Mar 9, 2015 | Change, Governance, Management, Small business
Three core factors of success
Over 20 years of working with mostly small and medium businesses, I have found there are three common factors that are almost always are pre-requisites to a successful business, generally in this order:
- Cash. Cash is the lifeblood of business, and too often small businesses do not manage their cash well enough. Simple tools and techniques are not used that could make a huge difference in the success and often avert the demise of small businesses. Businesses have absolute control of the manner in which they manage their cash, it is entirely up to them.
- Leverage. Most small and medium sized businesses are run by people who are functionally extremely competent, really good at the thing that led them into businesses in the first place, rather than being an employee. However, the flip side is that they often do not let go of their functional control, and they let other things outside their competence slide. The net result is that they work ridiculously long hours to take home less than their employees, and have no life outside the businesses which grinds to a halt if they take a week off. They must find ways to leverage their time, to get more done in less time. Most business people have the opportunity to leverage their time far better than they do, the choice not to do so is usually in their hands, weather or not they know it.
- Simplicity. Simple is good, simple makes life easier, more productive, and more profitable, but ironically simple is really hard to achieve. Unlike cash and leverage, simplicity is to a significant extent out of the hands of the business owners. The really good ones have simplified their processes, ensured their activities are aligned with their strategies, and built a culture that engages employees to minimise rework and maximise the amount of autonomy and innovation that happens, but then they have to deal with the world outside their premises. Customers, suppliers, competitors all complicate life, as does the public sector, unable as it is to even begin to realise the benefit of simplicity and the costs their own complexity imposes on small businesses.
Nevertheless, setting out to do better on all three parameters will most certainly deliver dividends. The first step is to form a quantitative picture of the current situation, plan the improvements, then measure the improvements as the changes bite.
Then “Rinse and repeat”!
Jan 5, 2015 | Branding, Change, Customers, Governance, Innovation, Marketing
Small business is at a crossroads as we move into 2015.
Either they embrace the opportunities and tools presented by the disruption of the “old ways” by digital technology, or they slowly, and in some cases, quickly, become irrelevant, obsolete and broke as customers move elsewhere.
Your choice, as much of the technology can now be relatively easily outsourced, and at a very reasonable cost, certainly less than most would expect. The two major challenges in outsourcing, snake oil salesmen and not knowing what you want and need, are little different to any other category of purchased service.
So, to the trends that will influence your business in 2015 that you need to be at the very least aware of, and in most cases take some sort of pre-emptive action.
- Marketing technology will continue its rise and rise. The thousands of small marketing technology players who are currently emerging will be forcibly integrated, as the big guys buy “Martec” real estate. Adobe, Microsoft, et al will spend money, and the little guys will be swallowed as the gorillas fill the holes in their offerings, and new segments emerge. At the other end of the scale, there will remain plenty of options for smaller businesses to step into the automated marketing space. The current rash of innovations to make life easier for small businesses will continue and as those smaller single purpose tools gain traction, and more are launched to fill the niches that exist to service small businesses.
- Peer to peer marketing will continue to grow at “Moores law” type rates. Jerry Owyangs honeycomb diagram and data tells it all. Almost any service I can think of has the potential too be disrupted in some way by the peer to peer capabilities being delivered by technology.
- Content creation as a process. The next evolution in marketing, the move that I think “content” will start to make from being individual pieces of information produced in an ad hoc manner to being a process that is highly individualised, responsive to the specific context, and informed by the behaviour of the individual recipient scraped from the digital ecosystem. It means that content creation needs to be come an integrated process, more than a “campaign” . The term “content” will become redundant, it is just “marketing”, focussing on the individual customer.
- Marketing will evolve even more strongly as the path to the top corporate job. Functional expertise is becoming less important, what is important is the ability to connect the dots in flattened organisations that work on collaborative projects rather than to a functional tune. This trend is as true for small businesses as it is for major corporations. There will still be challenges as many marketers are really just mothers of clichés, but those relying on the cliché and appearances for credibility are becoming more obvious as the marketing expertise in the boardroom increases, and the availability of analytics quickly uncovers the charlatans. This will make the marketing landscape increasingly competitive on bases other than price.
