A simple way to value your SME

A simple way to value your SME

Aug 21, 2017 | Governance, Management, Small business

The value of your business is absolutely dependent on its ability to generate free cash flow, which in its simplest terms, is the cash required to keep the business running, after necessary capital expenditures have been considered. It is a measure with many formulas that differ only in the detail, and means of determining the meaning of ‘necessary capital’

The durability of that free cash flow is simply an estimate of the confidence you can have in projecting that free cash flow into the future. The durability is usually expressed as a discounted cash flow, which simply applies a rate of inflation expected over time to the current value of a dollar. However, this is only half the calculation as financial projections are impacted by far more than just inflation. They are impacted by competition, regulation, emerging technology, and many other factors. In 2001, who would have thought the global Blockbuster video rental chain, who had built a multibillion dollar turnover, had 54,000 employees, and thousands of franchised and owned stores worldwide would be dead in a decade.

This thought was sparked by a conversation I was involved with that wondered at the difference in the value of two service businesses, that on the surface look very similar. One of them was a successful but modest sized suburban accounting practise, the second a similarly sized suburban wealth management practice. The wealth business had a market value several times the value of the accounting practice, should either of  the principals choose to sell up and enjoy a retirement.

When quizzed, the customer retention rate of the wealth practice was far greater than the accounting business, as was the share of the clients wallet that they had. There are accounting practises, selling pretty standardised services on every street corner, all with a similar offering solving similar problems for a potential client, whereas Wealth management is a way more specialised business, focussed on bespoke solutions to the wealth retention problems faced by wealthy individuals.

Therefore the durability of  cash flow from the wealth management business is considered by those who might be considering buying such a business to be more reliable into the future than that of an  accounting practise.

How does this apply to your business.

If you want to open a sandwich shop in a strip shopping precinct, there is nothing stopping someone opening a competitor next door, indeed, they often do when the first is seen to be successful. However, a similar sandwich shop in a shopping mall will not have a competitor next door, as the mall will not allow it. You do however pay for the privilege of that increased  certainty with the lease rates and turnover ‘tax’ extracted by the mall ownership.

The more specific and specialised  the problem you solve for customers, the less likely they will be to move elsewhere, and you are able to price your services accordingly, delivering both a higher free cash flow, and greater confidence in the durability of that cash flow. It also follows that clients are harder to find,  so the marketing costs prior to them becoming a client are likely to be higher.

The value of your business is absolutely dependent on the amount of free cash flow, and the expected durability of that cash flow. Little else really matters beyond arguing about the book value of fixed assets and any inventory.

 

The real measure of marketing effectiveness, and how to deliver it.

The real measure of marketing effectiveness, and how to deliver it.

Aug 7, 2017 | Governance, Leadership, Marketing

Marketing is a functional silo on an organisation chart, as is Sales, Operations, Finance, HR, but unlike the others, marketing deals with unknowns, the future, whereas all the other functions deal with the past, or what is immediately in front of them.

Marketing is about the future, long term commercial sustainability, and its effectiveness is really hard to measure, other than in hindsight. There are lots of measures for things that have happened, which are the result of often many combinations of actions taken some time ago, so the measures are unable to change anything, just give insights to what worked and what did not.

As the senior marketing person in a very large business 30 years ago, I found myself often talking about advertising, segmentation, positioning, graphic design, and all the rest, around the board table, which either put others to sleep, or elicited opinions, usually uninformed, about the detail. However, when I talked revenue I had their attention.

Marketing is all about revenue, particularly future revenue. The other stuff is the paddling under the surface that enables the generation of the revenue, but the real measure of marketing effectiveness is revenue and margins over time.

In every business I have ever had anything to do with, marketing expenditure is treated as an item in the P&L. By definition, items in the P&L are expenses or past sales revenue. This is inconsistent with the notion of marketing being about building the foundations of future revenue.

The closest analogy is a piece of capital equipment, they are always purchased to fill one of two roles, sometimes both:

  • To increase the volumes too be sold, or,
  • Increase the productivity of the processes.

