How do you manage growth inside a fast-growth firm? Ethan Carlson, co-host of the CFO Thought Leader Podcast, tackles our questions concerning strategies and the best practices organizations are adopting to manage rapid growth.
Join us as Ethan Carlson, CEO of Carlson Management Consulting, once more answers our questions to supply you with answers and a new mindset designed to help empower your finance organization to look ahead.
CFOTL: Ethan, a lot’s happened since we were last speaking with you. In fact, Inc. rolled out its annual Inc. 5000 list, and there was Carlson Management on it this year.
Ethan: We were very excited to be recognized at No. 553 on the list that Inc. put out. And I think it’s attributed to the team's effort and having a true client-centric focus and delivering great value to our customers. And so it’s an honor and we're excited about it. And hopefully we can glean some information from our growth and talk about managing growth here with our listeners.
The following is an edited abstract from CFO Thought Leader’s “Ask Ethan” podcast featuring Ethan Carlson, CEO, Carlson Management Consulting, and Jack Sweeney, co-host of CFO Thought Leader.
CFOTL We're speaking with Ethan Carlson, the CEO of Carlson Management Consulting as well as our co-host here at the CFO Thought Leader podcast. Ethan, welcome again.
Ethan It's great to be back.
CFOTL Ethan, a lot's happened since we were last speaking with you. In fact, Inc. rolled out its annual Inc. 5000 list, and there was Carlson Management on it this year.
Ethan Yeah, we were very excited to be recognized at No. 553 on the list that Inc. put out. And I think it's attributed to the team's effort and having a true client-centric focus and delivering great value to our customers. And so it's an honor and we're excited about it. And hopefully we can glean some information from our growth and talk about managing growth here with our listeners.
CFOTL Well, yes, so let's take this from the point of view of the finance leader and ask the question: what needs to be top of mind with CFOs when it comes to managing growth?
Ethan I think any finance leader managing a growing organization is it's a pretty easy four-letter word, cash. And so as you're growing your business, you need to make sure that you have the cash flow and assets available to you to manage that growth. That's sort of the short answer, and I think the longer way to look at that is I think that when you're managing a high-growth organization, you have to be very focused and tactical on how you look at your business. Like I said, you have to make sure you have the ability to operate, so cash, but also looking at key metrics. You don't have as many assets or they're being pulled in a lot of different directions. So the ability to allocate resources effectively is always important, but I think it's even more important in a high-growth situation.
So both our sales and customers of ours. We have a number of our clients who were also recognized in the Inc. list and we're very pleased to see them with that recognition as well. And we find that the organizations that are focused on that and look at it in a way of being, like I said, very tactical, what are the next things they need to do to get them to that next major milestone, the organizations we see that just have a five-year projection, very rosy, with a big hockey stick at the end, they're not as on top of things. But the ones that know what's the next major milestone or what are the key tactics to getting there are the ones that we see being very successful.
CFOTL Yeah, it's interesting. So much has been written about and talked about some of the high-growth firms today how they are leveraging decentralized business decision-making. Whereas the people along the frontlines are empowered to react swiftly to their client needs and make decisions. But at the same time, that seems to run contrary to managing growth, because you're in a sense forfeiting control at a time when control is more needed.
Ethan Sure. I think that you may look at the idea of decentralized decision-making and input on financials and controlling cash as opposites. But in fact, they can be quite parallel and quite similar if you manage your organization and have a culture around it. You think about it. In a high-growth, smaller business, I could say that most of your team typically feels very close to what they're doing. They're not just showing up for a paycheck. They feel like they're building something and growing it. So they want to make the right decisions. So it's really your job then to put that correct information in front of them so they make the right decisions.
We've talked about finance increasing visibility, and I think we're going to talk about that in an upcoming podcast. But the idea of people wanting to do the right thing is usually pervasive particularly in growth organizations and smaller businesses. So the goal of a finance person is to put the right information out there. Make it easy for them to access and make them understand the impacts of their decisions and how decisions translate into financials. Find ways to automate your reporting as a growth organization.
And again as a finance leader, usually you have fewer assets in people at your disposal to generate financial results and metrics. You have to be very efficient and find ways to automate process, and get out and interact with your business. We've talked about this a number of different ways. But as a finance leader if you're in a growth organization interacting with the people making those decisions on a very regular basis, and again if you're high-growth, I think time and meeting once a month or whatever it may be is probably not sufficient because your business can change on a day very quickly.
So I think that visibility and culture can make both transparency and decentralized decision-making very much in line with running a sound organization.
CFOTL Is it safe to say that most fast growth organizations experience cash flow challenges? There isn't any miracle remedy here, correct?
Ethan I think that's a fair statement, but I think there are some things that organizations do and they need to understand to make it a fact of life but not a crisis. Yeah, so growth uses cash. It's just fact. As you're growing, you're building whether it be AR or assets, and the pace in which you translate your cash back in usually is slower than the outflow.
