"You cannot step into the same river twice, for other waters are continually flowing on." Heraclitus
Everyone knows that starting a business is risky, with a scarily high proportion of new enterprises (one in five!) going under in the first year of operations. What fewer people are aware of is only 50% of businesses make it to their 5th year. In other words, running a business is risky, period!
Part of the difficulty is that growth means change. What worked yesterday - when it was just you and Emily helping with the books - will likely not be as effective when you have five employees and a roster of clients you no longer know all by name.
In this article, we’ll be looking at how businesses evolve, using the famous 5 stage model presented by Neil C. Churchill and Virginia L. Lewis in their 1983 paper in the Harvard Business Review. We’ll also be looking at how time-tracking can help in ensuring that you master the requirements of each new stage, and prepare thoroughly for the next one.
The five stages of business growth
Churchill and Lewis believed that the best way to appraise business development was not by a simple number (employees, revenue, years in business) but by the extent to which the people, processes, and systems of that business had evolved.
They separated this evolutionary trajectory into the following 5 stages, which we will summarize before going through each in detail.
Stage 1: Existence
This means going ‘zero to one’: building and shipping a product that customers want, and getting them to buy it.Stage 2: Survival
With the product established, the aim is now to develop a business that is profitable and self-sustaining (i.e. not dependent on external capital).Stage 3: Success
With the business now stable, the owner is now at a fork in the road: either seek greater scale (grow) or attempt to maintain a steady-state and make the business a ‘cash cow’ (disengage).Stage 4: Takeoff
If the owner succeeds in executing a ‘grow’ strategy, the next challenge is how to make this success sustainable by instituting the right systems and personnel.Stage 5: Resource maturity
When the business has reached the next stage of growth, the goal is to increase strategic and operational capabilities to a new level without becoming bloated and stagnant.
How time tracking helps
Navigating the challenges of growth depends on a combination of business and owner-related factors (such as financial support, personnel, and the leader’s strategic acumen). Ultimately, success hinges upon leadership, as it is a path fraught with decisions (e.g. diversify offering or expand footprint?).
Despite this, having the right tools is important, and time-tracking in particular can play a major role at each stage. Whether it is finding better ways to define success and track progress, creating better workflows, or preparing a case for change, time-tracking data is almost always helpful.
Stage 1: Existence
Building the proposition
Although the aim in this phase appears to be simple - get customers - answering this question is as much a matter of planning as doing. What do customers want, how much can we promise them, and for what price?
For work in which time is a core part of the deliverable, very often it will be hard to estimate the required effort for a given task, or how sensitive it is to key variables and customer preferences.
How Time Tracking can help:
Tracking how you serve your initial clients will give you a clear view of how and on what time is spent. This means more accurate estimations, but also a more accurate description of what you do (which is good for you, future employees, and of course prospects!).
Pick a representative group of clients (3-4 to begin with)
Analyze and deconstruct the time you have spent on each
Articulate the proposition and price range for each client case.
Classify subsequent clients according to the rubric, and update the details and price range.
Multi-tasking
In the early days, the owner may have few customers but many hats - selling, production, delivery, and after-sales - and must also carve out time to take a step back and process the feedback she is receiving, deal with any investors, or creditors, and so on.
Getting lost in a part of the business at the expense of other vital tasks can be fatal for a first-year business owner, particularly if early signs of financial problems are ignored and thus baked into the business model!
How Time Tracking can help:
Time-tracking allows a business owner to plan a target time allocation that assigns an appropriate share to work both ‘on’ and ‘in’ the business. Deviations from this allocation are inevitable. So long as they are visible, they will be informative.
Make a list of 6-8 key categories of activity.
Assign a breakdown of available working hours accordingly.
Use the same categories to track time throughout the week.
Review and diagnose deviations, and adjust target allocation as needed.
Stage 2: Survival
Manage profitability
After building up a certain number of loyal clients, the attention turns from ‘Can we generate revenue’ to ‘Are we making a profit?’. As demand for your product or service increases, so too will the expenses you incur in delivering it. Inefficient processes and poor capacity management obviously contribute to overly high expenses but can be hard to spot.
Over-delivering is tempting in the early stages when you are experimenting with what works, or simply trying to make your first clients enthusiastic fans. If you continue to be over-generous with your time, you will run out of it! This will lead to customer service issues (and others) later on.
