May 26, 2021 | Governance, Management
I was astonished when I recently went back to all the stuff I had written to copy and paste a simple explanation of cash flow into something I was doing. I had written a post some years ago, but not in the detail required in this instance.
Astonishing because I rabbit on about cash flow all the time.
Cash flow is the measure by which SME’s live and die.
I encourage as strongly as possible, repeatedly, that those I work with do a weekly rolling 13-week cash flow forecast.
It saves a lot of grief, and once set up is simple to do.
The real benefit of cash flow understanding for an SME is that it is cash, it cannot be ‘managed’ by various accounting practices, you either have it or you do not. Understanding the detail of where it comes from, and where it goes, and when, is the single most important metric for any business. This is particularly the case for an SME without a depth of reserves to accommodate when things go pear shaped.
So here goes.
Cash comes in from only a few sources. Most comes from being paid by customers in an ongoing business, but it can also come in from borrowings, sales of assets, capital injections by the owners, and incidentals like dividends.
Cash goes out in a similarly limited manner. Payment of purchases from suppliers, for anything from leases, capital items, manufacturing inputs, wages and salaries, to paper clip purchases, and repayment of borrowings, dividends, and tax payments.
In the presentation of statutory accounts, the required cash flow statement is broken into three parts.
Cash flow from Operating activities. This records the cash generated, and where it is used in the course of the normal operating activities of the business.
Cash flow from Investment activities. This records cash going into and out of investments that are outside the normal operating business. For example, a business deciding to invest in an adjacent business to firm up control of the supply chain, would record the investment in this part of the cash flow statement, as they would any subsequent dividends that were received.
Cash flow from Financing activities. This category records cash coming in from sources such as bank loans, and capital raising, as well as cash going out in repayments and dividends.
For most SME’s, the first is the major item, with only occasional intrusions from the other two, so I tend to just lump them together.
The format is the same for each. The source of the funds, and the use of the funds.
It is often useful to break the captions up a bit for a greater level of detail.
For example, you might break cash received from customers by geography, type of customer, or product group, all of which can give you a more detailed view of which parts of your business are working as expected, and which are not.
Coming out of pro-actively managing your cash flow are a number of other key improvement strategies, amongst which are:
- Reducing your cash-to-cash cycle time, which reduces working capital
- Managing inventory down without compromising supply,
- Actual cost of goods sold analysis rather than relying on some arbitrary standard,
- Positive relationship management with funders, especially valuable when you are looking for more capital
- Cash can act as a leading indicator of trouble with an individual customer or supplier, or indeed of a market segment in which you compete,
- Goodwill coming from being able to pay your bills on time, every time,
- Cash is the basis of several important investment analytical tools; a robust history makes the numbers even more credible
- Most importantly for most owners of SME’s, pro-active cash flow management delivers peace of mind.
Managing your cash is management 101. Unfortunately for many, it has become surrounded by accounting jargon, and mixed up with the more complex practises employed in the P&L and Balance sheet. Alan Mullaly when in the throes of saving Ford from extinction, demanded a daily cash balance assembled from operations around the world. If it can be done daily in an operation as complex as the global Ford organisation, it should be really simple for you to do it weekly.
Cartoon credit: Scott Adams and Dilbert again make the point better than I can.
May 24, 2021 | Change, Strategy
The product lifecycle is a well understood concept. Introduction, growth, maturity, decline, illustrated usually with a nice even normal curve, which almost never reflects what happens in the real world.
Despite its distance from the real world, it remains a central core of many strategic planning exercises.
However, it is not the only cycle to impact on the commercial sustainability of enterprises.
The life cycle of enterprises is shortening radically. Many of the dominating companies in the Dow Jones top 100 were not there 20 years ago. A number had not even been born. The emergence of tech companies into the top of share market valuation has been astonishingly quick, as has the demise of many of those that were the standard bearers 20 years ago.
The hand-over has been driven by the emergence of a host of new business models. No matter how great your product, loyal your customers, deep your IP and brand protection, how actively marketed, when the business model erodes, everything else goes with it.
