The single best financial measure on which to focus improvement initiatives: Cash Conversion Cycle.

Feb 3, 2020 | Governance, Management, Operations

 

 

How long does it take you to convert your products into cash?

This is one of the most important but overlooked measures in most businesses I see. It goes to the manner in which you manage all the processes  and resources it takes to turn ideas, products and services into cash, the lifeblood of every enterprise.

Your Cash Conversion Cycle, (sometimes called cash to cash cycle) is the time from the order of raw materials, in the case of a manufacturer, to the payment of the invoice related to a sale. In other words, days inventory (which includes raw materials, Work In progress, and finished goods), plus days debtors outstanding, minus days creditors outstanding.

Reducing your cash conversion cycle time can be a huge competitive advantage.

There are a number of well understood ways to reduce your CCC, the catch is, that it is a delicate balancing act between differing functional responsibilities.

In the pre-deregulation milk industry in NSW, my then employer, Dairy Farmers, paid the dairy corporation for its milk, as all production was vested in the corporation, in 30 days. We sold to milk vendors, the monopoly distributors, on 7 days terms. This gave us a -23 day cash conversion cycle. On the day of deregulation, from which retailers could buy from whoever they wished, that cycle changed radically. We paid the dairy farmers, our suppliers, in effect, C.O.D., and supermarket retailers paid us 90 days. Our cash cycle went from -23 days to +90 days for supermarket sales, a 113 day turnaround overnight, which cost in the region of 60 million dollars in working capital.

It was a big pill to swallow.

So, what are the strategies that can be employed to improve your cash cycle time?

Reduce inventory.

Physical inventory in a service provider is not a consideration, as there is none beyond consumables. However, in most cases of service businesses, there is some sort of project involved, which takes time to deliver. In this case, time can be considered as inventory, and the quicker the ‘inventory turnover rate’ the better.

A manufacturing business generally has inventory in three parts: raw material, Work in Progress (WIP) and finished goods. While it is tempting to manage each separately, the downside is the potential impact on customer service, so they must be managed together.

  • Purchase reduction. Too many times I have seen a Purchasing Manager instructed to reduce inventories, which is easily done by simply reducing purchases. However, done in isolation, this almost always leads to manufacturing shortages, and angry customers.
  • WIP reduction. Similarly, WIP is often seen as relatively easily reduced by doing longer manufacturing runs. The unfortunate consequence of which is usually increases of finished goods inventory of slower moving lines. When there is a multi-stage manufacturing process, longer runs also leads to WIP build-up in front of slower manufacturing sub-processes.
  • Finished goods reduction. Finished goods are the most expensive inventory items, as you have added time, labour and the input materials to produce them. Nevertheless, being out of stock when a customer orders is never good. Alternatively, depending on your business model, putting their order on a future delivery date can be managed, but the longer the delivery lead time, the more likely the customer is to go elsewhere.

The upshot is that inventory can be reduced, often by substantial amounts, but it takes leadership, functional collaboration, and appropriate performance measures to be successful while retaining customer service.

Decrease debtor days

Debtor days are a function of both your trading terms and diligence in collecting debt as it becomes due. A strategy that usually works, is a polite reminder that the invoice is due to be paid in a few days. It is too easy to leave debtors to pay their bills as and when they are able.  A bit of friendly, polite pressure applied might see your invoice  go to the top of the pile, at least over those who do not actively and politely follow up. Diligence, and being a very polite ‘squeaky wheel’  pays.

Another useful way to reduce debtor days is to split payment. When selling some items you can reasonably have as a part of your trading terms a deposit, and partial payments over the period between order and final delivery. This happens when you build or renovate a house, there are stepped payments in line with project milestones. Think creatively about how you might introduce similar stepped payments, your cash flow will love you.

Manage creditor days

Managing creditor days is not just a matter of delaying payment, although this is the most common reaction. Your suppliers are in the same situation you are, setting out to reduce their cash cycle time, and if you are a recalcitrant debtor to them, they will tend to reduce their levels of service, demand C.O.D., or even simply refuse to supply. Secondary to a shortened cash cycle is a reliable cash cycle. If your suppliers know from experience, and negotiation,  you will pay the invoices on a given day, they will tend to leave you alone, or even agree to an extension of terms. In effect they are exchanging a shortened cycle for a reliable one. Experience tells me paying exactly to the terms agreed is the best strategy, as it enables renegotiation of those terms.  

