Scaling Up: How a Few Companies Make It...and Why the Rest Don't (Rockefeller Habits 2.0)

by Verne Harnish

The Agenda Five minutes: Good news. Start each weekly meeting with five minutes of good news, both personal and professional. Sharing professional good news creates a positive start to the meeting and helps generate momentum — good news begets good news. The personal good news keeps the team connected at a human level, lets everyone express gratitude, and normally results in a good belly laugh or two. Laughter releases tension and brings the brain down into a better alpha state, preparing the team to tackle the important issues and decisions for the week. This important routine also serves as a mental health check. If someone has gone a couple of weeks without sharing specific good news, the leader should inquire privately to see if everything is okay. 10 minutes: The priorities. Review the status of the Red, Green, and Super Green priorities (discussed in “The Priority” chapter) and discuss any gaps in progress. Also review any metrics not reported in the daily huddles. 10 minutes: Customer and employee feedback. Spend this time reviewing specific feedback from customers and employees. What issues are cropping up day after day? What are people hearing?

Draw a line in your mind. This first 25 minutes warms up the brain and allows you to share enough internal and external data to help the team see patterns and trends in the performance of the company. The next 35 to 65 minutes are designated for putting the team’s collective intelligence to work and making important decisions.

30 to 60 minutes: One or two topics. Focus the team’s undivided attention and collective intelligence on a key topic or two. Base your choice on the patterns and trends from the daily huddles, progress on your priorities/theme, feedback from your employees and customers, and the opportunities and challenges that have surfaced. If a firm wants to discuss a potential partnership, schedule it for this time. If a major event is coming up and you need some decisions made, give it priority. At Gazelles, Verne sometimes knows the topic well in advance. Other times, he emails an agenda the night before, or the issue surfaces during the meeting. If you have a handful of priorities for the quarter, the weekly meeting affords you an opportunity to review each a couple of times each quarter.

Who, What, When (WWW). Take a couple of minutes to summarize “Who said they are going to do What, and When,” and email the notes to everyone. One-phrase close. End your weekly meeting by asking each attendee to sum up with a word or phrase of reaction. It creates a formal closing for the meeting, ensures that everyone’s had a chance to say something, and gives you a window into what peo...

Weekly CEO One-Pager Many CEOs also send out a weekly one-pager to all employees updating them on the status of the #1 priority and other significant developments inside the company and the industry. Employees want to hear from their top leader and appreciate the sense of being on the inside provided by this kind of report.

The Monthly Management Meeting You can tell a great company from a good company by spending just a few minutes inside of the business. In good companies, you’ll find the senior team stressed out and overworked from the crush of ever-increasing demands, while the rest of the team seems oblivious to the challenges facing the firm.

In great companies, you find just the opposite: a senior team that’s rested and relaxed while the balance of the staff is on fire as they work to capitalize on the ever...

Unless the senior team instills its DNA— namely, the knowledge and values required to make good decisions — in everyone from the middle managers on down, the top leaders will find themselves increasingly overwhelmed by the demands of a growing business.

Doing this requires one simple routine: a well-structured, one-day monthly management meeting that includes everyone who supervises or manages anyone in the business. It should be a day focused on learning, sharing, and problem-solving vs. a day of mind-numbing reports. Do anything short of hosting this meeting, and the business will ultimately outgrow its middle management. And few things are more painful than seeing a business leave loyal people behind.

Quarterly and Annual Planning Meetings The main agenda for these one- to three-day offsite planning sessions is to work through and update the Growth Tools. They provide the questions, focus, and agenda for these quarterly and annual planning sessions. Go to scalingup.com to download a bonus chapter on how to prepare for and organize these planning meetings.

Great companies, by choice, keep three to 10 times more cash reserves than their competitors, Jim Collins and Morten T. Hansen revealed in their book Great by Choice: Uncertainty, Chaos, and Luck — Why Some Thrive Despite Them All. That allows growth firms to weather the storms, and that is why Bill Gates, from the very beginning, mandated that Microsoft always keep a year’s worth of operating expenses in the bank.

Greg Crabtree, author of Simple Numbers, Straight Talk, Big Profits! 4 Keys to Unlock Your Business Potential

Cash is the oxygen that fuels growth. And the cash conversion cycle (CCC) is a key performance indicator (KPI) that measures how long it takes for a dollar spent on anything (rent, utilities, marketing, payroll, etc.) to make its way through your business and back into your pocket.

