Brad Born, vice president of Al Grace Appliance, Rockford, added a full line of mattresses when space became available in his showroom. (Rebecca O'Malley photo)

Five Things to Know Before You Grow

Despite waves of uncertainty in today’s marketplace, opportunities abound. Many small businesses and civic organizations are expanding operations or acquiring weaker competitors. Local marketing and finance professionals offer five things to consider before growing your enterprise.

Brad Born, vice president of Al Grace Appliance, Rockford, added a full line of mattresses when space became available in his showroom. (Rebecca O'Malley photo)

How do you fill 8,000 square feet of space that’s been vacated by other retailers? For Brad Born, vice president of Al Grace Appliance, 811 W. Riverside, Rockford, the answer was simple: add new product lines. For Born, that meant adding a TV display and a full line of mattresses to his appliance showroom.
Before he could grab additional market share, Born had to tell people about his new products and how they differed from competitors’. He set aside extra advertising funds and developed new TV and radio spots, highlighting the new “neat schtuff” in his showroom.
Many small-business owners are taking advantage of opportunities which have opened up in a marketplace that’s changed a lot in the past five years. Opportunities exist, and despite many uncertainties in today’s economy, some business owners find that it’s an excellent moment in time to grow market share.
Still, before you make any move, it’s essential to do the math first. Is this a good time to buy equipment, hire staff or step up marketing efforts? What do the numbers show, and how will they change over time?
Northwest Quarterly sat down with area finance and marketing professionals to better understand prudent business growth strategies in today’s environment. We’ve outlined five things to consider before you rev the engines.

1. Do Your Homework: Consider your company’s goals.

Pat Morrow, senior vice president of commercial loans at Alpine Bank, is a big believer in the fundamentals. The first step to business growth, he says, is introspection. He wants to know that clients have considered the impact of growth: Can they handle extra sales and new clients, or should they first adjust current practices, maximize efficiencies, pare expenses, increase prices?
“Maybe they say, ‘Well, maybe I don’t need to expand,’” says Morrow. “Or, they’re in a better position to expand because they have their house in order.”
Before you have that conversation, look deep into the company and consider what you hope to accomplish, how you’ll accomplish it, and whether your company is truly poised for growth.
Also look to your customers, Morrow says. First satisfy their needs, and don’t forget about them when adding new sales.
“A lot of times, if business is walking out the back door, you can’t replace it as quickly,” says Morrow. “You’ve got to take care of those current clients and make sure that you understand whether there’s anything else they’re buying from others that you can provide.”
Business growth is also about serving your company, as you add new people, equipment, processes and expenses. Todd Larson, senior vice president of business banking for Blackhawk Bank, wants to see clear, sustainable objectives.
“If you’re not focused on that goal and what impacts it can have on you, growth and sales, without planning, can take you down,” says Larson. “We can actually fail because we’ve sold too much, we can’t fund it, we don’t have the ability to deliver it.”
In some cases, bankers advise clients not to pull the trigger. When a business is overleveraged, has inefficient management structure or lacks customer potential, red flags arise, says Larson.
“If a company is maybe a little highly leveraged, they have to be watched a little closer,” he says. “You say to the customer, ‘OK, are you willing to go all in on this?’”
From an accountant’s standpoint, it’s critical to understand how a business will finance growth, what taxes and hidden costs are involved, and how growth will impact cash flow.
“All of these have balance sheet effects,” says Gary Neubauer, partner-in-charge of quality control for Sikich, a business consulting firm headquartered in Naperville, Ill. “A lot of times, business owners ignore these things and focus only on getting new customers.”
If the ultimate goal involves expansion into new territory, it’s critical to understand how taxes, insurance, transportation, workforce, utilities and other factors will impact your business, says Neubauer.

