What SME’s can learn from Apples trillion dollar milestone

What SME’s can learn from Apples trillion dollar milestone

On Thursday last week, Apple became the first trillion dollar company in market capitalisation.

I was not even sure what a trillion is.

A ‘Trillion’ is different in the US count to the British system which we in Australia follow.

In the US system a trillion is one thousand times one billion.

In the British system, a trillion is one million times one billion.

Apple when it passed the US Trillion mark on Thursday at a stock price of $207.04 per share, was a company worth 1 with 12 zeros following it. $1,000,000,000,000.

Long way to go to be a British trillion, but nevertheless, a heap of money. (pity they pay so little tax on Australian revenues). Just for a little context, the US Federal  budget in 2015 was $3.8 Trillion, and was 21% of the US GDP. Therefore, Apples market valuation is now roughly 25% of the US federal budget.

So, what can a simple local SME, the businesses I work with, learn from this astonishing performance? Broke to a trillion in 20 years.

Yes, Apple was as good as broke in 1997 when Apple brought back Steve Jobs by buying his NeXT business to get their hands on the operating system, because windows was killing the MacOS as it was at the time.

The Apple board terminated then CEO Gil Amelio and put Jobs back in charge, and he changed everything.

So, to the question, what can the local SME’s learn from this?

A lot it seems to me.

Strategy.

You have to be able to take a ‘helicopter’ view of the market you are in, its adjacencies, and likely future influencers.  Jobs did this several times, seeing the potential impact of MP3 players, then teaming that device up with software iTunes, then moving again with the iPhone and iPad. Each time he saw what was potentially possible, and made it happen. As a local business, this helicopter view is just as valuable to you as it was to Jobs in 1997, and subsequently.

Timing is everything.

Jobs was able to see what was becoming possible before anyone else, and leverage the change. He was not the first in any of the individual technologies, but he put them together in a different way to leverage the multiplier effects. However, each wave was enabled by the one before, so timing was crucial.

Control of your value chain.

Customers are not looking for components, they are looking for the best solutions to their problems. Apple controls its value chain with an iron hand, delivering to their customers a unique experience in a ‘must-have’ package. They do not manufacture any of the core components, they just arrange for it to be all put together. In the evolving commercial world we are all facing, one of the most important words will be ‘Control’. Apple has proven to be a master of control, and has benefited accordingly.

Great design sells.

Dell, and HP, and all the rest could have done what Apple did, but they failed to do so. They designed and sold solid, reliable commodities, that all looked, performed  and felt the same, Apple designed something different that delivered an experience. The evidence is clear. Apple has roughly 15% unit market share of smartphone units sold, but holds 85% of smartphone profitability. This astonishing performance is the result of great design and branding over a long time, and the control exercised over the supply chain and tech eco system.

Dream.

It is usually just fluff to talk about ‘dreaming big’, creating your own BEHAG, (Big Hairy Audacious Goal) but occasionally, someone does it. Dreaming is a key part of the process, but dreaming by itself does not get anything done.

 

As an aside, one of the members of my local tennis club is a long term Apple employee in Australia, who has Apple shares as a part of his salary package. He has been issued shares progressively over the years, all of which have been sold to pay for  the expenses of living, mortgages, school fees, all the stuff we all face along the way. The first shares he was issued were at forty cents each. A very long way from the $208 closure on Thursday, and yes, he was crying!

 

When you need help thinking about all this stuff, even if you do not aspire to be the next Apple, call me.

 

10 considerations to make better pricing decisions

10 considerations to make better pricing decisions

Setting the price is always challenging, the decision often left to the last thing.

Wrong.

Your pricing strategy should be a part of your overall strategy as decisions in other places have a huge impact on the best way to maximise your return from your  price.

Cost should have no say.

Customers do  not care about what it cost you to produce the product they are buying, they only care about the value they receive from the purchase. Understanding the value delivery is the real key, and everything else should flow from it.

What the market says should only be an influence.

If your product is the same as everyone else’s, in a homogenised mass market, where there is no source of differentiation, you cannot win. At best you will get a share in line with the number of direct competitors, at worst, chase the price down to the floor and everyone goes broke. This is a market you should not be in.