- Recognition that marketing is the driving force of any successful enterprise will become accepted, even by the “beanies”. Seth Godin has been banging on for years about the end of the industrial/advertising model, the old school of interruption, but many enterprises have continued to deploy the old model, but I sense that the time has come. 2015 will be the year that sees marketing finally takes over.
- Video will become bigger part of marketing, particularly advantaging the small businesses that have the drive to deploy it and the capability to manage the outsourcing of the bits that they either cannot do, or cannot do economically. The old adage of a picture telling a thousand words is coming to life in twitter streams, instagram shares, and all social media platforms. The video trend will be supported by increasing use of graphics in all forms, but particularly data visualisations as a means to communicate meaning from the mountains of data that we can now generate. The density of data on the web is now such that new ways to cut though, communicate and engage need to be found, and I suspect those will all employ visuals in some form, perhaps interactive?
- Pay to go ad free is a trend that will evolve suddenly, to some degree it is an evolution of subscription marketing. Free to date platforms will charge to be ad free, whilst new platforms and models such as the Dollar Shave Club will probably evolve.
- The death of mass and the power of triibes will become more evident. The “cat pictures ” nature of content of social media platforms will reduce as marketers discover smart ways to package and deliver messages that resonate and motivate action. The agility of digitally capable small businesses will open up opportunities for them their bigger rivals will not see, or not be compatible with their existing business models.
- Local, provenance, and “real”. Marketing is about stories, so here is a trend made for marketers, and you do not have too be a multinational, just have a good story, rooted in truth and humanity. ‘Hyper-local” will become a significant force. Marketing aimed at small geographies, such as is possible by estate agents, and “local” produce, such as the increasing success of “Hawkesbury Harvest” in Sydney, and the “Sydney Harvest” value chain initiative.
- Paid social media will evolve more quickly than any of us anticipate, or would be forecast by a simple extrapolation. Twitter will go paid, travelling the route Facebook took to commercialize their vast reach. Some will hate it as it filters their feeds, others will welcome the reduction of the stream coming at them from which they try and drink. Anyway, twitter et al will set out to make money by caitalising on their reach.
- Social will grab more of the market in 2015 than it has had, even though the growth has been huge over the last few years. Small businesses will either embrace social and content marketing, in which case their agility and flexibility will put them in a competitively strong position, or if they fail to do so, they will fall further behind, and become casualties.
- The customer should always be the focal point of any organisation, but often they fail to get a mention. It is becoming more important than ever that you have a “360 degree” view of your customers, as the rapid evolution of social media and data generation and mining is enabling an ever more detailed understanding of the behaviour drivers of consumers. The density of highly targeted marketing, both organic and paid is increasing almost exponentially, so if you do not have this 360 degree view, your marketing will miss the mark.
- Treat with caution all the predictions you read, keep an absolutely open mind, as the only thing we know for sure about them is that they will be wrong, as with this ripper from Bloomberg who predicted the failure of the iphone. However, as with statistical models, quoting George E.P. Box who said “Essentially, all models are wrong, it is just that some are useful” perhaps some of the predictions you find around this time of the year will be useful, by adding perspective and an alternative view to your deliberations for 2015.
As a final thought, if you think your kid may be good at marketing, be sure they learn maths and statistics. “Maths & Stats” will increasingly be the basis of marketing, and the source of highly paid jobs and service business start-ups.
Have a great 2015.
Allen
Dec 17, 2014 | Change, Customers, Strategy
“Only the paranoid survive”. Andy Gove
We spend heaps of time setting out to satisfy customers, do what is right for them, to ensure our success, no argument, but is it enough?
To add another dimension to your competitive efforts, ask yourself the simple question “what would really hurt the opposition?”
If the answer is clear, you probably should do it to them before they either do it to you, or address the weakness.
