Feb 21, 2022 | Governance, Management
Not all accountants are created equal, and not all do the same job.
All businesses have two types of information required, for which they need three types of accounting functionality.
There is the regulatory and compliance accounting, which can be a simple as the quarterly GST return for a small enterprise, to hugely complex set of statutory accounts for a public company, particularly when it operates in several jurisdictions.
Then there is the management accounting, the numbers used to manage the business on a daily, monthly, and annual basis. These are entirely different tasks, although use common data sources, the ledgers that record activity, and various devices and processes to collect the data for recording.
After making that distinction between compliance and management accounting, assembly of the range of skills necessary to deliver the outcomes is often overlooked.
Data assembly.
You need people to assemble and reconcile the data. These can be less qualified and experienced people, and the processes of collection and initial recording are increasingly being automated. Nevertheless, the processes that track and capture the numbers are vitally important to be proactively created, maintained, and improved. The rigor of the collection and ‘cleaning’ of data will determine the confidence that later processes can have in their numbers.
Accounting compliance.
Failure to follow the rules can result in legally enforceable penalties. Therefore, compliance is of critical importance for external stakeholders, but is largely irrelevant to the management of the business, for which an entirely different suite of skills is needed.
Analysis and presentation.
This is where accounting meets marketing. Either of the two by themselves will tell only a small part of the story. List the numbers and people will ignore them, or be asleep, no matter how important the words. Just use story and metaphor without the foundation of numbers, and you will be dismissed as a typical marketing person, fluffy and unreliable. It is a case of one plus one equals three. If you do not get this combination right, there will be suboptimal outcomes as the wrong decisions will be taken, opportunities missed, and resources misallocated. This third skill requires both the numeracy of the accountant, and future telling ability of the seer. An unusual and often derided individual.
In my case, my friends who are accountants run for the hills when I remind them, that I am in fact, one of them. Meanwhile, many marketers, particularly those under forty, think I am some sort of marketing troglodyte because I do not believe everything in marketing begins and ends with a digital solution.
As Peter Drucker pointed out all those years ago, “the purpose of a business is to create a customer“. The reason you do that is obvious: to generate revenue, from which you make a profit assuming the business is well managed.
Understanding and leveraging the means by which all the marketing jargon is converted into cash, is the core of a successful marketing function in any business. There are thousands of things every business can do without, and still function, the one thing no business on earth can function without is cash.
Therefore, marketing is about cash generation, short, medium, and long term, future tense. Accounting is about counting how much cash there is, where it came from, and where it went, past tense.
One without the other is suboptimal. When you find both in one person, do not let them go.
Feb 16, 2022 | Management, Small business
Do you ever struggle to do something you know how to do, and should be easy, at least that is the way it seems, but never get past the first hurdle.
I do. Disturbingly often.
For some years I have toyed with writing a book, becoming one of those liberated by the web to publish and perhaps generate a return from what I know, the experience I have gathered in a long commercial life.
There are several started lying around, rough drafts, notes, chapter outlines, all the stuff I know I have to do to complete something that may be of value.
I have written 2 or three blog posts every week for many years. I collect lots of ideas, stories, and metaphors from clients, reading, and just rubbing my belly thinking about stuff.
How hard could it be to pull all that together in a book?
Very hard it seems, even when pushed by some of those who know me well.
If I was my own consultant, there would be some tough love and bum-kicking going on.
Like any project, there are a small number of key questions to be asked, and answered which provides a framework for the task, then some logical steps to be taken.
Key questions:
- Who is it for? The core marketing question, who is it that you want to reach and influence to do what? In the absence of a clear answer, the result will be, at best, muddled. Luckily, I know exactly who I should be writing for.
- Why should they care? If you expect people to spend money to buy the thing, then invest the time to read it, there had better be a good reason that they should, and that needs to be convincingly communicated. Again, 25 years of contracting and consulting have given me a pretty good idea of the sort of knowledge and experience I can deliver that will increase the commercial sustainability of the SME manufacturers who are my ‘sweet spot’.
Logical steps:
- Nail the title, and subtitle. The title is in effect the headline for the book ad. It needs to convey in a few words the objective and drama of the book, provide a ‘hook’ for the intended reader. For the writer, it is the equivalent of the strategic purpose, the question to be asked continuously through the whole book ‘is this taking is closer to the objective?”
- Write the back cover. This should be the distilled sales pitch to those you want to reach. Often you will see this as an introduction, which to my mind is wasting the reader’s attention when it is the most curious, right at the beginning. Explain the value to be gained from reading the book, and how will they use this new knowledge? Ideally, this can be written by a third party, someone with real street cred, so it sounds less like self-promotion. I do not really know many people in the category. The one who would have been ideal, my original and great mentor Harvard professor James Hagler, has been sadly gone for some years.
