Nov 13, 2015 | Management, Small business
Many small businesses do not know the answer to that fundamental question.
It is technically illegal to trade while insolvent, but many small businesses do it every day, often without knowing.
So how do you measure “solvency”?
Being solvent means you are able to pay your bills when they fall due, but measuring it exactly involves a little judgement and understanding of the commercial circumstances of the business.
However, there are two simple measures almost always used by a lender, or anyone else with a need to check the health of your business.
Both are about the manner in which you manage your cash, which should be right on the top of any management agenda irrespective of the size or complexity of your business.
1. The current ratio.
The current ratio is the first calculation a prospective lender will do , it is pretty easy to calculate, and most bookkeeping packages have it as one of the standard reports available.
Current ratio = Current assets / current liabilities
“Current” in a accounting speak means less than a year, so your current assets include cash, inventory at sales value, accounts receivable, and any short term investments you may have.
Current liabilities are those bills that will have to be settled within the same year. This number is accounts payable, short term maturing loans to be repaid, and the one many miss, the provisions for an accrued liability you may have for things like employees long service leave and other benefits.
2. The “Quick” ratio.
The second commonly used ratio is the “Quick ratio”, which as implied, is a measure the very short term ability to cover debts. Many businesses have a lot of money tied up in finished goods inventory, work in progress and raw materials. All can be challenging to liquidate in a short time, so the quick ratio is a simplified ,measure of the immediate ability to pay the bills.
Quick ratio = (Current assets – Inventory) / Current liabilities.
These ratios are the same apart from the inventory valuations and provisions, and are usually used together.
The valuation of inventory is always a challenging question.
In valuing finished good inventory for a “quick” calculation , the appropriate number is the realisable value within a month. If you have three months inventory on hand, it is unrealistic to believe you can sell it all in a month and get full price. Valuing WIP and raw materials inventory is even more difficult, as who wants a half completed product, and suppliers will be very reluctant to take raw material back at full invoice value.
As noted, these ratios are virtually always used when seeking funding, by any means. The potential funder will look at both ratios before any other detailed discussions. A bank will generally require a quick ratio of at least 1:1, and preferably 1: 1.1 or more, depending on their lending policies.
Are you trading illegally?
Do you know?
Nov 11, 2015 | Marketing, Small business
marketing foundations
Marketing now is as different to marketing just 20 years ago as car manufacturing was before and after Henry.
However, the basics remain unchanged, just as happened with the manufacturing disruption Henry brought to building cars.
I find myself spending lots of time talking to small businesses about the things necessary for success, particularly in digital marketing.
They tend to be different conversations, but always coming down to a small number of common factors. It does not matter much if their focus is on a social platform, email marketing, video, webinars, podcasts, or any of the other techniques that have evolved recently, the 3 foundations remain.
- Positioning.
Positioning is one of the oldest notions in marketing, defining how your customers or prospects see you, what they think you might be able to deliver to them. In other words it is the unique story they recall when they think of you.
In the brand building process, researchers often seek the human characteristics of the brand that are present to be built on, removed or modified, and always seek the favourable characteristics. Reliable, detail driven, fun, creative, and so on.
In digital marketing it is no different, but just needs to be even more focussed. For most small businesses, it is way better to be really, really good at a small number of tings that are of value to your target market, than pretty good at a whole range of things. In the former you are the expert, someone worth considering, in the latter you are just another of the generalists. This is often a challenging choice for small businesses to make as the instinct is never to turn away a potential customer, but the fact is that there is so much competition out there that unless you are distinctive, and deliver some sort of value that cannot be obtained elsewhere, any customer relationship will be tenuous, or price driven.
Positioning can be most easily thought about on two parameters.
First, the niche you occupy
Second the persona of the ideal customer you are seeking. These are mutually reinforcing, and the more focussed on each the better.
One of my mates is a terrific, creative landscape designer. However, she occupies a very specific niche. Do not ask her to design a landscape for a block of units, or a park, both jobs she can do really well, but so can many others. Her expertise is in personal outdoor spaces with a “Japanese garden” flavour. If her particular style is not what you are looking for she will recommend several others in the area who can help, but she will not do it for you. But if the “tranquillity” of her speciality is what you are looking for, there is absolutely no one better.
