Budgeting: The crappiest time of the year

Budgeting: The crappiest time of the year

Mar 20, 2017 | Governance, Management, Small business

It is that time of year again, budget time.

In most businesses around Australia, at least those that will be around in a year or two, people are wondering where they will find the time to do the budget preparation for the coming fiscal.

To make it easier, following are some simple guidelines to apply to your thinking.

Where are you  now.

Before you set out on the planning of any journey, it is useful to know the starting point. This tends to avoid a lot of wasted effort and cost, and unnecessary frustration. Having a very clear picture of your current position is vital, but if you have left the development of that picture to the planning sessions pre budget, it is probably too late. Developing a deep understanding of your current situation, and most importantly the drivers of that outcome, needs to be an incremental and inclusive process that is happening in real time, all the time.

Where is it you want to go.

Again, obvious, but often overlooked. Good businesses have a strategic framework in place that delivers clarity and priority to the long term outcomes being sought, so the annual budget is just another step along the path. However, in the absence of a strategic framework that makes sense, a disturbingly frequent situation, set yourself some goals to be achieved, and the annual budget is the operational plan to get there.

How will you know when you get there.

Measurement for measurement’s sake is dumb, but having the few key measures of performance that really tell the story of your progress towards the end point is essential. Knowing what ‘success’ means is a core part of the planning process, but again, when that is left to the planning sessions, it is too late.

1/10 is not enough.

Another of the mumblings of my old Dad who used to say, ‘Son, you get 1/10 for  the talking, the other 9 are for the doing’. In a business context, the planning is essential, but of no value unless it is implemented. Just like a holiday, you can have some fun planning it, but the real fun is when you are actually on the holiday.

Profit is a two way street.

To make a bob, you have to sell something to people who really want at a price that is more than it costs you to produce and deliver it. Pretty sensible, and pretty simple, but understanding your costs and really understanding the value your product delivers to the specific target markets is a touch more complicated.

Everyone is in marketing.

The days of marketing being relegated to the back office are gone. Customers now have all the power, and they are exercising it in all sorts of ways not contemplated just a decade ago. Highly sensitive, fragmented, and focussed communication channels are being used by everyone, and amplification happens at the stroke of a social media pen. Everyone who comes into contact with your products can have an influence, and everyone in your business  is an agent of marketing. For heavens sake do  not leave it to the kids who have marketing in their title, thinking they have it under control, because nothing could be further from the truth. The most valuable asset you have is the position your product holds in the minds of your customers and potential customers, commonly called your ‘brand’. It is not normally listed on the balance sheet, as the accountants cannot agree how it is to be valued until a business is sold, when it is called ‘goodwill’ but it is the leverage that enables you to be able to stay in business.

Count outcomes before dollars.

Financial results are just that, results. Dollars are just easy ways to count the outcomes of more complicated stuff. Spending time understanding the drivers of the outcomes being counted is a far better way to invest your planning time that just manipulating the variables in spreadsheets. What is it that persuades someone to buy from you and not the opposition, how can you reduce the hidden transaction costs in your business, how can you increase your stock turn and reduce your working capital, and thousands of other questions that need your time and attention before the budget profit and loss is locked away.

The smartest people are not in the room.

No matter how big you are, and how much money you spend on expertise, the vast majority of the smartest people, and those who could influence your outcomes are working somewhere else, some of them for your competitors. This simply means that you have to find ways to be sensitive to the competitive, strategic and regulatory environment in which you are operating, and feed that intelligence back into the way the business is run. From going to local networking events, to travelling to leading markets and suppliers, to hiring expensive consulting knowledge, to ensuring the operators in your business have a voice at the table, all serve to add to the store of ‘education’ the business has to call on at budget time.

When you have done all that, it becomes time to go and punch the spreadsheets, not before. One last point, seems to be a common last point in my various musings, look after the cash. It is the lifeblood of the business, if you do nothing else, look after it as you would your first born.

 

The 70/25/5 rule of business turnarounds

The 70/25/5 rule of business turnarounds

Mar 14, 2017 | Change, Management, Small business

Most of my time is spent working with medium sized manufacturing businesses that for one reason or another, and usually many reasons combined, find themselves struggling.

The people running these businesses are often reluctant to spend money on consulting. Understandable, not just because it can be expensive in a cash challenged environment, but because they have been burnt before.

