The two crucial leading indicators of business performance.

The two crucial leading indicators of business performance.

Apr 18, 2018 | Governance, Management, Small business

‘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.

‘Burley’ is a great metaphor for marketing

‘Burley’ is a great metaphor for marketing

Mar 16, 2018 | Marketing, Small business

 

As a kid, I used to go fishing with my dad sometimes, usually off the rocks around Sydney’s northern beaches. He was a good fisherman, often came home with dinner when others around caught nothing.

His explanation of his relative success was hard for a kid to understand, a combination of the tides, moon, time of year, the spot he picked, and some mysterious concoction brewing under the house called ‘Burley’.

Burley he told me, was a brew he varied depending on the fish he thought would be around, making it easier for them to find him, and willingly receive bait that was irresistible, but hiding a hook.

Not  a bad metaphor for marketing.

Focus on the most likely target given the conditions

Go to where they might be found

Spread around something irresistible to them to attract lookers

Ensure you have the right bait when they turn up

Heat up the pan to receive the ‘incoming’.

 

Marketing ‘burley’ is a tricky thing to get right, so find someone with the experience and knowledge to  ensure your mix works.

Image credit: Hatalina via Flikr

7 tips on  how not to be boring while presenting.

7 tips on  how not to be boring while presenting.

Mar 6, 2018 | Communication, Marketing, Small business

As small business owners, we are often called on to speak publicly, and like most people, find that intimidating, and for some uncomfortable to the point of nausea.

There are many pieces of advice on how to structure a presentation, thousands of them on the web, and a few contributions from this site, but little about ‘how’ to speak beyond the very good advice on body language.

For most the degree of discomfort is brought on by fear.

Fear of making a dill of yourself

Fear of forgetting the important bits

Fear of boring your audience.

All can be addressed using a few simple things, that will not remove the instinctive fear of being the one outside the herd that in evolutionary times became a tigers breakfast, but at least will give you a few tools to beat the beast off.

Do not repeat to them what they already know.

Most speakers just repeat lots of stuff in the public domain, things most already know, or they pimp their companies and products.

Both are as boring as batshit.

You have been given the privilege of controlling the time of others, and the status of expert by whoever is organising the event you are speaking at, do not waste it by repeating boring stuff. Even if all you do is reverse the usually quoted factoids, and adding a bit, it will be more interesting. For example, instead of just stating ‘8% of transactions are now carried out ‘on line’,  say ‘while 92% of transactions are still carried out in person,  75% of purchasers do extensive research on line before you see them in the shop. How should that impact on your marketing strategies?’

Do not speak about things where you have only superficial knowledge.

Tempting as it is for some of us to speak at the opening of an envelope, resist the temptation unless you can genuinely impart some relevant and useful knowledge to the audience. Knowing you have valuable information that others will benefit from makes the process of imparting it that much easier.

Do not read to them what they can see.

Reading slides back to an audience is an absolutely sure fire way to ensure they all dive for their phones to check the Facebook update or what their  mother in law is doing for dinner. I cannot believe how often I see this, we have all seen it, yet  many allow themselves to knowingly bore the pants off the audience by doing it themselves. It is simply a response to fear, we can wrap ourselves in a sheet that excludes others, removing the presentation obligation to ‘connect’ with the audience.

PowerPoint has destroyed our instinct to be interesting when we speak, to hold the audience’s attention.

Resist the siren song of PowerPoint. When you use it, which is in most cases, always use it as no more than a memory jogger and to keep you moving along to a plan by having no more than a couple of words on a slide, but using it as a way to communicate in simple graphic manner the point that you are currently making. If you cannot condense that part of the discussion to a single graphical representation, remove the whole thing.

Do not just give them your opinion.

An expert speaker always has a point of view, but to be truly persuasive, that point of view will be based on solid facts, research, and data. Deliver that data, while articulating how you used it to form the views you have. Demonstrate the links between cause and effect. Failure to do this effectively is a large part of why we no longer trust politicians. While they are often slick talkers, they just give us opinions, and mostly we know they are not their private opinions, just the convenient line of the day, without any foundation of relevant fact and cause and effect links.

Do not stand still.

Particularly, do  not stand still behind a lectern.  When speaking, the stage is your domain, dominate it by moving around, using it to make your points, engage with the audience, match your voice to the point you are making, and be interesting physically. Back to evolutionary psychology, the tiger will have less chance at breakfast if the target is moving, so  move!

Do not just recite, tell stories.

Imagine your audience is one of your kids to whom you are telling a bed-time story, and you want more than anything for it to be memorable for them. To be memorable, every story has a structure. A beginning, an end, and a middle bit, drama, tension,  villains, heroes, laughter and sadness, suspense, and a point that you are trying to make. Use as many of them as possible in your presentation, with particular attention to the point to be made.

