Cash flow assistance for SME’s

Mar 22, 2020 | Governance, Management

Cash flow assistance for SME’s

Halleluiah

The Government has announced cash flow assistance for small businesses, turnover limit an arbitrary $50 million, impacted by the Corona virus.

Perhaps the precarious position many small businesses are finding themselves in has finally pricked the Canberra political bubble.

The assistance is intended to keep people at work, and therefore money flowing in the economy. Some of the details are in a fact sheet easily downloaded from the Treasury website. If unsure, speak to your accountant.

Industry organisations, particularly banks will play a role in ensuring the information gets out, and those eligible, are helped to make the appropriate applications.

Inevitably however, the devil will be in the detail. Governments being what they are, will without necessarily intending to do so, make it challenging to access the relief.

There will be layers of bureaucracy and miles of red tape to be navigated.

I have one piece of advice to give that might serve to reduce the disruption and stress any interaction with a government agency giving out money and assistance will create:

Start collecting the data you will need now!

Add a category to your ledgers, that captures each and every expense associated with the Corona virus. Direct costs are easily assembled, but put them in one place, and include a calculation that reflects the time people spend sorting through the debris of their employers caused by this blight. Use the total cost of employment X hours spent as the calculating base.

Assembling and reporting the numbers is something that will inevitably have to be done, so do it now, and do it in a disciplined manner, so that when the rush is on nothing gets missed, and having it organised will make the process of accessing the assistance less disruptive.

Header cartoon courtesy Tom Gauld.

The only commercial vaccine for COVID-19. Cash.

Mar 20, 2020 | Governance, Management

The only commercial vaccine for COVID-19. Cash.

When things suddenly get really tough, as we are now seeing, the priority is survival.

That simple word means many different things to different people, but the common denominator is that you need cash to do it.

If your processes do not include short term rolling cash flow forecasting, the best time to start was before the do do hit the fan. The second best time is right now. There are many templates out there, but the information required is simple:

A forecast of the cash coming in.

A forecast of the cash going out.

This is not a managed number like a profit and loss statement, it involves only what goes in and out of the bank account.

My preference for most circumstances is a 13 week rolling weekly forecast. It is long enough to give a good picture, short enough to be sensitive to the immediate challenges that arise.

As a sibling to cash flow forecasting and a little more complex, is an exercise to ‘stress test’ your business. It is in effect a model to enable you to test to see how long your cash will last given a variety of assumptions about the trading environment.

To do a stress test, you need 8 pieces of added information, some will be forecasts, others will be sourced from your trading history, captured in the P&L and ledger accounts. The importance of each will vary depending on the type of business you are in. For example, physical inventories in a service business do not exist, but there will be a work in progress number that can take its place.

Projected revenues

Margins

Fixed costs

Variable cost of goods sold

Accounts receivable

Accounts payable

Inventories.

Cash reserves and available lines of credit

You can make this a sophisticated and challenging exercise, and in a large business, it should be. However, in an SME, it should be simple enough that a competent bookkeeper will be able to create a simple spreadsheet that will reflect the impact on your cash reserves of changing assumptions about any of the variables. Even just the conversation about the weighting of variables going into the stress test model, and their underpinning assumptions, will be extremely valuable.

When you could do with an experienced outsiders input, give me a call.

Header cartoon courtesy Scott Adams and ‘Dilbert’

The critical key to reliable forecasting: Be less wrong.

Mar 18, 2020 | Change, Management, Uncategorized

The critical key to reliable forecasting: Be less wrong.

Thomas Bayes. 1701 – 1761

The key to good forecasting, that magic elixir most of us take, is not to be right, but to be increasingly less wrong.

We know the future will be different, being less wrong about that difference is better than consuming resources trying to be right, because you never will be.

For a decade, several decades ago, as marketing manager of a very significant business, I did a weekly sales record for about 50 SKU’s, by hand. It was in the late eighties, early nineties, the days before this was made easy.

Every Monday morning, I took about 15 minutes to record the sales on a sheet, with a 5 week rolling average, and a 5 week rolling forecast. Every month I did the same, but it took a little longer, as there were comparisons to the relevant quarter the year before, and budget, which took about 45 minutes.

In 10 years, I only ever got one forecast right, but was usually very close. Nobody took any notice at all of the forecasts of the sales force, despite them being part of the sales KPI’s. When manufacturing had choices to make about factory utilisation and what not to make, they came to me, and ignored the rest.

This was simply the building of a qualitative knowledge over time.

