Cash flow as the lifeblood is only half a metaphor.

Cash flow as the lifeblood is only half a metaphor.

 

 

Cash flow is often described as the lifeblood of a business.

While it is correct, it leaves a lot on the table.

If cash flow is the lifeblood, you also need a heart to pump it around the body. The leaner and more efficient the body in which the heart resides, the easier it is to pump, reducing the stress on the mechanism, reducing risk.

Similarly, to be effective blood requires oxygen to be attracted and distributed through the system.

Oxygen is what keeps everything working, it is the source of the power required to run the system, without which the system rapidly grinds to a halt.

In a business context, the oxygen is the input of information, the lungs and heart are the analysis and leveraging of that information, and the culture of the organisation is the body that holds it all together.

You go to the doctor to get a physical, where do you go to get a ‘commercial’?

An accountant will give you part of the picture, based on the books.

A ‘lean’ expert might offer many insights into the operational processes, particularly in a factory, and at the same time offer cultural insights.

A ‘6 sigma’ expert will deliver an arithmetic analysis of the efficiency of each part of a process.

A marketing expert (if you can find a bullshit-free one) will give you opinions based often on questionable and partial information, and usually biased towards their particular view of the role of marketing.

A sales expert will opine that everything else will be OK if you just get more leads for them to convert, and here is how!!

The point is that each will give you a picture of your business as they see it based on their experience, training, predisposition, domain knowledge, and their own assessment of WIFM.

Finding someone who ties all that together, and offers a complete, unbiased, and expert picture is a challenge.

 

 

 

 

How to make incentive programs compulsive

How to make incentive programs compulsive

 

 

At this time of the year, there is much thinking going on in relation to the manner in which incentives will be applied in the coming year, for which you are preparing the budget.

There are many and varied schemes, most of which are geared in one way or another to a threshold, above which the incentive kicks in.

It can be anything from a sliding commission, to share allocations, holidays, and goodies from the local store.

99% of those I see have one common characteristics: they are known, the thresholds are clear, as they are seen as the motivating factor. They can also be gamed in all sorts of ways, particularly by those in sales. When the commission is based on revenue alone, that can be achieved by giving big discounts, the timing of invoices can be varied, ‘channel stacking’ becomes common.

These sorts of incentives are usually ineffective, because they become taken for granted, and are always ‘gamed’ by staff.

In the early 50’s psychologist B.F. Skinner did a series of experiments, using rats and pigeons as subjects, since validated widely. He used a box that became known as a ‘Skinner box’ in which he placed the hungry subjects, and a lever. The rats and pigeons pushed the lever, and could gain an intermittent reward of food. They soon learned that pushing the lever sometimes delivered a reward, so they pushed it more and more, each intermittent reward reinforcing the behaviour.  The variability of the reward when it is intermittent tends to increase the speed with which the subjects pushed the lever, a few will keep pushing despite the calorific value of the intermittent rewards being less than the calories required for life.

This behaviour can be seen in any room containing poker machines. Some players will, despite knowing the odds are against them, keep pushing money into the machines, hanging out for the intermittent reward of the clatter of coins in the tray, and the psychological reassurance that goes with it.

Why not use the same sort of thinking to manage your incentive programs?

 

 

 

What SME management should know before investing in chasing government grants

What SME management should know before investing in chasing government grants

 

 

Most SME’s I meet have at one time or another contemplated, and often invested considerable resources in the quest to obtain public grant funds.

Rarely do they approach this exercise with any understanding of the disconnect between the way the commercial world, and the bureaucratic one work. They assume that what to them is normal and obvious is reflected in the bureaucratic processes.

Wrong.

For context, 25 years ago I ran a small grant-funding outfit called Agri Chain Solutions that had been outsourced from the then Department of Forestry, Fisheries and Agriculture at the express direction of the then newly elected Prime Minister Howard.  ACS was a Company, limited by guarantee with a largely commercial, board with two members from the senior ranks of AFFA and Austrade. The chairman had been a very successful MD of a very large business in the food industry. I was recruited as a senior manager with extensive experience in FMCG and agriculture.

Following are some relevant observations from that time about how the bureaucracies operate, which from what I can see, remain accurate.

