The November 2017 issue of the magazine of the Australian Institute of Company Directors (AICD) contains a very insightful and useful article by Phil Ruthven dealing with the industry cycles that IBIS research has been cataloguing for 40 years.
Ruthven makes the observation that while industry cycles are crucial to success, the risk they pose is only 1/3 of the risks faced by businesses, the other 2/3 are internal risks, in short the quality of their management.
No real surprise there, but seeing it in black and white, with supporting numbers from a source as credible as Ruthven is disturbing.
ASIC has developed a list of the impending signs of insolvency, no surprise, as they deal with that situation every day. High on the list is poor cash flow, absence of a business plan, disorganised internal finances, inadequate cash flow forecasting and budgeting, board dysfunctionality, customer and supplier complaints, and growing liabilities.
Again, no surprises in this list, I have seen them all regularly over the last 25 years of working to improve SME performance.
I have my own checklist, broken into 4 categories: Financial, Operational, Strategic and Revenue Generation, against which I assess performance. It is a quick and dirty tool that over the years has captured the main culprits of underperformance, the red flags to insolvency.
It is reproduced in summary form below.
- Unclear undifferentiated position in primary markets
- Lack of investment in ‘Environmental research’
- Absence of an innovation mindset
- Absence of any differentiating Intellectual Capital
- Lack of clear alignment of operations and strategic priorities
- Wrong CEO and/or governing body
- Poor cultural drivers
- Poor strategic, operational and tactical planning and ‘After Action’ Review processes
- Ambiguous lines of responsibility and accountability
- Absence of a continuous improvement mindset
- Absence of performance management and review systems
- Unreported customer and supplier complaints
- Absence of DIFOT management and measures
- Digital naivety
- Erratic and unforecast cash flow
- Poor management of debtors and creditors ledgers
- Inadequate budgeting and financial performance management
- Disorganised and/or inaccurate numbers
- Tightly held financial and operational performance reports
- Growing debt
- Lack of financial understanding amongst management
- No defined ‘ideal customer’
- Uncontrolled distribution channels
- Lack of end consumer contact and feedback
- Disorganised lead generation and conversion processes
- Absence of customer profitability and Share of wallet measures
For some time now I have been referring to the marketing and Sales functions collectively as ‘Revenue Generation‘. To my mind the functional separation that is usual is redundant in this fast moving world where the demarcation between the two is both blurred and irrelevant to customers, so should be eliminated.
This list is not a template, it is a compendium of headings that typically require investigation. To the extent that there are numbers available, they are very useful, and the absence of numbers also offers an insight into what is going on. I also make observations based on the conversations I have, and set about weighting of the various factors. Two however always are at the top of the list.
The absence of routine and pro-active cash management is a very strong signal of trouble to come, as is a disorganised, and in B2B businesses, often absent revenue generation processes that go beyond being reactive to whatever walks in the door.
Any one of these 26 factors will result in under-performance, that can lead to insolvency, but a combination of them is toxic.