It does not matter if you are BHP or a local business, there is a always a strong Darwinian trait displayed by those who are successful.
In my past, I spend a significant amount of time in the dairy industry, lots of lessons, but amongst them one that demonstrates the essential truth of commercial Darwinism.
My major competitor made an inordinate amount of their total profit from one product in one state, a situation that had evolved over many years, and seemed unassailable. The margins they made on this product would have funded a substantial amount of activity elsewhere that was causing us grief. The board of the dairy co-operative I worked for would not allow me to aggressively attack that profit pool, not being prepared to lose a little bit in order to assist the competitor lose a lot.
They were concerned at retaliatory action, correctly, but the capacity to retaliate would have been limited by the impact on their profits of a successful attack by us, and the fact that our business did not have any equivalent weak point that made us way less vulnerable. My view at the time, and still, was that the real reason they were unprepared to be aggressive was that it was not “gentlemanly” and the dairy industry in those days, which was still evolving from a lot of smaller co-operatives, carried some of the competitive baggage of being a co-operative.
Gentlemen did not do those things!
Competitively stupid decision, and an opportunity lost, but all this had nothing to do with the customer, beyond setting out to disrupt the comfortable relationship they had with my competitors brand in South Australia.
Some years after I left the business, my erstwhile target, having addressed their competitive weaknesses, successfully mounted a successful hostile takeover of the my previous employer, who still acted as though the competitive market place was somewhere that gentlemen met to have afternoon tea.
Sometimes we lose sight of the playing field as we play the game, we talk about competitive advantage, but often just in the context of the customer, and the value they receive, but forget the flip side of competitive advantage, finding a way to belt your competitor over the head.
Legally of course, and within the boundaries of acceptable behaviour, but nevertheless, a belting.
Dec 15, 2014 | Change, Governance, Leadership, Strategy
With thanks to Tom Fishburne. http://tomfishburne.com.s3.amazonaws.com/site/wp-content/uploads/2014/05/140505.pivot_.jpg
Strategy is one of those alters of organisation to which almost everyone offers lip service, and once a year in the planning cycle, receives mass genuflection. That does not mean we believe, just that it is a part of the duty of organisations, and as such, fails to deliver to its potential.
Over the years as a corporate employee and consultant, I have seen strategy implementations fail, sometimes with spectacular results. Usually however, strategy just whimpers in the corner, ignored and derided, but every now and again, I have been privileged to see, and be a part of successful strategic exercises. Below is a list of the most frequent sources of the failures I have seen, the good part of such a list is that taking the opposite gives you a list of what you need to do to succeed.
- Failing to understand that reality is not always what people tell themselves, self talk is too often tangled up with self delusion and adherence to the status quo. Recognising the hard realities as they actually are rather than the way you would like them to be is a remarkably common delusion.
- Believing self serving optimism and hubris are substitutes for achievable goals. It is OK, indeed admirable to work towards the BHAG, but allowing ego, management power based on the position rather than the person, and “group-think” into the room , and it becomes a different beast.
- Not seeing “Capability inflation” for the damming flaw that it is. Virtually everyone sees themselves as better than average at whatever it is they are doing, which simply does not work. Capability like everything else in life is spread across some sort of “normal” curve, in which the only thing that really changes is the height of the average, in relation to the spread of scores.
- Not recognising that competitors do not always react in an orderly and predictable manner, they are not a party too your strategies, and rarely react in wholly predictable ways.
- The factors often seen as “differentiators” are very often just the table stakes to be in the game. Asking management what are the “differentiators”, what characteristics makes any enterprise different, or its products different, and you usually get back a list of things that are just a cost of doing business, just like a watch has to tell accurate time before it is a watch.
