Budgeting: The crappiest time of the year

Budgeting: The crappiest time of the year

It is that time of year again, budget time.

In most businesses around Australia, at least those that will be around in a year or two, people are wondering where they will find the time to do the budget preparation for the coming fiscal.

To make it easier, following are some simple guidelines to apply to your thinking.

Where are you  now.

Before you set out on the planning of any journey, it is useful to know the starting point. This tends to avoid a lot of wasted effort and cost, and unnecessary frustration. Having a very clear picture of your current position is vital, but if you have left the development of that picture to the planning sessions pre budget, it is probably too late. Developing a deep understanding of your current situation, and most importantly the drivers of that outcome, needs to be an incremental and inclusive process that is happening in real time, all the time.

Where is it you want to go.

Again, obvious, but often overlooked. Good businesses have a strategic framework in place that delivers clarity and priority to the long term outcomes being sought, so the annual budget is just another step along the path. However, in the absence of a strategic framework that makes sense, a disturbingly frequent situation, set yourself some goals to be achieved, and the annual budget is the operational plan to get there.

How will you know when you get there.

Measurement for measurement’s sake is dumb, but having the few key measures of performance that really tell the story of your progress towards the end point is essential. Knowing what ‘success’ means is a core part of the planning process, but again, when that is left to the planning sessions, it is too late.

1/10 is not enough.

Another of the mumblings of my old Dad who used to say, ‘Son, you get 1/10 for  the talking, the other 9 are for the doing’. In a business context, the planning is essential, but of no value unless it is implemented. Just like a holiday, you can have some fun planning it, but the real fun is when you are actually on the holiday.

Profit is a two way street.

To make a bob, you have to sell something to people who really want at a price that is more than it costs you to produce and deliver it. Pretty sensible, and pretty simple, but understanding your costs and really understanding the value your product delivers to the specific target markets is a touch more complicated.

Everyone is in marketing.

The days of marketing being relegated to the back office are gone. Customers now have all the power, and they are exercising it in all sorts of ways not contemplated just a decade ago. Highly sensitive, fragmented, and focussed communication channels are being used by everyone, and amplification happens at the stroke of a social media pen. Everyone who comes into contact with your products can have an influence, and everyone in your business  is an agent of marketing. For heavens sake do  not leave it to the kids who have marketing in their title, thinking they have it under control, because nothing could be further from the truth. The most valuable asset you have is the position your product holds in the minds of your customers and potential customers, commonly called your ‘brand’. It is not normally listed on the balance sheet, as the accountants cannot agree how it is to be valued until a business is sold, when it is called ‘goodwill’ but it is the leverage that enables you to be able to stay in business.

Count outcomes before dollars.

Financial results are just that, results. Dollars are just easy ways to count the outcomes of more complicated stuff. Spending time understanding the drivers of the outcomes being counted is a far better way to invest your planning time that just manipulating the variables in spreadsheets. What is it that persuades someone to buy from you and not the opposition, how can you reduce the hidden transaction costs in your business, how can you increase your stock turn and reduce your working capital, and thousands of other questions that need your time and attention before the budget profit and loss is locked away.

The smartest people are not in the room.

No matter how big you are, and how much money you spend on expertise, the vast majority of the smartest people, and those who could influence your outcomes are working somewhere else, some of them for your competitors. This simply means that you have to find ways to be sensitive to the competitive, strategic and regulatory environment in which you are operating, and feed that intelligence back into the way the business is run. From going to local networking events, to travelling to leading markets and suppliers, to hiring expensive consulting knowledge, to ensuring the operators in your business have a voice at the table, all serve to add to the store of ‘education’ the business has to call on at budget time.

When you have done all that, it becomes time to go and punch the spreadsheets, not before. One last point, seems to be a common last point in my various musings, look after the cash. It is the lifeblood of the business, if you do nothing else, look after it as you would your first born.

 

Consider the moment of Opacity

Consider the moment of Opacity

We are all familiar with the ‘lightbulb’ moment, that time when suddenly, all seems clear, the idea that has been buried in the depths of your brain, unable to be born, suddenly sees the light.

Ever thought of the opposite?

The moment of Opacity?

That moment when you suddenly realised that something you had accepted as the norm, the way things were, a certainty, was suddenly revealed as a Furphy?

This is not something many of us think about much, if at all.

Perhaps it is not fashionable, but the moments of opacity are as important as the lightbulb moments.

My job is working with businesses to facilitate change, to move from the status quo, to something new, something that is almost always considerably outside their comfort zone.

To do that, I have to create those moments of Opacity, when my clients recognise that the way forward is different to the way they have followed to date.

Usually they are not moments, that is just a convenient metaphor.