Differentiation.

Without some sort of differentiation that adds value to customers, you will be forever  in a price war. There is always a source of some differentiation, somewhere, if you look hard enough.  Something that adds value to  a segment of the market, so find that source of differentiation, understand the value it adds, and price for that. This may mean that many, perhaps even most in some circumstances, will reject you as being ‘too expensive’, which is fine, let your less focused competitors go broke alone.

Ensure the pricing model scales.

Pricing  models vary along with the business model in place. From a strategic perspective, when you choose a pricing model, it is very hard to adjust later to suit a different business model. For example if you start selling on line and take a 50% gross margin, that may look good until a distributor comes along and wants to sell your product through his system, but requires a further 50% margin to do so. There is not enough in it for you both.

Less distribution is sometimes more profit.

Uncontrolled distribution leads to conflicts in the pricing requirements of the different  business models, and can lead to a race to the bottom which no one  wins

The classic case is Australian FMCG retail. The two retail gorillas account for 70% of FMCG sales, so have a lot of power in the pricing discussions. They are largely unconcerned about your margins, only concerned with theirs, and especially theirs  compared to the alternative gorilla. When you go with them, you are trading volume for margin. At the same price point you can sell much less product at higher delivered margins through  more limited channels and have more in your pocket at the end.

I have had a  number of farmers as clients over the years, selling produce to the gorillas, investing significant capital to deliver the volumes but having nothing left over at the end. Mostly they also sell through alternative channels, from farmers markets to a few independent retailers, and these are always more profitable than the gorillas. It is a choice you need to make and my advice is always to treat the gorilla as a way of covering a bit more overhead, but when you get to the point of needing their volumes to pay the bills, you are in real trouble.

Simple trading terms.

Trading terms are just another way of packaging discounts, and should be as simple as possible.

The simpler and more consistent they are the better, as complicated terms have a habit of creating heavy and usually unseen transaction costs in your business. The other risk is that you end up using the terms to give favorable net prices to someone over another, and when buyers move, they take the terms books with them, so look out.

Again, the experience of FMCG retail is instructive. Aldi has ‘net net’ terms, the price is the price, whereas the gorillas insist in complicating terms and that delivers them added margins, and you the transaction costs. It is much cheaper to do business with Aldi, as there are fewer transaction and overhead costs, but you still play by their rules, which do not include your proprietary brands.

One of the most insidious terms component is payment terms. It is hard to resist the temptation to extend under pressure, but in the long run always better to do so. The shorter the time taken for customers to pay you the money they owe you the better, and long terms become more damaging as interest rates rise.

Demand creation.

When there is demand for your product, you can make more rewarding pricing decisions, than  when you are just competing in a commodity market. Therefore it is better to spend your money creating demand than funding discounts.

Going hand in hand with demand creation is the notion of what market you want to play in. Mass markets have price expectations and so do luxury ones, although they may sell less volume. This is associated with the business model and the strategic choices you make about the markets you will play in, and the way you play. Niches always deliver better margins, question is how much is left at the end as the volumes will be lower and product costs usually higher.

Customer value.

When the customer wants and needs your product and cannot get it or any substitute anywhere else, you have monopoly pricing power, something businesses love and regulators hate.  The classic economics 101 supply/demand pricing model, ignores two basic tenets: First, there is always a substitute somewhere, in some way, even if it is going without. Second, human behaviour is never just rational, and economic theory assumes both rationality and perfect knowledge. Value delivered should always be seen from the perspective of the customer, and different customers will assess the value delivered differently.

However, understanding the drivers of value that your ideal customers will have delivered by your product enables you to price at the point of maximum satisfaction for them, and margin for you.

Anchoring.

It is always better to start high, as you can if necessary come back a bit. By contrast, starting low and then trying to increase prices is enormously difficult. There is a process called ‘Anchoring’ in psychology that applies directly to the manner in which you set prices. Whatever is the first price identified becomes the anchor around which the rest of the conversation is ‘anchored’. Anchoring low means you will end up low, anchoring high usually means you end up higher than you would have otherwise.