They became successful by being good at what they do, the product manufactured, the service delivered, and the admin and ‘soft’ management stuff just took care of itself.

Unfortunately, those days are gone.

In a variation on the Pareto 80/20 rule which holds true in every case, I find myself using what has become the 70/25/5 split in the things that receive attention.

Having done the analysis to determine the 20% of things that will deliver the 80% of the value,  and be able to leverage from the effort to be made, the improvement task is to focus the effort where it will turbo charge the results.

This is where the rule comes into play.

70% of the effort goes into improving the current operations.

20% goes into spreading the current, and now improving operations into related, or adjacent areas.

5% goes into new stuff, experimenting, going right outside the comfort zones.

It also tends to follow that sequence.

Let me give a generic example.

My point of engagement is usually a perceived problem with sales and/or marketing. They need to generate more revenue, and usually quickly, so call in an expert.

Typically I find a tangle of current practises and issues that are sub optimal, that are not generally seen as ‘Sales’ issues. There are poor delivery lead times, inconsistent quality, poorly understood costings, lack of cash management, a reactive and undertrained sales force, poor customer service, and so on. All current activities and processes that require work before much that is ‘sexy’ which is what consultants usually sell, can be implemented. For example implementing a sales training package will not deliver value if the product quality is questionable, or the lead times longer than customer expectations.  It will just be an expensive holiday for the sales staff.

This is the 70%, the early grind of improving the existing  processes and priorities. It is usually a process of planting a nurturing a variety of improvement seeds in all sorts of corners of the business, rather than applying a silver bullet solution, and it does take time.

When the seeds are becoming seedlings, and some improvement is becoming evident, and often it is anecdotal, as the accounting systems typically look behind, rather than in front so the numbers are usually lagging, it may become time to apply the next 20%.

Continuing the Sales analogy, you can now reliably manufacture and deliver products that stand up competitively, you know your margins and capacity constraints, so you can start to focus more effort on increasing your share of wallet, engaging new customers in your priority markets, and entering adjacent markets perhaps with a marginally altered product to better meet the specific needs.

By the time the  20% gathers some momentum, the business is usually becoming prosperous, so can afford to start investing some resources in the really new stuff. The 5% effort spent on new products, the next technological development, and perhaps building scale by merger or acquisition.  It is here that the exciting stuff happens, the next breakthrough in performance, and the payoff for long suffering managers, staff, and shareholders.

What leaders must do to enable organisational change.

What leaders must do to enable organisational change.

Feb 16, 2017 | Governance, Management

Through processes of organisational change, there is a lot to do, a lot that can go wrong, and something always does.

The only way to handle it is to just keep going, making the necessary adjustments as you proceed. However, there are some ways I have seen that smooth the waters on the way through.

Communicate, communicate and then communicate some more. When you are sick to death of the message, it is probably just getting through, just starting to resonate, so long as your actions are consistent with the message.

Be transparent. You need the trust of the employees during a period of rapid and often unpleasant change, and you cannot hide anything. If you try, when it gets out, you will lose the trust so necessary to enable the changes. When people believe their views have been taken into account, even when they do not agree with the outcome, they are more likely to be prepared to accept it than when a decision they do not like is just foisted on them. Be prepared to share everything, particularly data, even if it is ambiguous or not necessarily as you would like, the fact that you are prepared to share will go far. Besides, you rarely win an argument by telling people what you think, you have to show them the data, and why the conclusions are based on the data.

Stories have an important place. True leaders are at heart storytellers. We all come to understand complex questions from narratives and metaphors, and the stories provide the platform from which we learn. However, there are also some traps here. You have to know when to shut up, when to let the audience absorb and process the stories you are telling them, and every word counts. Never be seen as anything other than 100% up front, and always ensure that your actions are consistent with the narrative.

Remove the trappings of position. Every person is equal, and has an equal right to have an opinion, and express it. Good leaders quietly ensure that the quiet ones get an equal chance to express their views. When a great leader expresses their views, it is as an equal in the conversation, not as the boss. It is also the leader’s responsibility to ensure that others in the organisation structure also follow this no trappings rule. It follows that in these circumstances, you may know the answer to a question being discussed, but it is often useful to keep it to yourself, and continue listening. When they come to the same conclusion, they will be more committed to it than if you had proclaimed it, and if the conversation comes to a different conclusion, as the boss at another time, you still has the power of the position, but due process has been observed.