Her ideal customer is equally specifically drawn. They are successful, middle aged couples with no children at home, working in the relatively small spaces of the near city suburbs, seeking an easily maintained space for quiet times and contemplation. If you have kids, or want a broad entertaining area, your needs will rarely overlap her special design skills, and again, she will recommend someone who will do a great job for you.
2. Communicating.
There are all sorts of ways to communicate, both digitally and offline. The sum of the combination of the options is almost always greater than the sum of the individual pieces of communication by themselves.
The key is to ensure that every piece of communication has a purpose that serves the overall objective, plays a role in the jigsaw of communication.
Having an objective is paramount. For some people that objective will be a personal meeting with a prospect who has been ‘warmed’ by a series of communication pieces that each has an objective and call to action as a part of the communication. It could be an email with a download, video with an invitation to subscribe to the channel, or an ad designed to gain attention and build, awareness of the product.
The key these days is to appropriately mix and sequence the communications in response to the signal coming from the prospect as they move around, and hopefully through the sales funnel.
3. Automating.
The days of one piece broadcast communication, with little hope of identifying the recipient are gone, technology has turned the communication process on its head. It is now the case that a piece of communication has not been of any value unless an intended recipient actually does something with it. In order to know, you need to be able to track the actions, then respond appropriately to the signal the receiver gives you.
Without automation, this is virtually impossible on any commercial scale. You need t build repeatable and predicable processes that respond cross the marketing and sales processes, so you have to also ensure that the right people are in place, and that the product offering is relevant to the target market.
None of this is easy, particularly for small businesses, and the cost can be a barrier, but think of the cost of doing it wrong.
Get the foundations right, and the building will stay up, get them wrong……….
Oct 23, 2015 | Communication, Marketing, Small business, Social Media
Courtesy: “First dog on the moon”
I am getting pretty annoyed with the enthusiastic panting of the toothy self appointed social media guru brigade extolling the ‘awesomeness’ (my current second most hated word) of social media.
They give the serious advisors amongst us a bad name.
It happened again during the week. At a casual SME meetup, there was one of these types there flogging the line that all you had to do was give him some money, and you would make it back 10X (actual claim) because he was able to focus his specialist and exclusive Social Media expertise on your objective and ‘Abra Cadabra’ money would appear.
The loaves & fish story have nothing on this lot.
Social media is just a fragment of the challenge of Social Marketing enabled by the technology that not just encourages, but demands that your ‘targets’ (will have to think of another word) have the opportunity and means to communicate with the marketer.
As I have heard it said, ‘it is not communication until the intended message is received, understood and has elicited a response’.
Seems to me there are a few questions you should ask yourself about your message:
- To what extent does it assist the prospect move along the journey to a transaction?. We do not engage in social marketing for our health, it is for a commercial outcome. Therefore measure it against the progress towards that outcome, recognising there are probably many other things in your message mix, from deliberate marketing communication aimed at the prospect, to random stuff like how clean was the company delivery truck was when it passed your prospect at the lights last week.
- How does the communication add value to the prospect?. If you cannot add value in some way, why should the message assist the journey to a transaction?
- What do they do next as a result of seeing your message?. If they do nothing, it is just another of the 95 gazillion messages they might see today, if they do something as a result of seeing it, whole new ball-game? It is great to have someone take action as a result of your message, greater if that action not just moves them down the transaction path, but if they also share it with their networks. In effect they are not only acknowledging the value of your message, they are endorsing it to their networks. This is the gold at the end of the social marketing rainbow.
Social marketing is pretty easy to write and talk about in a superficial way, but very hard to put into meaningful practice. It takes careful and creative analysis of your prospects and your own value proposition, as well as the construction, content and nature of the messages sent. This is not an exercise conducted with a fairy wand and pixie dust, it takes serious marketing thinking and experience.
If it sounds almost too good to be true, grab your wallet and get out, because it almost certainly is.
Oct 19, 2015 | Customers, Marketing, Sales, Small business
Strategic Key Account Planning
Almost every organisation I have dealt with uses some variation of the accepted sales funnel model.
Start by gathering as many leads as possible, then progressively whittle them down through the funnel until you have a customer. The practice is always way more chaotic than the nicely drawn funnel, as leads enter and exit the funnel at various times for various reasons. Chaotic is usually an appropriate expression.
When you think about it, there is a huge amount of waste in the process.