Iteration. 

Finally, testing differing pricing options should be in most cases an ongoing, iterative process. We now have tools that will deliver real time feedback in many, particularly consumer, markets, so you can adjust prices for an optimised outcome as you gather experience and market intelligence. On line, ‘dynamic pricing’ driven by machine learning and masses of personalised data will become the norm in the very near future. In some areas, it is already here, and I can only see that increasing relentlessly, so you had better be ready.

None of this is easy, but setting the best price for your market that reflects your best interests  is crucial to sustained success. Call me when some deep experience is required.

Cartoon credit: Scott Adams and Dilbert. Nailed it!

 

What ‘digital transformation’ is not!

What ‘digital transformation’ is not!

 

It happened again over the weekend.

I had a conversation with a bloke who runs a medium sized business, and is embarking on what he called a ‘digital transformation’.

In other words, he is paying someone to build a website.

Another example of someone who is probably about to be badly disappointed, and lighter in the pocket.

A website is not a digital transformation, it is a piece of marketing collateral, and like every other piece, needs to have met and passed a few basic tests:

What is its purpose?

Who is my customer?

How is it different to others in a similar space?

What problem does it solve?

How do you want visitors to feel?

What do you want those visitors to do next?

 

If that is not all obvious in the first glance, start again.

The greatest cost in building a website is not  the technology, that is now almost completely commoditised, it is in the generation of the content in response to the answering of these simple questions. Failure to deliver to a site visitor something of value to them that creates at least curiosity to  learn more from you, means they will leave, and probably never come back. While there is  no dollar value to that outcome you can easily count, it is in reality the greatest cost in not having a site that works for you: lost opportunity and revenue.

 

 

 

 

 

 

 

4 questions to enable you to extract maximum leverage from your marketing investment

4 questions to enable you to extract maximum leverage from your marketing investment

Imagine you are faced with the task of joining two pieces of wood.

What information are you likely to need before deciding how to go about the task?

How big and important are the pieces? Are they structural weight bearing? Is the joint going to be seen? And so on.

So: you have the information; you can then decide how you go about the joining.  Do you nail? Screw? Glue? Combine rebate glue and screw? Countersink the screw? And so on. You have many options, but without the contextual information, you cannot make an informed decision that will give you the best outcome.

Sometimes this is easy, instantaneous, other times it will require more time and research to get the right answer.

Figuring out your marketing programs is no different.

How are you going to allocate your limited resources across all the possibilities that face you?

Marketing has only one purpose, to generate revenue. Sometimes it is revenue today. Sometimes tomorrow, next month, next year, next decade. If you cannot see a connection between the marketing activity and future revenue, stop now!

 The challenge is to know enough to ask informed and intelligent questions, and be able to separate the bullshit from the good answers.

This ‘marketing game’ is full of sellers of new shiny toys that are ‘guaranteed’ to be the answer to all your commercial problems, delivering you rivers of cash.

In order to help you separate the bullshit from the reality, there are four tools you can use to do the separation, which will assist you too see the connections to revenue.

They all are interdependent, none by themselves is of great value, and together they are a powerful way of thinking about your business.

The 4 seem simple at first glance, but in reality very complex questions, that in combination will give you the beginnings of an answer. The rest will come with experience and domain knowledge.

  • What problem can I solve for a potential customer, or put another way, how do I add value?
  • Who is my ideal customer?
  • How do I apply maximum marketing leverage?
  • How do I make a profit?

 

When you have the answer to these four questions, you are ready to spend some money.

Not before.

However, once answered, it is never enough to stand still and think the answers tomorrow will be the same as today, and that the answer today is the ideal one. Business is iterative, you learn from doing, experimenting, doing it better next time. It is an evolutionary process, so long as you are careful not to bet the farm on a dud horse. These are all connected to each other, one without the other is of less value, and the impact of answering them all well is not just cumulative, it is compounding.

There is never one right answer, the interdependencies are huge, as are the options, it is all incremental, a process of improvement and no good answer remains the best one forever.

These four factors, and all the lesser things that hang off them, are compounding.