Strategies and tactics work together. They are not mutually exclusive, and you do need both. People are all different, they think, act, and work differently, which is why teams are better at developing and implementing both strategies and their supporting tactics. Small teams are better than large ones, and the make-up of the teams is crucial to their success, so do not leave it to chance. Make sure you have diversity of styles and skills on the teams, ensure the team is collectively responsible for the outcomes, and the way things get done.

Respect Vilfredo Pareto and his rule. Always focus on the 20% that will deliver the 80%. When you have done those big things progressively, you can do the others, but letting the not so important but urgent crap that will not in the end make much difference consume time is not smart.

Decide and do. When there are difficult decisions to be made, make them, and implement quickly. The uncertainty of thinking something unpleasant may be about to happen is far worse than the sure knowledge that something unpleasant just happened. When it is organisational structural change, this is absolutely the case. When it involves redundancy, you have to be prepared to deal with the ‘survivor syndrome’ that can be challenging but is helped by the speed, fairness and transparency you have already exhibited.

Hire slowly, fire fast. Often we get this the wrong way around, and hire because we have an urgent need, then find ourselves with the wrong person, and a problem. Not only should you take your time, but you should when possible involve others in the hiring decision. This is not an abrogation of responsibility, but a recognition that the person being hired has to work harmoniously in a group. Taking the time to find the really best people, not just the most technically qualified, but the one that exhibits the passion and curiosity that are the foundation requirements in this challenging world will pay big dividends. Along the same lines, when an existing employee exhibits behaviour you do not want, irrespective of how superficially important they may be, get rid of them. The team when working well gets more done than any individual, and a toxic individual has the ability to destroy the performance of those around them.

Be prepared to be wrong. This is again a function of the due process, but the leader does not ever know all the answers, and if you think you do, you have just made the biggest mistake possible. Giving others the authority to be wrong, and learn from the mistakes is as important as learning yourself

Yes. This is a powerful word, spread it, have a culture of yes, getting things done, making decisions and being transparently accountable for them, without fear is a powerful culture to be developing. Recognise that many decisions are based on judgement as well as data, and judgement only comes with experience, which must be earned.

Never forget the customer. They are after all, why this us all happening. Jeff Bezos famously ensures that there is a spare chair in every meeting at Amazon, as a constant reminder that they are there to serve the needs of that invisible customer.

Encouraging and nurturing change is amongst the hardest things a leader has to do, and perhaps the easiest to put off, until the day it can be put off no longer. Then is it often too late, and is always harder than it would have been yesterday.

What return should I expect?

What return should I expect?

Jan 23, 2017 | Governance, Management, Small business

This is a common question I get from the owners of businesses with whom I interact.

There is  no right answer, but when you consider that putting your money in a bank term deposit at no risk will currently generate you about 3%, and a diversified share portfolio held over the long term will earn 7-10%, you have to consider the risk/reward you are prepared to accept.

The question should really be expanded into two:

  • What is the financial return on the capital needed in the business
  • What is the personal return that might accrue.

Dealing with the financial return, it is a simple equation:

EBIT/Net Assets = Return on Capital employed (ROCE)

EBIT, or Earnings Before Interest and Tax  is a good measure as it reflects the true costs of running the business. Definitions do vary a bit, but usually it includes depreciation, a cost of replacing productive assets, but before the externally imposed Tax and interest which have little to do with the operations of the business.

Net assets is simply the result of subtracting Liabilities excluding equity, from the total assets of the business.

Businesses that have even moderately sophisticated financial management have usually reflected on the rates they see as acceptable, but as a rule of thumb, most manufacturing businesses  should have an explicit minimum hurdle rate not less than 15% before new investments can be approved.

A business that has very few fixed assets, such as a consulting practice, could reasonably expect a far greater return on the assets employed, simply because there needs to be so few of them, the key asset is knowledge. The calculation here is more about the return on time spent rather than fixed assets, way harder to measure, but directly related to revenue.

Clearly the type of business has a profound impact on the numbers, so commercial context is important.

Dealing with the second perspective, the risk/return of being your own boss is a highly personal equation, resistant of any useful quantification, so my advice is always to do what ‘feels right‘ to you.

 

 

 

Where are your OSZ boundaries?

Where are your OSZ boundaries?

Nov 25, 2016 | Change, Management, Strategy

We are all familiar with the term ‘Comfort zone’ as in ‘that is outside my comfort zone’.

