A Quick Refresher on How to Evaluate Growth Plans.

leadershipfunding

5 Oct

Before not-for-profit CEOs and Boards decide what to do to deliver growth let’s start with a refresher on how businesses grow.

Business growth can occur in two categories;

Organic growth means investing in your company by reallocating expenditure to the operations that you want to grow. You do this in one or more of three ways: you can create new products for your company to deliver; improve the performance of activities you are already doing, or you can invest in activities you are doing well to scale up their impact.
Inorganic growth is when you buy, merge, or partner with another company to make a larger entity. (A not-for-profit friendly term to use is "collaborate")

Not-for-profit CEOs and Boards can use these categories of growth to frame the right questions and assess proposed decisions when you are presented with growth plans by your team.

Assessing Organic Growth Plans

Create - Invest - Improve

Let’s start with organic growth and the three categories of growth we can assess:

Create

If creating new products or services is the path identified for growth you will want to see a set of new activities clearly articulated and costed in the growth plan.

Questions to ask: How do these new activities fit with existing activities? How do the new activities take advantage of our core business competencies and value propositions? How do these new activities support our purpose and mission?

Invest

When investing for scale you will want to see some form of evaluation framework that ranks your current activities by results/impact and a decision on which of those activities are being invested in and a rationale for why.

Questions to ask: What criteria was used to rank the performance of these activities? What is the impact on shared services (IT/HR/Finance) of these changes? How will growth in these activities support overall growth?

Improve

Efficiency improvements are best completed across the whole suite of activities so here you would want to see a list of core functions that are homogenous to all your products and services and a rationale as to which of the core functions are to be improved and how the improvements will flow on to growth in each activity.

Questions to ask: How will these changes support growth over the next 10 years? What are the risks of not making these changes? What alternatives have you considered?

Funding Organic Growth

Reallocate - New - Balance Sheet

For most not-for-profits cost control is a core activity and top of mind for CEOs and Boards when evaluating growth plans. Expenditure on growth plans can be allocated by reallocating existing expenditure, adding in new expenditure, or using the balance sheet for funding.

Reallocating existing expenditure

In this case the growth plan will look at the previous period's expenditure and propose a reallocation of expenses to support the growth plan. This type of planning is mainly done in a growth plan built around zero or marginal total expense growth compared to the previous period.

New expenditure

If the growth is tied to new programs because of new funding or service delivery agreements, you want to look for increased expenditure in alignment to the new programs, and a level of confirmation on progress of new agreements or contracts. You will see an increase in total expenditure linked to some form of increase in service delivery. Be sure to check the impact on new programs on shared services like HR, Finance and IT. Revenue teams will sometimes link new expenditure to new income. Be diligent with these plans and make sure the new revenue forecasts are well thought through. Expect higher expenditure ratios in the short term on new revenue programs as the team learns to deliver them. If the revenue does not appear as expected you may need to access your balance sheet to fund the expenditure.

Balance sheet funding

Growth can be funded from the balance sheet and as balance sheets grow across the not-for-profit sector this option is one that should be more fully explored. Balance sheet funding works best for growth investments that are one off or can be self-funded from recurring revenue once established. Balance sheet funding is usually articulated by a deficit budget where the shortfall is funded from the balance sheet. It is important to balance the fiscal responsibilities of a strong balance sheet with the expectations of funders and clients to deliver impact.

With all expenditure plans make sure you remember the basics of fixed and variable costs. You should be aware of whether increases or reallocations in expenditure are fixed or variable and make sure that the team proposing the growth plan understands this as well. As an example, a growth expense of a new FTE staff member will be a fixed cost whereas an increase in a campaign's advertising expenditure would be variable. They are two distinct decisions and should be evaluated differently when assessing the growth plan.

Inorganic growth

For forward thinking not-for-profit CEOs and Boards this category of growth should start to be a topic of more discussion. Having a considered approach to reviewing the external market and looking for companies with similar, complimentary, or adjacent offerings should be part of your long-term growth plan. The opportunities for impact and future growth via close collaboration or partnership will be the ones easiest for not-for-profits to engage with. Sharing resources like back-office functions or linking programs to deliver improved customer experience and engagement can achieve strong outcomes. Over time this may lead to a merger of two companies. In the short term make sure your organisation has a distinct part of its plan that reviews the external market and identifies the main stakeholders. Create and maintain connections with the CEOs and Boards of the companies on your radar and don't be shy to float mutual growth ideas in your regular discussions.

What type of business growth will deliver for your company?

This question is one that every not-for-profit CEO and Board should be asking themselves and the review above provides a simple framework to support you.

The big challenge for not-for-profit Boards and CEOs is how to continue to create impact in a world that is changing rapidly. It's no longer enough for organisations to focus on their core business alone, particularly if they are focused on delivering social impact. Not-for-profits must consider the entire system in which they function as linked and interdependent. Organisations will need to be able to detect change early, think adaptively, and act promptly to get the most out of their plans for impact and future growth. Being able to provide strong governance over decisions for impact and future growth is a critical role for not-for-profit CEOs and Boards.

This may sound simple, but it isn't. The reality is that change no longer takes place in a vacuum; instead, it's occurring simultaneously across several industries driven by market forces and societal issues that are in a state of flux. We are now attempting to work with the decisions made by boards and executives five, ten, and even fifteen years ago, which have established organisations intended to function in a world that no longer exists.

Before deciding what actions to take to support impact and future growth it is important to first remind ourselves how businesses grow. Growth can occur in one of two ways: organic or inorganic. To make a good decision about which type of growth you want, your company should explore both options and decide on the best fit with your goals. If you are looking for additional help determining the best way forward, reach out to us at insight & foresight. Our team has the skills and deep experience to provide you with additional capacity and capability to support you to plan and make decisions for impact and future growth.