The twist is that they also compound in reverse, so you have to be prepared to try things, but get them off the table quickly when they do not work.

 

A little detail on the 4 questions.

What problem can I solve?

Unless you can solve a problem for someone why would they buy from you?

Albert Einstein, my senior marketing guru, said, amongst other things, “If I had an hour to solve a life defining problem, I would spend the first 50 minutes defining the problem, the rest is just maths’

So, do your research before you jump in.

The definition of how you solve the problem becomes your value proposition. In other words, how does what you do add value to the lives of those ideal customers?

If you cannot articulate that, you have nothing except price, and nobody wins a price war.

The solutions to problems come from being able to ask the right questions.

Seeing things others do not see, solving problems better than others, and sometimes seeing a potential problem before it is an acknowledged problem, highlighting it, and then solving it.

The classic case is the iPod. It was not the first MP3 player, and arguably it was not the best technically, but it did something no other mP3 player did. It put ‘1000 songs in your pocket’.  It articulated the problem that the product solved.

While others all talked about their technical superiority, the stuff the geeks thought was important, Apple just told us what consumer problem they solved.

Who is my ideal customer?

Who is your ideal customer, the one who will not haggle the price, who loves the product you sell, and proselytises for you? Knowing that person in great detail would be marketing and commercial gold.

Like all gold, it is hard to find, subject to all sorts of distractions and false starts, but immensely valuable when discovered, and discovery is usually incremental, rather than a ‘eureka’ moment. This means it is also a demanding challenge.

What is often also forgotten in the effort to define that ideal customer is that every customer also has an ideal supplier, one who meets all their needs, delivering value in excess of the cost to them. It is a two way street, and a relationship only prospers where there is value being delivered to both parties.

Defining your ideal customer is an iterative process, deceptively demanding, as it requires choices about who is not an ideal customer, and therefore excluded from primary consideration. Choices like this are challenging, but necessary, particularly for small and medium businesses which do not have the luxury of a big pot of marketing money, you have to get it right or waste limited resources.

Following is a list of 6 parameters you can use. Not all will be equally applicable in every situation, but it will pay to give each deep consideration.

Who: Is the demographics they may exhibit. Where they live, age, gender, education, job, and all the other quantitative characteristics that are available. These parameters are pretty much all that was easily available in any detail until digital tools came along.

What: are their behaviours. Do they go to the opera or rock concerts, perhaps both, do  they travel overseas for holidays, what sort of causes, if any, do they support, are they likely to demonstrate their beliefs publicly, or are they just internal. All the sorts of things that offer a picture of how they think, feel, and behave in all sorts of situations.

Where: will you find them digitally, as well as in the analogue (perhaps real) world, and what means can you use to make a connection. Are they likely to be avid users of Facebook, LinkedIn or other social platforms, are they comfortable buying on line, do they ‘showroom’ digitally then visit the physical retailer, do they get their news from Facebook and Reddit, or more focused news sites, or even, surprise, surprise, newspapers, radio and magazines.

When: will they be ready to buy? Customers are rarely ready to buy when you are ready to sell. Understanding the customer buying cycles, particularly in B2B and a larger purchase is critical.

Why: should they respond to your entreaties, to do whatever it is you are asking of them. What is your value proposition to them? What promise of a new and better tomorrow can you deliver? What can you deliver that is different and more valuable to them than any alternative? If you cannot answer these questions, it will come down to price, and winning a price war is a great way to go broke.

How: will you service the transaction, and the subsequent relationship that may emerge? This is usually down to questions about your business model and the ‘fit’ that has with the customer.

 

How do I make a profit?

Just as a successful young single male professional might opt for a red sports car, when 10 years later, with a family, kids, soccer practise, he might opt for a brick on wheels, you can have different business models to suit different circumstances and conditions.

Most small and medium businesses with which I have been associated give little if any thought to the business model, but it is of critical importance.

Are you retail, wholesale, franchised, subscription, digital, or some combination? All are different, working in differing ways, to allocate and absorb the costs and benefits that accrue. Being very clear about your business model, and being able to anticipate if a potential customer will fit is in some circumstances, a vital component of making a profit.