When most people speak publicly to a large audience for the first time, it is way outside their comfort zone. That discomfort manifests as fear, they sweat, the knees are rubbery, voice goes up a few octaves, and sometimes nausea takes over, but for most, they become increasingly comfortable with being on stage with practice.

In effect the limits of their comfort zone have been expanded. What was previously in their discomfort zone has become comfortable.  The ‘fear’ of being on stage has lessened, you learn to work with it, manage it, and often turn it to your advantage.  For some it becomes an exciting and stimulating experience.

I would propose then that we go one  step further.

To our own comfort and discomfort zones, which are well populated in our minds, we add a third option.

Our ‘Oh Shit’ zone, or OSZ.

This is not just an increased level of discomfort, the jelly-knee, voice cracking experience of that first gig on a big stage, where you are able to add rational thought and know that whatever happens, you will go home that night at about the same time.

The Oh Shit Zone implies a level beyond  psychological discomfort to one of physical or psychological danger. Manageable but nevertheless, danger, with the attendant fear that has to be managed if you are to get through to the ‘other side’ of the event.

For me, it would be jumping out of a perfectly good aeroplane with a little sack on my back that promised to float me to earth safely.

However, once done, having conquered the fear the first time, the second time would be easier, and the third, easier again.

The uncomfortable things we all need to do, but often do not are the things that hold us back. I am as guilty as anybody, that fear of failure, of public censure or even pity is strong. Those that push through, conquer their fear and get the job done despite the obstacles, are the ones who will be successful.

Considering you OSZ puts a different perspective on  bit of discomfort.

 

How to set a marketing budget that works

How to set a marketing budget that works

Nov 21, 2016 | Governance, Management, Marketing

Pretty obvious question, particularly at this time of the year when organisations are starting to think about the preparation of the 2017 budget.

In many  enterprises, the marketing budget is set by the boss and the finance people.

They see marketing as a cost, so typically it becomes a percentage of revenue. They agree a targeted revenue, then apply a percentage.

What absolute bollocks

If marketing is a driver of revenue, then the more you spend, the more productive you should be, and when well done with metrics and sensible discipline, the more money you get at the top line as a result.

Therefore the challenge is for marketers to come up with sensible marketing plans, that promise to deliver on the strategic objectives agreed by the enterprise.

Marketing then becomes  an investment, not a cost.

Zero based marketing will have its day, when the marketing planning  is done reflecting the strategic drivers and priorities of the enterprise, and answers the question ‘what are the best ways to deliver on the objectives?’.

Do that and you generate the revenue, and marketing becomes an investment, the effectiveness of which can be measured.

Thinking about marketing as an expense is about the most common stupid assumption in the corner office, but is well ingrained because marketing people have lacked the balls and organisational grunt to back their convictions that it is otherwise. When confronted by reasonable, but difficult questions marketers without the necessary experience, knowledge, or intellect,  break into generalisations, weasel words and fluff.

Use cascading S.M.A.R.T. goals to forecast and measure the impact of the tactics employed to achieve an outcome, any outcome, not just marketing.

Pretty sensible acronym.

Specific. Measureable. Agreed. Realistic. Time bound.

I know the BEHAG (Big Hairy Audacious Goal) crowd will trot out JFK’s BEHAG to reach the moon by 1969, that galvanised the space effort, but most of us do not have the resources of the US at our disposal, so lets just take a powder and be realistic.

Set realistic enterprise goals, then have them drive the allocation of resources to marketing, and indeed elsewhere, hold people accountable, and have continuous learning loops in place. Only a fool makes the same mistake twice.

I once had a very confronting shouting match with the MD of a business I worked for who drove the whole budgeting process from the bottom right hand corner of the P&L. Somehow, magically, a number appeared, and he drove budgets backwards through the business. It was a reverse auction between functions, who could promise to deliver the most for the least?

Problem was that the promises were extracted in a strategic vacuum, and meant little.

The shouting happened as the finance guy offered up a chunk of his budget that had been earmarked to integrate the reporting systems of several businesses we had taken over the previous year to deliver reliable and timely sales and margin numbers. At the time (it was over 20 years ago) I stated it was not worth spending marketing budgets if I could not track the outcomes, and the priority was therefore the sales information, not the promised revenue resulting from the marketing expenditure because it could not be reliably measured.

I smile now, but at the time, it was not fun, and was just another nail in my corporate coffin.