Management of cash is an essential discipline for success, and the time it takes to convert an order into cash is about the best measure there is to proactively manage your procurement, manufacturing and sales demand planning processes. Out of measuring the cash conversion cycle time will come a number of contributing measures that will together make the enterprise more competitive, resilient,  and agile.

This is all pretty simple to say, but like most things in life, much harder to do. When you need an experienced hand, give me a call.

 

 

Australia Day, January 26, 2020.

Jan 24, 2020 | Governance, Leadership

 

Sunday is Australia Day, and the bushfires consequences, and the possibility of more in the next short period, is at the forefront of peoples minds.

In recent days however, we have had dust-storms that have been truly frightening, and intensive storms, including damaging hail, some in areas still smouldering. Now we have the farce of the Libs buying votes with grants to sports clubs prior to the last election. (In the interests of full disclosure, I chair a sporting body that had an application in to replace some critical infrastructure that was, now still is, on its very last legs.  We were pretty confident of being successful, as it fitted the guidelines like a glove, but we failed to account for the fact that the club concerned is in a safe Labor seat)

There will be substantial political and commercial fallout from all this.

From the various climate induced calamities, insurance rates will go up, politicians will be held accountable. Those with capital to be invested  will demand that action be taken, and they will vote with their money by not investing in areas they see as subject to the uncertainty of climate change. Larry Fink, chairman of Blackrock, the largest money manager in the world ,has written an open letter to CEO’s informing them of Blackrock’s revised assessment of the risk profile of investments it makes based on climate change risk. His is a voice that carries huge weight, and Blackrock putting their trillions where Larry’s mouth is, will have a significant impact. If the commercial funding of the revised Adani project needed another nail in the coffin, I suspect Mr Fink just supplied it.

Mr. Morrison will be haunted by photos of his stunt bringing a lump of coal into parliament. It has become a parody of the inability of this government, and to be fair, those that preceded it, to develop a framework to manage the impacts of climate change. I wonder if the Greens in their quiet moments now look back on their decision to scuttle the Rudd governments carbon pricing scheme as the greatest blunder they have ever made? I did hear Richard Di Natale defending the decision on radio a couple of weeks ago, and he sounded like a kid caught stealing money from the church fete. 

Rudd’s comment that ‘climate change   is the great moral challenge of our generation‘ is proving  right, unlike much of the other stuff he said. He was right and every government, including his, has failed to step up to that challenge.

I wonder if the fires might start a serious consideration of  the manner in which we replace the infrastructure destroyed? We have the opportunity to experiment with technology, capital equipment, and organisational processes, rather than just running out and replacing the destroyed infrastructure with more of the same. Perhaps not: that tactic may reduce the headlines and openings to use as photo ops, as well as risking partisan criticism in the inevitable event an experiment does not work as ‘advertised’.

The economy is in the shitter. The GDP figures for the April quarter when released in about September, will show increases in activity and our gormless Treasurer will mount his soapbox blathering about the plan, when the increased activity is just about replacing assets lost in the fires. Nothing will be done about our manufacturing productivity, which long term is the core of the economic growth we would like to see. Supporting that are basic items  like the technical education and  apprenticeships, the hard, on the ground skills needed to keep up in a digitising world.

I suspect tourism, one of our biggest industries and employers will be hit hard, not just by the impact of the fires,  but by the uncertainty that prevails. It will put off many travellers, and spending a few million on reactive advertising is about as useful as pissing on a bushfire. Better than nothing I guess, but about as useful.

The impact of the financial services royal commission are yet to be worked through the system, but to me it seems like not a lot will change. There have been a few heads chopped, a few of the protagonists in the debacle promoted, and a few new regulations proclaimed, intended to fill the obvious holes,  which will more than likely just require more administration, and inevitably costs will increase. Just in the past week, we have had AMP caught, again, with its hand in customers cookie jars. Will these amoral pricks ever learn?

