May 26, 2021 | Governance, Management
I was astonished when I recently went back to all the stuff I had written to copy and paste a simple explanation of cash flow into something I was doing. I had written a post some years ago, but not in the detail required in this instance.
Astonishing because I rabbit on about cash flow all the time.
Cash flow is the measure by which SME’s live and die.
I encourage as strongly as possible, repeatedly, that those I work with do a weekly rolling 13-week cash flow forecast.
It saves a lot of grief, and once set up is simple to do.
The real benefit of cash flow understanding for an SME is that it is cash, it cannot be ‘managed’ by various accounting practices, you either have it or you do not. Understanding the detail of where it comes from, and where it goes, and when, is the single most important metric for any business. This is particularly the case for an SME without a depth of reserves to accommodate when things go pear shaped.
So here goes.
Cash comes in from only a few sources. Most comes from being paid by customers in an ongoing business, but it can also come in from borrowings, sales of assets, capital injections by the owners, and incidentals like dividends.
Cash goes out in a similarly limited manner. Payment of purchases from suppliers, for anything from leases, capital items, manufacturing inputs, wages and salaries, to paper clip purchases, and repayment of borrowings, dividends, and tax payments.
In the presentation of statutory accounts, the required cash flow statement is broken into three parts.
Cash flow from Operating activities. This records the cash generated, and where it is used in the course of the normal operating activities of the business.
Cash flow from Investment activities. This records cash going into and out of investments that are outside the normal operating business. For example, a business deciding to invest in an adjacent business to firm up control of the supply chain, would record the investment in this part of the cash flow statement, as they would any subsequent dividends that were received.
Cash flow from Financing activities. This category records cash coming in from sources such as bank loans, and capital raising, as well as cash going out in repayments and dividends.
For most SME’s, the first is the major item, with only occasional intrusions from the other two, so I tend to just lump them together.
The format is the same for each. The source of the funds, and the use of the funds.
It is often useful to break the captions up a bit for a greater level of detail.
For example, you might break cash received from customers by geography, type of customer, or product group, all of which can give you a more detailed view of which parts of your business are working as expected, and which are not.
Coming out of pro-actively managing your cash flow are a number of other key improvement strategies, amongst which are:
- Reducing your cash-to-cash cycle time, which reduces working capital
- Managing inventory down without compromising supply,
- Actual cost of goods sold analysis rather than relying on some arbitrary standard,
- Positive relationship management with funders, especially valuable when you are looking for more capital
- Cash can act as a leading indicator of trouble with an individual customer or supplier, or indeed of a market segment in which you compete,
- Goodwill coming from being able to pay your bills on time, every time,
- Cash is the basis of several important investment analytical tools; a robust history makes the numbers even more credible
- Most importantly for most owners of SME’s, pro-active cash flow management delivers peace of mind.
Managing your cash is management 101. Unfortunately for many, it has become surrounded by accounting jargon, and mixed up with the more complex practises employed in the P&L and Balance sheet. Alan Mullaly when in the throes of saving Ford from extinction, demanded a daily cash balance assembled from operations around the world. If it can be done daily in an operation as complex as the global Ford organisation, it should be really simple for you to do it weekly.
Cartoon credit: Scott Adams and Dilbert again make the point better than I can.
May 19, 2021 | Governance, Leadership
The characteristics of leadership we expect from the local non-profit, to the largest businesses in the country, to the Prime Minister, are pretty much the same.
Trust.
We need to trust those who lead. However, trust is never just given, it must be earned by the behaviour we observe. It is also incremental, built over time, it is fragile, and can be brought down in a minute by one bad example. The test, if there is such a thing, is whether we believe that the private conversations the ‘leader’ is having are the same as the public ones, and would they be prepared to say those private things on the 6 O’clock news. By this test, many in prominent so called ‘leadership’ roles in this country fail. Dismally.
Dependability.
Dependability is a component of trust. It has many forms, from delivering on the big promises made, to turning up on time for an appointment with the local hairdresser. In any leadership role, no matter the size, when a real leader finds themselves from time to time unable to deliver, they do not walk away from the fact, they acknowledge the failure, learn from it, and move on. To many, this is the essence of leadership, to me, in it is simplest form, it is only common courtesy painted on a wider canvas.
Competence.