We routinely defer to ‘Bayesian’ statistics, a theorem proposed by English statistician Thomas Bayes in 1763, that dealt with the probability of a future event, and how that probability becomes more certain with the addition of information relevant to the outcome. We see Bayesian thinking all around us all the time. Every time we see an outcome to an action, and adjust before we repeat the action, we are using Bayesian thinking. Artillery is the obvious example. Use one cannon to get as close as you can, observe the degree to which you are long or short of the target, and adjust accordingly. When you land one on the target is when all the other cannons in the group adopt the same settings and blast away.

In business, we can spent inordinate amounts of time and energy trying to get the last 5% accuracy, when it would be far better to take a decision, and move ahead knowing that the chances are you will be wrong, but able to adjust and accommodate the degree of ‘wrongness’ with far less effort. This is the basis of continuous improvement, Plan, Do, Check, Act.

Bayesian theory at work, every day.

How to think about your business

Mar 2, 2020 | Governance, Leadership, Management

Business is simple, in principal.

Sell something for more than it cost you to produce or acquire it, recognising that the buyer needs to understand that the value they will derive from the product is greater than the cost they incur in buying it.

Simple.

Einstein said everything should be as simple as possible, no simpler, and his E=MC2 is the simplest equation that explains (somehow) masses of complicated stuff. It is the best example ever of Occam’s Razor, named after William of Ockham, a 13th century philosopher which encourages decision making to the broken down by progressively removing those outcomes that are based on beliefs and ideas rather than facts. When you have all the beliefs removed, you are left with the facts.

Often however, not so simple after you go one or two levels down the burrow to figure out just how you go about that process of removing all the biases and beliefs that masquerade as facts.

Charlie Munger, offsider to Warren Buffett in creating billions of value for Berkshire Hathaway shareholders over 50 years spoke about Mental Models in a speech in 1994. His premise was that you need a ‘lattice’ of mental models that apply to the different perspectives that apply to any question being faced in order to distil the ideas and wisdom that applies to your situation.

I agree absolutely with the idea.

It is simple, but as complex as you choose to make it.

As someone who helps small and medium manufacturing businesses improve the economic performance, there are numerous mental models at work simultaneously.

Strategic models: There are many strategic frameworks or models for business planning. Porters 5 forces, Boston consulting’s 4 quadrant, game theory, the old favourite SWOT, and many others. Profoundly important and often missed at this point, is consideration of the business model being employed.

Operational models: Lean thinking, 6 sigma, shift sequencing, the mix of technical, support and operational staff, deployment of technology, interaction of technology and those at the work face, on and on, you have the opportunity to use the wisdom of others to sort the relevant from the not so relevant.

Financial models: the standard accounting forms of cash flow, P&L, and balance sheet, together with a break even analysis, and decisions about the type of costing models to be used, ratios to be calculated, and formats in which the information will be communicated. To properly understand the operational mechanics of a business, you need more than the standard financial reporting. Their limits are a view of what has happened to the money, little about why and how it happened, and certainly very little about what may happen in the future.

Marketing and sales models: where do I start? Ideal customer profiles, value proposition, digital Vs analogue, differentiators, marketing toolbox and the multiplicity of tools to deliver leverage, ROI of marketing investment, Account based selling, selling models such as BANT, sales funnel, conversion rates, anchoring a negotiation, and thousands more.

How do you sort all these options into a few that will deliver results that are worth the investment?

You start with the end in mind, the strategic and commercial objectives, the why. I call this process ‘hindsight planning’
You break down the challenges into sequential ‘chewable chunks’

You focus on the important more than the urgent.

Behavioural models: These usually emerge as a group of expected behaviours, collectively called ‘Culture’. The best example I can think of is the 10 commandments, common to the 3 Abrahamic religions (Islam, Christian and Jewish) that sets a wide framework of the few things you must not do, leaving the rest up to you. Together, in their own environment, they provide a ,macro framework for behaviour, which we then break down further into the components that we seek to live by in a community.

When you need some help sorting this out, call me.

The core problem of calculating a return on an investment in marketing.

Feb 24, 2020 | Management, Marketing

Return on Investment is a very simple financial equation.

What you earned, minus what you spent, divided by what you spent.

Earn $100 after spending $75, divided by the $75, and you have a 33% ROI. Put another way, for every dollar you spend, you get back $1.33.

Simple, right?

Then why do marketers seem to have so much trouble convincing the corner office that investing in marketing is a sound strategic and commercial choice.

Simple answer: Attribution.

Which part of revenue, or margin earned, depending on how you want to measure the success or otherwise of an investment, is attributable to the spending of the money?

Let’s take a simple and very common example: building a website.

Every business these days is told they need a website, not having one is like not having a phone, it simply makes doing business next to impossible.

Let’s look at the formula to try and pick clean the bones of the calculation.