But there are a couple of things you can do as a finance leader for a high-growth business to understand it. There's a concept of a sustainable growth rate, and what that is is really how fast you can grow without borrowing. There's a number of ways you calculate it, but it's usually with return on equity times the inverse of your dividend payout ratio. It comes up with a percentage that you can grow. Now no one is suggesting that that's the right rate of growth for your business, but what you can use is if you're growing faster than that ratio would indicate, you're going to know you're going to need some influx of cash from either debt or equity. So it's not foresight that can be very helpful.
We have a number of our clients that are very much metric-oriented, and they understand their metrics and how business transactions translate to cash. And they're better off, because if you think about it, you have money flowing, and you're selling services, you're invoicing and you're receiving cash and of course you have expenses going out. The rate that those occur can be managed. And the organizations that understand their DSO or days sales outstanding and understand their DPO, which is days payable outstanding, are at an advantage, because you can manage your cash flow if you understand this sort of scenario.
So, for example, take a service business like ours and say we hire a contractor to fulfill the job. And we need to pay them on a net 15 terms. So they do their work for the first 2 weeks, they get a bill and they expect to be paid within 2 weeks of that. We always invoice our clients monthly. I would say our average DSO is probably about 45 days. So if you think about that, we might have had cash outflows on Day 30 with no cash inflows until, I guess, that would be Day 75. So you've got a 45-day gap in cash flow that you could've managed around if you understood those metrics.
So understanding those metrics, setting up your payments with both your vendors, with your customers and managing it, if you're in a high-growth situation looking at ways to increase cash flow, offering incentives, are all very real. And then understanding those macro factors like the sustainable growth that it can help, but, yes, if you're going to grow, you're going to squeeze your cash.
CFOTL This topic of resource allocation was something we hit upon with Brad Dickerson, the CFO of Under Armour, in an interview that we did with him last year. But I thought I’d tee up his remarks related to resource allocation. And Under Armour as many may be aware it's really grown substantially in recent years. It's grown from, say, a $600 million firm into a $3 billion firm over the last, I don't know, 4 or 6 years. So it's very much a high-growth firm. We'll play what he told us and then we can come back and ask you about your clients and whether they're moving in the same direction.
Brad: The allocation of resources is probably one of the biggest challenges of a CFO and overall a company let alone just within the finance function itself. To me, it was really important to be successful in embedding the talent into the organization because I think to some degree it became a self-funding mechanism at that point. And instead of trying to fight the business that says, "I need to hire some more financial people for us to run our business," it was really the other way around. The business started coming to me and saying, "I would love to pay for some more resources. I see the value in it. I see the success in it." And these are very valued business partners.
So it was really important the first couple of financial people we hired and embedded in the business. It was really, really important that they had the right attitude and personality, maybe a little more extroverted than your typical finance person. But it was really important to build that bridge early on, at the time, with some skeptical business partners. It was just making no sense with this work, and it ended up working very well. And I think again with the right personality, with the right balance of these individuals sitting in the business, probably spending 95% of their time with the business, supporting them, helping them make decisions of controlling their numbers, getting them some information. And then 5% of the time, they do spend with myself and the corporate finance group. It's more around calendar when we need things, the standardization of the policies and procedures and so forth.
So to get the dollars and to get the resources built, it was really, really important early on that the business saw value in this. And once they saw that, it was actually a pretty easy proposition for me that they would come to me and say, "I'd love to hire another finance person." So we went from one in 2008, and then pretty much by the end of 2012 had at least one financial person in every critical business we had in our company.
CFOTL So again that's allocation of resources, Brad Dickerson talking about what they did at Under Armour. Again moving the people out into the field where the decision-making is. Are you seeing this more broadly?
Ethan I think that we have very much seen the idea of embedding finance resources inside the business unit. It's something we have seen in a number of clients. I've seen it in a number of companies I've worked at in past roles as well. And I think you're very much on the forefront of increasing transparency and visibility and valuing finance and analytics in how you run your organization if you're taking those steps.
So if you think about it, we have a client that took a very similar step, and they took their finance team and they physically took them out of their… Rather than having to sit off in one side of the building, they were sprinkled around sitting with the business that they were supporting. And the impact was very significant. If you think about the biggest challenge we see in getting engagement with the businesses, the perception, how is the finance perceived to your organization? So if you're embedding the people, you're within the business and you're already addressing that.
And then second what I love that he talks about is the value, the value that the finance resources brought to the business, and the business saw the value and wanted more. It speaks to the idea that financials and analytics is a competitive advantage. The more we can move away from just using what we think is right where we're relying on hard facts and analysis, the better off we'll be in business. And then to see the business respond that way and want more I think is a testament to increasing that transparency and interaction. And we see that very much. Our companies that we work with that are really successful in using visibility in the financials as a competitive advantage are doing exactly these sorts of things. And we do find that the result typically is people want more engagement.
CFOTL Well, you've been using the word "visibility" and certainly touched upon it a number of times how visibility into the numbers can really empower leaders. Maybe that's something we can explore a little more in-depth next time.
Ethan Sure. I think that sounds like a great topic.
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