Those purchases are recorded in the cash flow statements, and the balance sheet, not the P&L. The greater irony is that capital items are depreciating assets, whereas marketing  investments, when done well are appreciating assets, unrecorded anywhere until the business is sold, then the accountants start talking about ‘Goodwill’ being the difference between the realisable value of the physical assets, and the liabilities on the books.

There is a structural paradox here. We treat a potentially appreciating asset differently to one that can only depreciate, just because it is hard to measure.

This challenge of measurement is the biggest one marketing people have to hurdle. The turnover of marketers in senior roles is the fastest amongst the functional heads in large corporations because we generally do not recognise the essential long term business building nature of marketing investments. We treat it as an expense to be cut at the slightest cloud on the profitability horizon, and the marketing people with it.

One of the challenges here is that to achieve these long term outcomes, marketing requires the co-operation and  collaboration of all the other functions, without the organisational authority to direct. The CMO has to be a leader across functions. He/she has to build the respect and co-operation of other functional leaders, often at odds with their short term function specific performance measures.

25 years ago, I and my marketing team, failed to convince the board of the then Dairy Farmers Co-Operative to invest the required capital in new equipment to launch a new brand of flavoured milk. It was to be packaged in plastic bottles, with a screw cap, to be sold at a very considerable premium to the products then only available in the gable top cartons, and we proposed to sell it to different consumers. Nobody had done this before, we were banking on tapping into a market completely under-serviced by existing packaging and branding. The Operations Manager at the time believed in the project, and put his neck on the line by committing  his R&M budget to refurbish some older gear in the absence of capital approval, and I ‘stole’ the required advertising funds from another brand.  We launched Dare Flavoured milk, and it delivered the fastest return on investment I have ever seen, and 25 years later, it is still going strong, delivering revenue and margins to the now overseas owners of the business.

If marketers started talking about revenue generation, rather than the more common ‘marketing-speak’ like positioning, segmentation, and all the insider jargon generated by digital, they will be taken much more seriously around the board table. Building support amongst other functions to acknowledge the long term impacts of intelligent marketing, is necessary for long term prosperity, and the only real measure of marketing effectiveness.

 

How to choose your marketing and sales automation software

How to choose your marketing and sales automation software

Jul 31, 2017 | Change, Governance, Marketing, Sales

One of the common questions I field is which tools are the best to automate sales and marketing processes.

The right answer is that there is  no right answer.

There are just so many tools out there that may do a really good job for you, some need to be stitched together with others, but there are a few that offer all singing, all dancing solutions.

The latter are usually not appropriate for the needs or IT resources of small and medium enterprises, who typically lack the knowledge  and resources to do a complicated implementation.

While it may seem wasteful, my advice to SME’s is to take small steps, be wary, find ways to work around the shortcomings, and stitch things together, then when big enough take a bigger step and integrate in a larger package.

It does not always work, but experimenting as you go along is usually a very good idea.

However, here are some generic steps that can be taken that should be done at the beginning of the process, no matter what, and how, you are going to implement.

  • Define outcomes. Define the outcomes you want from the software in the context of your strategy. Automation tool implementation without reference to the strategic principals and goals will be a painful experience.
  • Integration. Consider how the software will integrate into the rest of your business. Most implementations I see these days are automating sales and marketing in one way or another, which usually need to be integrated into the existing financial and operational software that has typically already been deployed. You need to clearly understand where the holes between the applications hide, and have considered the manner in which they are to be filled. Excel seems to be the ‘filler’ of choice in most circumstances I come across.
  • Build wide buy in. It is essential that you get the buy in for the functional users, by seeking their input to the tool choice, project planning, training, and implementation. This offers the opportunity to ensure that their current and anticipated requirements are met as far as possible, and that their concerns are able to be aired, if not completely addressed.
  • Fit. Ask yourself how well the new software and existing processes fit together, and how familiar the new processes will feel. Most software is not fully utilised, and this is often a result of legacy systems being useful and familiar. You need to determine how to address these issues of what I call ‘legacy elasticity’.This may seem very similar to the challenges of integration, but they are different, as there is always resistance to change, and  the better the fit to the existing, the easier the evolution will be. Integration implies that both parts of the equation can be altered to achieve a different outcome, whereas fit matches existing parts together.
  • Map your processes. My normal practise is to have someone outside the business map all the current processes, then run that map over the process map that will be implemented in the software. My objective is twofold: remove the inconsistencies and silly bits from the current, and find a process that matches what is left as closely as possible, then implement the software without change. Changing the code in the software package seems easy, but always ends up in tears as unintended consequences rear their ugly heads.
  • Do we go to the cloud? The argument about ‘cloud or not to cloud’ has been had. Go to the cloud. The compromises can be managed, the cost will continue to beat the costs of on premises, but the real value is in the automatic patching and upgrades that occur.
  • Due diligence. As you are doing your due diligence, make sure you ask deep questions, and hold control over the agenda. Software sales people are very good indeed, and will sway the most recalcitrant and reluctant buyer with a vision of the new life you will have purely as a result of their software. Just assume it is all bullshit, that there are a number of options that will meet your requirements, and be clear about what you need, not just in terms of the functionality, but the training costs, ongoing maintenance, upgrades, any internal hardware expenses, and features that may not be included in the base package.