- Failure to recognise and adjust for unintended consequences quickly. Usually this occurs because it is not in the plan, and plans are after all prepared by the bosses, performance measures are tied to the plan, and it is a great adornment on the shelf. (my time contracting to the Public Sector sees this blatant ignoring of unintended consequences justified by all sorts of complicated and cliché ridden language developed as an art form)
- Failure to believe. For a senior management to formulate spruik, and go through the motions of articulating and implementing a strategy, then not “living” it themselves means the strategy is doomed to failure. People watch what you do far more than they listen to what you say. Saying you believe is not enough.
- Underestimating the importance of “people“, their attitudes, fears, relationships, egos, and behavioural norms.
- Failing to recognise the elasticity of the status quo. Its durability in the face of logic, common sense and the blinding obvious (to outsiders) is just remarkable.
- Failing to understand and manage the essential paradox of “predictable” and “Innovation” . Customers like predictability, they come to rely in it, but they also expect their suppliers to be at the “cutting edge” to be finding innovative solutions to their problems, and the jobs to be done by their products. Nobody has managed this paradox as well as Apple over the last 20 years. Their products are all predictable easy to use, look great, and perform beautifully, yet they are always at the cutting edge, innovating with everything they do.
- Failing to recognise the sources and likelihood of disruption, and preparing as if it was about to happen. The commercial technical and competitive environment in which a strategy has to succeed is increasingly being disrupted in very hard to predict ways. Strategy is about the basic choices that make up the business model, and those are no longer models that are predictable across decades, they are evolving almost daily. A quick look through Jerry Owyangs presentations, writings and data bases outlining the collaborative economy is all the evidence of the shifts happens that are needed, but just think a few words: Air BnB, Uber, Amazon, iTunes.
- Failing to understand that loyalty cannot be built by money, and material benefits, loyalty is to people, and is very local. it must be earned by displaying and genuinely feeling respect, awareness and interest in individuals. Dunbar’s number plays a huge, largely unrecognised role in organisations. 150 people is about the maximum we can have relationships with on a face to face basis, and the smaller the group, the more intense the potential of the relationships that exist. In this context, loyalty is local, people relate to, work with, and support those who are a part of their local “tribe” against all those outside their tribes. This can often mean other divisions from the same business, or even the other function living down the hall. Believing this local loyalty can be leveraged or changed without real hard work is a common trap for strategists, particularly those entering a strategy that calls for organisation al change, renewal, and in the case of M&A activity.
- Failing to understand that data is inherently ambiguous, and swings between being of some value and intensely dangerous. It all depends on the assumptions that drive the analysis, wrong assumptions render the analysis at best misleading. Is that upswing in sales due to the insightful marketing campaign, or the failure of a competitor to deliver due to problems in the factory? Bet I know most marketing people will say.
- Thinking Strategy and culture are one and the same thing, with perhaps just a few nuances for each. Whilst they must be considered together, they must be managed as separate but mutually reinforcing entities, A degree of inconsistency here will see a strategy fail, as culture is always stronger. Attempts to change culture to align with strategy, rather than recognising the the power and reliance of culture, are doomed to failure, it is simply too elastic to be easily changed. There are really only two ways to change culture. The first is bit by bit, with a leader who demonstrates the behavior required, and is unprepared to accept compromises. The second is to fire almost everybody, if not everybody, and start again.
- Failure to recognise any of the above for what it really is, and calling it something politically more acceptable, thus ignoring the failure, and worse, taking no steps to correct the sources of that failure.
I would be interested in other sources of strategic failure you have witnessed, or been a part of, I am sure there are many I have missed.
Nov 27, 2014 | Branding, Category, Change, Marketing, retail, Small business
A short while ago, I posted “10 strategies for SME’s to beat the supermarket gorillas at their own game” which generated quite a bit of comment and feedback. Amongst the feedback were a number of requests to go into more detail on each of the strategies, and so this is the first of the series, focussed on understanding the business model of the supermarkets.
I deliberately used the word “Gorillas” because of the extraordinarily concentrated nature of Australia’s supermarket retailers, with Coles and Woolworths between them holding over 70% of FMCG sales depending on the category, and whose numbers you believe.
You know the old question: “where do the 500kg gorillas sleep?”
