How the founders of R750 million-business The Creative Counsel, Gil Oved and Ran Neu-Ner, learnt how you first have to spend money to boost growth – and then tighten the reins to maintain it.
According to Ran Neu-Ner and Gil Oved, co-founders of The Creative Counsel, South Africa’s largest advertising agency, there are different levels of growth, and they’re often dependant on your company’s lifecycle.
“Your start-up phase is all about staying open and paying your bills,” says Neu-Ner. “Everything you make is ploughed back into the business, and you’re putting in 18-hour days because you can’t afford to hire staff. You’re a jack of all trades who lives, breathes, eats and sleeps the business.”
Oved agrees, adding that the next level, which for TCC happened in 2011, is all about putting a management structure in place.
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“You reach a tipping point where you just can’t do everything yourself. For us, it started with one receptionist a few months into the business. Today we have over 1 000 employees, and provide work for over 30 000 people every year.
“To really grow though, and reach that point, it’s important to put a management team in place – and it needs to be a top-class management team.”
Spend money to make money
“This is an area where we had previously made mistakes,” admits Neu-Ner. “As a start-up and then early-stage SME, you’re generally trying to do things on the cheap. It’s natural, and certainly in the start-up phase there’s nothing wrong with that. But you reach a point where you need to recognise that it’s time for a shift.”
“Doing things on the cheap has two results,” adds Oved. “First, you end up with poor or incorrect hires who are difficult to get rid of down the line, and can actually do more harm to your business than good.”
“We’ve learnt that simply spending a bit more upfront can also save you millions down the line,” says Neu-Ner.
“The cost-to-company difference between a mediocre employee and the best in the market is about 20%. The difference in output on the other hand is 100%. An excellent financial director is about R250 000 more expensive than an average financial director, but we’ve personally experienced the fact that a great FD stops you making mistakes that can run into the millions. If we’d realised that simple fact years ago, we’d have saved the company millions. Spend more now, and make and save infinitely more down the line.”
The second problem with hiring ‘on the cheap’ is that you end up with ‘compression’ managers. “Compression managers perform multiple roles because employees are stretched thin,” explains Oved.
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“This means no one is working exclusively at their pay level, and while this seems like a cost efficient way to run a business, because less hands are doing more work, what you’re actually doing is stifling growth because great employees and managers are doing menial tasks instead of focusing on areas that impact the more strategic growth areas of the business.”
“This is bad if your managers are operating in this manner, but detrimental to growth if you, as the business owner, are doing the same thing,” Neu-Ner adds.
Top line vs bottom line growth
“During your start-up phase you’re concentrating on top line growth,’ says Neu-Ner. “ This is 100% correct. Revenue gives you the confidence to build your business and allows you to become a serious player in the market. You need revenue to scale the business and leverage suppliers.
“But with revenue comes the cost of sales as well. As we’ve already mentioned, revenue growth has certain responsibilities attached to it, including salaries, overheads and supplier invoices. You need to spend money to make money, but of course, spend it wisely, and don’t waste.”
There’s another level of growth though, which is where Oved and Neu-Ner are currently focusing their energy.
“We’ve spent the last decade concentrating on top-line growth,” explains Oved. “You reach a point where it starts getting harder and harder to grow that revenue at the same rate though. That’s when you need to start looking at profit growth. Turnover is all good and well, but ultimately, your profit margin is what really matters.”
“Efficiencies are all about saving money, which directly impacts the bottom line and your profits,” says Neu-Ner. “Efficiencies and revenue are not mutually exclusive, but where your business is in its lifecycle will dictate which is more important and requires more focus at that time.
“Focus on revenue first. You can’t grow a business unless you’re building revenue. Once you’ve started growing though, you need to start focusing on efficiencies and EBIT (earnings before interest and tax). If you ignore these two crucial areas, you’ll never increase your profit margins.”
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“We love the analogy that revenue is the fuel that drives your car,” says Oved. “Fuel’s important. Without it your car won’t move. But once you’re on the highway, you can start thinking about efficiencies – how far can you travel on one tank, and where can you save on fuel costs?
“Revenue is important, but, it’s not about turnover; it’s about leftover. Turnover is ego.”
“From a turnover perspective, we’ve had good, steady growth since we launched,” says Neu-Ner. “But we’ve reached a point where our turnover can no longer double. Once that happened, we realised it was time to start focusing on our earnings. In 2014, our earnings doubled. We’ve invested in systems that manage the business better, and we’ve become a lean, mean operating machine. We watch our costs, and look for every single efficiency we can find, no matter how small. The results have been incredible, and that’s where real future growth and earnings lie.”