Leaders must be Competent. Someone placed in a leadership role, who is an example of the Peter principal is corrosive to the rest of the organisation. Those being led must believe that the leader is someone who can get the job done. That does not mean they never make a mistake; it does not mean they are never unsure of themselves or exhibit human frailties. It just means that we believe that they have the wisdom, skills, and experience to get the job done. This extends further, by ensuring they teach others to be competent at their job, and the next one. Competence is a compounding quality they pass on to others.
Humanity.
We are herd animals, we rely on those around us for safety, and security. We have evolved and prospered as a species because we are able to collaborate and care for one another and rely on our neighbours in times of stress and crisis. Someone in a leadership position who does not care about those being led, is not a leader, at best they are a manager, dispensable and easily replaced.
In summary, you can always tell who the real leader is: they are the ones others follow because they want to.
How does your leadership style stack up??
May 9, 2021 | Change, Governance, rant
As I look at the current state of the economy from my spot as a boomer who has largely lived my life in times of peace and easy excess, it is becoming clear to me that there are two tracks at work.
The first is the one along which is driving those who work for a wage, pay taxes in the absence of choice, and struggle to feed, house and educate the kids. In the decreasing incidence of the traditional nuclear family, both parents tend to work, often multiple jobs, and seemingly get nowhere.
The second is those who own stuff. Specifically, property and shares. They are doing OK in the enormous inflation of price that has occurred.
The problem for our society and the glue of community is that the latter group are living on what economists call ‘rent’.
Income from ‘rent’ comes from what you own, rather than what you produce. In the absence of producing greater income ‘producing’ than from ‘owning’ you get what we have now, a two-speed economy.
It further seems to me that the system is weighted towards those who own, so can charge rent. Our tax system and increasingly education system which is the gateway to ownership is increasingly weighted towards ‘rental’ at the expense of ‘production’ by those in control. The controlling group are themselves renters, and so set the rules favourable to them, rather than being equitable to all.
This is not a simple challenge for us to address. It has been a long time in the making, and will be a long time in the fixing, which makes it unlikely to be fixed in the absence of strong political leadership that is able and willing to look beyond the current electoral cycle.
The economic problem posed by renters is that they tend to double down on what is producing the income today. In other words, optimising the short term at the expense of the long term, which is messy, uncertain, and therefore subject to greater risk. Risk minimisation is core to a renters mindset. That is why small enterprises are more innovative and less risk averse, they have much less to lose, and are reaching for the point where they can become renters, a much easier life.
When looked at through such a lens, the source of the current malaise in this country is obvious. Too many renters, owning way more than their ‘fair share’ of the largess we have inherited.
I wonder what constitutes a ‘fair share’? This is not something you can legislate, and in any event, the legislature is controlled by renters, so no joy there. In a democracy, we the great unwashed are supposed to be able to bring about change via the ballot box, but that seems unlikely in the short term. Again, the game is rigged to exclude anything other than very gradual change from the edges, and that is too hard for the renters to think about and accept the minor risk it might entail. The outcome of the last federal election when the Labor party put a few anti renter ideas on the table, they were scuppered. To my mind this was the result of incredibly poor marketing rather than the ideas being lousy.
I am first and foremost a strategist, one who looks at the big picture and articulates the principals by which the resource allocation and tactical decisions are made. As such, I propose two principals by which the foundations of our economy, and therefore the society we should be aiming for are sourced.
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- Education. Make this more accessible to all, from preschool to advanced tertiary, and everything in between. We need not only the scientists, doctors, and managers, that make the industries and services we want work, but the plumbers and toolmakers who actually make things that produce income. It is that latter group that have been killed off by policy decisions based on something other than the long term good of the community.
- Funding. It is a simple matter that the aspiration above needs to be paid for, somehow. Increasingly the tax burden is supported by the ‘workers’ while the renters get a pass. This simply must change. Not a proposition easily accepted by those who will ‘lose’. It will be resisted with all the resources at the disposal of the renters, and their allies. First target should be the multinational corporations that infest our industries, who reduce their tax, legally, to close to zero by a mix of entirely legal strategies, usually involving transfer payments to head offices domiciled in places where the rates are lower. This is an international problem, not just ours, so the benefit is that others need our cooperation as much as we need theirs, and the economies of the Bahamas and Cook Islands can be assisted in other ways to play their role in a fairer world economy. Then there are multiple soft targets in our domestic tax system that need to be progressively addressed so the balance is reweighted towards those making, at the expense of those renting.