The current Royal Commission into the treatment of the aged, will I suspect, throw some more explosive material into the public forum, and we will be demanding quick and effective action, neither of which the government will be likely to deliver. If the fires, storms, and sporting grants rorts do not destroy the prospects of another term for this lot, the anger from the baby boomers whose parents it is that are suffering should be enough to tip them into oblivion. This is assuming of course there is a credible alternative. If not, hopefully Morrisons invisible friend who has been notably absent these last 4  months will turn up to assist.

Exactly a year ago today, I expressed concern that we would be ‘molested’ by politicians seeking election. Well, that happened, but then as we got closer to the day, the polls clearly showed a win for Labor, which failed to eventuate. Nobody was as surprised as our then, and now current Prime Minister who said in his acceptance speech: ‘I have always believed in miracles.’ As a result he floated along doing nothing beyond making ‘how good was that’ speeches and having a restive, and in some cases stupid back bench, sitting on a one seat majority, but grasping the trappings of power. I suspect the year coming will be entirely different, as the mood of the electorate seems to me to be pretty ugly. The question is have Labor recovered sufficiently from losing the election they thought was in the bag to be an effective and contributing opposition, or will they remain hiding under the table. A good start may be to propose a unity ticket to develop a  long term policy response to the climate and energy challenges we face.

Whoops, there goes another heavily made up pink pig flying past.

Have a good Australia Day, hug your family, friends and neighbours, and batten down the hatches.

 

3 factors creating an existential crisis.

Jan 19, 2020 | Change, Governance, Leadership

 

I recently found myself in the position of refereeing a ‘debate’ over lunch on climate change between 2 zealots, one from either side.

One who was a passionate advocate of the argument that it was real, and would kill us unless we did some challenging things, the science was in 30 years ago, and we have barely moved. Our public institutions have displayed, and continue to display, criminal negligence in that inaction.

The other, was a passionate advocate of the ‘why bother’ story. As Australia is a tiny contributor to global warming, unless the rest of the world did something, destroying our way of life was an irrelevant act of self -immolation. 

Thinking about it later, three things came to mind, that reflect the barriers to any major change in the way we work and live.

Denial. It is not happening, we cross our fingers and hope it goes away. Through history this has never worked, it is the ‘peace in our time’ solution.

Money.  Making the change will  not make any money, just impose unnecessary and unrecoverable costs. This assumes that tomorrow looks just the same as today, which is always wrong, we just cannot see the potential. Steve Ballmer dismissed the first iPhone as an expensive toy that would  never work,  Blockbuster did not see the potential in Netfliks, and Kodak, who invented digital photography, failed to commercialise it. With the short term  dominant in our institutional and public governance, the immediacy of money being generated  is a powerful argument for inaction, despite the evidence to the contrary.

Optimisation. We have optimised our current organisations, they are good at running exactly what it is now, and change is messy, expensive, risky, and dangerous to the personal advancement of those who advocate for it. In addition, the short term prospect of generating a return on investment is low, so our institutional risk aversion kicks in, often on steroids. Both time frames have their costs and benefits, quantifiable with significantly variable degrees of certainty. On balance, my money is on the ‘do something’ button, as history suggests those who do not change in the face of undeniable  change around them,  get run over by those who take the prizes. IBM and Olivetti used to own the typewriter business, Kodak owned photography, Hoover owned vacuum cleaners, all optimised businesses for the maintenance of the status quo, and none survived.

As I write this, the east coast of Australia, gripped by drought, has been on fire. We are only in the early part of what is usually called the  ‘fire season’, so things could easily get worse, although there may not be much left to burn. I suspect the views of both sides of the debate my lunch colleagues had will not have changed much as a result, a microcosm of the policy problem facing us.

However, every problem is accompanied by opportunity.

Climate change is a problem for everyone, a challenge for policy makers faced with the reality of short term populism to keep their jobs, and an opportunity for the few who see the problems as challenges to be solved.

 

 

 

5 key factors to consider when planning your budgeting process.

Jan 2, 2020 | Governance, Management

The new year will bring budget season. For most, it will be an addition to the  day job, but it is a critical activity that is often treated with less application of critical and creative thinking than it demands as a precursor to superior performance.

Following are 5 fundamental factors to consider as you plan for the budgeting process, and allocate the resources necessary to deliver strategically significant outcomes, as well as, ‘the numbers’.  

Parentage.

