At the end of this year, many awards are being prepared to recognize "our French growth champions".
In an environment that is often volatile and complex, generating a high level of "profitable" growth does not happen by chance. For the company, it is necessary to gain in efficiency, optimize its costs and for the founder(s), to assume the opening of a part of the capital to finance medium and long term projects.
What is hypergrowth?
Hypergrowth can be defined as a very strong growth of a company. In general, a company is considered to be in hypergrowth if its annual sales increase exceeds 40% for 3 consecutive years. It can apply to both SMEs and large companies, although this is more rare.
The hypergrowth of "Slip Français
Let's be a bit "cocardian" and take the example of the French underwear, a textbook case, whose business model is mainly based on online sales (70% of items sold) and whose turnover has grown from 3.5 million euros in 2015 to 20.7 million euros in 2018, an exponential growth for 3 years.
At the end of 2016, the company's capital intensity* represented 47.15% (i.e. 47 euros to arrive at a turnover of 100 euros). A level that is far too high for an online platform whose customers' payment is almost immediate. The fault is due, in part, to the too high weight of the stocks (20% of the turnover before tax), the not so fast cash receipts (weight of the customers = 8% of the turnover before tax) and the too fast cash disbursements considering the cash situation of the company (weight of the suppliers = 24% of the turnover).
In addition to its WCR (Working Capital Requirement) problems, the French company's gross operating margin was negative, resulting in a cash flow shortfall. In short, everything was going wrong.
How reliable is the company's business plan, whose ambition was to approach 25 million in sales in 3 years?
And yet ... After convincing at the end of 2016, a financial partner to enter its capital, the results, 2 years later, are in. The company's growth can be described as profitable. The 2018 turnover exceeded 20 million euros against 13 million euros a year earlier, its gross operating margin is up and positive again, and its Operating Cash Flow Surplus has generated 2.6 million in cash.
Turnover is not a guarantee of security.
The Ellisphere score reflects this rapid change in growth. This has risen from 2/10 (mid 2017) to 5/10.
Let us congratulate ourselves on this success. Not yet...for nothing is certain, for if it is profitable, growth must also be controlled. On this last point, let's question the considerable 12-point drop in the company's capital intensity in 1 year (IK of 35.84% at the end of 2018) and this despite the investments made in the boutiques and the opening of the platform towards export.
Part of this decrease is linked to the increase in the weight of suppliers in the turnover. This weight is constantly increasing. It represents 37% of the turnover in 2018 against 24% in 2016. The company is paying its suppliers later and later. Ellisphere's sector behavior index (Payrank) is a reminder of this (1/5 -> The company has a high DPO* compared to its sector). The company's balance sheet reflects this evolution and is less and less liquid.
What does this mean?
In general, we should not fall into the trap of the turnover which is not a guarantee of security. Accelerating growth too quickly has its limits. The ambition to become a reference in one's market very quickly is a strong risk, while the ambition to make one's assets bear fruit in the long term by methodically setting milestones, particularly in one's traditional activities, is much less so. Both approaches are nevertheless respectable and should be encouraged, as the French economy needs both.
*Capital Intensity = (Fixed Assets + WCR)*100/Sales
*DPO = Days Payable Outstanding