Answer: “anywhere they bloody like”
That was the way it was, a comfy duopoly, however, more recently there have been some major strategy alterations by Coles which has dramatically lifted their financial performance, and Aldi has successfully carved out a growing niche as a third retail presence. In addition, there are still some very good independent retailers around operating out of the wholesaler Metcash, who also competes with some of their own and franchised retail outlets.
This mix, combined with the opportunities suppliers have to sell into food service and institutional markets and increasingly direct to consumers via the net and other means makes for an environment where the agile and insightful suppliers can be very successful despite the obstacles, but it is a very challenging environment.
The concept of business models is well known, in summary, it is the expression of how a business makes money. It always involves a matrix of revenue generated, the fixed and variable costs of generating that revenue, and the choices that the business makes about its customers and how they will be serviced, and the way they incur the costs of that servicing.
Supermarkets are a great example of a number of seemingly similar competitors that have slightly differing business models. At a macro level they have strong similarities, relying on volume, price, and shopper numbers to succeed, but everyone who shops knows that Woolworths is not Coles, is not Aldi.
However, they do have some common building blocks.
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- Revenue generation. Supermarkets generate revenue on both sides of the equation.
- Shoppers buy products, paying at the checkout.
- Suppliers “pay” for shelf space via a range of charges levied for every variable the retailers can dream up. Volume discounts, payment terms, promotional levies, preferred shelf positioning, promotional slots, access to sales information, and a host of others. Some are items for which suppliers receive an invoice, others are taken as discounts off the invoice price, increasingly applied automatically as a part of the trading term package.
- Cost management. Supermarkets work on very low percentage margins, relying on the volume to generate the cash margins.
- Fixed costs are a significant part of retailers total costs, made up of the provision of the retail floor space, the logistics infrastructure and personnel. Supermarkets attack their fixed cost base aggressively using their scale as negotiation tools with landlords and logistics suppliers, while keeping a very substantial proportion of front line retail staff as casuals rather than permanent employees so they can better adjust staff levels to match activity. The sorts of choices retailers make are between high density shopping centre locations Vs stand alone locations. There are costs and benefits to each which are considered as a part of their strategic decision making.
- The biggest variable cost is the cost of good sold, and they similarly use their scale to manage those costs downward. Tactics vary between retailers, but the core game is to maximise their margins while keeping prices as low as possible to attract the volume buyers. This is an extremely delicate balance.
- Transaction costs are usually pretty well hidden in most businesses, but are really significant in the case of supermarkets simply due to the number of transactions they make. For example, there is a cost to managing the buying relationship with a supplier, but the larger the supplier, the less is the total costs/unit of sale of managing that relationship. This has led to a dramatic reduction of the number of suppliers supermarkets have in any category over the last 15 years or so a trend further accelerated by the increasingly common strategy of limiting the number of proprietary brands in any category substituting house-branded products, and reducing the number of relationships to be managed. This has made negotiating shelf space increasingly hard, and because of scarcity, increasingly expensive for suppliers, in turn putting extreme pressure on small suppliers.
- Customer service and relationships. The retailers have each made choices about the pricing, location, ranging, and service strategies that sets them apart from each other, and more subtly, they have back office strategies that differ. However, their common aim is to have as much market share ass possible, as volume is the profit generator.
- As in any market, no retailer can be all things to all people, so each makes the choice of the “ideal” customer, and markets towards them, grateful for any overlap. Increasingly the marketing is being supported by customer loyalty cards and the data mining and personalised promotional opportunities that technology is delivering, but the fundamental measures of success remain unchanged: number of shoppers, share of wallet, and basket size.
- The two major retailers have very large marketing budgets which they spend in a wide variety of ways, across all channels of communication with customers and potential customers, and often in joint activity with their suppliers, which inevitably, the suppliers end up funding in return for volume. The smaller the retailer, the less “mass market” they are, so the tactics tend to differ, although strategically, finding willing supplier partners is a core part of every retailers marketing mix.
