partnering introduces stability and lowers costs

In plan

Key costs

Controlling key costs central to business stability

Separate topic in plan

Key customers

Pareto’s Law focus on key customers and how to build relationships

Separate topic in plan

Key employees

Development of employees essential for retention and skills development

Separate topic in plan

KFR

As the enterprise expands, it is important that all staff are clear about goals

KPI

Key products

Pareto’s Law focus on key products and how to build and maintain competitive advantage

Separate topic in plan

Key projects

Success for key projects – time, budget, specification crucial for long term development

Separate topic in plan

Key regions

Pareto’s Law focuses on key regions and how to build and maintain competitive advantage

Separate topic in plan

Key suppliers

Partnering with key suppliers crucial for product development, cost management

Separate topic in plan

Key performance indicators

Understanding KPI’s will provide valuable individual targets in individual KC

In KC with benchmark

Knowledge based structure

Building and maintaining skills and allocating authority and responsibility best matched by KC structure – Admin, P&L, IT, Finance, Personnel, M&S, NPD

In plan

Learning curve

Increasing the learning curve can have major impact on profitability, especially in early stage enterprises

In plan

Legacy

Previous decisions must be reviewed to identify future potential impact

KC analysis

Legal

Company structure, shareholder agreements, contracts, IPR, planning, NDA, tax all vital for stability and growth

Separate topic in plan

Maintenance

Maintaining effective production or service delivery essential for high levels of customer satisfaction

In plan

Management

Essential that enterprise has experienced, skilled management in key roles

Separate topic in plan

Market drivers

Enterprise needs to fit with market drivers PESTLEG

Separate topic in plan

Market dynamics

Vital that conservative estimates applied -TAM, PAM, RAM, market structure, market growth, segmentation

In plan

Market research

External validation of key elements in the plan provides stability to concept(s)

Appendix of plan

Me too

Early stage businesses must concentrate on delivering products/services with clear differences to competition

KPI

MIS

MIS must work for enterprise on bottom up basis (SATURNS)

MIS in KC analysis

Monitoring

Enterprise must monitor effectively to retain stability – weekly, monthly, quarterly plan update, rule of eight

In plan

Motivation

Effective motivation policies ensure long term commitment and higher rates of productivity – basic salary, bonus, fringe benefits

Separate topic in plan

Networking

Early stage enterprises require support from trade associations, chambers of commerce, enterprise groups

In plan

New product/service program

Essential that enterprise looks to continually modify and improve product/ service offering – “future proofing”

Separate KC in plan, balanced scorecard target

Operational strategy

Important that policy in operational areas developed – Admin, NPD, Personnel, M/S, P&L, Finance, IT

Each KC reports

Operational targets

Combination of KPI, benchmarks and targets drives incremental operational improvement

In KC

Organic concentration

Sticking to the knitting is essential for early stage enterprises

In plan

Payback

Payback period is important element of stability

In exit plan

Planning horizon

Enterprise needs to define short, medium and long term

In plan

Prestige projects

Prestige projects waste money which could be more usefully invested in productive assets

None identified in plan

Pricing

Early stage pricing decisions have vital impact on growth, profitability, product acceptance, price/promotion optimisation

Separate topic in plan

Pricing power

Leading pricing decisions in market segment demonstrate long term viability

In plan

Product positioning

Early stage decisions have long term implications

In plan

Product spread ratio

Reliance on a limited product range creates potential instability

KPI

Product viability analysis

Will the product or service continue to be a success? Product viability analysis is a valuable forward looking tool

In key product topic

Productivity

As the enterprise develops, productivity should rise as more effective working methods are developed

KPI

Project success rate

The ability to plan and execute projects to time, budget and specification is essential – those that cannot will fail

KPI in all KC reports

Promotion

Structured promotion plan important for achieving trial and penetration for early stage enterprise

In plan

Quality circles

Regular review of operational performance improves learning curve, product development, cost management

In all KC reports

Quality control

Essential that formal QC system exists, including Deming rules, kaizen

Each KC reports, ISO 9000/ 14000, KPI

Random inspection

Management by walking about identifies strengths, weaknesses, achieves motivation

In plan

Reality check

Aggressive plans must be checked for realism

In plan

Record keeping

Research identifies this as a major failure point for early stage enterprises

In plan, administration KC

Recruitment

Formal recruitment programmes aid productivity, diversity, speed skills acquisition

In plan

Reference material

Enterprises must keep up to date with overall market changes and specific operational developments