Making a software vendor decision is challenging, but the truly challenging bit, the implementation and leveraging of the software is yet to come. Make sure that the whole project is planned in great detail, and that the vendor is locked into the outcomes.

Do all that, and you might get away with it, and when you do so the productivity gains will be huge.

Image credit: Scott Brinker of Chief Martech. The landscape details 5,381 digital martech automation tools as of the end of April 2017. There will be more by now. I recommend you dig around in the Chief Martech blog for ideas, information and insight.

 

The simple 4 letter word that underpins every improvement initiative.

The simple 4 letter word that underpins every improvement initiative.

Jul 24, 2017 | Governance, Lean, Operations

Improving the performance of businesses is often like being set loose in a commercial kitchen without a recipe. Random ingredients, absence of some staples, disaffected staff, erratic processes, and severe cost pressures, but still being expected to produce an experience people are prepared to pay for.

Not easy

However, every time I look back on a project, the common factor that has made the most difference is not what you would expect.

It is not the financials, or the marketing plan, or how well the sales force performed, it is more basic than all that, and enables all those things:

Flow.

Simple word, and an idea at the core of all performance improvement.

The concept of flow emerged from the work done to improve manufacturing processes by W. Edwards Deeming, Joseph Juran, and others, and was first widely implemented and documented by Toyota, then spread around the world as ‘Lean thinking’ and the ‘Toyota Production System’.

At the core of Lean is Flow, and at the core of any improvement in any process, physical or otherwise,  in any context, is flow.

The basic confusion is between being busy, and being productive. Jumping up and down in one spot may be  busy, but it is hardly productive unless you are killing ants.

Optimising flow in manufacturing operations requires the configuration of all the lines such that work passes unobstructed from job centre to job centre through to completion. The faster and more uninterrupted the flow, the higher the output.

Flow optimisation always requires the counter intuitive decision to leave unused capacity at points in the process, to avoid building Work in progress inventory, which act as ‘rapids’ in the flow metaphor. It usually feels wrong to leave available capacity unused, but the slowest work centre will be the limiting factor for  the whole process, and to keep the flow steady, the flow rate is limited by that slowest point. In addition, shit always happens, something breaks, an item spec ‘wanders, ingredient fails to come in as required, so there is always downtime of some sort. This means that  some spare capacity in the system is a requirement for  the flow to be matched to demand, or ‘Pull’ in Lean parlance.

A key component of flow is the orderly release of work into the process. A schedule is written based on priority and optimal flow, and is then executed without change. Queue jumping, to meet unscheduled customer expectations, is a common distraction from the plan that multiplies, disrupts everything, and often results in total turmoil in the flow. It is deadly to process optimisation.

These days, not as much manufacturing is done, after all many of us are told we are now knowledge workers.

Exactly the same principals apply. While it may be harder to see because there is no physical product moving down a production line, the thought process is identical.

The trouble with these non physical tasks, is that they come at us from every direction, often with little warning and lead time, and with ambiguous importance and priority. Unscheduled demands on our time.

How do you sort through the mess to optimise your productivity?