We need to share the largess of the golden goose more widely by re-weighting the distribution of the gold, rather than the ownership of the goose.
It is Sunday morning, and clearly, I am dreaming!
Apr 13, 2021 | Change, Governance, Strategy
When should you let go of the sunk cost that is not performing?
How do you decide when to quit, walk away from an investment? It is as important a decision as the one you made when planning where to allocate your resources in the first place.
Strategic quitting is the flip side of strategic planning.
Realistically, you have only a limited amount of resource to be allocated. Determining the priority for those allocations includes being able to stop proceeding with some, and redirect. This acknowledges the opportunity costs often swept under the corporate carpet.
It is not being a quitter, it is sensible strategic leadership
The good thing about being at the point of strategic quitting is that you have actually done things, and hopefully learned from them. Therefore the next action you take should be better informed.
I am sick and tired of the fluff around strategic planning, what we need is less of it, and more strategic doing!!
Strategic quitting is a fundamental part of strategic success, embrace it.
Apr 10, 2021 | Governance, rant
Dismay is the only (polite) word to describe the feeling as I watch the machinations and manipulation of current politics that passes for representative government.
Where is the humility, empathy, dignity, and recognition that they are there to serve, which is a specific choice encapsulated in the role?
Instead, we are confronted by ego, hubris, pride, and arrogance, manifested by the all-pervading sense of entitlement.
Where is the vision, and the expertise to deliver on that vision?
Nowhere to be seen.
Where are the facts?
Nowhere to be seen.
I am sure there are good people languishing on the back bench, and in the ranks of the political organisations as disgusted as most of us seem to be, at least in my wide networks, but their voices are not heard. There are many other great people in the community, with the drive, vision, and expertise to deliver positive outcomes for their communities, made up of their children, grandchildren, and thousands of those of others, who would not go anywhere near a public role.
The reason: They have no wish to be associated with the body politic and the toxic culture that surrounds it.
That leaves us with a huge problem: how do we change it?
The key to success is working together. Always has been, always will be. That is the nature that human evolution has bestowed on us, as it has proven to be the only way to survive and prosper.
Somebody should tell those in the Canberra Clown Factory. Both sides of the factory, and both floors.
A few months ago, I read, again, the narrative of Alan Mullaly delivering Ford from the executioners door, building the foundations that have resulted in its current prosperity.
The overriding impression from that narrative is that besides being the smartest and most driven bloke (or gal) in the room, he was also the most humble. It was by that humility that he created a culture of visionary co-operation and accountability for outcomes.
Compare that to the products on show in the Clown Factory showroom.
The header for this rant is a reproduction of the little card Mullaly handed out at every opportunity. By way of example, he ensured he and those for whom he was responsible worked for the common good. The card originated when he saved Boeing from visiting the receiver in the nineties and lived on through his tenure at Ford.
Perhaps I should send one to the clowns?
Mar 21, 2021 | Governance, Leadership
I have been dismayed by the quality of the language coming from our leaders, deteriorating as it has for the last 45 years I have been watching closely.
With several notable exceptions on both sides of the house, the standard, if measured by the insight and understanding delivered to the listener, has dropped to the level of a Sunday school teacher proselytising for their invisible friend.
“Political language……. Is designed to make lies sound truthful, and murder respectable, and to give an appearance of solidarity to pure wind’
So said George Orwell in his essay ‘Politics and the English language’ published in 1946.
Orwell thought this manner of language use to be a ‘contagion’ devoted to hiding the truth.
It seems to me that the contagion has well and truly dug deeply into our political ‘leaders’ now, with Scotty from Marketing being the current flagbearer.
I almost miss Pauline Hansen’s outrageous mishandling of not only the language, but people’s common sense and the truth, when listening to Scotty blather on. It is easy to dismiss Hansen as a looney, of little consequence beyond a small and decreasing group of loonies. It is way harder to dismiss the impact of a Prime Minister defending the indefensible, taking credit for anything good that happens despite his ministrations, and abrogating any form of responsibility for those that tank.
A little bit of truth, transparency and humility would go a long way to restoring the shattered trust, we the electors have in those who end up in the various parliaments around the place.
