To See Ourselves As We Really Are
Subject: The 5 Stages of Growth
The company I founded worked for sureties across the country completing failed construction projects the sureties had bonded. During this period, I assisted in the resolution or salvage of hundreds of distressed or failed construction firms and learned to view construction companies from a unique perspective. Credit grantor–bankers, and sureties were evaluating construction firms of different size and age in the same manner. What they did not seem to take into account was that these firms were in distinct stages of growth and that each stage represented a different degree of credit risk. My research also verified that contractors did not see themselves this way either.
Because continued access to capital is the very life-blood of the construction industry, I realized that contractors, sureties and lenders would be more in sync with each other if they understood that construction enterprises alter dramatically as they evolve through the five stages of growth. If their company’s credit worthiness was measured accordingly they would all have a better understanding of their credit worthiness. Their efforts to obtain capital would be more realistic and, therefore, more successful if they saw themselves as they really are.
The Five Stages Of Growth
A study of more than 1,000 closely held construction firms revealed that there are five distinct stages of growth:
A start-up construction company is generally run by a contractor/entrepreneur who does everything: bids the work, sells the work, supervises employees, and provides working capital. The credit grantor is unlikely to extend credit to a company at this stage because the company simply has no track record. It has not proven its capability to get and produce work at a profit on a consistent enough basis to satisfy potential credit grantors. A company may stay in the start-up stage for five years or more, though some firms progress more quickly.
In the survival stage the company is stable, and the founder and credit grantors believe that the enterprise is more or less established.
The company has discovered and exploited a business niche. It is still a one-person show but the primary concern is no longer to get from one month to the next because it has grown to a sufficient size to generate enough revenue to solidify the organization.
Cash flow is the bane of the survival stage contractor’s existence. The contractor can borrow money because the company is relatively stable, but usually learns quickly that growth eats cash and that more borrowing is usually required as a result. There is little organizational structure or control. Managers continue to follow the very specific instructions of the founder.
A company in the success stage generates positive cash flow from its operations. If the company owes money, debt is being reduced or it may be debt-free. Usually…
- The company is growing modestly (under 15 %) and is able to finance its growth internally. The company is large enough to maintain its position in the marketplace and earns at least average profits. The risk of failure is minimal, and the personal assets of the owner are no longer the sole basis of credit.
- The founder is still in charge.
- There is a tendency to overspend, particularly on benefits and bonuses.
- Profits are made by maintaining “business-as-usual”.
- A company in the growth stage is increasing annual sales by 15 % or more, in addition to inflation.
- It is usually profitable, but often at a lesser rate than when it was in the success stage.
- The major issue is financing the expansion.
- Debt is almost always increasing because growth consumes cash in the form of reduction in working capital and increases in retainage.
- There will be an increase in debt-to-equity ratio that can affect bonding and banking relationships.
- Existing systems and procedures usually become strained and replacement systems often become overloaded before they are operational.
- A construction company seldom reaches the maturity stage during the first generation of leadership. It is usually the second generation or later.
- The company has competent, self-reliant management and is large enough to dominate a market.
- Debt is modest, and the company’s course is charted through formal strategic planning.
- The management structure is clearly defined and most likely decentralized and/or departmentalized.
- Separate profit centers or operational units provide necessary opportunity and training ground for future managers of the company.
As We Really Are
Unfortunately contractors rarely recognize these five stages of growth, but would do well to learn about them. Knowing how to recognize what stage your company is in and how to manage the transition from one stage to another is critical. Not understanding the stages is like driving blindfolded. You cannot be sure where you are and can’t anticipate and prepare for where you are heading. The stages of growth was vital research and crucial to maintaining success over time. You will find ample materials here on the site to help you develop a deeper insight into the stages of construction contractor growth and the liquidity risks associated with each stage.