Amazon killed off bookstores in quick time. The bookstore business model became obsolete as they watched. Air BnB is an entirely new business model to that successfully leveraged by hotels for 50 years, themselves a business model that killed off the local tavern as a place a traveller could get a meal, a drink, and a bed. Perhaps the most telling is the end of encyclopaedias, which seemed to happen in the blink of an eye. Microsoft first launched their Encarta digital encyclopaedia on CD in 1993. Encarta was itself disrupted and destroyed by Wikipedia in 2001.
The leadership challenge is how to manage the portfolio of eroding and potentially emerging business models that will support growth in the future, while also managing the contracting and often conflicting lifecycles of their product and product development portfolios.
The leadership of enterprises spends the bulk of its time in one way or another searching to maximise the leverage it can build from finite resources. So, what happens when someone comes along and suggests that they take some of those resources, and allocate them to some new thing, that is inefficient, scrappy, and will deliver lower returns, if any at all, than the existing business? It gets canned, few managers will proceed, it is against the existing ethos of maximising efficiency.
The net result is that the incumbent enterprise tend to ‘pass’ on taking up the very things that will replace them.
I have a client, an emerging SME in a market that is in its early stages, growing rapidly, with very few ‘rules’ beyond the expectations set by the incumbent industry players, backed by regulation. At some point the pressure to revise the regulations will become irresistible, and the dominant existing business and manufacturing model will become compromised almost overnight.
I was in the dairy industry in the leadup to deregulation in NSW. I clearly remember the resistance to change, and the resulting organisational and financial chaos when it did arrive. The chickens did not just come home to roost, they crapped all over the pre-deregulation incumbents, and none of the major businesses survived in any form that resembled the pre-deregulation organisation.
The evolution of often competing business and product models happening in real time, creating a raft of organisational, cultural, and financial conflicts is unprecedented. It will also open up opportunities galore for the agile, and crevasses for those less nimble to stumble into.
The demand for strategic creativity and an action-oriented culture have never been greater.
May 19, 2021 | Governance, Leadership
The characteristics of leadership we expect from the local non-profit, to the largest businesses in the country, to the Prime Minister, are pretty much the same.
Trust.
We need to trust those who lead. However, trust is never just given, it must be earned by the behaviour we observe. It is also incremental, built over time, it is fragile, and can be brought down in a minute by one bad example. The test, if there is such a thing, is whether we believe that the private conversations the ‘leader’ is having are the same as the public ones, and would they be prepared to say those private things on the 6 O’clock news. By this test, many in prominent so called ‘leadership’ roles in this country fail. Dismally.
Dependability.
Dependability is a component of trust. It has many forms, from delivering on the big promises made, to turning up on time for an appointment with the local hairdresser. In any leadership role, no matter the size, when a real leader finds themselves from time to time unable to deliver, they do not walk away from the fact, they acknowledge the failure, learn from it, and move on. To many, this is the essence of leadership, to me, in it is simplest form, it is only common courtesy painted on a wider canvas.
Competence.
Leaders must be Competent. Someone placed in a leadership role, who is an example of the Peter principal is corrosive to the rest of the organisation. Those being led must believe that the leader is someone who can get the job done. That does not mean they never make a mistake; it does not mean they are never unsure of themselves or exhibit human frailties. It just means that we believe that they have the wisdom, skills, and experience to get the job done. This extends further, by ensuring they teach others to be competent at their job, and the next one. Competence is a compounding quality they pass on to others.
Humanity.
We are herd animals, we rely on those around us for safety, and security. We have evolved and prospered as a species because we are able to collaborate and care for one another and rely on our neighbours in times of stress and crisis. Someone in a leadership position who does not care about those being led, is not a leader, at best they are a manager, dispensable and easily replaced.
In summary, you can always tell who the real leader is: they are the ones others follow because they want to.
How does your leadership style stack up??
May 17, 2021 | Leadership, Strategy
‘The smartest people are constantly revising their understanding, reconsidering a problem they thought they’d already solved. They’re open to new points of view, new information, new ideas, contradictions, and challenges to their own way of thinking.” Jeff Bezos
Strategy development is an inherently creative pursuit, you are seeking to visualise and articulate something that does not currently exist. Like any creative pursuit there are barriers to thinking in this manner, barriers that must be addressed if you are to build a robust strategic response to opportunities that may be very hard to see.