- Consumers generally want choice when they are in a supermarket, the more the better, in any category. Woolworths and Coles stores carry 12-20,000 Sku’s (Stock keeping unit) depending on the size and location of the store, a typical IGA might carry 8-10,000, while Aldi carry just over 1,000. The sku’s carried in any store also reflect of the demographic and cultural mix. The Woolworths store in Auburn in Sydney has a significantly different product mix to the Woolworths of a similar size in Double Bay.
- Every retailer uses some form of category management disciplines as a means to monitor, adjust and locate their inventory onto the sales face in the way that best meets their customers needs and maximises impulse pick-up. This is always a data intensive mix of the volume and margin of the individual Sku, (such as Ski strawberry yoghurt 200gm) group of similar Sku’s (all strawberry 200gm yoghurt) subcategory (all strawberry yoghurt) and category (all yoghurt) and between categories. They make choices about how many brands and types to keep in stock, where they put them, on shelf and in relation to other yogurts, and indeed other chilled products. A facing of yoghurt added is a facing of some other product gone, as the sides of the stores are not elastic. At the core of the category management activities is the need to best satisfy consumers, whilst competing effectively and delivering maximised margins.
Being agile, persistent, and prepared to experiment are about the best qualities a supplier to supermarkets can have.
Nov 24, 2014 | Change, Governance, Management, Small business, Strategy
Roman baths. Bath UK. photo courtesy www.guardian.com. No matter how fancy the building, it will not last on dodgy foundatons.
I talk to small businesses all the time, have done for 20 years, and it makes me cry how many of them do a great job at their passion, the reason they stated the business, but a lousy job of making money from it.
A simple analogy.
When you drive around a bit, you use petrol. Everyone knows that when the gauge gets low, you need to put more petrol in, or the car will stop. Basic common sense, but how many use the same sort of common sense with the basic gauges in their business, and stop now and again to look at the levels, and recharge when necessary? Nobody can make you look at the gauge, and take the necessary action, you have to do that yourself, just like driving into a petrol station before the car stops.
There are four really simple questions to be asked that represent the “gauges” of your business, they represent the foundations of profitability and longevity. For many small business owners, motivated by the passion of what they are doing, it is too easy to ignore the basics of what will build the foundations of the busness that will allow them to keep doing what they love.
Take this road at your peril.
However, the good news is that much of this can be automated, and outsourced, so you can spend a few minutes a week, and be sure that the foundations are in place.
So, to the four questions.
- Will you have enough cash to pay your bills? Many small business owners just look at the balance in their bank account, and answer “yes” or “no” to that question. Mobile banking apps have made it even easier, but that is not enough. Cash is the oxygen of business, cut it off, and you die, very quickly. You should know if there will be enough cash to pay the GST bill in 2 months, or the long service leave entitlement of Suzie the receptionist in three months when she goes to Europe with her husband. For that you need to track your cash-flow, the money you anticipate coming in, and going out over the next three months. The formula for a cash flow forecast is pretty simple, and takes only a small amount of time, but can save your arse.
- Pick the period. I recommend a rolling 3 month forecast, updated weekly.
- List all the cash you expect to come in, and when you expect it in. Not sales, cash coming in. Similarly, list what cash will be going out, and when, as you pay the bills that come in. This is the reality of the cash flow through your business, just like the petrol flow to your car engine driven by the mechanics of the motor as it turns over.
- Simply subtract the cash out from cash in, and carry the total over to the following week, “rinse and repeat” for every week in the rolling three months. A very simple spreadsheet will do it for you, so long as the numbers are put in, either from your accounting system, or for micro businesses, from the pile on your desk/in your inbox, that you often manage to ignore.
- If you have a cash shortfall forecast at any time, you have the time to do something about it. Ever gone to the bank and asked for an extension to your overdraft activated tomorrow? They will laugh at you, but go to them and ask for an extension because you will need it in 6 weeks, and chances are they will give it to you.