  • Departmental budgets are set annually in line with the governments policies and priorities. While program budgets are often spread over a number of years, they are reviewed and changed as necessary, or for a hundred other reasons, annually.
  • Departments put in their ‘bids’ in the pre-budget preparation, which includes the costs of running the department, as well as the cost of the programs for which they are arguing.
        • Departmental overheads have been progressively cut over years by shedding heads, which are then contracted back as an ‘off the books’ expenditure, usually netted off against program costs, or just classified as an unavoidable cost overrun.
        • The status of public servants is measured by the number of reports, direct and indirect (i.e., reporting to someone who reports to them) they have, and the size of the budgets they manage. This leads to an ongoing turf war between departments, and sections within departments for status, and public service grades that determine pay and advancement.
  • Public servants are typically held loosely accountable for the expenditure of money compared to the budget allocated. This has absolutely no relationship to the outcome generated by the programs they manage. To my mind, this mismatch of expenditure and accountability is at the core of much of the waste that occurs. It is also the factor that leads to the mad rush to ensure that budgets are all spent before June 30. An underspend will be seen as a sign that a cut is possible, while an overspend is seen as bad luck, with no recriminations, or understanding of the drivers of the overspend.
  • Program reviews done by an ‘outside’ neutral agency are built into the program costs, but neutrality is a joke, as the current PWC fiasco demonstrates. In ACS’s case, the review was done by KPMG, who had to do three revisions to get to a program report AFFA was happy with, in order to get paid. As you might guess, draft 1 was OK by me, draft 2 was nonsense, and draft 3 was total bullshit that bore no relationship to the success, or otherwise of ACS expenditure. I was bitterly and noisily opposed to the final report submitted, but was advised that my disagreement while noted informally, was not relevant. I could not change the world, so I should just get on with life.
  • Grant program budgets allow a percentage of the total program to be held back for ‘Administration’. In the case of ACS, that amount was 20%, a laughable amount, as the total expenditure on all ACS overheads and project management was around 6% of the program budget. All AFFA did was use the withheld amount as a slush fund.
  • Program budgets are broken up to make keeping track easy, bearing no relationship to the way money should be spent to optimise the outcomes. In ACS’s case, we had $9 million over 3 years, minus the withheld admin cost. The department broke the total into 12 equal quarterly amounts and insisted that was the budget. Pointing out that it took 18 months to get good projects up and running, during which time little grant money would be allocated had little effect. In the last 18 months more than the quarterly ‘budget’ amount was to be allocated, which caused great angst in the department. I also pointed out that at the original sunset of 3 years, there would be projects that had not been completed, that ACS and AFFA had a moral if not contractual obligation to see through. After much discussion, we negotiated a 12-month extension for nominated projects that were then shuffled into the follow up program, the National Food Industry Strategy, with a contractor to administer them.
  • Senior public servants speak about accrual accounting as being the base of their accounting processes. ‘Nonsense. It is cash accounting, there are no accruals involved, anywhere.
  • There is a myriad of ‘allowances’ that foster rorting and destroy accountability. I came into contact mostly with those relating to travel. The intent is sensible: make the management simple. However, the effect is to enable officials travelling to rort the system. E.g. A level X official is allowed an amount/day for meals and accommodation, without any paperwork showing expenses incurred. Predictably, they travel as much as possible to places where they have friends and families, claim the whole amount, and pocket the lot, or stay in a cheap hotel, eat as cheaply as possible, and pocket the difference.
  • Finally, for all the babbling about innovation that goes on, it represents the antithesis of the cultural abhorrence bureaucracies have with risk. Innovation is impossible without risk, and risk seen in hindsight is always weaponised as a mistake by those who oppose. As was once said to me by a senior bureaucrat in a well lubricated social setting “my job is to ensure my minister is never seen as stupid, and you know who my minister is, so you know how hard my job is’.

None of this is to denigrate public servants, quite the contrary. As individuals, they are generally a well-educated and potentially powerful force for good, frustrated by the constraints of the culture within which they work. The challenge is changing the culture that has been encouraged to grow around them, a task belonging to those with the power to do so, the politicians.

 

 

Stop investing in dead horses.

Stop investing in dead horses.

 

 

Investing in dead horses sounds like a pretty dumb idea, but it happens all the time.

Projects, ideas, products, people, that have little or no probability of returning revenue and margin from the continuing investment should be stopped. Not only do you save the money and management distraction, but you have the opportunity to leverage the freed-up capacity against the opportunities otherwise passed over.