 

How and where do I apply Maximum Marketing Leverage?

Identifying the point at which you can apply Maximum Marketing Leverage (MML), or in other words, get the most productivity from your marketing investment is the point at which the previous three questions intersect.

Answering the three questions well requires a combination of introspection on your business, in combination with exospection, the examination of your business from an external perspective. The point where these two perspectives intersect is the best spot to apply marketing leverage.

Most will be familiar with the SWOT model of business analysis; this is one of many, and perhaps simplest of the many ‘Mental Models’ you can use to do the examination.  Porters 5 forces, Balanced Scorecard, BC matrix, Business Model Canvas, and many others are alternatives. All have their pros and cons, but the key point is that you give due consideration to them, as they will identify and clarify your point of MML.

The ‘maths’

All that has gone before, in Albert’s language, is the definition of the problem. Now we get to the maths, the way in which you apply the leverage.

Most small businesses rush straight to the tools of leverage without due consideration of the nature of the problem they want the tools to solve. However, once defined, pick a tool, or most often a combination of tools that best fits your point of leverage and apply them, recognising that there is no formula to give you thee exactly right answer, so you need to experiment  to find the best outcomes. The process of experimenting, will also give greater clarity to the 4 questions, which will in turn clarify the point of MML.

The choices you face are multitudinous.

Digital, analogue, which social platform, how much should be spent on Adwords, does Facebook work, how to use the automation tools available, what about email, letterbox drops, and so on, and on, and on. 20 years ago, life was much simpler, there were few choices, but there was also very few of the tools available that enabled the identification of the point of MML, so experimenting was far more costly and risky than it is now, to  the point where small businesses had very few options. Now you have plenty, the challenge is to use them in the best possible manner.

However, there are three things you should always remember, and apply.

  • Customers and potential customers move through a decision making process every time before they put their hands in their pockets. Sometimes this is almost instantaneous, as it would be in a supermarket doing the weekly shop, much of it is on ‘auto-pilot’. By contrast when buying a new car, house, or even considering a restaurant, the decision is usually much more considered, research is done, options considered, a short list compiled before a decision is make. This process happens in many ways, and can be influenced by the marketer using different tools, and combinations of tools at different times in the process.
  • The tools themselves are only as good as the message that is delivered. Whether you are writing an ad for the local newspaper or sending a series of emails to your prospect list, you need to be able to write and design a piece of communication that will engage the reader, give them the information they are looking for at that specific time, and lead them to the next point in the purchase process. In other words, in the vernacular, you need to be able to produce a variety of ‘content’
  • The one tool that should be in every toolbox is your own website. This is your digital home, the spot you own, from which you can communicate with your ideal customer under your terms. The trick of course is to have a website that accurately reflects the answers to the four questions and directs the tools to the point of MML. Most SME’s recognise the need for a website, and either lack the skills to do it themselves, or get a contractor to do it, usually without reference to the 4 questions. Then you end up with a nice looking but not revenue effective website. It is a vital but challenging tool to get right.

A few final but general points about running a successful SME, that are nevertheless vital but rarely  get enough attention.

  • Referrals are the best and cheapest form of marketing; it just takes time and effort to get to the point where current customers will refer you to others. Get this right, and many of your marketing problems will be solved, so it makes sense to have a formal referral process in place.
  • You must understand your ‘numbers’. The accounts, Cash flow forecasts, revenue, cost and customer analysis and forecasts. The Pareto principal, well known as the 80/20 rule applies in every circumstance. Sometimes it is 90/10, rarely is it 70/30.
  • Marketing cannot be left to the last minute, it is absolutely essential you identify your MML before you start spending your limited resources.
  • Social media is not free, despite the rumours, it costs not only in time and effort, as well as design costs to be effective, the quid pro quo is that you give over a heap of personal information that the social platforms then use to market to advertisers. There are no silver bullets in the quest for success.

 

 

 

 

 

How much do I need to spend on marketing my new business?

How much do I need to spend on marketing my new business?