- Write the Chapter list. This is the skeleton of the book, the bones from which everything hangs. A few sentences that specifically articulate what knowledge will be imparted in each chapter acts as an anchor around which the words and stores can be built. This requires creative thought, as most people will read the chapter list before buying the book, so the more interesting, differentiated, and engaging the better.
- Write the draft, of at least 1 or 2 chapters, They will be awful, discouraging, but out if it will come the ‘voice’ that you want to use for your audience, and the structure of the chapters. One person I know wrote their whole book as draft, it worked for him, but the added work after the draft completion to redraft the whole thing when he recognised it was rubbish was almost the end.
- Edit, edit and re-edit. Then get someone else outside to have a shot. Better if the outsider is on side from the beginning and giving the bad news progressively so you can improve as you go, rather than all at once when the draft you have is in your mind, complete. It is hard to kill off those parts into which you have poured your sweat after the words have dried too hard on the page, and in your mind.
- Marketing. Then there is the marketing and operational stuff of necessary to get it out there. Worrying about that too soon is just distracting, plenty of time at the end, and plenty of advice and options around on the best way forward. However, if you are writing the book to make money from the sales, it is entirely different to the situation where you are writing it for credibility, leading to consulting assignments, and perhaps speaking gigs. These two objectives for the book require entirely different marketing strategies.
- Do it, now. Stop thinking about it, and take action. Now.
Note to self: Read the blog, and take action as advised!
Feb 7, 2022 | Governance, Management
Successful people will tell you to concentrate on the things you can control, be aware of, and prepared for those you cannot. Stressing about those you cannot control adds no value, the best you can do is anticipate the impact they may have, and shape your response in advance.
Managing a business is the primary example of an environment where managers sometimes obsess about things out of their control. Meanwhile, they often ignore or undermanage those they can control, and that deliver sustainable returns.
There are many components to a successful business, the only one that is common to all is cash. It is like oxygen to people, we cannot survive without it.
Therefore, it makes sense to ensure that in every decision you take, part of the consideration is the impact on cash.
Too often I see decisions made, that on the surface make some sense, but when deeper investigation occurs, are counterproductive. The most common is the almost instinctive urge to drop price to meet some competitive pressure, usually accompanied by reassurances that volumes will be increased as a result. 4 times in 5, it results in less cash, and less profitability. Management is way too often surprised at this outcome.
There are 7 things you can control, broken up into two buckets represented by the income statement and balance sheet, that have a direct impact on your cash position.
Price
Volume
Margins
Overheads.
Accounts receivable
Inventory, or in a service business, Work in progress
Accounts payable.
The first 4 are recorded in the income statement or profit and Loss, which records the revenues coming in, and costs going out that are directly influenced by trading activity.
The last three are recorded in the balance sheet, reflecting the cash value of the business and are again directly influenced by management decisions.
Each of these 7 components are linked in a macabre commercial dance, every action on one can and often does, influence most if not all of the others to varying degrees.
It is the responsibility of management to manage these levers to deliver the maximum return to the business, and ensure that decisions made are in line with the strategic priorities.
No business can survive without cash, so it is incumbent on every employee, even if just in their own self-interest, to look after the cash of the business as if it were their own.
Feb 2, 2022 | Governance, Leadership, Management
The Reserve Bank released the latest inflation figures a week or so ago. The year-end number was 3.5%, significantly influenced by a few highly volatile items like petrol. Stripping those out, the underlaying rate was 2.6%. These numbers do not bode well for the RBA target rate of 2-3 percent average over time.
It would appear that despite the denials, the reserve will be forced into increasing the official rate well before their earlier undertaking not to do so until 2024.
From the graph in the header, should we sneak back to official rates above 6%, last seen in the late 80’s, we will have a cohort of managers making strategic decision in an environment they have never experienced.
That is not a good omen.
I well remember paying 17.5% rate on my first mortgage around 1983, an experience that will never be forgotten. The little equity I had built up in the previous 2 years since borrowing the money to buy that first house, was swallowed up while my very young family ate a lot of potatoes and sausage.
Managing a business in a period of inflation puts a lot of pressure on things the cohort of younger senior managers have not ever had to worry much about to still deliver acceptable returns. Now they will be faced with some nasty choices:
- Increase prices, annoying customers, and risking volume loss, and the associated relative increase in overheads.
- Annoying stakeholders by holding prices resulting in decreasing margins as inflation driven costs increase.
- Cutting costs which in a crisis normally means cutting ‘heads’, which rarely makes you popular in the lunchroom.
- Reducing investment in everything from advertising to R&D and new product introductions, which has the compounding impact of making tomorrow’s cash flow and profitability that much harder to generate.
The most usual course for the inexperienced is to generate lots of words, but take no or only ‘fence-sitting’ action until their options have closed in. They then stir into action with emphasis on the last two options, leaving it to the following leadership to pick up the pieces.