Frank Rotello (left) and Brent Bernardi, owners of Alpha Controls & Services, recently expanded services and gained market position. (Rebecca O'Malley photo)

When high energy prices and a skidding economy threatened businesses in 2008 and 2009, the owners of Alpha Controls & Services, with offices in Springfield and Rockford, saw opportunity. The specialty contractor provides engineering, installation and technical support for energy management systems in commercial buildings. It recently began offering new, green solutions to reduce utility costs, and expanded its expertise into other building systems.
The partners’ aggressive pursuit of new sales has paid off. In 2009, during the depths of recession, the company grew nearly 13 percent, says Frank Rotello, co-owner. The following year, it grew another 13 percent. By 2011, when several new contracts were in full swing, it grew 42 percent.
In part, Alpha took market share from the competition. By February 2011, the company and its client base grew enough to justify opening a third office, in Champaign, Ill.
This wouldn’t have been possible without the long-range plan that Bernardi and Rotello launched when they bought the company nine years ago. With Morrow’s help, the owners stayed focused on their goals.
“When we started out, we set our goals and our culture, and metrics about what we do and how we do it,” says Rotello. “Everything was evaluated for its financial impact.”

2. Know the Numbers: Forecast your financial needs.

Once you know where you’re going, you’ve got to know how you’ll get there. Set out your financial road map by forecasting expenses, capital needs, cash flow, long- and short-term debt.
“It’s important to project out their balance sheet, project out their income statement, to see what the impact of that growth will be,” says Larson. “If you’re a small manufacturer, will you need to increase your inventory? With this new customer that’s giving you growth, how much accounts receivable growth is your company going to have?”
When starting your forecasts, look at accounts receivable and inventory, payment schedules and payroll. Cash flow analysis usually indicates how the bank can cover the gaps, says Larson.
“It’s easier to sit down early and say, ‘OK, Todd, how do you fit into this plan?’” says Larson. “How is this going to impact my line of credit that I need to support working capital, or what kinds of things can we do for this new equipment that we’re buying?”
Tom Bayer, partner-in-charge for performance measurement at Sikich, helps clients to develop “dashboards” of key financial information that inform the financial planning process. He advises clients to just plan on higher interest rates, higher taxes and the liabilities of a higher income.
Tax planning is an essential part of forecasting, and something that Jennifer Wood, a tax expert at Sikich, takes seriously. First, she helps clients to understand what they’re liable for. Then, she finds ways to reduce that liability, often through restructuring domestic investments or by shifting resources.
“Companies don’t always understand that your tax planning can make or break your strategy,” says Wood. “You can end up with significantly more cash in your pocket and can restructure your future tax liabilities.”
Morrow expects clients to provide a two-year financial forecast, in which they’ve fully mapped out expenses and the potential for deficits. Debt is part of growth, but should be carefully leveraged and monitored. He uses a simple formula.
“For every dollar of debt, you want to be producing, at a minimum, $1.20 of cash flow,” he says. “That’s a minimum. Obviously, the higher that ratio, the better. That’s your cushion.”
When cash flow doesn’t add up perfectly, Morrow suggests creative solutions, such as stretching out payment options with vendors or getting faster payment terms from customers.
When gaps can’t be helped, Morrow looks to other solutions, such as grants and SBA loans. One popular product is the SBA 504 loan, a mortgage refinancing product that locks in super-low interest rates. The program is scheduled to expire in September.
Comply 365, of Roscoe, Ill., started with a simple mission, in 2007: Develop software to help aerospace companies manage tons of paperwork needed to comply with federal regulations. The concept quickly expanded into food service, manufacturing and transporation, among others, and the company is gaining clients around the world. In the process, the company has added new managers and programmers, who often act in dual roles.
Forecasting the “puzzle” of data for this aggressive growth became a major headache for CEO Kerry Frank, who travels around the world constantly. With the help of in-house programmers and her advisers at Sikich, Frank transformed unwieldy spreadsheets into a “living tool” through modified software. Her advisers quickly offered input on data models and strategies.
“You can’t imagine the mess it creates on Excel spreadsheets,” says Frank. “They immediately got that, and they weren’t afraid to be innovative.”