This ‘How much’ question was posed to me recently in a networking group by a young professional who had just left the comfort of a large corporate firm to strike out on her own with a business partner. My answer: ‘Depends’. There is never a right answer to  this question, every situation is different, but there are a few foundation things that should be considered, and they all involve some sort of trade-off.

Time.

Time is our only truly non-renewable resource, so it makes sense to use it as productively as possible, depending on your definition of productive. For this new firm, while they have clients, they also have more time than they had working as corporate ‘slaves’ in a bigger firm, so they can choose to use it for marketing, developing their professional competence, which is after all an investment in their future, or they may even go to the pub. Early on it makes sense to invest some of the excess time in building their marketing and sales processes so that they can ‘feed’  the pipeline of potential clients.

Money.

Nobody, no matter how big, has sufficient money in the marketing budget to do all they would like. Therefore it is a matter of priorities and choices. Never easy. It is also true that the way you see marketing makes a potentially huge difference. Seen as nothing more than a necessary expense, it is just a chunk of money going out the door. Seen as an investment, marketing becomes something different, by definition. While it costs money now, it is an investment in future prosperity. By gaining clients that will continue to deliver revenue over a longer period, without having to spend on getting them through the door again in the first place, the initial investment will deliver great returns. My answer is also always tied up  in the need to use available money as productively as possible, which means that before you spend a zac on the communication end of the marketing spectrum, make sure you have the definition of  the ideal customer and your value proposition in place, so you can accurately target both the potential clients and your messages.

Expertise.

Expertise you can buy in, but it is dangerous to buy in expertise in a situation where you do  not know enough to adequately make the choice between alternatives.  This applies  perhaps more than anything else the strategic/marketing end of  the service continuum, simply because there is rarely one right answer, and  there are no external professional standards to be met. This means that a  marketing professional may just be highly professional about marketing their  business, but hopeless at marketing yours. If you buy in expertise before you know what expertise you really need, you risk getting a plumber when you need a carpenter. Alternatively, you can buy in the expertise to assist define just what it is you do need before you make the investment in marketing activity. The instinct these days is to talk to a so called ‘digital marketer’ whose business it is to sell you digital marketing services, whether or not that is the best use for your money. It pays to be sure, do some serious introspection before you jump. This is not usually an instinctive thing for most, in this case they are lawyers, not marketers, and marketing remains a ‘dark art’ outside their experience and expertise. Marketing has to be at the front of your mind, not just during the start-up phase, but for ever more. While the specific activity that drives client engagement can be turned up or down according to the capacity available to service the business, marketing is a key part of the DNA of every successful business.

Create processes.

Everything in business is a part of a process, no matter how big or small it may be. Therefore the things that are repetitive should be ‘routinised’ as much as possible so they happen with minimum resources, and optimum performance. In other words, they are a productive use of the time and money allocated. Just as providing a professional service requires a process to be followed, so it is with marketing activity. You can automate just about everything these days, which is where a mistake is often made, as automating a rubbish process just leaves you with automated rubbish. There is  no substitute for mapping out what you want to achieve, and the best way to achieve it, piloting and refining, before you automate. Remember also  that automation by definition, removes the ability to be agile in the face of something not considered in the automation phase.

Prioritise ruthlessly.

We only have so much capacity, spreading it thinly just ensures nothing gets done properly. Far better to do less things, well. Therefore, I absolutely subscribe to, and work with clients to prioritise their investment of time money and expertise. You can do this in any number of ways, two of which I like and use. The first is the well known urgent/not important matrix,

 

 

 

 

 

The second is an aggressively culled priority list. Record the top 20 priorities you have in front of you. Prioritise 1 to 20. Draw a line under number 4, or 5, and discard the rest into a ‘carpark’ of some sort, not to be considered at the moment, but too be kept aside, as being in your top 20, there is some importance to be attributed. Ensure that as a part of  the process you have performance measures built in so that you know which parts of your marketing are working, in which case you double down, and which are not in which case you stop, and either save the investment or use it in the doubling down.

Finally.

Find activities you are happy to do, that you can feel proud of, and do  them. You are in business for yourself, being happy is often hard as the pressures can be substantial, so make the effort to find the elements  of the wider role you have taken on, and do those that you enjoy, are good at, and which add value to your business, and outsource the rest, having done sufficient research to ask good questions of potential suppliers.