The much harder work of refining product portfolios, brand development, generating operational ‘flow’, ensuring strategic alignment, building resilient supply chains, process flow optimisation, business model innovation, and all the rest, should not be activities stimulated by some sort of crisis. They are the responsibility of managers always, but often lost, obscured in the better times when getting a bit fatter is the most common characteristic.
Header Image credit:. Source World bank.
Jan 24, 2022 | Leadership, Management, Strategy
As I observe the better performing manufacturing businesses around, I see some components not spoken about in any of the verbiage that comes from the various interest and political groups.
These common themes are:
They are close to customers.
This means they are less price sensitive than competitors and are focussed on building a bigger pie in collaboration with their customers. As a result, they always outperform those trying to grab a bigger part of an existing pie using price as the primary driver.
They have high level trade skills.
They have a higher rate of apprentices and tradesmen in their ranks. In the absence of publicly available vocational training, they find ways to deliver it to employees internally. This determination often extends to their key suppliers, adding glue to the supply relationships and enabling innovation through their supply chains. Skilled tradesmen are valued not only for the skills they have, but as people who have combined trade skills with experience, and are therefore tertiary qualified by an alternative route to a university degree. They are often better able to get stuff done as a result. Their deep respect for trade skills results in less turnover of personnel, delivering a substantial competitive advantage.
They seek tertiary educated employees.
The education does not have to be specific to the businesses, they are seeking people who have demonstrated a capacity to apply themselves, learn, and who are curious about what is going on around them. This looks expensive on the surface, but it gives them an ‘intellectual edge’ in the competitive game.
There is a continuity of leadership, and leadership style.
While the individual leaders might change over time, the style remains consistently participative and flexible. This leadership culture comes with a very clear set of performance expectations for individuals and the operations, which evolve in parallel with the strategic and competitive demands of the market.
Optimised and messy live together.
While there is a very strong focus on optimising operations, there is also a recognition that innovation, which is expensive, risky and messy, is fundamental to future competitiveness. They find ways to live with the ambiguity that comes from focussing on optimisation for the existing major part of the business, and exploration at the ‘sharp end’ where they are building the base for tomorrow’s cash flow.
They have big ambitions.
Their strategic planning sessions are not just extrapolations of the current in a nice location with a few beers for bonding. They deeply question the assumptions that shape the business, and allow many voices to be heard, and they reach for the ‘big’ outcome.
This is all effectively anecdotal, coming from observation rather than published data, so it may be a bit flimsy, but it does pass my ‘pub test’.
Header cartoon Credit: Hugh McLeod at www.gapingvoid.com
Dec 15, 2021 | Leadership, Management
What happens if you are on the receiving end of negative feedback during a debate, or an ‘executive heckle’ during a presentation?
How do you respond?
Our natural reaction is to push back, to defend your position, which creates friction and ‘heat’.
That is what happens when you respond to a negative proposition with ‘Yes but’. You are setting yourself apart from the questioner, defending an alternative position.
By contrast, had you responded to the heckler with ‘Yes and’: what you have just done is agree with the heckler, at least partially, and then been able to move onto the reasons why it is an ‘and’
This subtle but fundamentally important distinction was brought home to me years ago. I was in a running debate with the MD of a conglomerate to whom I reported as GM of a division at EBIT. I had taken over as the GM after 5 years as Marketing manager, running the logistics, and part of the sales in my spare time. It had been turned around from a disaster into a commercially aggressive, successful and profitable entity.
The MD’s latest ‘brain-fart’ at the time was to incorporate the division into the much larger core division of the company. The much larger division was monolithic, and relatively unprofitable, lacking the innovation, commercial skills, and ‘can do’ culture of our much less bureaucratic smaller division. The MD’s view was that an amalgamation would bring to the larger division the commercial hard edge of its smaller cousin, thus making the larger entity more responsive.
My view expressed strongly was that to amalgamate the smaller division into a larger division would kill the very culture that had been built which made the smaller division successful. There were better ways to address the problems of the larger division than risking smothering the culture of the smaller one.
It was a debate I lost, and resulted in me leaving a short time later, rather unceremoniously.
With the great benefit of hindsight, and from experience gained in the almost 30 years since, what I should have done instead of saying ‘yes but’, and having the argument, which I was certain to lose, was to say ‘yes and’ agreeing that the problems of the larger division were real and needed fixing. I could have then suggested creative and practical solutions to the problems. Instead, I unknowingly chose to lose the argument.
It still may not have worked, but the odds would have moved dramatically into my favour. However, at about 40 years old, and having been given the responsibility of running the business, almost my perfect job, I was too self-unaware and perhaps arrogant to acknowledge the inevitable failure of the path I unwittingly chose to argue the case.
Simple and subtle changes of words can have a profound impact on the response they bring.