2. Are you making a profit? Pretty basic question that many small business owners cannot answer. To answer the question you need an “Income Statement” or as it is often called a “Profit & Loss” statement. This should be done monthly, and as with the cash flow statement, is essential to maintaining business health, and to continue the petrol analogy is a bit like knowing that your petrol gauge is accurate, and that there is not a leak in the tank, or the youngster down the road is not sneaking in at night to keep his tank full at the expense of yours. Again, the formula is pretty simple.
- Total booked sales less expenses incurred. Sales are pretty simple, although I like to track gross sales, before any discounts, and record discounts as an expense.
- Expenses come in two forms, fixed expenses, those that happen irrespective of sales, like rent, salaries, insurance, and many others. Secondly variable costs, those that occur that enable you to make the sale such as discounts, commissions, freight, advertising, and usually most importantly, the cost of the goods you have sold, which could be manufacturing costs, or some sort of acquisition costs, commonly called “Cost of goods sold” (COGS).
- Simplistically the formula is: Sales – COGS – Variable costs – fixed costs = Profit. When you do an income statement monthly, and build up a bit of history, it becomes very easy to see what needs to be changed, and the impact that even modest changes can have on the profitability of your business. As with the cash flow, a simple spreadsheet can offer great insights and direction. What happens to your profit if you increase your sales by 5%, or decrease your COGS 2.5% when you are working with a 40% margin? Easy to calculate, and then you set out to do what is necessary to move the percentages around, although sales always remains at 100%.
3. Are you creating or destroying wealth? This question is more longer term that the P&L or cash flow statements, and is often done just twice a year. It has less immediacy than either, although if you go to your bank because you will be short of cash in 6 weeks, they will always want the most recent balance sheet. Partly this is hard wired into banker DNA, and partly it is reassurance that the longer term health of the business means they will get their money back, with interest. Again, the formula is pretty simple.
- When you start, you in effect make a loan to the business, and in return take equity in, or ownership, of the business.
- The business then uses those funds to make sales, pay all the business costs, borrow more money to operate, buy/lease equipment, and hopefully create the wealth that can deliver an return on your initial investment.
- The in principal formula is: (Fixed assets + liquid assets) – (long term liabilities + short term liabilities) = Equity. It is not usually expressed this way in financial statements because equity is technically a liability of the company, but this simpler way is easier to see and understand for those “number-phobics” out there. It is also complicated by all sorts of differing treatments of all the variables that can occur, such as the treatment of depreciation, and how much of Suzies long service leave has been brought to account over time. Perhaps the best example to use is the equity you have in your house. Your equity is the difference between what you owe on the mortgage, and what the house is worth if you sold it, which is rarely what you paid for it.
4. Do you have a plan? George Patton once said “unless you have a plan you are just a tourist” which is absolutely true. If you do not know where you are, or where you are going, any route can get you there. Having a plan is so essential, it is left off many lists, and to many others, it is just an exercise in extrapolation, which although easy, is not what it is all about. Good planning is all about the examination of the assumptions that underlay your business, the assumptions about costs, customers, markets, and competition. At the very least, it offers as my old marketing mentor, Jim Hagler of Harvard used to say, (or rather rumble) “at least you know the point from which you departed”
Most of the help you will need that shows you how to do all this stuff is available on Youtube, and all electronic accounting systems, no matter how simple, have as a core part of their reporting the first three reports. They just need some setting up, and once done, so long as they are maintained, will continue to deliver the numbers essential to the insights needed to make profits.
The last, you need to do in a much more hands on manner. Whilst there are many templates which can be of value, there is no template I have ever seen that will create a plan by itself. You need to do the numbers and research, make the enquiries, incorporate the testing that offers the chance to learn, and then most importantly, implement, measure and adjust.
The response to these questions offers an insight into the strength of the foundations of a business. We all know that any structure lasts better on a solid foundation, and no matter how fancy the edifice, it will not last on quicksand.
To build a really solid foundation, you may need the assistance of someone who has done it all many times, and knows the right questions to ask.