How Time Tracking can help:
Success in this dimension comes from asking such questions that provoke useful questions like ‘Are we spending our time where it matters?’, adjusting your ways of working and who you work for to maximize profitability.
Assign a cost per hour to each resource (a rough estimate is fine).
Create a time-budget (internal only) for each engagement with a target profit rate (price minus cost).
Identify the reason for unprofitable engagements (your processes, or unreasonable client expectations?).
In cases where it is the client, refocus your attention on to clients who are a better fit.
Proper billing practices
In addition to tracking your costs, managing revenue is obviously also crucial to keeping your business solvent. This means that billing accurately - receiving what you are worth - can be a make-or-break.
When the startup funding has dried up, the number one risk for a business in survival mode is very often cashflow rather than revenue - i.e. when you receive the money, as well as how much. A business without working capital - typically doesn’t work!
How Time Tracking can help:
An efficient system will make accurate tracking easy and (as far as possible) automated, so that you are in no danger of under-charging. It will also ensure that the correct numbers for the invoice are always to hand (or better yet, generate the invoice for you), so there is no reason to bill late.
Ensure that you have a coherent invoicing policy (billing period, late payment conditions etc.).
Create an invoice template that reflects your brand.
Establish a workflow that connects your time-tracking process to the invoice generation process.
Ensure that you maintain robust communication channels with the client, particularly in advance of a large bill!
Stage 3: Success
Option 1: Disengagement
In order to maintain the same level of cash flow while stepping back from the business to pursue other ventures, the owner needs to be able to trust that the various managers she has hired to perform the various functions she used to perform can be trusted to preserve the status quo.
The danger faced by such a company is a change or series of gradual changes in the external environment that means that the status quo approach cannot be maintained. If the change is incremental rather than fundamental, however, it is not unreasonable to expect that a competent group of managers could still adapt - provided they have the right tools and metrics.
How Time Tracking can help:
The accurate collection of time data allows changes in business performance resulting from an environmental change to become visible and to be diagnosed for the underlying cause. A good set of KPIs put in place by the owner will also flag any issues for her attention, without the need for day-to-day involvement, and allow early corrective action.
Establish acceptable bounds for core KPIs.
When KPIs trend towards or outside boundaries, prioritize diagnosing the cause over addressing the symptoms.
Use time-tracking data to drill down into where the problem might lie (e.g. more time required per customer indicates that online alternatives are emerging to address simple cases that were formerly our 'bread and butter').
Option 2: Growth
The growth route means that the owner must if anything lean further into the business and develop a credible strategic plan for how the business can reach a new level: either by doing something different in the market in which it operates (diversification), or doing the same things it does now, but in another market (geographic expansion).
The issue with either strategy is that it involves a fundamental reappraisal of potentially every aspect of the business, from the front office to the back. If the area is new, there may also be regulatory considerations with which the owner is unfamiliar. While this will likely require major new hires, the owner must also mitigate new risks with watertight planning.
How Time Tracking can help:
The strategy must begin with a future vision, but must be implemented in the cold reality of the present. Testing grand future assumptions against observed KPIs (e.g. capacity and productivity) is the perfect sense check. This is the classic debate (set out in the E-Myth) between the Entrepreneur (Vision) and the Manager (Data). Both are necessary for an inspired, yet realistic plan.
Isolate the assumptions behind the projected financials for the new business.
Identify relevant current performance metrics (e.g. time to complete similar work).
Compare assumptions with current metrics and identify any gaps.
Provide a compelling argument for how or why the gaps can be closed in the new growth scenario.
Stage 4: Take-off
Delegation
When it comes to carrying out the Grand Plan, the owner will find herself in charge of a fundamentally different organization. Regardless of the industry, this will almost certainly create the need to substantially share executive power with C-level executives (i.e. with strategic as well as operational abilities).
One of the two big reasons for failure at this stage (the other being running out of cash - see below) is an inability for the CEO to delegate in this manner, leading to burnout, poor decisions, or more likely both.
How Time Tracking can help:
The owner can perform an exercise, working back from the Grand Plan to the implied requirements of leadership. For example, how much time is required to manage the new marketing strategy? How about the technology transformation, and the redesign of the distribution network? Quickly, it should become apparent that there is no longer a ‘strategy’ that can be managed by one person with only 24 hours per day, but several strategies requiring several individuals.
Set out the major initiatives in each area of the business, with an estimate of total hours.
