Building your enterprise for scale – First Principles:

Brendon Pereira / September 19

Enterprises / Entrepreneurs that seek to break the shackles of mediocrity need to keep in mind a few basic ‘First Principles.’ Violation of these will impede growth as much as competition, competence or capital.

Scale or growth is used here in the context of entrepreneurs who aspire to compete against the big boys of their industry or at least substantially move up the pecking order. This would normally infer an external equity infusion to be adequately capitalized for growth. Therefore, a specific revenue or enterprise value is no benchmark as these would vary from industry to industry.

Principle No 1 – Focus: Define your business and customer correctly. Too narrow a definition will exclude you from a larger potential market, while too broad a definition will have you pulled in too many different directions reducing the efficacy of your resources. While the very essence of entrepreneurship is to be opportunistic and seize opportunities where others see only pitfalls, once one has established a certain Competitive Advantage or Differentiation (a service, technique or product that is profitable in a growing segment, is superior to competition and cannot be easily replicated) it should become your cornerstone or focus for growth.

Remember that scale will require to place bigger bets in terms of investment, resources, marketing, supply chains etc. One cannot effectively fight on multiple fronts especially where others may have a competitive advantage over you.

Principle No 2 – Accounting & Compliance Hygiene: Both, For-profit and Non-Profits have finite resources and must utilize them efficiently. The ability to accurately forecast, control and deploy finance is the lifeblood of enterprise. More often than naught, accounting systems and by extension, Management Information Systems are not designed in congruence with the overall company strategy. This leads to wastages, leakages, misappropriation and insufficient information for effective decision making.

Timely access to accurate sales, profitability and cash flow data enables enterprises make decisions on cutting losses in bad projects and pursuing profitable / cash positive ones. Anecdotal or perception-based evidence should not be a substitute for hard data driven models.

For example, ‘Strategic’ customer acquisitions (loss making / low margin or large credit customers) tend to outlive their purpose long before someone has the courage to purge them from the system. This happens because strategic imperatives are not quantified in advance.

The second dimension of this principle is compliance and statutory adherence. Inculcating a culture of adherence from the beginning may seem as an expensive proposition at the onset but will go a very long way in mitigating crippling punitive actions later on. Further, a sense of suspect compliance & integrity tends to permeate the enterprise setting in a rot that is not easily cleansed.

Principle No 3 – Separate the Personal & Enterprise: At inception and early stages, the entrepreneur and the enterprise cannot be told apart and resources are usually fungible. This is an essential feature of entrepreneurship and is critical to generate the needed escape velocity to create an enterprise from nothing. Paradoxically, on achieving a certain scale or consistency of performance, the entrepreneur must maintain a certain separation.

A dispassionate assessment of decisions and prioritizing the enterprise over self is required. Incurring costs / acquiring assets that have little or no accretive value to the enterprise but are more in the nature of self-esteem for the entrepreneur must be kept in check. One must keep in mind that the value of the enterprise is usually a multiple of its aggregate cash flow generating capacity. Thus, delaying gratification will pay back multi fold.

Diversification is another business decision that tends to go awry. A cash generating enterprise tends to attract all sorts of investment opportunities, each one potentially more lucrative than the previous. Hubris causes one to mis-interpret critical success factors of one enterprise as analogous or transferable to another in a completely different context or setting.

Principle No 4 – You cannot do it alone: The entrepreneur-manager is usually an ‘A+’ type in terms of passion, drive, grit, ability, energy etc. However, no ‘A+’ person can accomplish the work of ten B+ or B individuals. (Not to be confused with personality types).

The ability to delegate without losing control or the feeling of losing control is a huge hurdle that entrepreneurs need to overcome if they seek to scale their organizations beyond their immediate reach and capability. Bringing in experts in finance and accounts should usually be the first to be delegated but tends to be the last. Managing this function directly consumes enormous amount of time but seldom adds value to the enterprise. That time is better spent in looking outside at the evolving customer needs and opportunities while delegating generic functions with an adequate risk management framework and oversight mechanism. Easier said than done……

Delegation is a difficult skill to muster but an imperative one.

By no means is this an exhaustive list but these particular areas will cover by far a majority of situations that enterprises go through during their growth spurt. Irrespective of the industry and market conditions, as in investing, violation of fundamental rules will sooner or later cause significant distress.