What you spent:

You need resources to determine the form and scope of the website.
You need someone to write the copy, and take or source the photos and illustrations.
You may need subscriptions to items supporting the website, such as CRM integrations, analytics services, pop-ups, autoresponders, and on, and on, and on.
You may need resources to manage and ‘clean’ the data bases that appear on the site, such as product specifications, promotional deals, customer and lead management, and on, and on, and on.
Finally, you need resources to build and maintain the website.

All of these resources can be sourced from external parties, in which case you can track invoices, or from internal resources, in which case all you have to do is determine what part of their employee costs you need to attribute to this website development. Simple to say, hard to do.

What you earned:

If anything, this is harder than attributing costs to a website development project.

What part of the revenue, or margin, whichever you choose as the benchmark, can you attribute to the cost of the website, and which part goes to the sales force, the quality of the product, the photography on the website, the manner in which you follow up enquiries, how you capture returns, the cleanliness of the delivery truck belting around suburban streets, and on, and on, and on.
Over what time frame do you measure the return? A week, a month, a year, the duration of the associated advertising campaign, the lifetime of a customer?
How do you factor in other marketing activities, advertising on traditional media, digital ads, the weight of your distribution, the quality of the targeting of activity to real potential customers Vs the tyre-kickers. And on, and on, and on.
How do you include the value or otherwise of the word of mouth, or organic reach on social media? Which social media do you include in these considerations, is it just Facebook and twitter? What about LinkedIn, or if you are a ‘techo’, GitHub, or Reddit, or the networks of gamers, and on and on, and on.

The core question is, ‘what do you include, and how do you allocate a weight to the contribution it made to the outcome?‘

Attribution.

Too add to the confusion, people use a range of terms interchangeably, usually because they do not think about, or recognise the problems of attribution.

For example, they confuse return on marketing investment with return on advertising spend, and they confuse leads generated with real financial results, and most particularly when confronted by someone flogging new and shiny digital toys, revenue with margin.

To go back to the metaphor at the beginning, a website is not anything like a telephone, so to make the comparison is nonsense. A phone is a one dimensional tool. They all look the same, and do the same job, although the advent of smart phones has widened that scope considerably. A website by contrast is infinitely variable in what it does, looks like, and performs, and should be the product of a robust strategy and tactical implementation plans, not some simple template pulled out of a digital urgers kitbag.

To build that necessary credibility in the corner office, most probably occupied by an accountant or engineer, whose whole mind set is quantitative, you must be able to draw conclusions based on data. This data must demonstrate the cause and effect chains that exist, often very well hidden, and avoid the marketing clichés and jargon, which just make you sound like that digital urger in the foyer.

Need help thinking about the implications of all that, call an expert.

Why most enterprises fail at cost effective marketing

Feb 17, 2020 | Management, Marketing

It is budget time again, that time of the year when planning comes to the fore, usually as an added job that is just a pain in the rear.

There is an easy way, and a hard way.

The easy way is to download a template and get the intern to spend a day filling in the gaps. About as useful as an umbrella in a cyclone.

Better than nothing, but only just.

Then there is the hard way, because it takes time, and requires you to use your brain, and the collective brains of others, and can be an emotional as much as analytical exercise, requiring time, energy, critical thinking, and collaboration, and making some really challenging choices.

Let’s define what we mean by marketing, useful if you are going to plan for it.

My definition of marketing is the ‘generation, development, leveraging and protection of competitive advantage’.

Not a definition you will find in any textbook, but mine evolved over 40 years of doing this stuff.

Competitive advantage evolves, and comes in many forms, but without it, you are in a commodity, price driven market, and you cannot win in that. The pace of evolution is these days frenetic, so writing a plan, and leaving it on the shelf for an occasional reference before the next budget session is useless. It has to be an evolving document.

If you can find a template that helps you do that, let me know.

Marketing is about the future, you are trying to shape it, so you are dealing with unknowns that can be qualified, but rarely quantified. With the use of various mental models, cause and effect, domain knowledge, customer intimacy, competitive understanding, tactical agility, and a whole range of other things, you can build a level of confidence that justifies the risks being taken.

It is a jigsaw puzzle, to which you do not have the picture, and many of the pieces you do have are wrong, and many are missing, so you have to experiment, make up your own, use someone else’s cast-offs, try making your own pieces to fit.

At the end, it is about making choices with imperfect information.

That is hard.

When faced with a choice that appears to be between two sub optimal outcomes, step back, and find another way. That is in itself a valid choice, and a very good one, and it makes you think.

The greatest two problems most corporates have in planning marketing are:

Extrapolation.

Confirmation bias.

Add 3% to last year, and, only seeing what they want to see.

That is what you get when you use a downloaded template in place of using your brain to critically assess options, information, domain knowledge, capabilities, resources, risk, and market and trend sensitive indicators.