3. Tell People: Don’t wait for the cows to come to pasture.

Most people hate annoying TV ads. But Monica Hills, owner of Hills Marketing, 418 Financial Ct., Rockford, admires them, because annoying as they are, they’re also memorable. That’s the point.
Define your strengths and your niche, and then shout your message loud and clear in your advertising. Tell people about your expanded products or services, and then tell them again. Make it count.
“We’re bombarded with so many ad messages in a day that we really need to have teeth when we get someone’s attention,” says Hills. “Otherwise, I call it white noise. It’s just background.”
At the same time, have a clear idea of who your customers are, and why they should care. Don’t advertise a women’s retailer during a men’s program, and consider whether your customers might interact through social media.
Too often, customers don’t budget enough for marketing, says Hills. Get as aggressive as your finances allow, but remain focused on your audience.
“Usually people set the budget as a percentage of sales, and you can look into your industry to see roughly what that is,” she says. “Then, understand that your marketing is an investment, not an expense, and that it does take time.”
When marketing is done correctly, people respond. So before amping up sales or marketing, make sure your production and inventory can handle the response.
“If they’re not treated well or they feel disappointed, or they feel the product is too expensive, have a bad experience, whatever, they’ll go away and they won’t come back,” she says.
If new customers don’t flood through the doors, be patient, she says. It takes time for a message to sink in. “Remember that advertising is a process and not an event, and that you don’t just advertise for the first few months and then go, ‘OK, I’m done with that, I’ve done that part.’”
Born, of Al Grace, takes Hills’ advice to heart. Rarely does a week go by when he doesn’t advertise on radio and TV.
“It’s important for us not to be out of the consumers’ vision for too long,” says Born. “We do notice a drop-off when we’re not advertising mattresses. When we advertise, there will be an almost instantaneous spike in sales.”
Co-op dollars from the mattress manufacturer help him to budget for aggressive advertising. Every ad mentions the store’s other core product lines and distinguish his products from those of the competition. Consider the recent radio spoof he did on retailer hhgregg.
“We welcome yet another box store to Rockford – after all, we are all about good, healthy competition,” the announcer says. “At llgrace, we offer all the best in appliances and home entertainment, with great prices and free delivery.”
What really has Born excited is the ability to grab market share by outmaneuvering the competition. “Everybody spends gobs of money positioning themselves,” he says, “but it’s just as valuable to position my competitors, so in this case I talked up how we were local.”
That’s a message customers remember.

4. Measure Your Performance: Evaluate yourself, and have a backup plan.

Hills knows that not every marketing campaign is perfect. If a campaign doesn’t go as planned, Hills and her client re-evaluate their strategy.
“Certain months of the year are good for some businesses and others not at all,” says Hills. “So do you spend a lot of money trying to make a good month great, or a bad month OK?”
Be prepared to constantly measure your progress, and when things don’t add up, have a contingency plan in mind.
“Once you get your plan all set up, don’t just say, ‘Here’s my plan, Todd,’ and I say, ‘That’s good, here’s your money, I’ll put this plan in the bottom drawer,’” Larson says. “You need to interact with it. You need to say, ‘OK, I said this was going to happen. Did it?’”
Larson likes to role play what-if scenarios with his clients, to make sure they’ve considered all angles. He pretends that delays have happened, or financial conditions have changed. This process helps clients to be better prepared when things go wrong.
“What did we say we were going to do if we lost 20 percent of our sales? Well, we said we were going to do this,” Larson says, role-playing. “OK, what’s changed? Should we still do that? We said we were going to look at our staff, we said we were going to look at shutting down one of our plants. Are those still valid decisions today?”

Eric Anderberg, vice president of Dial Machine, and Eric Snavely examine a component that will be used in heavy machinery. (Rebecca O'Malley photo)