When Michael Dell was growing his company rapidly, he reached a point in the mid-’90s when he ran out of cash. He was “growing broke,” like so many other businesses scaling up quickly. That’s when he brought in Tom Meredith as CFO. Meredith calculated Dell Inc.’s cash conversion cycle (CCC) to be 63 days. That

meant it took 63 days from the time Dell spent a dollar on anything until it flowed back through the business and onto the balance sheet (into the bank) as cash. Focusing on one cash improvement strategy/initiative each 90 days, Meredith drove the CCC to negative 21 days by the time he left Dell a decade later. This meant the company received a dollar 21 days before it had to be spent on anything. As Dell grew faster, it generated cash instead of consuming it. That is why the founder and CEO had sufficient cash to contribute to taking the company private in 2013.

For instance, Catapult Systems LLC, an Austin-based, Microsoft-focused IT consulting company, used to bill clients on a 30-day cycle. Meanwhile, employees were paid twice a month, leading to what founder and Chairman Sam Goodner calls “a terrible cash-flow story.” He simply started billing his clients twice per month, after finding more than 90% were agreeable to the change. This nearly doubled cash flow immediately. To tackle the cash conversion cycle, start by reading “How Fast Can Your Company Afford to Grow?” a Harvard Business Review article by Neil C. Churchill and John W. Mullins. It provides the formulas to help your team calculate the company’s overall CCC and discusses many of the financial levers highlighted in the last chapter of this “

section of the book.

The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers’ Cash

Cash Acceleration Strategies (CASh)

It breaks down the CCC into four main components:

Some areas of opportunity: • First, stop saying, “Well, this is just the way it is in our industry.” • Have your available cash reported DAILY, with a short explanation of why it changed in the last 24 hours, and chart it against accounts receivable (AR) and accounts payable (AP) weekly. You’ll learn so much more about your business when you see how the cash is flowing on a daily basis. • If you want to be paid sooner, ask. Small firms are finding that large companies (and governments!!) will pay considerably faster or even prepay if they simply ask, ask, ask, ask, and ask some more. • Give value back to customers who pay on time or in advance. • Get your invoices out more quickly. Hire one more person in accounting to do nothing but make sure invoicing is timely and follow up on payments. • Send friendly reminders five days before the deadline that payments are due. Many customers are disorganized and

will appreciate the reminders, resulting in faster payment. • If invoices are recurring, obtain recurring credit card authorization from your customers to automate on-time payments. • Understand why your clients are paying late. They might be unhappy with your product or service. Or perhaps an invoice has recurring mistakes, or it is not structured to flow through the customer’s automated invoicing system. • Understand each customer’s payment cycles, and time your billings to coincide. • Pay many of your own expenses with a credit card so you can play the float. Get your own customers to pay by credit card, so they can pay you quickly even if their cash flow is slow. • Help your customers improve their cash flow so they can pay you on time. Offer them leasing options, for instance. • Shorten cycles for delivery of your product or service. All of you have some kind of “work in progress.” The faster you complete projects, the faster you get paid. • Offer a product or service so valuable that you have some leverage with your customers to get them to pay sooner. • Remember, improving margins and profit improves cash.

Have your CFO give you a cash report every day, like Verne’s does. The CFO should summarize the sources and amounts of cash that came in and out of the business during the last 24 hours, along with anticipated cash flow for the coming month. It keeps cash top-of-mind and allows you to react quickly — within ...

cash flowing in and out on a daily basis also gives real insight into your bus...

Almost all of these ideas fall into three general categories where you can make improvements: 1. Shorten cycle times. 2. Eliminate mistakes. 3. Change the business model. To further stimulate your thinking, here are some ...

Shorten Cycl...

Pay particular attention to the sales process. You may be expending enormous amounts of money and time on landing customers. Using negotiation techniques taught by Victoria Medvec (check out her powerful online “High Stakes Negotiation” course at scalingup.com), firms like Goldman Sachs have reduced sales cycles from months to weeks and from weeks to days. The quicker you can get a deal in the door, the quicker the cash starts flowing — and you thwart would-be competitors.

For sources of cash other than loans or investors, we refer you to a Fortune Small Business article Verne wrote titled “Finding Money You Didn’t Know You Had”: http://tiny.cc/finding-money

Completing Your Cash Acceleration Strategies (CASh) Tool 1. Read the Harvard Business Review article by Neil C. Churchill and John W. Mullins titled “How Fast Can Your Company Afford to Grow?” 2. Calculate your existing CCC in days. 3. Calculate the amount of cash required to fund each additional

day of CCC. 4. Brainstorm ways to improve your CCC and the 7 financial levers highlighted in the last chapter of this “Cash” section using the one-page CASh tool. Be sure to explore ways in all three general categories — shortening cycle times, eliminating mistakes, and changing the business model — for each segment of the CCC. 5. Choose one cash-improvement initiative every 90 days as one of your quarterly priorities (Rocks).

