Wake-up call for unrealistic growth plans

Off target: There is much to learn from analysing why companies fail to meet goals iStock

At the beginning of the year, the directors of consumer electronics online retailer Eljo said that they expected their 2011-12 revenue would be 150 per cent higher than the $2.7 million turned over in 2010-11. Now that the financial year has finished, director Jonathan Green reports that revenue for the almost four-year-old company only grew at about half that rate, about 80 per cent.

Given the benefit of hindsight, he says the target was too high and puts the miss down to being “relatively young and inexperienced” – he and business partner Elliot Ramler are in their early 20s.

But older proprietors also pumped up their growth expectations. Of this year’s BRW Fast Starters companies, the fastest growing start-ups that have been operating for four years or less, 21 expected to grow at 100 per cent or more, year on year. But few got there.

Now that’s not to say they were failures. Far from it. In the case of Eljo, although the electronics marketplace didn’t reach its 150 per cent target, its growth of about 80 per cent looms large in an economy that is breathing a sigh of relief at annual gross domestic product growth of 3.6 per cent in the March quarter. (Moreover Eljo is a retailer. That sector cheered to the heavens recently when it was revealed that retail sales rose 1 per cent between May and June).

But rather than lauding the astronomical growth achieved by a few, there’s just as much to be learned from identifying why businesses miss their targets and looking at how they tweak their strategy for the next financial year.

Website marketplace Flippa turned over $3.2 million in 2011-12. That was growth of 60 per cent on the 2010-11 figure of $2 million but short of the target of 100 per cent, says general manager Dave Slutzkin. Two main factors caused this slower rate of growth, he says: lower overall market volume and a lack of sufficient internal resources to implement new revenue generating ideas. An important difference is to know when a revenue-slowing factor is in your control or out of it, Slutzkin says.

Entrepreneurs should be aware of the effect of broad economic conditions but not get caught up in trying to anticipate them. “We’re not macro-economic forecasters, so we can’t predict what can happen,” he says. “I don’t even know if macro-economic forecasters can.”

A slowing in overall volume is consistent with a depressed US economy, the source of most of Flippa’s revenue. Although this hurts revenue, Slutzkin says the parameter that keeps him happy is that Flippa still has a dominant market share. “[By looking at] sales as a fraction of the market, it does give us some way of factoring out the market conditions. If we’re growing slowly and still number one . . . then at least that gives us something to fall back on. It’s a good barometer of what our performance is.”

Slutzkin is less laid back about the second slowing factor, which is “well and truly our own problem”, he says.

“Our lack of implementation capacity has only really become evident in the last few months, though it’s been bubbling away for a while and it’s something we’re now working hard to address.”

There are related markets that Slutzkin wants to open the Flippa community to. He laments that “we still don’t have an iPhone app and that’s something that everyone in this day and age needs”.

But instead of these ideas, resources have been dedicated to developing a tool for website sellers to value products. To use the tool, sellers need to input an email address. The Flippa team can then approach them with more detailed valuation information. “From our point of view, it will be good for lead generation, because we can find people when they’re interested in selling before they’re about to sell,” Slutzkin says.

“It’s a good opportunity for us . . . because it increases the size of our sales pipeline and the sophistication of our sales funnel.”

Despite not reaching his 100 per cent “stretch target” in 2011-12, Slutzkin still wants to hit 100 per cent this financial year. He plans to hire four more staff in the next two months and says the business has probably been understaffed.

“That was a mistake on my part, I didn’t identify early enough that we were so short on capacity,” he says.

“We’ve restructured the company, in the last month or so to give me a bit more time to focus on strategic issues. We’ve taken a few of the operational things off my plate.”

Sydney-based technology and accounting recruiter SustainAbility had growth last year of 40 per cent, down on its target of 100 per cent. Director Martin O’Donnell says that although the firm had “doubled in size the previous two years” a similar target for the third year in a row may have been “a little over exuberant and ambitious”. “Instead of exponential growth . . . it moved to a more straight line growth,” he says.

Nonetheless, O’Donnell stands by setting big targets for the 12-person firm.

“If you miss soft targets you’ll be more disappointed,” he says. “We stretch each of the consultants individually. Market conditions meant that unfortunately the guys didn’t operate at full capacity. There just wasn’t the demand in the market, but they all hit good numbers.”

The business adapted to slower market conditions by freezing its own recruitment. “In more buoyant times we would have been more aggressive in hiring,” O’Donnell says.

For restaurant chain Mad Mex, the obstacle was securing real estate – a common refrain among franchisors. The group’s revenue grew to just over $20 million, from $9.4 million, which was growth of 117 per cent, just shy of the 136 per cent chief executive Clovis Young expected.

Same store sales grew 19 per cent, which Young says is “not bad in the economy”. The slight miss was due to lessor delays, he says.

But Young is realistic. “You can’t force good real estate decisions,” he says.

Mad Mex had planned to open 15 stores in 2011-12 but three of those have been delayed until late 2012, adding to eight already planned, which means more work for the second half of the year. To prepare for this, Young has overhauled franchisee and employee training, bolstered his executive ranks and hired more store level trainers.

“We took the lull in the first half of the year to build the strongest possible team for what is definitely going to be a very challenging four months,” he says.

Young cautions other start-up proprietors from focusing too narrowly on revenue growth. “We don’t start with a revenue target and work backwards,” he says. “We have a strategic plan and revenue is what that strategic plan yields. It’s just a byproduct of trying to manage our business. If strategically it made sense to go slower then we wouldn’t be concerned about revenue growth.

“Higher topline growth and deteriorating margins would be much worse. It’s important not to get caught up in one number.”

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