Opportunity Cost flipped to be just Opportunity.

Over the years I have seen many projects that have persisted long past any reasonable time, never seeming to move forward, but never getting the chop.

When resources have been invested in a project, particularly when it has a favoured place in the psyche of some manager, killing it is often hard, resources just get budgeted, absorbed, and ultimately wasted.

Voltaire observed that: ‘Perfect is the enemy of good’ This leads to the idea of Minimum Viable Product (MVP), getting an idea out to the market in some form to test if it really has sufficient traction to deserve the allocation of resources over alternative uses. ‘Ship and Iterate’ should be the cry, assuming that each time you iterate, you learn from the outcomes, and better understand the commercial reality you confront.

Prudent investors and managers take a ‘portfolio approach’.

They know that not all initiatives are equal. Differences abound in the resources they consume, the opportunity offered, and the odds that the opportunity as visualised will become reality.

Daniel Kahneman established quantitatively that we value what we stand to lose much more than what we stand to gain. This is the magic power of continuing to invest to avoid accepting a sunk cost. Flogging a dead horse by another name.

Stop investing in dead horses, they will not come back to life no matter how hard you wish it were different.

 

 

 

 

Does Wright’s Law work in reverse?

Does Wright’s Law work in reverse?

 

 

Volume, flow, and capacity utilisation are drivers of each other, a symbiotic relationship articulated by Wrights Law.

A product with significant volume that is easy to schedule through a factory, and because of those volumes, has ‘well-oiled’ and efficient operational processes, generally delivers profit.

Years ago, I did a product profitability exercise on a range of products that were marketed by the company for which I worked at the time, Dairy Farmers Ltd. The parameters I used were based on the gross contribution to fixed overhead after promotional costs. These I calculated from the standard costing model being used at the time. Also weighted into the calculations were the complexity of the operational scheduling imposed by the products, and the ratio of gross contribution to the calculated capacity of the individual production lines, including downtime measures like machine availability.

The most profitable product in the range in both dollars and percentage was 300gm sour cream in cartons. It was a product that had significant and easily forecast volumes, so raw material procurement was simplified, predictable, the operational processes were ‘well-oiled’, and we had some pricing power in the supermarkets. There was very little wasted capacity or product failure in the manufacturing processes. Wrights law at work, and after a bit of thought, it made absolute sense that it would be the most profitable.

The second most profitable product in the range in percentage terms was a surprise to everyone, including me.  A relatively small volume product, ‘Buttermilk’ in 600ml cartons. At the time there was no competitive product, so we had considerable pricing power, the volumes were highly predictable albeit modest, the ingredients simple and always available, and we could run the product immediately after sour cream with just a change in carton size which we could do ‘on the run’, the first few cartons acting as the ‘clean-up’ after the sour cream. There was effectively no downtime, no ‘start-up waste’ product, no added labour, few inventory costs, and no promotional costs. The capacity utilisation of buttermilk was virtually 100% of the capacity allocated by the arithmetic that combined volumes required and theoretical throughput rate and delivered margin.

Sadly for Dairy Farmers profitability, the supermarkets realised there was a profit pool they were not accessing. They introduced house brand products manufactured by a competitor who had idle capacity and took a marginal cost approach to the price at which they were prepared to sell the product to use that capacity. The volumes of both sour cream and buttermilk products fell quite quickly, while the operational costs per unit increased markedly.

Wright’s Law works in reverse as well.

The header is of Theodore Paul Wright 1895 – 1970

 

 

 

 

 

 

Where can a manufacturing business get money for nothing?

Where can a manufacturing business get money for nothing?

 

There is a simple answer, but the money is just a bit harder to find.

It is tied up in your current operations, consumed by all manner of things that do not add value to a customer.

Machine down time, rework, waste, on line inventory, double handling, and a host of other things that get in the way of a steady, predictable and continuous flow through a factory.

Progress to completion through a production process can only go as fast as the slowest point in the process. Working around these choke points entails either building WIP inventory, or slowing the faster parts down to the speed of the slowest part of the process. There is no third internal option, but ‘outsourcing’ the slow bits is sometimes a productive choice.

Progressive removal of any impediment to a predictable even ‘flow’ and you will save money. However, even more importantly, you will free up capacity that will give you the opportunity to sell more from the same fixed cost base.

That is where the gold hides: Money for nothing.

Do you want it?