Why growth decisions during transition need a level of financial and commercial discipline that often gets dropped at exactly the wrong moment.
There’s a particular kind of pressure that shows up in the year or two after an ownership change. A new ambition is in the room. The growth story has been told, often quite loudly, to a much wider audience than before – the team, the trust, the new investors, the family. There’s an expectation of movement, of evidence that the new chapter is going somewhere.
That pressure is mostly a good thing. It focuses minds, surfaces difficult questions, and pulls the leadership team out of any comfort zone they may have settled into. But it has a cost: commercial discipline can slip when the pressure to grow is highest, which is when the business can least afford it to.
Revenue is not the same as value
The first place this shows up is in the conflation of revenue growth with value creation. They’re not the same thing, never have been, and in the early years after a transaction the visible KPI everyone gravitates to is the top line. Revenue is up, therefore the strategy is working, therefore everything is fine.
Then you look at the numbers underneath. Margin has thinned, the cost of acquiring the new revenue is higher than the cost of acquiring the old… Working capital has lengthened because the new customers have terms the old customers didn’t. The team is stretched, so some of the operational excellence the business was known for is showing wear. None of this shows up in the headline, but all of it matters deeply.
I’m not saying revenue growth is bad. I’m saying revenue growth without margin, cash and capacity discipline tends to result in visible disappointment 18 months down the line, by which point it’s much harder to take a different approach.
The strategy and the resource have to match
The second place commercial discipline tends to slip is at where strategy meets resourcing. Let’s say a growth strategy is written and it looks credible on paper. The story being told says “we’re going to do X, Y and Z in the next three years”. Nobody quite asks the next question: with what resource, with what capabilities and is it possible?
The strategy often assumes a level of leadership capacity, financial headroom, operational capability or customer engagement that the business doesn’t currently have, and isn’t building fast enough to have when it needs it. Either the strategy needs to be adjusted to fit the business as it actually is (and as it can credibly become), or the business needs to be deliberately invested in to become the kind of organisation that can deliver the strategy. Both are valid answers. Doing neither, and hoping it sorts itself out, is the most common one – and the most expensive.
When I ask boards or executive teams whether the strategy is actually possible to deliver with the resources they have today, the answer is often a slightly uncomfortable silence. The honest answer is usually “not yet”. And the follow-up – “so what are we changing?” – is the conversation that needs to happen at board and leadership level, and often isn’t.
Profit and cash aren’t the same thing
Most of us know that profit and cash aren’t the same thing. That a business can be profitable on paper and yet running out of cash. A business can be cash-positive in the short term and yet eroding its long-term financial position. In stable conditions, the gap between the two can be managed. In a transition window (when the business is investing, growing, taking on new customers, perhaps carrying acquisition debt) the gap can widen quickly. If nobody is watching it carefully, things can go from comfortable to uncomfortable inside one quarter.
I’d encourage any leadership team going through transition to genuinely know, in their own heads, the difference between profit and cash for their business. Where the timing differences sit, where the working capital pressure is most acute. What a bad quarter does to the cash position, where the headroom is, and where it isn’t!
This isn’t finance director territory – it’s whole-leadership-team territory. The teams with this fluency tend to make better commercial decisions under pressure. The ones without it tend to make the wrong call when it matters most.
The disciplines worth sticking to
A few specific things worth keeping tight through a transition period:
Decisions of any size should be evidenced. “What’s the return on this, what’s the cash impact, what are we choosing not to do as a consequence?” – asked of every commitment of resource, every project, every hire. As a discipline, rather than a bureaucratic gating mechanism.
Investment cases that are actually investment cases. Quantitative, time-bound, with a clear view of what success looks like and when it will be visible. Reviewed against actuals once the investment has been made, which is the bit that gets skipped most often. If you never look at whether the investment delivered, you’ll never learn what kinds of investment work in your business.
Honest forecasting. Forecasts that are realistic rather than aspirational. Three scenarios where useful (base, downside, stretch) so the team is thinking about the range of outcomes. And then revising them with humility when the world doesn’t co-operate (spoiler alert: it rarely does co-operate!).
Margin discipline at the deal-by-deal level. Particularly in B2B businesses, where individual commercial decisions can erode the overall margin position over time. The leadership team needs to be able to see this, and to be willing to walk away from revenue generating opportunities that are a bad strategic fit. Easier said than done when there’s a potential sale on the table…
In Summary
Commercial clarity through a transition is a whole-leadership-team capability, rather than a finance team responsibility. It’s one of the things that distinguishes the businesses that come out of the post-transaction period stronger from the ones that come out scrambling.
When I teach ‘Finance for Non-Finance Director’ courses, I tell my delegates: “if you don’t understand the numbers, you’re not really steering the business, you’re just hoping for the best” and I’d reiterate the point here, because the transition window is the very much the wrong moment to hope for the best.