Challenges and pitfalls accompany boom-fuelled growth

Fast-growth companies are appearing on the Western Australian landscape in numbers unseen for decades.

They have emerged from hiding in a variety of forms, from very public events such as management buy-outs, takeovers and IPOs, to more subtle forms such as filling the 'positions vacant' sections of newspaper classifieds or buying prominent industrial land.

With the resources boom having been under way for several years, many businesses servicing that sector have grown rapidly to operations several multiples of their previous size.

It's an exciting time for any business owner or management team that has taken the risk and struck out on their own.

But it comes with its own set of traps and pitfalls.

Even with so many in business believing that this boom has years left in it, the rest of the world has not been so assured and issues beyond our isolated economy, such as rising credit, fuel and materials costs, have started to inflict pain.

Other problems are more home grown. The skills shortage is not just among the employee base; skilled management is also hard to find.

And then there are the genuine growth issues, which would occur no matter what the economic conditions - based on the fact that, as companies get bigger they interact differently with the world around them, and their internal structures have to change.

West Perth-based Coote Industrial Ltd listed on the Australian Securities Exchange in late 2006 and remains a fast-growth company, with revenue forecast to rise nearly 300 per cent this financial year to $269.9 million, from $69.4 million in 2006-07.

Managing director Michael Coote has been servicing the minerals and transport industries, with a specialisation on diesel equipment, for almost a quarter of a century.

Mr Coote said fixed-price contracts were very dangerous in the mining sector, especially with fuel prices and other costs escalating. Even when review periods were provided for, costs could rise so quickly that profits were eroded, he said.

With the mining sector booming, good operators don't need to take on such trouble.

"When there is plenty of competition around you might need to chase that, but right now you need to avoid those speed humps," Mr Coote told WA Business News

"We have gone through it. We have moved some people on and closed some smaller entities."

It was vital the key people in the business understood the cost side of the equation, he said.

"It is not just systems; it's great to have consolidated accounts but when you don't have the blokes who have their fingers on the pulse...These guys, the blokes at the coal face have to be commercially savvy."

Operational managers need to know the average cost of labour, the average hourly cost and the number of hours to do the job, and be able to keep those variables under control.

Mr Coote said all the issues of a fast-growth company could be exacerbated in the listed environment when a delay in a big job by just one week could significantly hit earnings and disappoint the market.

Another listed player in this arena is Southern Cross Electrical Engineering Ltd, run by Frank Tomasi, who has also been in the contracting field for decades.

Mr Tomasi said project timing had changed. In days gone by, he said, a job may start two to three weeks after it was awarded, but in the past two years that had widened to become three months or even longer.

"If you do two or three big jobs a year and one of them gets delayed, you get thumped," Mr Tomasi said.

"With smaller jobs you have a cushion against that.

"We have had that [delays] but we have had some early. We had growth in existing contracts to offset that.

"It is not always good management, it is sometimes good luck."

Mr Tomasi said another area that tripped companies up was moving up a league in contract size.

"When a contractor like us goes on to a bigger scale, the contract conditions are a lot tougher. It is harder to digest and you can get indigestion," he said.

With the current skills shortage, Mr Tomasi said he had to ensure the company did not over-stretch.

"If your crane has 10-tonne capacity you don't try to lift 15 tonnes."

While the views of CEOs are, naturally, more specific to their industry conditions, the overall themes are persistent whether someone is advising a fast growth company or simply assisting them.

"One of the areas I think that is probably happening in the past six months or so is the financial side of things becoming a lot tighter and finance costs increasing," RSM Bird Cameron partner Mark Conlan said.

He said businesses that simply shopped around for finance to fund growth 12-18 months ago were finding it harder this time around, as banks grew wary.

"If someone is coming from another financier, the new financier is really going over it with a fine-tooth comb," Mr Conlan told WA Business News.

Mr Conlan said that, while a business owner might see their company's future as a growth story based on business-as-usual over the past two or three years, financiers were now taking a view of regional and sector risk - and putting a price on that.

"A credit guy in a bank is probably thinking about what was happening in the gold industry 20 years ago. It is probably not the view of one person or one bank," he said.

Brian Beresford from PricewaterhouseCoopers's GEM Consulting division believes that many companies missed the chance to raise equity in the bull market prior to the recent credit crunch, mainly because they had unrealistic views on the value of their shares.

