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Jessica covers Australia's technology start-up scene, writing on breaking news and trends in entrepreneurialism, media and marketing. She was previously named Australia's best New IT Journalist for 2011.

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The speed wobbles

Published 21 March 2012 12:11, Updated 22 March 2012 05:04

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The chief executive of Mexican restaurant chain Mad Mex, Clovis Young, wants to double store numbers in 2012. The chain, established in 2007, had 15 outlets at the end of 2011. Three new stores will open in March, coincidentally the same month that the chain claims to have sold its 1 millionth burrito and Young expects to open the doors on 12 more outlets before the year is over.

BRW celebrates the rise of fast-growth businesses such as Mad Mex but we also know the fate that awaits those that grow at unsustainable rates. The group managing director of consultancy Vantage Performance, Michael Fingland, likens this scenario to a trolley with a wobbly wheel, rolling faster and faster down a hill. He says fast growth leads to collapse “far too often ... And most of them can be saved.”

The ambitious Young “absolutely” thinks about the possibility of growing too fast, too soon. However, he says that opening 10 to 15 stores each year is “very manageable”, thanks to procedures that were put in place early in Mad Mex’s history.

This yearly goal is also conservative compared with the amount of retail space Young says he could find each year – probably more like 20 to 25 sites. “That is [the amount] that we think we can manage and execute well,” Young says. “We sat down at store [number] three. We knew we wanted to and could be a 50 to 100 store chain, so we thought about ‘what do we need to do now at store three to ensure at 15 stores we don’t have the speed wobbles?’ ”

Young spent about $25,000 to build up a training platform and process, when it was decided that Mad Mex could be a large chain. Training up franchisees and their staff is a crucial step for Mad Mex to deliver a consistent product and experience across all its outlets. So, as well as being a restaurant chain, Young says he thinks of Mad Mex as a training organisation. He recently hired five certified trainers who all have experience building organisations.

One problem that often underlies a business not being able to handle its fast growth is if it has outgrown its staff, Fingland says. Young has tried to nip this in the bud by hiring people with quick-service restaurant experience.

Most recently he has hired an operations manager from England who previously was in operations for the 800-store PizzaExpress chain. He also has a new employee dealing with franchisee operations who ran corporate stores for another Australian franchise success, Oporto. Young has also put in place a chief financial officer, originally from South Africa, who has experience in food chains. As a result of this and further bolstering of head office, he has tripled the size of his finance team.

Mad Mex is growing rapidly, turning over $9.42 million in 2010-11, with average growth over three years of 136 per cent. It does seem that Young has the chain on fairly stable footing. However, Fingland’s experience suggests that many other fast-growing businesses are not as steady.

He says about one-third of new clients through the Vantage doors are victims of their own success who are looking for advice on how to turn their company’s performance around before it’s too late.

“[For example] they’ve been growing at 30 to 50 per cent over the previous one or two years and they actually outgrow their finance structures and get into cash flow crisis,” Fingland says. “Or they’ve also outgrown their people skill set in their business and their internal systems and controls.”

There are obvious signs for company founders to look out for that signal they’re growing too quickly. When it comes to cash flow, falling behind on superannuation or tax liabilities should act as warning beacons, he says.

Although the Australian Taxation Office can be accommodating of small businesses that need a payment plan, Fingland cautions against just blindly taking up the option. “Unfortunately, a lot of small businesses who get into a situation where they need to do a payment plan with the ATO just do the payment plan, then don’t look seriously at their business and at why it happened in the first place.”

The way a company uses its overdraft facility can also raise a flag, Fingland says. After starting at zero at the beginning of the month, payments to creditors will eat into the overdraft but the balance should come back to nought following customer payments. “The telltale sign that a business has outstripped its finance base is when the overdraft is effectively operating as a term loan,” he says.

Both of these scenarios are symptomatic of a business in cash flow crisis. “It happens very quickly,” Fingland says. “In a high-growth scenario it can happen in three months.”

Most founders are focused on sales, marketing and building the brand and relationships, “at the expense of the books”, he says. “The numbers side seems boring to them.” This attitude means that cash flow management is likely to be poor.

Jenny Pattison runs Darwin-based Pattison’s Heavy Machinery Maintenance with her husband David. The pair are trade minded, she says, and so often turn to consultants “in all possible areas”. The business had doubled in size over the past three years. After engaging Vantage Performance’s services, an important outcome for Pattison was deciding that a monthly cash flow “just doesn’t cut it” and moving to weekly cash flow management that forecasts out 13 weeks. “You should be able to see in advance if you’re going to have any problems,” she says.

Fingland says cash flow forecasts aren’t too difficult to set up. All it takes is a look through bank statements to first find all the costs that are debited regularly, such as wages and overheads. Creditor payments should then be spread out over monthly cycles.

“It needs to be at least four weeks [forward-looking],” he says. “Most SMEs, if they’ve got [a cash flow forecast], it will be one week out. That’s just a waste of time because you can never see what’s coming around the corner.”

Being realistic about how long debtors take to pay is important and he adds that “the trick with cash flows is to have the rigour to continue with it”.

“Usually by the time they’ve come to us, businesses are in cash flow crisis,” Fingland says. “The first stage is to understand the reasons why they’ve got there. With high-growth businesses you can be profitable but still run out of cash.” This often happens where the balance of debtors and stock runs too high. “The outstanding balance grows at a faster rate than your creditors and that’s why most of them get into strife. [Owners] take their eye off, particularly debt collection, and then all of a sudden that imbalance happens.”

Fingland says such a business may not need bigger debt facilities – just more focus on debt collection and stock control. Nonetheless, he stresses the importance of talking to creditors early on if cash flow is a problem.

“The first port of call is to right-size their working capital,” he says.

Once cash flow is stable, it is time to assess whether other parts of the business need changes, such as more capability in senior management. Fingland stresses the importance of forecasting, saying now is the time to put in processes “to tell you ahead of time if something is happening again”.

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