‘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.