A now standard method is the scaling of Importance and urgency into quadrants. When analysing how our time is spent, most of us find that too much is spent in the not important/urgent quadrant, when we should be focusing on the important items, urgent or otherwise. It is almost always the important/not urgent tasks that get shuffled aside, and it is these items that have the greatest long term impact on the performance of an enterprise.

An alternative means to allocate time is on an ‘Impact/Effort’ continuum. Tasks that are high impact, low effort are the quick wins so beloved of consultants, by contrast, high effort, low impact tasks are just thankless tasks, and not worth doing.

Everyone is in charge of managing their time to some extent, the further away you are from a time driven physical process, the greater the amount if discretion you will have. It behoves you to work the tasks in front of you in order of priority. Responding to that email may seem important, after all it has come in, the ‘new email bleep’ (Pavlov would love this one were he still alive) has sounded, there is a sense of urgency generated, but in 99% of cases, what does it really matter of the email goes unopened.

In everything you do, consider the impact and benefits of optimising Flow.

Photo credit  Dirk Veltkamp: Thredbo river.

 

4 essential questions for the new leader to ask

4 essential questions for the new leader to ask

Jul 17, 2017 | Governance, Leadership

Taking the top job in a new organisation is a stressful experience. No amount of planning and research can properly inform you of the cultural  DNA of the organisation you will be taking over. That knowledge will only come over time, and only if you go actively looking for it.

In many cases, new leaders do  not go looking, and as a result usually do not know what it is they are changing by their presence, and often do not care, to their cost.

Nothing is as resilient as a culture that perceives itself to be under threat from a new leader who ignores it.

In the course of coaching leaders, I encourage them to be absolutely transparent, to never shy away from those often difficult but clarifying conversations that are the daily menu of leadership. For the new leader taking a role in a new organisation, I encourage them to act like a sponge in the first few weeks, and understand the nuances of what they are really getting into.

Four simple questions can be very useful, and I encourage you to ask them of every senior employee you can in that very first familiarisation encounter, and if possible to communicate the questions beforehand, to allow them to think about the answers.

  • What three things do you think we should change.
  • What three things should we leave absolutely alone
  • What three things do you most want me to do
  • What three things would you encourage me not to do.

After you have asked as many of the existing employees as practical the same four questions, you will have a pretty good picture of the way things are around the place, and what the pressing issues are.

It is a bit like learning to swim.

You cannot do it from a book, you have to get into the water to experience it for yourself, and in this case the four questions are similar to learning to dog paddle, and to stick your face under water for the first time.

Cartoon credit: Hugh McLeod @ Gaping Void.

10 point leadership framework for reviving SME manufacturing businesses.

10 point leadership framework for reviving SME manufacturing businesses.

Jun 26, 2017 | Governance, Leadership

The Modest sized manufacturing sector in Australia has  a huge problem. It is being wiped out like an insect  pest at your backyard barbie. The problem with that is that they provide the bulk of employment and training in the economy, and without them, we will become a nation of baristas.

Perhaps it is not that gloomy, there are some exceptional little businesses out there, intensely competitive on the world stage, aggressive, and innovative, but they are a rarity.

For the average manufacturer, the task of just surviving is daunting.

In 20 years of advising these sorts of businesses on change and improvement there are some leadership lessons that seem to crop up time after time, in one form or another.

The survivors learn them, rarely an easy path, the others just go the way of the Dodo.

Management of people and their capabilities.

Successful leaders manage their people and their capabilities on an individual basis. When you have a bunch of people performing well and growing individually, you get  groups of them doing the same as the group, and then the enterprise benefits. For the person at the top of an enterprise, even if it is a small one, this aspect of managing cannot be left to chance. This is first on my list, as it is the most important by a long way.

Identifying the molehills early.

Every enterprise has more than its fair share of molehills that need attention, The challenge is to address them, smooth them out before they become mountains, or even little hills that get in the way of performance. The impact of even a tiny molehill on the performance of an enterprise is like the ripples in a pool when a rock is thrown in. They radiate out, and when meeting up with ripples from elsewhere, there is rough water. The job of everyone in a business  is to remove the molehills as they emerge, before any ripples can be sent out.