Ensure the budgeting process is a child of the strategic priorities, and measures of progress towards the stated strategic objectives. If these strategic priorities are not clear, budgeting in the absence of strategy is like having a shower with a raincoat on, you will have done the process, but it will not do much good.

Rolling budget.

Make the budget a rolling document, reporting against the expectations articulated in the budget, and updated quarterly. For many, month reporting is standard, but mostly it is financial only, make it strategic as well.  However, monthly is too small a time frame against which to reliably measure for strategic progress, quarterly is preferable. This rolling process should not be just for the budget year, they should be rolling quarters, and perhaps more than 4 of them. Strategies should not change dramatically in the absence of some significant and unexpected external catalyst. What changes, are the tactics used to achieve the strategic objectives, and both must be measured. I have used a 5 quarter rolling ‘budget’ in the past. This time frame is long enough to enable a continuous process of critical thinking that becomes part of the routine performance management processes. It has the added psychological benefit that it is  not 4 quarters, that are too easily seen as a proxy for an annual budget. 

Zero based budget

Make the process zero based, or at least partly so. Do the critical analysis of what is required to deliver the long term. Which markets and customers should you be servicing, what capabilities do you need, which improvement activities do you prioritise, which investments make most sense, what tactical activities should we be doing, and so on. Then then cost it, while making forecasts of the tactical outcomes and longer term benefits derived from the various activities. Taking last years numbers and adding 3% is again getting under the shower with that rain coat on.

Zero based budgeting demands that assumptions be examined and validated before they are included in the numbers and forecasts. It is a means of testing the boundaries of the status quo, and enabling some extrapolations to be done, and strategically sound experiments to be undertaken, so forecasting can be based on data and experience rather than what one person thinks may be a good idea. It also demands cross functional buy in, particularly when improvements are being sought. Functional siloes usually get in the way of improvements, by focussing on their own patch, and not recognising the cross functional nature of processes.

It also requires an analytical approach to decision making in the place of the often qualitative approach used when you just bung on 3%.

Deploy Data.

Data is essential, no sensible budgeting effort can get away from the need to have quality data and depth of thought created by critical examination of the data. Internal data is essential, and as important, but usually just glossed over, is external and competitive data. While I always advise clients to worry about themselves rather than their competition, that does not detract from the simple  fact that competitors do have an impact on performance, so being able  to quantify that impact is of great value.

Do not trust the Status Quo.

In every organisation, the status quo exerts a great deal of pressure. Doing what has been done before, even if it is sub-optima, will rarely get you into trouble, but it does ensure at best average performance outcomes. The status quo will override any effort that is not supported by both critical thinking, creative solutions to well articulated challenges, and data. The automatic continuation of the status quo is always a sign of sloppy or absent thinking.

Happy budgeting, and if you need some experienced guidance, give me a call, today.

 

Own your digital real estate, or slowly disappear in 2020.

Dec 22, 2019 | Change, Governance, Social Media, Strategy

It is getting harder and harder to be seen in the tsunami of stuff posted on various digital platforms.

The platform owners are wholesalers of eyeballs, their business is monetised by being the choke point between those who create material, and those who may benefit from seeing it.

Since the purchase of LinkedIn by Microsoft, the changes being made to generate a return on the $US26 billion paid have all been designed to build the case for monetising the access to the other side of the equation.

I have no problem with the principal, being paid for value delivered. However, for a small consultancy, wanting to inform, educate, demonstrate expertise, and add value, the costs can become significant.

There is an option.

Be really good, be different, and be of value to the few who really care.

Everything posted on the various ‘social’ platforms is first posted on my own digital home base, a point of distribution I own, so make the rules by which I operate, www.Strategyaudit.com.au . The alternative is to rely on platforms others own, where they make the rules by which you have to play.

For those who sometimes find value in what I write, subscribe to the posts on the site, rather than waiting to see them on LinkedIn or some other place, because you will miss most of  them.

Once subscribed, you have the option of reading them, or just skimming and moving on, the choice is yours, not that of an algorithm designed to extract rent for the privilege.

If the posts become less than valuable, unsubscribe. Easy.

For many years now the path has become increasingly clear: to be seen, you must own your own your digital real estate, not rent it from someone else. 

The recent changes in the LinkedIn algorithms have halved the number of people who see what I post, and moved them geographically. A set of eyeballs in Sydney is for me terrific, New York or Mumbai is of less value.