You start with many, and expend considerable resources to turn leads, of which a large majority are unlikely ever to be customers, into prospects, into hot prospects, (or whatever creative name you call them) then create a transaction, then hopefully to build a relationship.
In most B2B situations, this simply does not make sense.
Would it not be far better to spend a fraction of the resources identifying your ideal customer based on your value proposition, then identifying the decision makers and their procurement processes in those ideal customers, then setting out to engage them with personalised marketing?
This is in effect turning the funnel upside down, but recognising that prospect behaviour is unpredictable if not chaotic, it may be that the pyramid, in what ever orientation is the wrong metaphor.
Why not use a cycle of some sort, with the central objective of creating a relationship with the key customers and prospects in your industry.
Digital technology is making this easier by the day to execute, but the foundations of good marketing have not changed. Digital technology cannot change those foundations, the things you simply have to get right to earn the confidence of a prospect to give you their money.
Oct 16, 2015 | Collaboration, Customers, Marketing, Small business
local business is your business
Small business owners seem always struggle to find the ways to build their business. B2B, B2C, does not matter, the challenges are similar.
How do you identify, engage, then build towards a transaction and relationship with people to whom your product or service solves a problem, and adds value too their lives?.
In my local area, there are a significant number of networking groups, ranging from community based ones to expensive franchise operations. I am a member of two groups, plus a local chamber of commerce. It takes work, but they do deliver results. In observing the behaviour in these groups of those who are successful, there are some pretty common things that can most small businesses can learn to do better.
1. Elevator Pitch. It amazes me how few can state in a few words what they do, what problems they solves, what outcomes can be achieved, and why their services are worth consideration. It should not be hard, but it is. Developing a good elevator pitch should be a priority.
2. Think local. Most small businesses find most of their business in the local area. It seems therefore to make sense to invest in the activities of the local area, from being a voice in the community groups such as Rotary, to sponsoring the local kids sporting teams with playing gear. A little bit of time and effort, but very little money can go a long way in a community.
3. Be vocal. Communities offer all sorts of ways to engage and make it clear what you stand for. A builder might be a protector of the architectural heritage of an area, the local sports store agitate to turn the local dump into playing fields, a bike shop might be the lead voice in having some waste land rezoned to enable building a bike track. The list can be as long as your imagination.
4. Collaborate. Locasl can build scale by collaborating, cross promoting, and assisting each other in all sorts of ways. Again, being open to ideas and opportunities can reap large rewards. My local bottle shop holds tastings on a fairly regular basis. They secure the time of the winemaker of a high quality small winery, who then takes a small group through the current releases, a vertical tasting, or whatever is appropriate, and over the course of the evening, the Japanese café next door delivers some terrific ‘nibblies’ Everyone wins.
5. Leverage the network. Local networking groups of various types do deliver value, but like all things of value, success only comes with work. Others need to understand what you do, how you deliver value, why they should use you instead of an alternative, they need to find common ground and build some trust. Going to the meetings is just the start.
6. Referrals. An adjunct to the networking activity, it pays to ask for the job, or referrals. Network theory clearly demonstrates that the networks of those in your network are the most potent source of leads there is. Many people feel that asking for a referral is not good form, remove that notion from your mind. Members of a networking group are all there for the same reason, to build their business, so they will not mind, and so long as you are prepared to reciprocate.
7. Offers. Offering an incentive of some sort always helps. A friend runs a small suburban bistro, open 6 days a week. He is booked solid Friday, Saturday, and Sunday evenings, but has to carry the overheads of being open and able to provide services at other times. He is always creating offers of his slow times, two for one, a bottle of champagne on the table, cakes for birthdays, on and on, in order to get bums in seats in the slow times, and as a result has a thriving business, with many repeat customers across the week.
All this stuff can be done as a part of your general marketing activities, it adds a critical personal dimension very challenging and expensive to achieve with any form of media. The range of options for small businesses has never been wider, and never forget that people buy from people far more than they buy from businesses.
Oct 13, 2015 | Customers, Marketing, retail, Sales, Small business
Innovation in supermarkets
Small business suppliers to supermarket chains are substantially compromised by the lack of resources to innovate.
Peter Drucker stated 50 years ago that innovation is the only really sustainable competitive advantage, and the passage of events have proved him correct.
Commercial survival requires that you are able to continually innovate, or you rapidly find yourself left behind, simply because everybody else is.