Create a calendar with the projected hours distributed by week.
Decide on the minimum level of "business as usual" activity the owner will be involved.
Back out the requirements for additional leadership hours and the type of new talent needed.
Cash
While preserving profitability remains important during this phase, a large amount of capital will be both required and risked in the new expansion venture. Much like the initial survival stage, failure to secure sufficient funds will lead to underinvestment and hence underperformance. In order to secure substantial additional funding, the prospective financers (whether banks or equity investors) will need to gain comfort that the expansion plan is well planned and hence likely to succeed.
How Time Tracking can help:
When making a business case for investors, nothing is quite as effective as robust numbers. A trove of existing time-based data on resource requirements, procedures, and project profitability is an excellent starting point for making assumptions about future financial success, and requires less of a ‘leap of faith’ when committing capital to an ambitious goal.
Use the plan originally prepared and internally debated in Stage 3 (Growth) as the basis for the investor document.
Take investors through each of the key lines of the business case, covering revenue and cost.
Re-iterate the objections raised in the planning phase and demonstrate how the assumptions were checked against existing metrics.
Show how the assumption ranges correspond to the actual range of KPI values experienced historically.
Stage 5: Resource Maturity
End-to-end professionalization
By the time a business reaches a mature state (typically signaled by reaching a certain scale and hence classifiable as either significant or dominant with respect to the industries it inhabits), everything must be systematized to the extent that key processes can be run and hired for, without the need for reinventing the wheel.
If this transformation does not occur fully, there will not only be a higher “key person risk” relating to the individuals who are still doing the wheel-inventing, but the resulting inefficiency will mean that the firm is unable to capitalize on its scale and market strength, which is the trump card of a larger organization.
How Time Tracking can help:
A mature organization can be conceived of as an intricate machine. Governing it all requires a common language - and time is a good candidate for this role. If management sets budgets, targets, and objectives for each department at least some of which relate to time allocation or task length, it is possible to “paint a picture” of what a well-functioning organization looks like, and keep those various departments honest accordingly.
Task each business unit with the objective to identify the processes most critical to producing its target output.
Describe what good looks like in terms of high-level outputs from this process (e.g. financial, operational).
Determine what needs to be true on a resource-level (type of resource, time expended) to achieve target outcomes.
Implement a means (e.g. electronic workflows) to ensure that employees are aware of and can follow these ideal processes.
Avoiding ‘ossification’
While a changing external environment is always a risk, large organizations are in many ways the most vulnerable to major changes, as smaller competitors are typically able to move faster in response, while the larger business remains set in its ways.
Furthermore, the entrepreneurial spirit, responsible for the early innovations and counter-innovations that have protected the firm from irrelevance up to this point, can easily be smothered. This can be due to inflexible processes or risk-averse, change-averse managers with an administrator’s mindset (“Let’s stick with what has always worked”).
How Time Tracking can help:
As the Innovator’s Dilemma shows us - good ideas are typically strangled at the mid-management level. Under-empowered employees ‘on the ground’ may well be the first to see the approaching storm in the marketplace. Therefore, two-way transparency of data (i.e. for the KPIs mentioned in the previous point) can provide a source of data-based way to remove political roadblocks and bring existential problems to the surface. Logic (data) trumps fear (emotion) - or at least it should do!
Ensure that employees can access both their own and their team's performance data.
Hold periodic feedback sessions where anyone can submit concerns and proposals, stipulating that they must be backed up with data from the commonly-accessible database.
In addition to rewarding contributors, reward managers whose teams successfully identify potential improvements.
Conclusion
Managing business growth is a complex task, and there is obviously more to it than having a robust time-tracking system in place!
However, if we consider the journey of the owner, the story can be summarized from one perspective as a constant process of delegating (first execution, then management), in order to free her to focus on the increasingly complex question of the overall strategy.
This process of drawing out ideas from the owner's head and making them into concrete processes, plans, and objectives, which can, in turn, be managed by competent individuals, is one that requires the specificity of numbers, not just words and ideas. At every stage, the process of turning ideas into numbers is one in which time-tracking plays a core role.
To end on a Sun Tzu-style note, the Vision that is informed by Data can never fail, even in a business that undergoes a hundred transformations.
We hope this dose of wisdom has been helpful, and that you are inspired to take your business to the next level, whatever stage you are at. As always, good luck, and we’re rooting for you!