Greg Crabtree’s highly readable book, Simple Numbers, Straight Talk, Big Profits! 4 Keys to Unlock Your Business Potential, pioneered new territory for growth firms.

Accounting: Underappreciated

If the #1 weakness of growth firms is marketing, the #2 problem is accounting. Accounting is often underappreciated.

Hiring just one additional person to either support the CFO or carry some of this executive’s workload enables him or her to provide the following: 1. Better cash and cash-flow management 2. Waterfall graphs, which we will explain shortly, to share more granular accounting data for better decision-making 3. Trend analysis and early-warning systems to support better prediction 4. Two sets of books — for the right reasons! Waterfall Graphs A key accounting activity is to slice and dice a company’s financial data as granularly as possible. This lets the leadership team view the gross margin, profit, and cash flow by categories, such as individual customer, location, product line, salesperson, etc. Accountants do this by creating a series of waterfall graphs (see the diagram below).

For more insight into this common strategic mistake, read Brenneman’s Harvard Business Review case study on the turnaround of Continental Airlines.

Trend Analysis A fundamental responsibility of leaders is prediction, and they need both frequent quantitative data and qualitative feedback from the market to make the right calls. As we’ve mentioned, any data more than a week old is history and is not useful for making the fast decisions necessitated by our highly connected global economy.

Use Labor Efficiency to Drive Profitability Now we can get to the #1 driver of profitability — labor efficiency — a measure of the productivity of each dollar we spend on labor. Notice that we do not discuss total labor costs, but rather the productivity of a dollar of labor.

You just need to know the multiplier (e.g., for every $1 you spend on labor, you get $3 back). The theory is that as long as you can keep applying productive labor (be it salespeople, programmers, or call center reps) at the right multiple, the only bottleneck is lacking enough of the right people to keep growing.

The key is to know the right multiple for each of the three major segments of labor demonstrated in the exhibit below. The three segments of labor efficiency we want you to focus on are: • Direct labor efficiency: gross margin dollars divided by direct labor cost • Sales labor efficiency: contribution margin dollars divided by sales labor cost • Management labor efficiency: contribution margin dollars divided by management labor cost

A few points that address some common questions: • Contribution margin is defined as gross margin minus direct labor. This is what most accountants refer to as gross profit, but it mixes labor costs with nonlabor costs and masks the productivity o...

Start with direct labor, determining which employees spend 50% or more of their time delivering on the product or service your business offers. All other labor goes into management labor. If you have a sales team, as in the example below, break out those employees separately. • Avoid splitting a person across multiple groups. • Do not add payroll taxes and benefits. Only count what you pay employees in wages and bonuses, to keep the calculation simple. • Here’s why contribution margin is used for management and sales labor: Workers you classify as direct labor are accountable only for the work you put in front of them; that is why they are measured against gross margin. But manage...

Force #1: Taxes Know how much you owe in taxes throughout the year to avoid the annual tax day surprise. And resist the temptation to spend $1 in order to save 40 cents in taxes by rationalizing, “Hey, the government pays for 40% of the cost of the computer [or whatever the company is buying], anyway.” Crabtree believes that rather than chasing the very limited tax-saving maneuvers available, CPAs would better serve business owners if they would emphasize that true wealth is created only with after-tax profits. If you do not pay any taxes, you either have not created any wealth or you have cheated, and both scenarios are bad.

Force #2: Manage Debt Debt is generally not your friend. If not managed properly, debt will enslave your business and keep it from reaching its full potential. Once you have set aside your tax money, eliminate debt on your line of credit and remain current on any term loans. Lines of credit are like crack cocaine for businesses because it’s too easy to draw on them to solve cash-flow issues, rather than make the hard decisions that lead to improved profitability.

Term debt can help you spread the cost of long-term assets over their useful life. However, if you have “termed out” your line of credit, pay off this debt as quickly as possible if it does not support any long-term functional asset. And avoid falling for the trap of using debt to buy an asset at year’s end just to save on taxes. This ends badly over the long run, unless the asset is

critical to improving profitability.

Force #3: Core Capit...

Meeting your core capital target means having two months of operating expenses in cash, after you have set aside money to pay your taxes and assuming that yo...

In our opinion, any company that can meet this criterion is considered fully capitalized and can start harvesting profits for either further growth opportunities or distribution to shareholders for wealth diversification. If business owners harvest profits before debt is cleared, they risk putting the business into ...

The definition of two months of operating expenses includes all normal operating expenses on which you do not get terms. As a rule, the only costs you exclude will be your cost of goods sol...