Get it right first time.

The fundamental lesson of ‘Lean’ can be summarised as getting it right first time, every time. While this is hard to achieve, but every corner that is cut, every expedient decision and compromise that is made, will come back to bite you hard, some time, in some way. Never settle for less than the absolute best that can be done, every time, and improve the processes that deliver that  outcome to increasingly demanding specifications, relentlessly.

Focus, Focus, Focus.

The 80/20 rule works every time in every circumstance I have ever seen. Do a limited range of things for those who really care, and do it better than anyone else. Anything else means you are compromising the things you do by spreading them too widely, and as a medium business, you simply cannot afford to do that. Be opportunistic only if it can be done from within the existing narrow definition of  what you are great at doing.

Team alignment.

Alignment has unfortunately become a bit of a consulting cliché, which must be some indication that it is right. Having everyone pulling on the same direction is essential, but you never get there without hard training and robust debate on the way through. The metaphor I always like is of a rowing eight. The best team always wins, but to get the best team in the boat on race day, and working in that absolutely coordinated way that seems so fluid and natural, is really hard, the result of training, mutual respect, and the subordination of the individual to the performance of the team.

Right, not popular.

It often happens that the right decision is not always the popular one. That is why business is  not a democracy, someone always holds the right of veto. It is the responsibility of that person to make the right decision, best made after robust debate amongst those affected, what I call ‘Due Process’. At the end of the debate, the leader has to make the call, and those who may not have agreed with the decision need to line up behind it and support it in every way. Any ongoing dissent needs to be behind closed doors, and between the parties involved only.

Humility and Agility.

Having made the point about right not popular, not every decision taken will be the right one, so the really good leaders amongst us moderate their right to the veto by  being able to acknowledge mistakes, change course and get on with it. Managers are usually loathe to admit they are wrong, as they consider that it shows weakness, the leaders amongst us know  that being able to admit they were wrong shows strength of character, which is what we follow.

Balance the competition between today and tomorrow.

Taking the short term easy route at the expense of the longer term good rarely pays off. The urgency of the immediate often outweighs the importance of getting the foundations right for tomorrow, and while doing so may make for an easier weekend, it usually makes for a crap year.

Write it down, and create a rhythm.

Documenting your plans makes them available to everyone else who needs to know, and provides the framework for decision making, without which, there can be no chance that everyone will be working off the same hymn sheet, another worthwhile cliché.

A really effective plan is a combination of a number of elements that add to the clarity of the plan, which makes it something that can be effectively implemented, managed and improved.

Your ‘why’ or business purpose, or Mission, however you choose to describe it will only evolve slowly over time.

Your strategy also evolves, but over a shorter period, a few years. it used to be that 5 years was a reasonable evolutionary period, but the speed and aggression of competitive pressures have shortened that to three in most cases.

Operating plans, usually called budgets are the financial expression of what you will and will not do over the next 12 months. Allowing the numbers to determine the activities is a common mistake. It is way better to manage activities by the objectives that need to be achieved and then measure the outcomes and adjust as necessary by the numbers. Having your sales, marketing, and operational plans in place that have been derived from a combination of the objectives and zero based budgeting , rather than fitting the activities to some vague notion of the acceptable cost, is the way it should be done.

Unless you measure the outcomes of what you are doing, you will have no idea of the effectiveness of your activities and investments. Having said that, you cannot measure everything, and trying to do so will tie you up in administration, and compromise the learning that comes from having a few key metrics where you understand clearly the cause and effect chains in place.

Learn and adjust. Plans that do not change in the face of contrary outcomes are worse than  no plans at all. Therefore your metrics need to drive adjustments in your activities and costs as you cycle through the year.

Someone is the driver.

That leader, the one with the veto, is the one doing the directing, the cox if you like in the  rowing eight metaphor. They are the ones with the overall view of the progress, both in the scull and across the competitive arena, and should be the one most sensitive to the changes necessary to achieve  the optimum return from the assets, financial and otherwise, invested.

When you, as the leader get all that stuff right, or close to it, the performance improvement will be considerable.