Emerging Growth Companies: Managing Growth 101

Congratulations, you have your own business. Question is: How do you stay creative and entrepreneurial, not to mention profitable, as the business grows?

Because managing growth is one of the toughest challenges for entrepreneurs, MWorld's editors sat down with an expert -- Donna Kelley, professor of managing growthî at Babson College of Entrepreneurial Studies. A successful entrepreneur herself, Kelley is co-founder of the Amherst Athletic Club, a thriving business she started in 1982. She also served as operations manager for a computer hardware start-up that she helped grow to a $7 million international business.

MWORLD: As a start-up grows from 10 to 20 to 30 employees, how do you communicate the company culture to an often diverse audience?

Kelley: All great businesses start with a vision, but contact with the founding team decreases with organizational growth. As you move forward, it becomes the task of those at the helm to make sure the entrepreneur's initial vision gets translated into a set of values that helps guide everyone's activities. In other words, keep finding new channels of communication to keep the culture alive.

MWORLD: As the organization grows, how do staffing needs change?

Kelley: Being part of a start-up is fun, challenging and invigorating because it's new. But when you move from a garage to a building with multiple offices, roles become more specialized and management becomes a critical skill. It's important during early growth to balance the need for effective managers with initial workers who may be good innovators but poor administrators.

Some of the change will come from natural fall-out -- early entrepreneurs may get bored and want to move on while others will rise to new levels of responsibility. But you also need to be prepared to replace people. We saw at the computer start-up that the founders were engineers, and they hired all tech people. They only later thought about how they would market and distribute the product. As you grow, generalists turn into specialists, and even the entrepreneur may need to yield the top position to an outsider better equipped to manage an organization experiencing growth.

MWORLD: How do you develop an infrastructure and company culture that can handle growth?

Kelley: It's important to balance flexibility and efficiency -- to balance the innovative environment that led to the company's initial success with the need to build a more efficient operation. At start-up, everyone pitches in -- everyone is a generalist because you just want to get product out the door. But eventually you need to hire specialists for various parts of the organization. It's important to think about this early-on so the transition from start-up to an established, innovative organization is smooth.

MWORLD: Managing assets and liabilities is always difficult. What do you suggest?

Kelley: You have to ensure that cash is sufficient and being used efficiently. What I mean is, you need enough available cash to pay vendors and employees, but you don't want too much available cash because that means you're paying 12% interest on a bank loan that, in essence, is in your checking account instead of earning money in a savings fund. It's all about budgeting techniques and tracking cash needs and cash flow. Additionally, you have to tightly manage accounts receivable so collections are timely. This step reduces bad debt and helps avoid the need for additional short-term financing.

MWORLD: What about inventory control and accounts payable terms?

Kelley: Inventory control is tricky; you have to watch it like a hawk and get to know its ebb tide, so to speak. No matter what you're selling, inventory must be closely managed so there is sufficient stock, but not an excess amount that ties up working capital. Terms are tricky, too, because you have to weigh the risk value. At the computer company, we had clients like AT&T that we knew would pay us, so we gave terms payable in 30 days. But with small businesses -- or unknown businesses -- we required everything COD.

The more generous 30-day terms will increase your client base but will also increase the risk. One thing you can do if you go to terms is to do a credit search on prospective clients through Dun & Bradstreet and, of course, get references.