Knowing this does not however, make the challenge any less daunting, especially in an environment like FMCG where the retail gorillas stamp on variation as a source of transaction costs, and are actively seeking to reduce SKU numbers by pushing housebrands.
Lets define what we mean by innovation for the purposes of this post.
It does not include business model and process innovation. Both are terrific ways towards commercial sustainability, are paths every business must follow, but have little to do with innovation from the customer perspective, at least in the short to medium term.
By contrast, product innovation is concerned with new stuff that adds value to consumers.
Pretty simple definition, that precludes line extensions, which are just a fact of life, and product changes, which are again a fact of life. We are seeking to talk about the things that really make a difference, and how and why that happens.
Following are some thoughts on the nature of the strategic environment we find ourselves competing.
Innovation Paradox. Big businesses get big by being able to reproduce things without variation, their processes ensure consistency, and reject the outliers. This goes as much for people as it does products, so generally large businesses have more difficulty seeing and acting on something new than small ones. There are obvious exceptions, and large businesses everywhere are seeking ways to overcome the innovative inconvenience of their scale, with greatly differing levels of success. Nevertheless, the generality holds, but the small business end of the FMCG supply chain has been decimated, perhaps almost eradicated by the scale of the supermarkets and the power of their business model. Where is the innovation going to come from I wonder.
Risk. The risk profile of every business is different, but as a generality small businesses have a greater capacity to take risky decisions, but a less capacity to absorb them when they go pear-shaped. Large businesses survive on consistency as noted, and success for individuals in a large business is usually counted by their successes, failures are frowned upon, so the tendency to take risks is reduced, hence, their inability to innovate. Again there are notable exceptions, but they always occur when there is a leader who mandates and lives risk tolerance.
Wide view. Any organisation, no matter how big, only has a small proportion of the people thinking about the categories they compete in, so why do you think you will come up with the great ideas? Those using what I have always called “Environmental Research” always do better. This has nothing to do with hugging trees, and everything to do with understanding the context in which the behaviour of your consumers happens. When you understand the context, and see shifts, the opportunities suddenly become more easily identified.
Habit. Consumers are driven by their own habits, and once formed, it takes a lot of effort to break them. Habits work because they make our lives easier, and we are loathe to risk what we know works, for that for which there may be a question.
Boundaries. Innovation efforts need boundaries, or they tend to wander off into irrelevancy. I have found it far better to provide those boundaries in the pre-workshop, if that is what you are doing, material. It is necessary to encourage people to as the cliché goes, “think outside the box” but it is counter productive to have people thinking outside the municipality. Far better to ground the process in a context that is familiar, where there is market and customer knowledge available to feed the process. Without such grounding you tend to get uncertainty and irrelevancy, and ideas and conversation that skates across the surface rather than digging deep to where the problems and opportunities that provide the fodder of successful innovation are buried. I love the metaphor of Classical music and Jazz in the context of innovation, the score provides the boundaries. To be a good classical music player, you need to be a master of your instrument, and be able to reproduce note perfectly what the composer has written, the allowable variation is very small, the emphasis is on technique. Jazz by contrast requires that you are a master of the instrument, as well as the music to the extent that you can take what a composer has written and innovate around the base rhythm and melody, so you need to be not just a master technician, but a master of the music. Great innovation in a commercial environment has exactly the same characteristics.
Think different. The great 1997 Apple advertisement said it all, but how many corporate entities will tolerate the crazy ones? Very few. If you are to truly be an innovator, somehow you have to accommodate some crazy ones. Generally they are tough going, irreverent, unconcerned with status and the status quo, constantly irritating the nice smooth flow of processes that deliver the consistency that corporates thrive on.
Problem definition. Innovation occurs when a problem is solved. Often it is an old problem solved in a new way, sometimes it is a problem unrecognised until the solution comes along, the classic example being the post-it-note. A huge part of the challenge of innovation is the identification of the problem. Rarely does a problem emerge with a fully-fledged solution, but as Einstein, in my view one of the greatest marketing thinkers who never receives any credit at all once said, “if I had an hour to solve a live changing problem, I would spend the first 55 minutes defining the problem, the rest is just maths.”