The two crucial leading indicators of business performance.

The two crucial leading indicators of business performance.

Simplicity is the ultimate sophistication’. So said Steve Jobs and he was not only right, but just one of a long line of people saying similar things.

Aristotle, Marcus Aurelius, Mark Twain, and my personal favourite, a marketing guru of great stature, although known for other things, who said ‘Everything should be as simple as possible, no simpler’. Albert Einstein.

It is also very useful to have a few simple but reliable forecast measures that give you a ‘heads-up’ about rough waters ahead.

Therefore when doing a StrategyAudit of a business, I try to distil everything down to its most simple form. That way not only can most (including me) understand it, but there is less room for error, misunderstanding, evasion, finger pointing, and all  the rest that goes on.

Two words capture the essence of a successful business, irrespective of size, structure, location and market. Having done many StrategyAudits, using a whole range of tools, some simple, some pretty sophisticated, there are just two words that underpin everything.

‘Cash’ and ‘Flow’.

Let me explain.

Cash.

Cash is the lifeblood of every business. Every activity, in one way or another is connected to the consumption or generation of cash. When you are doing something that is not contributing in a positive way to cash generation, even if it costs cash (such as advertising), stop. It does not matter how grand the vision, how well meaning the mission, how creative the advertising, how innovative the products, unless it generates cash in excess of its cost, stop.

So, I look at the cash. How it is managed, committed, deployed, forecast, leveraged, and disbursed.

The three fundamental parts of an accounting system are the cash flow statements, Profit and Loss statement, and Balance Sheet.  Both the P&L and Balance Sheet can be ‘managed,’ just look at Enron, Dick Smith, FAI insurance, State Bank of SA, One-Tel, and a host of others for proof. However, look closely at the Cash Flow, and without sophisticated fraud, it cannot be ‘managed’, and if there is fraud, a close look will reveal it fairly quickly to an experienced eye.

Probably the easiest way of judging the health of a business is to look at free cash flow. Cash coming in – cash going out, excluding capital expenditure. If positive, at least there is some hope, negative, start resuscitation immediately, or run for the lifeboats. This assumes a reasonable period of time. My recommendation to most clients is a rolling 13 weeks. Long enough to be somewhat immune from the day to day stuff, but short enough to give a fair indication of the overall health of the place quickly while giving enough time for any necessary corrective action.

Every business I work with is strongly encouraged to do a weekly rolling 13 week cash flow forecast. Those that resist strongly usually end up former clients for one reason or another. Once set up, the routine makes it easy, takes little time, and removes a whole lot of stress.

Flow.

This is probably a bit unexpected, but when you think about it, every business is made up of many processes, sub processes, and sub, sub processes. Draw a ‘map’ of your sale to cash process, and there are a number of steps, preparation and dispatch of the order, proof of delivery, invoicing, supporting book-keeping steps, and debt collection. Similarly, all the processes in your business have stages, points at which there are necessary interventions, potential changes, interruptions, delays, mistakes, rework, and a myriad of admin things and performance measures that need to be completed.

Keep drawing process maps and see how they become entangled, are dependent and interdependent, and can create uncertainty, opacity, and opportunity for error, as well as being necessary to get the work done.

I think about flow as you would a river. Water flows smoothly and predictably while there is no interference, but insert a rock, or bend, or shallow bits, and there is interruption to the flow. The greater the interruption, the more unpredictable the flow, and the more energy is required to move the water through. The velocity of the water through a part of the river is a measure of the productivity of that part, and again, the greater the interruption, the less the productivity.

I therefore look at the ‘flow’ of processes through the business, and seek to simplify, and accelerate all of them by removing the ‘rapids’. It is an incremental and never ending task, but one that delivers great financial and emotional rewards. In most cases, there has been little process mapping done, so that becomes a priority in any improvement project, but the current state of the ‘Flow’ is a very good indicator of the health of the business.

When you need a bit of help considering these two crucial performance indicators, give me a call.