Do not end with thank you for coming.

You have been given the status of expert, someone worth listening to, by whoever has organised the gathering. Do not surrender that status by thanking the audience for all being there, for their attention. Instead, demonstrate why the investment of their time has been worthwhile, by telling them what to do next.

When you manage all that, I guarantee that not only will you have been of benefit to the audience, you will probably have enjoyed the experience, at least just a bit, and you will be better for the practice next  time.

 

8 clichés every entrepreneur should consider

8 clichés every entrepreneur should consider

Feb 5, 2018 | Customers, Management, Small business

Clichés become clichés because they make sense, and are widely used, so they pass into the language. Unfortunately, common usage often makes them appear flippant, a throw-away line that means nothing.

That they take on that label does not make them any less valid, in fact, becoming a cliché is almost like getting an endorsement for wisdom.

Following are 8 that entrepreneurs embarking on an enterprise, whether it is the next Uber,  starting a cleaning business in your local area, taking on a franchise or a multi-level selling ‘opportunity’, that you should consider.

 

Cliché 1. Know where, and who, you are.

Irrespective of the starting point, starting a business is a journey. If you are going to start a business, recognise  that it will consume you if it is to be successful. It is not like being an employee, irrespective of results, at least for a while, you get paid to turn up.

Not so now.

Starting a business takes a heavy toll on not just your financial resources, but your resilience and personal relationships as well. Being prepared for the long hours, stress and uncertainty is a good start, you must know yourself well.

Cliché 2. Know where you want to go.

Many become tangled up in visions, missions, values, business purpose, their Why, and all the other ways that have become ‘popular’. All are valid, all have their place, but I ask my clients a simpler question; What does success look like? When you can answer that question, you have at least enough of an idea to start, but if the answer is purely financial, you need to do some more thinking.

Cliché 3. Have a plan.

There are lots of clichés about plans. Prominent amongst them are: ‘no plan ever survives first contact with the enemy‘, and  ‘failing to plan, is planning to fail‘ and both are right. Point is that unless you have a plan, you have no chance of understanding and managing your progress towards the goal, which tactics worked, and which ones did not. All crucial pieces of information. There are many planning models, each with their own emphasis, and I always recommend that you use several in the thinking part of the planning process as a way to ensure that things do not get missed.

Cliché 4. A journey of a thousand miles begins with a single step.

Planning is the easy part, the hard bit is to take action. Without action, nothing happens, nothing!

Taking the steps, getting outside your comfort zone is why you are going into business for yourself.  Curiosity, an idea, recognition of a need you can fill, a problem you can solve, all are great reasons to go into business. All it takes is the first step, and it is always the hardest.

To add another cliché to the list: ‘hope is not a strategy’

Cliché 5. To succeed, you must have something others want.

Success in business is dependent on being able to deliver superior value to customers, at a cost that delivers you a margin. If you cannot deliver value, almost always the solution to a problem, which can be anything from a more efficient power station, to a better tasting tub of yoghurt, to on time delivery, or something no-one else can do, at a price the customer is happy to pay, you will  not survive.

Tough but simple.

Cliché 6. People have to know you are there.

Even if you do have the next greatest thing, you cannot sell it without  others who may need or benefit from your gizmo knowing about it. Marketing is essential. The process of gaining understanding how you will deliver value to whom, while making a profit on the way is make or break for every business, particularly a new one as generally you cannot afford to make mistakes. Selling skills are as important. Not only do you need to sell to your potential customers, but to the banks, your suppliers, and often even your partner. If you cannot sell, and do not want to learn how, do not go into business for yourself.

Cliché 7. Watch the pennies and the pounds will take care of themselves.

There are two aspects to this cliché. Cash is the lifeblood of every business, and you need to watch your cash the way a mother bear looks after her litter.

The first is to do a regular, I strongly recommend weekly, cash flow forecast. Make it a part of the way things are done in your business. At first it may seem strange, but it pays off, as you will always know your cash position, which will be a huge stress reliever. As a side benefit, trading while insolvent is illegal, and the simplest measure of solvency is can you pay your bills as they fall due.

The second is the behaviours you are setting out to build. Results come from the way things are done, as well as ensuring the right things are done, and if you want your staff to be as frugal with your money as you are, you have to  build, that behaviour deliberately. A weekly cash flow forecast with the appropriate level of staff engagement and contribution is a very good way to start.

Cliché 8. Work on your business, not just in it.