Larson also finds that each client has a different tolerance for risk. Consider this common scenario: Mr. Smith is a middle-aged business owner who’d like to retire within 10 years. How does he react to financial hiccups? It depends on whether Mr. Smith plans to sell the company or pass it to the next generation.
“If I’m in it for 10, 20 years or even the next generation, we can certainly handle a few bad years if that scenario happens,” says Larson. “Your timetable is like investing. As you get closer to retirement your strategy changes. I’m closer to retiring than you, so I should probably have a different risk tolerance in my 401(k) or my stock purchases. It’s no different for companies. They need to be cognizant of where they are, what their plans are, and what their future holds, and then adjust to what risk they want to take for that.”
The risk is harder to see at Dial Machine, Rockford, which has grown aggressively this past year. The machining company shapes precision parts for customers in mining, oil and gas, power generation, construction/farming and aerospace/defense industries.
Taking advantage of a smaller marketplace and a strong niche, it recently bolstered its market position, becoming the key supplier of components for a client’s mining and power generation equipment. Everything Dial Machine builds for the customer goes straight into the machines, which are sold around the world.
To satisfy the new contract, the company has added nearly 33,300 square feet of space and plans to hire about 10 highly skilled workers. During the planning process, Dial executives determined that, because the new contract was long enough in duration, they had sufficient cause to add new equipment. The three additional machines may allow Dial to meet more needs of existing customers; in short, the numbers worked in favor of growth.
“We feel like it’s never been a better time to make a move like this,” says Eric Anderberg, the company’s vice president.

5. Seek Expert Advice: There are no stupid questions.

There’s no need to go it alone. Throughout the process, attorneys, accountants, bankers, insurers and other professionals are ready to help. They have a financial stake in your success, and are willing to share their knowledge and experience.
Larson likes to provide a sounding board that helps business owners to produce smart, thorough plans. At Blackhawk Bank, members of the commercial lending staff have expertise in industries such as construction, manufacturing and health care. Bank president Rick Bastian is trained in lean manufacturing techniques, and members of the board operate manufacturing companies. The lending team often collaborates, when it’s useful.
Larson and Morrow each have nearly 30 years of experience in local commercial banking, but admit they don’t know everything. Morrow sometimes refers clients to the EIGERlab business incubator, Rock Valley College and/or various government resources that may offer relevant products, services or advice.
When seeking expert advice, be sure to communicate, advises Morrow. And put your ideas in writing. “Having those ideas in writing helps us to digest it and think about it, and to offer our feedback on it,” says Morrow.
On the marketing side, Hills acts as an intermediary between business owners and advertising medium. Business owners can focus on their daily operations while she researches and proposes marketing solutions.
Bayer’s accounting dashboards help business owners to see the big picture.
Avoid the temptation to skimp on professional advice, advises Bayer.
“Some people don’t want to spend money on professionals because they want to cut costs,” he says. “That’s unfortunate, because you could be making a decision without the advice of trusted professionals.”

Today’s Forecast: Partly Cloudy, With a Chance of Storms.

Is now the right time to grow your business? It depends.
In a June survey by the National Federation of Independent Business, only 5 percent of small-business owners said now is a good time to expand. Still, they’re more optimistic now than they were in 2010 and 2009.
Economic signals remain mixed. In the first quarter of 2012, GDP grew just 1.9 percent – poor, but better than the 0.4 percent during the same time last year, according to the federal Bureau of Economic Analysis. While GDP shrank 3.5 percent in 2009, it grew 3 percent in 2010, and 1.7 percent in 2011.
“Looking forward, we’re probably good through 2013, and then it gets a little fuzzy after that,” says Morrow.
National issues like health care costs and potential tax hikes worry Rotello and Bernardi, whose Alpha Controls & Services is highly labor-focused.
“If you don’t set the right environment, there won’t be jobs,” says Rotello. “That’s my biggest concern. As owners, we have all of the risk. We need a return on our investment so we can continue to reinvest in the business.”
The biggest challenge for manufacturers is finding skilled employees, says Morrow. He applauds local school system efforts to improve vocational education, but says those won’t help employers today.
Larson’s clients, including Dial Machine, are stepping forward cautiously. Nearly half of his manufacturing clients are prepared to grow, but the fear of backtracking causes many to hesitate. They don’t want to find themselves in a situation where they’ve gone down a pathway thinking one set of rules apply, only to find that the rules have changed on them.
“Business owners are resilient,” says Larson. “Just give them the rules, and they’ll figure out a way to play.”
Anderberg sees mixed signals, but believes there’s long-term growth opportunity. Some of his customers see a bumpy path toward short-term growth. Others are solidly planning for long-term growth.
The glass looks better than half full, he says.
“If you have a good customer base and you’re reasonably confident, there’s not a better time than now to grow.”