Change is normally a process of recognising and revising the assumptions and behaviours that drive activity and priorities to accommodate a new reality, small bit by small bit.

Einstein is reported to have said something like ‘The most powerful force in the universe is compound interest’  and the legend of the chessboard is a well known example of just how powerful compounding really is.

Change is no different.

Small changes, compounded over time make a huge difference in time. The hardest bit is getting started, generating some momentum, but when that has happened, compounding can become an unstoppable force.

 

 

 

The 70/25/5 rule of business turnarounds

The 70/25/5 rule of business turnarounds

Most of my time is spent working with medium sized manufacturing businesses that for one reason or another, and usually many reasons combined, find themselves struggling.

The people running these businesses are often reluctant to spend money on consulting. Understandable, not just because it can be expensive in a cash challenged environment, but because they have been burnt before.

They became successful by being good at what they do, the product manufactured, the service delivered, and the admin and ‘soft’ management stuff just took care of itself.

Unfortunately, those days are gone.

In a variation on the Pareto 80/20 rule which holds true in every case, I find myself using what has become the 70/25/5 split in the things that receive attention.

Having done the analysis to determine the 20% of things that will deliver the 80% of the value,  and be able to leverage from the effort to be made, the improvement task is to focus the effort where it will turbo charge the results.

This is where the rule comes into play.

70% of the effort goes into improving the current operations.

20% goes into spreading the current, and now improving operations into related, or adjacent areas.

5% goes into new stuff, experimenting, going right outside the comfort zones.

It also tends to follow that sequence.

Let me give a generic example.

My point of engagement is usually a perceived problem with sales and/or marketing. They need to generate more revenue, and usually quickly, so call in an expert.

Typically I find a tangle of current practises and issues that are sub optimal, that are not generally seen as ‘Sales’ issues. There are poor delivery lead times, inconsistent quality, poorly understood costings, lack of cash management, a reactive and undertrained sales force, poor customer service, and so on. All current activities and processes that require work before much that is ‘sexy’ which is what consultants usually sell, can be implemented. For example implementing a sales training package will not deliver value if the product quality is questionable, or the lead times longer than customer expectations.  It will just be an expensive holiday for the sales staff.

This is the 70%, the early grind of improving the existing  processes and priorities. It is usually a process of planting a nurturing a variety of improvement seeds in all sorts of corners of the business, rather than applying a silver bullet solution, and it does take time.

When the seeds are becoming seedlings, and some improvement is becoming evident, and often it is anecdotal, as the accounting systems typically look behind, rather than in front so the numbers are usually lagging, it may become time to apply the next 20%.

Continuing the Sales analogy, you can now reliably manufacture and deliver products that stand up competitively, you know your margins and capacity constraints, so you can start to focus more effort on increasing your share of wallet, engaging new customers in your priority markets, and entering adjacent markets perhaps with a marginally altered product to better meet the specific needs.

By the time the  20% gathers some momentum, the business is usually becoming prosperous, so can afford to start investing some resources in the really new stuff. The 5% effort spent on new products, the next technological development, and perhaps building scale by merger or acquisition.  It is here that the exciting stuff happens, the next breakthrough in performance, and the payoff for long suffering managers, staff, and shareholders.

Decision time for manufacturers of ‘disposable’ items.

Decision time for manufacturers of ‘disposable’ items.

I have used the term ‘disposable’ to mean that the consumers investment is low, so purchase risk is limited. Buy one and find it does not deliver, and little is lost.

Over the weekend I had a casual conversation with an acquaintance who runs a small business selling such a line of disposable consumer products into a niche via specialist chain retailers, many branches being franchised, so are somewhat independent.

His problem is that he is being overrun by the scale of the retailers who take his ideas and have them fabricated in China under another brand at prices he is having increasing trouble matching.  In any event, they also control shelf space, so he is at their mercy.

Not an uncommon problem.

My rather glib response was that he was trying to sell to the wrong people. His current customers, the retailers, were not actually his customers, in fact they were more like adversaries. His real customers were the ones who had a need that his products fulfilled, and the retailers were just a logistical barrier to be managed and overcome.

The retailers see the only value in his products as a range they should carry as an occasional addition to the customer basket  at the cheapest price that meet their margin requirements. For them there is no investment in the success of the product, and little downside.

To the real consumers however,  the question of whether they outlay $8 or $11 for the items is largely irrelevant once the buying decision, often impulse, has been made. There is little brand awareness or preference involved, there has been only modest marketing investments made, the sales come from demonstrating the utility of  the product.

My advice: Set up an online shop, and actively market to the identifiable groups of customers who would benefit from using his products.