The ability to see your business as others  see it, customers, potential customers, and competitors, is essential to success. To have that external perspective, you must be able to extricate yourself from the day to day pressures of getting stuff done. It leads on to what could have been an addition the list, ‘do what is important, but not necessarily urgent’. Knowing what is important to the long term health and prosperity of the business is more about how others see you than it is about responding to those unimportant but seemingly urgent  things that pop up every day.

So, remember, all that glitters is not gold, but good advice can be.

 

 

9 reasons why SME’s should invest in a governing board

9 reasons why SME’s should invest in a governing board

Jan 31, 2018 | Governance, Leadership, Small business

 

Very few of the small and medium sized businesses I interact with have a governing board of any real quality. Many have a ‘board’ required under the various regulatory regimes they must meet, but very few have a board that acts in the manner of a public company, as an independent oversight of strategy, financial and operational performance, culture, and of the senior management effectiveness.

This is something that should be remedied.

The short term costs are in my experience  heavily outweighed by the benefits over the medium to long term.

Some of the benefits I have seen can be summarised as:

  • Introduction of industry knowledge and networks.
  • Introduction of business management expertise and experience from a wide range of backgrounds.
  • Provides time and the catalyst for management to consider wider issues than the normal ‘urgent’ things that dominate the daily routines.
  • Provides diversity of views, values and ideas
  • Keeps management and particularly the CEO focussed on the issues that will impact long term commercial sustainability, as well as the short term financial outcomes.
  • Adds depth to the management functional capability by enabling mentoring and coaching
  • Thought starter and sounding board for management
  • Acts as a catalyst and guidance for longer term capability development of employees, and the manner in which the business captures and leverages those capabilities.
  • Oversight if not development of strategy, and oversight of strategy implementation, feedback and renewal.

 

There is an old saying that most of the smartest people in your industry work somewhere else. Therefore it makes sense to try and tap into that expertise in some way, and a well considered ‘board’ is a great method.

These bodies do not necessarily operate under the rules of  the Corporations Act, where there are enforceable fiduciary responsibilities. They are usually more of an advisory body, often meeting  formally only 4 times a year, but with significant interaction with management on an as needed basis.

 

Understanding your break even point.

Understanding your break even point.

Dec 20, 2017 | Governance, Management, Small business

 

Understanding the break even point in a business is a crucial but often overlooked piece of the financial puzzle.

It is particularly important in a manufacturing business where there are both overheads  to just keep the doors open, and the marginal costs of production.

In order to make informed and sensible cost and pricing decisions, and effectively manage the business, you need to understand both.

Marginal cost

This is the cost of making and selling another widget. The materials consumed, packaging, and direct labour necessary. The difference between your sales price of a widget and the marginal cost of that widget is usually referred to as the ‘Gross margin’

For example, if a widget costs .80 cents to manufacture, (materials + packaging + direct labour) and you sell it for $2.00, the gross margin is $1.20/unit.

Fixed costs.

These are the costs necessary to keep the business going, and not tied to the cost of production. Rent, insurance, staff labour costs, marketing and sales expenses, travel, and many others. These costs keep on coming irrespective of sales.

Let’s assume your business has fixed costs of $600,000/year, it is a small business, so you as the owner pay yourself a modest wage, there is one sales person,  an office manager, rent and insurance, as well as the general costs of running a business. In the factory there are three people, a factory manager, and 2 people who work on the production line. The factory manager would normally be included in overheads, but if he works on the line part time, then a portion of his salary would reasonably be included in the costs of production.

There are always questions about where a cost should be allocated, marginal cost or fixed cost, For example, sales commissions would usually be considered a marginal cost, but sales salaries would be considered a fixed cost. Similarly with freight costs, the cost of keeping trucks on the road would be considered a fixed cost, but the cost of an outsourced courier service would be a marginal cost, as without a sale, it will not be incurred. The key is to be consistent in the treatment of costs.

Break even is the point at which all costs are covered, but there is no profit.

How to calculate the break even.

The formula is fixed costs divided by the unit gross margin.

In our case above,  the break even point would be $600,000/1.20 = 500,000 units.

In a situation where there are several different widgets, with different selling processes and differing costs of production, the calculation can be done either by taking averages, of both the sales revenue and costs of production based on average sales mix, or it can be done separately, for each of the products and added together.

In any event, understanding  the structure of your break even will assist enormously in making sensible pricing and cost management decisions. It will also make the choices that  impact future cash flows, such where to concentrate your limited sales and marketing resources, much clearer.

This will be the last StrategyAudit post of 2017. I am very grateful to those who have commented, shared and generally engaged with the sometimes random stuff that pops out of my brain, and I am enormously gratified that you see the value in the ideas. Have a safe and merry Christmas, and I will be back early in 2018, refreshed and eager to  go another mile.