KC report

Reference sale

Lowest cost route to achieving early stage development

In plan

R&D spend

Essential that enterprise invests in future proofing

KPI

Reverse engineering

Identifying exactly how competitors achieve product/service benefit essential for early stage competitive advantage

In plan

Risk

Understanding risk is essential for stable enterprises

Separate topic in plan

SER

High sales costs are damaging

KPI

Scaleability

The problem of increased size causing instability must be understood

Separate topic in plan

Security

Problems of physical, intellectual, corporate security can destroy enterprises

KC report

Sensitivity analysis

Impact of higher costs, lower prices, slower sales achievement vital to define financial headroom

Separate topic in plan

Shared values

Agreement on common good drives enterprise forward, conflict holds it back

KPI absenteeism, labour turnover, disputes, employee satisfaction

Shareholder return

Defines how shareholders will be rewarded – dividends, share buybacks, capital return

In exit plan

Skills

Higher skills lead to greater productivity, returns, ability to deal with higher value  chain products/ services, higher growth

Component of balanced scorecard

Software

Productivity driver through operational requirements

In KC analysis

Span of control

Important to ensure that adequate supervision exists, but that enterprise is not over managed

KPI

Staff turnover

High rates of staff turnover diminish stability, training effectiveness

KPI

Stagegate

Essential for stability and growth that major expenditures are part of a project and controlled through intermediate targets

In plan

Stakeholder relations

Important for early stage enterprise to build relations with stakeholders

In plan as part of KC

Standard operating procedures

Formalise procedures, transfer expertise, aid training

In KC analysis

Standardisation

Standardisation improves cost management, balanced against vulnerability

In plan

STR

High stock levels increase costs, decrease cash flow, profitability

KPI

Style

Three standard classifications – authoritarian, bureaucratic, democratic with democratic best

In plan

Step investment requirements

Limits to growth require assessment of expansion investment requirements

Separate topic in plan

Substitutes

Price pressure caused by substitutes important influence on overall profitability

In competitive advantage

Successes, failures, lessons learnt

Enterprises can only improve through building on success and learning from failure

Separate topic in plan

Succession planning

Seamless transition of staff into greater positions of responsibility ensures long term stability

In key employees

Supplier spread ratio

Reliance on a single supplier creates potential instability

KPI

Tax management

Major cost centre, effective management improves profitability, cash

Separate topic in plan

Team building

Teams improve stability, decision making

KC structure in plan

Temporary staff ratio

High levels of temporary staff impact skills development, team building, innovation

KPI

Testing

Early stage enterprises need to continually test to ensure best market fit

In competitive advantage

Training

Formal training program – induction, maintenance, development based around formal qualifications drive business development, personnel retention

Each KC reports

Transition plan

Clear ideas about building more business with key products, customers, regions

In plan

Trial

Essential for early stage that trial format is clearly established

In plan

USP

Differentiation for early stage enterprise critical – product benefit, relative advantage, divisibility, communicability

Separate topic in plan

Valuation

Provides range of valuations of business – EPS, DCF, NPV, IRR, PS, PE, Assets, Break up

In exit plan

Virtual office

Creating intranet/extranet via hybrid cloud methodology encourages scaleability and staff productivity/mobility

In plan

Vision statement

Quantifiable long term targets provide clear direction

Separate topic in plan

Wages ratio

Evenly spread returns improve motivation, reduce labour turnover

KPI

Waste management

Defines how gas, solids, liquids are managed, recycling, carbon footprint

Separate topic in plan

WCR

Low WCR ensures internal financing of growth more achievable

KPI

Working conditions

Motivation, productivity, lower absenteeism, higher employee satisfaction

In plan

Z score

Provides forward warning of solvency problems

KPI

 

Obviously, not all topics are equally important. Ibis considers that an initial filter for plans should include:

Action plan

Assumptions

Balanced scorecard

Benchmarks

Business strategy

Capacity utilization

Cash flow return on investment

Certification

Competitive advantage

Consumer satisfaction

Customer spread ratio

Contingency plan

Corporate governance

Costing methodology

DER

E- enablement

Exit plan

Financials

Forecast case

Gross profit

Interest cover

Key costs

Key customers

Key projects

Legal

Management

Market drivers

Market research

Me too

Monitoring

New product/service development

Operational strategy

Pricing power

Product spread ratio

Reality check

Record keeping

Risk

Skills

Successes, failures, lessons learnt

Training

Transition plan

USP

Wages ratio