Why Growth Is What Kills Profitable Businesses – Construction Business Coach in Edmonton

Record revenue. The owner working harder than they have in years. And the bank balance going the wrong way every single month. Profitable on paper, no cash in the account.

Most business advice rests on the assumption that if you can just sell more, everything else sorts itself out. In this conversation with Trevor, Bruce Baker of The Business Builders by Workplaces argues that assumption has quietly put a lot of good companies out of business, and explains where a growing company actually breaks.

Why a growing business runs out of cash

Profit and cash are not the same thing

Trevor: You said something interesting to me. The companies you see in the worst trouble are the ones growing. Why does a growing business run out of cash?

Bruce: It is strange, because you hear growth, you hear profitability, you do not hear problems. One of the big things I see is that owners and founders treat profit and cash as the same thing. If I tell you we are profitable, the first thing you picture is the cash cushion getting bigger. It is quite the opposite.

When businesses grow they do not necessarily become profitable. Volume increases. But most of the time, in businesses that consider themselves growing, at least in revenue terms, profitability becomes less and less. So they look at their top line, because that is the scoreboard. We have not had this revenue for years. It is the first time we have hit three million, for example. Then they go back to the bank account and cash is dwindling. We are growing in spite of cash flow. We are not profitable, but our revenue is going up. That is the conundrum.

What it looks like from inside the business

A construction company at seven million, and no payroll next week

Bruce: One construction company I work with is a good example. About five or six years now. It started at around $750,000 a year, a small company, and today it is almost a $7 million company. They went through a growth spurt roughly two years ago and exactly this happened. We have landed some of the largest commercial jobs we have ever landed. We are no longer eight employees, we are fifteen or sixteen. We are growing. And next week’s payroll is due, and when I look at my bank account I do not have the thirty five or forty thousand dollars for it. I have never had that problem before.

The line that matters is this one. I never used to have this problem before I started growing. Now that I am growing it feels like I am being punished. On one hand I am excited about landing the largest project we have ever had, and on the other I cannot afford payroll next week, and the utility bill is landing at the same time. So the owner concludes they should downsize. They believe they have been punished for taking the business to the next level.

Where a business actually breaks

Stages of growth, and why the transitions do the damage

Trevor: You have said this does not happen randomly, that there are predictable points. Walk us through that.

Bruce: This runs contrary to the traditional way of thinking, which is that people measure the size of a business by revenue. That is an axiom, and it is false. It leads people down the wrong path. We determine the size of a business by the number of people. Anywhere from one to ten employees is a stage one business on the growth curve. Eleven to nineteen is stage two.

The stage itself is hard, because you have to grow. But the danger, the real risk, comes when you transition from one stage to the next. Here is the good news. At every stage of growth there are predictable areas of failure. It is like not knowing what is round the corner. If I gave you a mirror to see round it, how would that change things? Most profitable growing businesses hit rock bottom precisely because there is a predictable failure point at each stage. If you know what those points are, you can plan and respond, and that predictability is what stops you getting tanked as a result of working harder and growing.

The stages of growth framework is the work of The ReWild Group, based on the original research of James Fischer. Bruce applies it as a Certified Organizational ReWilding Adviser (CORA).

The first two things to break

Cash you generate but never track, and employees you never set expectations with

Bruce: Each stage has what we call non-negotiable rules, and within them certain areas need focus. Businesses in a growth spurt come back and say there are so many things to think about, I feel overwhelmed, I have one person doing three people’s jobs, and all I can do is keep up with the new work coming in.

A non-negotiable rule at stage one or two is to generate, track and preserve cash. During a growth spurt all most people are concerned about is generating it. Not tracking it. Not preserving it. I had a conversation with a brand new client yesterday. He wants to grow, and the only reason is money, because he does not enjoy the people side. It is all top line focus. The problem is that we are leaking money. We focus on generating cash without asking what returns for every dollar we spend. In as little as three months you are pushing out more volume, more cash, and then suddenly there is not enough for payroll.

The second place it breaks, especially in a stage one or stage two business, is employee feedback. Most businesses twelve to eighteen months in have not thought about what feedback they give their people. I hired them because they were the expert, but they are not doing what I expected. You have not set expectations, you are not communicating, and you are not calibrating and recalibrating with them. While the business is growing you can get away with it for a few months. When volume peaks and margin starts to dip, your employees have had no expectations set and they go their own way. Now you have two businesses moving in two different directions. That cracks the foundation, and it is one of the reasons growing businesses fail.

The three question test

How to tell, from the driver’s seat, whether this is you

Trevor: How does an owner watching this know if they are in one of those transitions?

Bruce: Ask yourself three questions while you are sitting in the truck.

One. Looking at your overall revenue over the last year, if that revenue has increased, is your cash position better or worse? Easily eight out of ten owners will say worse.

Two. Looking at the last two or three jobs you completed, can you tell me the margin on them off the top of your head, without looking?

Three. How many to-dos or action items landed on your desk yesterday? That one matters because we get into a groove and wear the busy badge like a badge of honour. Anybody who asks how to do something either gets told how, or gets, do not worry, leave it with me. Anybody who asks a question the office admin should be handling gets, I will get back to you tomorrow, and you write another sticky note. Your to-do list gets bigger and bigger. You might argue it was only a request to get back to them. That sticky note is another to-do adding on and on.

If you cannot answer two out of those three questions, you have a growth problem and your risk is exponentially higher.

What to do about it

Job costing, the postmortem, and the mistake of selling your way out

Bruce: First, job costing. Your bookkeeper may provide it, and if not, ask them or your accountant, because it is an extremely valuable service. You are not just looking at gross profit on a job. You are looking at whether the markup is sufficient to cover your overhead.

Job costing is also what I call a job postmortem. Once the job is costed and everybody has put expenses in the right categories, you look at each component. We break it into four blocks. What was the financial health of that job, the price you charged and the margin. How did the job function operationally, what worked and what did not. How satisfied was the client. And how did your employees function.

You are giving the job a score, but more importantly you are asking what we did well, and then, if we did that well, how do we repeat it. If we did not do something well, it is not about punishing anybody. It is about what remedy we put in place next time to mitigate that risk.

The second thing is throwing more cash at the problem. Look, I am growing, I have a cash problem, all I need to do is sell more. That is probably one of the biggest mistakes you can make, because when you sell more you have to pay more. It is all relative. Selling yourself out of the problem will not help.

The third is delegation. Instead of fielding every can you help me with this, start creating a line just underneath you. Someone who can answer those questions or do those things for you. It sounds easier than it is, because of the fear of delegating. Before you can delegate you have to create structure. Set expectations with that person. Teach them what they need to know. I do not have time to teach, Bruce. It is time well spent, and it does not take that much. The person you put underneath you is likely going to be far more of an expert at it than you are as the founder.

Who this is for

Trevor: Who is this information for?

Bruce: Any business that is growing but is not experiencing the joy and jubilation they anticipated when they grew. The kind of owner who is growing right now, but because of that growth has been hurt on cash and hit other constraints, and has started to think maybe the idea to grow was the wrong idea.

I want to encourage people like that to stop thinking that way, because you can absolutely grow your business and be profitable. You still have to work damn hard, like we all do. But you can grow sustainably, if you know where the risk points are.