At some point soon I will simply stop posting outside my own digital real estate, relying on that oldest of marketing tools, word of mouth, to spread the word. At least then I know that those who see the stuff really care, perhaps learn, and might start a useful conversation, which is why I do it.

This is the last post for 2019. I hope it has been a good year for you.

As I sit here in Sydney, ringed by fire, and observe the impotence of the public governance  we have somehow inherited, the hubris and self interest that prevents sensible debate and change across our economy and social services, I can only believe we are at a tipping point. I remain an optimist, and hope against hope that 2020 sees the awakening of a feeling that we have to not only demand change for the better, but dig in and generate it, one by one, until it becomes unstoppable.

Merry Christmas, and I will see you next year

Oh come all ye turkeys

Dec 16, 2019 | Governance, Leadership

 

As we hurtle towards another Christmas, the turkeys are out, clamouring to be at the front of the line.

Australia’s latest quarterly GDP figures were released  on December 4, generating a flurry of commentary from all sides of the political and economic tables.

What are we mere every day Australians to make of this welter of ‘informed’ commentary, that takes the same set of figures and comes up with entirely different analysis, delivered as fact.

We have the treasurer spewing patronisingly about how well it is all going, the plan is working, as the number is 0.4% growth, an annualised 1.6%. This is down from forecasts, way down from the post GFC average growth of 2.6%, and a long term average of around 3.4%.

Not so sure I like the plan, particularly as all the anecdotal stuff I see indicates we are much deeper in the doo doo than those figures would indicate.

For example, household spending is steady at best by the numbers, awaiting the yet to happen Christmas shopping binge, which seems  unlikely to emerge. Household spending is a key component in the GDP figures, when it sags, the economy is heading for trouble. I expect a very poor outcome when the next quarters figures are released in March.

Unemployment was 5.3% in the latest numbers, and when you look at the graph, it is on a rising trend.  Perhaps it is time for a revision of the manner in which that number is calculated, in order to offer a more realistic picture than the one delivered by the current sanitised nonsense? Unemployment is the number of people looking for work in the period. It excludes those who could work, but are not actively looking. However, the catch is that ’employed’ is defined as anyone who is paid for more than 1 hour a week. By that measure, our unemployment rate may be 5.3%, but the real rate, the point at which the so called ’employed’ are able to live, pay the bills, and not look for more paid time, is way, way, way higher, and the rate amongst significant slices of the population, such as those under 20, is devastating.  Then you have the problem  my client base of SME manufacturing has, of actually finding tradesmen who are capable and willing,  to do the jobs necessary to keep our SME manufacturers competitive, thriving , and employing people.  Those trades do  not exist because we stopped training them and offering the dignity of work.

The unemployment number is an absolute nonsense, we all know it, yet it is a highlight of the political discourse.

The tax system is stuffed, as stuffed as that turkey that will be crammed into the oven as the kids rip the paper off the latest imported offering from K-mart. It is beyond the comprehension of the average person, all we see is the balance swinging against those who are in the PAYE system. Companies, particularly  multinationals, have the resources to manage down their taxes at a time when the governments are spending more, which needs to continue as our infrastructure ages, schools and trades education are in trouble, health costs are rising at a rate significantly greater than the anaemic inflation, and there are added costs like the NDIS.  There has to be a tipping point somewhere, and about now seems to me to be a fair bet. The Henry tax report is now a decade old, and none of the recommendations have been implemented. None. Ken Henry may have blotted his copybook at NAB, but that does not take away from the value of his contribution to public life generally, and specifically as the boss of Treasury, on whose advice Australia dodged the GFC bullet in 2008.

Trust in public institutions has never been lower. It is hard to pick the catalyst for this reality. Is it the realisation that institutions of all types, but  particularly those operating on a platform of faith, have been abusing our kids, that financial institutions have been stealing, politicians have a truly flexible relationship with the truth, or that social media has made us informed, lied to, mesmerised by trivia, and deeply cynical, all at the same time?

Enough, I am depressing myself, just as I have to think about going to the shops and spending on stuff I am not sure people want, for reasons I do not really understand, as should we not be generous with things way more important than money, with those we love and value all the time, not just around the summer solstice?   

The turkeys are all coming home to roost.