6 ways to achieve this elusive outcome:
- Forget finding the right answer. The ‘right’ answer probably does not exist, what does exist is the best answer today, that delivers another step on the road to the strategic objective. Looking for the ‘right’ answer is a way to ensure nothing gets done and that you drown in data.
- Don’t follow the rules. Every industry and market has ‘rules’. These are the assumptions that this is the way things always work. If you follow them, you will never come up with any combination of factors that delivers anything new. The best you can do is optimise, and while optimising is a very sensible and competitively necessary thing to be doing, it is not strategy.
- Allow yourself to ‘play’ with ideas. Try applying metaphors and similes to the situations you outline and see what happens. This is hard work, but it frees the mind. Just like little kids do not play by any rules, they make them up as they go, you should do the same. Throw logic out the window and enable the ‘inner child’ to come out, you may be surprised at what emerges. Like children, everybody is creative in their own way, it has just been beaten out of us by the education systems and life. Encourage the creativity by play, it is in these unrestricted and non-confrontational situations where tacit knowledge flourishes and is shared, and can be turned into original ideas.
- Get everyone involved. this is a cultural thing, and enables the seeds of creativity to grow. One of the greatest impediments to creativity is when someone thinks ‘this is not my job’. Strategy is everyone’s job. Being close to customers is typically the job of the salespeople, but look at what happens when your engineers and logistics people get close to them, all sorts of opportunities emerge because they are looking at things from a different perspective. It is challenging to create and nurture the processes and cultural drivers that encourage this sort of general engagement, but it pays great dividends.
- Ambiguity is your friend. It enables different thinking to be applied when the rules are unclear, so redefining the situation is easier.
- Be prepared, even happy to be wrong. So long as you recognise being wrong as a learning opportunity rather than one to apportion blame, this is a powerful practice. Recognising a mistake means you have tried something, learnt something, and moved forward. One of the realities that risks becoming a cliché is ‘Psychological safety’. This is when people are relaxed about being wrong, it is safe to call out mistakes while knowing it is about the process and conclusion, not the person. There is however a flip side to this ‘happy to be wrong’ choir. It is not an excuse for sloppy due diligence, or shallow consideration. This is a cultural tightrope that requires confident leadership to flourish
None of this is easy, if it was, everybody would be doing it. When you need the necessary outside assistance, let me know, I can help. Alternatively, Call Jeff, he has some time now, and has exemplified strategic creativity for the last 25 years.
May 13, 2021 | Branding, Customers, Marketing
Having a point of differentiation that is sustainable, and sufficiently valuable to customers that they are prepared to pay for it, is marketing’s holy grail.
Everybody seeks differentiation, the challenge is to do it effectively.
It seems to me there are three dimensions:
The first is the product itself, pretty obvious. The benefits that the various product features that add the differentiated value to customers are not easily replicated by competitors.
The second is the means by which you deliver those benefits, which is your business model.
A valuable differentiation is one that competitors cannot or will not replicate without great expense and effort. Some of these evolve out of a significant change in the prevailing business model, such as happened when Amazon started to sell books, but most happen incrementally.
It is relatively easy for a competitor to copy one or two things you do, and usually they will get it pretty right, even 99% right. However, when you do a whole lot of things together, it is harder to copy them all, and even if they do, getting 5 elements of your strategy copied at 99% accuracy, delivers only 95%. Few customers will opt for 95% without a significant discount.
The third is the choices you make that exclude some customers but have an impact on your ability to better service those who remain. This is a strategic choice you make based on the needs of your ideal customer.
Years ago, part of my sales responsibility for my employer at the time was for the regional distributors we used. Across NSW we had numerous small distributors, most of whom took small amounts of product on each delivery. The logistic costs were often more than the gross margin on the sales, but the sales revenue in total was significant. I took the decision to deliver only in 1/2 pallet lots of any product, and put in a staged discount for increased pallet numbers. After the initial yelling finished, most distributors moved to one of our competitors, along with the margin losses. We were able to increase the levels of support we gave to the remaining larger distributors, and they were able to significantly increase their sales, and our costs dropped accordingly. That segment of distributor customers suddenly became profitable after years of losses.
If you cannot figure out how to differentiate in ways that are meaningful to a cohort of customers, you are destined to be defined by price.
No future in that!