Margin maintenance. This is tangled up with risk profile, but is separate. Over the years I have done many proposals for new products killed at the gate by the margin problem. “If we launch this, it will erode our margins” often true, but the standard response I give is “better us than someone else”, but it is often a futile response when the ultimate decision maker is compensated by short term considerations. After all, Kodak managed to survive for 40 years after they invented the digital camera in1975, several generations of CEO had passed through in that time, all taking their packet, it was just the last in the line who had a problem.
Value not just price. Consumers look for “value”, but way too often that is translated by suppliers and the retailer into “price”. Price is just one way of reflecting value, but it is the most obvious, and easiest to articulate.
Barriers. Every industry has its own set of barriers to innovation in addition to the more general ones above. In the case of the Australian packaged goods industry, they are several, all associated with the concentration of power in the retail trade.
Margin squeeze
Speed of house brand copying the successful products
Timing of distribution and advertising
On shelf management of facings, cut in, position, promotional programs and stock weight
13 week “live or die” time
On shelf upfront costs
Category management if you are not the category captain, and few small businesses are, you are at a significant disadvantage
Risk averse retailers
Habit. Everyone is used to doing business in a certain way, so that is the way it is done.
Opportunities for suppliers.
Similarly to barriers, every industry has its own unique set of opportunities that when seen are open for businesses to chase.
Social media. FMCG suppliers have not yet solved the problems of how to best use social media to market their process in supermarkets.
Mobility. Engagement with the web and its tools is now mobile, a majority of net interactions are mobile, and most people have their smart phones with them all the time. Using this capability and the geo-location capability to foster a direct relationship between the brand owner and the consumer with the supermarket playing the distributor role is a real opportunity currently under-recognised and utilised.
Food service and ingredient. These are fragmented markets, where innovation, service and brand can still play a real role, and getting a return on your investment is still up to the quality of your business, not the whim of a buyer in a gorilla suit. Depending on whose numbers you use, sales outside the major chains of ingredient and to food service outlets from fine dining to fast food, is north of 60 $billion.
Digital coupons. Retailers in Australia have ensured that the redeemable coupon, so prevalent in the US does not get a start here, too much transaction cost, but a digital coupon? Why not? There have been several tries of various types, Groupon being the most obvious, but smartphones make it so much easier to collect coupons and redeem them in some way, not necessarily even associated with the retailer.
Range optimisation. Category management as it has evolved has always been data intensive, and from a retailers perspective, the objective has been margin optimisation. The next step I suspect will be range optimisation which is really just margin optimisation with a far greater understanding of consumer behaviour thrown into the mix. We have all operated with the view that our various research tools and their data gave us enough to work with, and they did, but suddenly there is the “big data” behaviour mining opportunity offered by social media and geo location, in addition to the fragmentation of times we shop, and how we place and receive orders. Range optimisation to accommodate all these changes just became in my humble view, the FMCG marketing challenge of the decade.
Innovation from the waste. Until very recently, produce that was outside the specs for appearance was consigned to the waste bin, juicing, and other marginal uses, it was not deemed good enough by retailers to sell, not because it was nutritionally or organolepticly deficient, but because it looked crook. Along came the idea of highlighting the products visual imperfections, “Imperfect pick” is the term Harris Farm have used, Canadian chain Loblaws has successfully rolled out “ugly fruit” in Canada, and both Woolies and Coles appear to be tinkering with the idea currently. There are a myriad of opportunities to utilise undervalued product to build a category, for example, shin bones are the foundation of Osso Bucco, many of us will sample great Osso Bucco at an Italian restaurant, but never cook it at home, when it is an easy, tasty meal with a very low meat cost. Pretty simple marketing I would have thought.
Innovation is tough, but it is also fun and makes the future. Those who just wait for the future to happen will be overwhelmed by it, those who take a role in shaping it will at least have the chance to do well.
This post is the 8th in the series examining the means by which small businesses can deal with the retail gorillas.
The one that started it, back in October 2014, is a summary of the 10 ways to beat the gorillas at their own game, a summary post that generated a lot of interest, so I expanded the individual points in subsequent posts.
The first expanded post was the 3 essential pieces of the business model
The second, 5 ways to compete with data
Third, 6 category management ideas for small business at Christmas
Fourth, 9 imperatives for small businesses to build a brand
Fifth deals with the reality for all supermarket suppliers, that they have two customer types, requiring different approaches.
Sixth, deals with the least understood large cost impact on small businesses: Transaction costs.
Seventh suggested ways for small businesses to collaborate for scale,