As he has a limited budget, and little brand recognition, this is potentially a make or break decision, not to be taken lightly.

Retailers will be even more disinclined to stock his products when they see him actively competing with them on line, but on the other hand, his sales volumes have been dropping steadily for some time, and the costs of doing business are increasing, so the end game is in sight.

The flip side is that the product is ideally suited to selling on line, the value is demonstrable, it is easily sent via the post, and the margin freed up by selling direct would be considerable.

A change of this nature would be uncomfortable, but I suggest the only way the business will continue to prosper, and have any value when the current owner decides it is time to retire.

Does yours fit the consumer definition of ‘Disposable?”

If so, what are you doing about it?

 

4 foundation ideas for business improvement.

4 foundation ideas for business improvement.

Having spent many years involved in one way or another in business improvement, as you may expect, I have some thoughts.

Primary amongst them is the dismay I feel when I meet another medium sized business owner  who has had a bunch of expensive Lean or Six Sigma consultants, or now coming to the fore, ‘Agile’ consultants in their business who have achieved little beyond mouthing clichés and scraping the coffers.

All these branded and marketed improvement processes are just toolboxes that contain a set of pretty common ideas that are dressed up to sound like the next coming.

There are no silver bullets, no easy solutions to difficult problems, no template that covers even a significant amount of ground. There are just tools that can work when used in the right context by people who know what they are doing, and/or are prepared to learn as they go.

However, in the fast moving world we live in there are a few foundation disciplines that go beyond the individual tools.

Identify the problem. Improvement comes from  identifying and solving problems. The identification and articulation of the problem to be solved should be the first, and continuing priority. No improvement project I have ever seen solves just one problem, there are always a series of smaller ones when you dig deep enough.

Collaboration.  Collaboration is the core of getting things  done that  ‘stick’. In other words, they change the status quo in some way that sustains itself, becoming the new status quo. Unless change is accepted by those affected, it will simply not last.

In parallel. Sequential change takes too long, and inevitably leads to unintended consequences that do not become evident until the damage has been done. Working in parallel offers the opportunity to improve and problem solve in real time as the project proceeds. The days of sequential improvement programs are gone.

Anticipate risk. Managing risks at the beginning of a project by anticipating, and allowing for them makes way more sense than just barging in. Once you get towards the end of a project, there are sunk costs, and often corporate momentum and egos involved, all of which are very hard, sometimes impossible, to shift.

Almost 20 years ago I worked with a group of fine wool growers frustrated by being price takers. They were on the end of a long sequential supply chain that delivered them no information at all on any topic beyond the price of their greasy wool on auction day. We gathered all the processing steps from sheep to the fancy suit around a table, and turned a 2 year opaque, price driven supply chain into a collaborative demand chain that took 15 weeks from the sheeps back to the suit on the rack, and delivered better margins to all players. That collaboration is still delivering returns to growers, by solving the industry structural problems in a way that remaiins almost unique. The inventory savings made through the chain were just the cream

Cartoon credit: Tom Fishburne

How SME’s can get invaluable feedback, insight and coaching, almost for free.

How SME’s can get invaluable feedback, insight and coaching, almost for free.

As kids, most of us told each other our secrets when we were in a safe place. In the tree-house,  in a tent in the backyard, under the house, wherever it was, we tended to open up with our fears and dreams.

It felt good to confide, to open up and get the responses from those we trusted.

As adults, being able to open up like this seems both confronting and dangerous to self image.

As business owners, it is even harder, we are never sure who will find out about our deepest commercial secrets. We also know and find really hard, is to ‘work on our business not just in it’. The most common reason is used is  ‘where do I get the time? The only answer is to make it somehow, and the rewards will be substantial.

Large enterprises have a number of options to be a part of various round tables that set out to re-create this safety felt in the tree house. Operations like The Executive Connection (TEC) do it well, putting together groups of business leaders from non competitive businesses into a regular moderated forum in which they can be coached, and encouraged by their peers and learn from each other. It requires a commitment of time as well as the finances, to both attend the meetings and to do the ‘homework’ that emerges, but I have seen spectacular results from the commitment.

For the owners of SME’s the financial and time commitment to be a part of these sort of groups is substantial, and most do not take the step. However, increasingly there are options emerging as a part of local networks of like minded and non competitive owners meeting regularly to share experiences. The value that can come from the advice and support of such a group is substantial and should not be missed.

The usual rules for constructive conversation apply. Everyone needs to be given a voice by the moderator, and there needs to be a depth to the conversation that enables both deep analysis by the group, and by its very nature, builds trust. ‘They would not have said that unless they trusted me’ and trust recieved, begets trust given

My thanks to Scott Adams for the Dilbert cartoon.