That can leave them undercapitalised and make funding harder to find now.

Ironically, these issues come at a time when there is a shortage of skilled labour, notably CFOs, who play a fundamental role in managing the financial elements of the business.

ANZ state director for corporate banking in WA and South Australia, Mark Crumby, said the cost of finance had gone up with both interest rates and spreads rising, prompting banks to be more rigorous when they looked at applications.

"The market has re-priced risk," he said.

However, overall the same key factors were looked at, no matter what the lending environment was like, including:

- quality and depth of management;

- cash flow management, understanding the difference between cash and profit;

- quality of management information systems, especially when it comes to managing the working capital cycle and knowing if it changes; and

- fallback capital, be it access to equity markets for a listed company, or assets or partnership opportunities for a private company.

Mr Crumby said a big challenge for local companies was to translate their founder's culture into a bigger company, especially one that had ambitions outside WA, as so many did.

"How can that be embedded to work in other markets?" he asked.

Rising costs were viewed by many as a serious and significant issue, one that might catch a fast-growing business.

Mr Conlan said a thorough examination of the books (often during bank assessment) may reveal that a business was not as profitable as the owner believed. Margin squeeze from rising costs may mean management was working twice as hard for nothing.

• Michael Coote

Coote Industrial Managing director

Michael Coote believes the big risk areas for fast growing companies in the sector are fixed-price contracts, the timing of delivery, and the size of the contracts.

He adds that systems and the right people are also vital to stay on top of things as a business grows beyond the control of existing management.

"I think fixed price contracts are obviously a killer for these guys, and also timing," Mr Coote said.

"Timing is critical for smaller guys, especially when it is chunky.

"Mostly for ones who are doing well, it is just about all cost plus," he added, referring to contractors who work simply for an established margin above their cost base.

• Frank Tomasi

Southern Cross Electrical Engineering Managing director

Being in the listed environment adds another set of challenges for company management, according to Frank Tomasi.

"Running a private company was like riding a donkey; you could do what you like with it," he said.

"Now it is like riding a racehorse, with all the stewards watching you."

Mr Tomasi is reluctant to describe his company as engaged in fast growth.

"I call it controlled growth, you don't want it to go ballistic," he said.

Mr Tomasi said one of the current traps for contractors was project delays, often due to the client seeking out services earlier in the design phase than they did in the past.

"Projects are getting delayed," he said.

"You get the contract but with the shortage of contractors they get you committed early and stitch you up early."

"Experience tells me that when people are growing their business they get busy and grow the top line," he said.

"They start to lose track of what is happening on the bottom line. They don't build reporting structures and the people around them to tell them what is happening on the bottom line.

"They are building the business and growing sales, suddenly they want some more money and the bank will not give it to them."

Mr Conlan said many entrepreneurial characters got into trouble during this growth phase of their business.

"When they are smallish they have the capacity to be across all aspects of their business," he said.

"When growth occurs quickly their efforts tend to be across the revenue side of the business.

"What you might call the more mundane and boring parts of the business, and spending more time to think about what is happening around them, the more entrepreneurial people forget about that, they don't have the make-up to deal with that.

"Before long they have put a number of band aids across the business."

Deloitte partners Michael McNulty and Kathleen Bozanic believe business people need to realise when its time to beef up management.

"Small business people know how the business is going intuitively, but as business gets bigger you can't do it that way," Mr McNulty told WA Business News.

"A lot of issues are not outrageous, it is just hygiene areas that get more difficult as they grow."

He added that many fast-growth companies ran into difficulty when the founders lacked an adequate succession plan or exit strategy, often because they'd been too busy building the business.

"They have been working hard," Mr McNulty said.

"How do they realise value and lie on the beach?

"If it is so dependent on them...anyone who buys the business will demand they stay anyway."

Ms Bozanic said the extension to this for fast-growth businesses was on the human capital side, finding and keeping the right people in key positions.

"We are seeing a lot of [businesses] trying to get the right people and experience to fill gaps," she said.

Mr Beresford believes it's not just the right people that are required, but also an organisational design or structure that suits a bigger business.

"There can be confusion over accountabilities or responsibilities and often too many direct reports to the CEO," he said.