Jun 5, 2015 | Governance, Management, Small business
whoops!
Do I have enough cash to……………….?
This is one the 4 fundamental questions for small business survival, and is the one I hear far too often. It is all to do with how much cash is available at any given time to pay the bills.
It is almost inexplicable to me that many operators of small business do not understand their cash flow, how it works, how it can be managed, and how to leverage it. After all, it is their lifeblood.
The sad reality was brought home again a week or so ago talking to a tradie I met casually who was hurting badly because a developer he had subbied for over many ears was not paying him, and he in turn was not paying his bills, as he had used up his overdraft. He was in effect funding the developer, and ultimately the receiver, and seemed unlikely to get any of his money back.
A common occurrence and all too easy to address with a bit of planning.
There are some pretty simple things that can be done to assist in the management of cash, but like all things it takes a little bit of work up front, and a disciplined process
1. Routine.
The steps to a positive cash flow are simple, if you make them a part of your routine, you can follow them with little effort, although at first, it can be a bit confronting.
- Have robust, enforceable and explicit terms of trade. For anything that requires credit terms to be extended, make sure you have a signed agreement that specifics all aspects of the terms under which you agree to provide your goods and services. These terms are an enforceable contract, and in the event it is necessary, is actionable. There are templates available that can be personalised for your needs and used without cost or with just a small charge. Some service providers such as EC Credit Control will assist in the preparation, as will your bank, although your bank has a vested interest in lending you money, not making what you have work harder.
- Do credit checks. By giving credit, you are effectively lending someone your money. It makes sense to check if they have any history of fraud or default, which can be done easily for a modest fee. You pay for access to a database that is in effect a credit footprint of everyone who has applied for and been given credit, and the data includes their credit history, and any outstanding judgements. Veda is one of the agencies that provides this information as a service, there are several, most banks will provide the service for a fee, often they wholesale services like Veda. Often if you choose to outsource your debtor management in some way, these sorts of checks are a part of the service.
- Issue invoices immediately and follow up politely but persistently and in a highly predictable manner. Most businesses wait until they receive an invoice before they initiate any consideration of a credit period, let alone get around to paying, so the sooner you issue the invoice, the earlier you have a chance to be paid. A client of mine about two years ago instituted a process of sending a polite “thanks in advance” for payment on the invoice due in a couple of days. He thanks his clients for the expected payment, indicating being paid on time is one of the ways he manages to maintain the high value he is able to deliver. It had a significant impact on his debtor days, and served a marketing purpose to highlight the quality of the service he provided, and as it was highly automated. After the initial set-up and a few teething problems, the process became virtually automatic, and a boost to his business.
- Keep the credit period ASAP. In this case, the acronym is As Short As Possible. Generally the negotiation on credit terms will take place at the beginning of the relationship, and that is the best time. Make it as short as possible, I always advise starting with 7 days from invoice date, be very happy with 21, and if it is in your interests, give a bit more, but if you start with 30 days from the end of the month, watch your sales bunch into the beginning of the month, which effectively gives a customer up to 60 days to pay, before the invoice is overdue, and you can start chasing payment. This is a gap you are funding, bankrolling your customers, and generally people in business are not there to be a philanthropist, leave that to Bill Gates.
- Do a weekly rolling 13 week cash forecast. This is a simple exercise, but knowing what is coming at you offers the opportunity to manage it with the least pain, ignoring it can be terminal. Generally this cannot be automated, but most bookkeepers and service providers can do it simply, although most would say monthly is sufficient. I strongly recommend weekly for small businesses.
2. Automate.
One of the more innovative automations I have seen is the one noted above, but most of the basic bookkeeping routines are now highly automatable via mobile connections into software that can manage all the recording and invoicing processes. For a tradie, assembly and issue of an invoice via email against a signed and dated acceptance of the cost can be done on site the moment a job is complete. No paperwork to end a long day. Automating can cost a bit to set up, and ensure it all works, but the expense is well worth it.
3. Outsource.
Most parts of the process can be easily outsourced if you choose not to do it yourself. Think of this outsourcing cost as insurance, and the cost of buying back a bit of your own time and peace of mind.
- Book-keeping. There are many book-keeping services available, and whilst they may vary in quality and cost, it is pretty easy these days to find one you are comfortable with, who provide the mix of services you require.
- Debtor and debt management. There are many service combinations possible from the straight invoice financing where you in effect sell your invoices to a finance broker who then owns the debt, to more relationship sympathetic arrangements where a third party undertakes to be your accounts receivable function, and often do some of the risk assessment functions noted above. Selling your debt, or “factoring” still smells of desperation, but outsourcing accounts receivable is pretty sensible and often very cost effective.
4. Leverage.
Most understand the concept of leverage when it comes to moving a physically heavy object, but have never thought of it in relation to their business, and particularly their two most crucial resources, their time and their cash.
- Closely managing terms and collections so that your average debtors is shorter than your average creditors means you are collectively enjoying having your creditors fund your business. However, I recommend paying your bills as they come due, as a history of reliability can pay big dividends when things suddenly go pear-shaped.
- Inventory. In many businesses the greatest consumer of cash is inventory, and closely managing it can save considerable sums. For a retailer like a fruit and veggie market, they take most of their revenue by cash or credit card, for which they get paid within 24 hours, but often pay for their stock on 21 or 30 days, by which time they have turned the stock over several times. Lovely. Measuring stock turn is a great metric if you have inventory.
Finally, there is a further measure not usually recommended that I particularly favour, Net Cash Consumption or NCC. It is a simple measure you can apply over any period, simply the difference between cash in and cash out over a time period. For small businesses I usually exclude capital items, so it is a measure of trading cash generation, or destruction. If the measure is positive, that is a good start, if it is negative for any extended period, trouble. I usually recommend a rolling 3 month measure, short enough to be sensitive, long enough to accommodate the operational vagaries that occur like paying the receptionist long service leave. Adding it as a graph on the bottom of your cash flow forecast automates it. Easy.
If you would like more information, or the opportunity to discuss any of this, just give me a call.
Jun 3, 2015 | Change, Governance, Management
For 20 years, Mary Meeker of KPCB has been collating and publishing an annual report on the growth and growth of the net and the services and products it carries.
This 20th publication contains information that will be useful to every business.
The local lemonade stand, to the huge Multinationals dominating the commercial landscape, there is vital stuff for you.
Just a few of the points that jumped out at me:
- Mobile data usage rose 69% last year
- 55% of mobile data traffic is from video
- Ads in mobile account for 8% of ad spend, but mobile accounts for 24% of time spent with media.
- Mobile use in underdeveloped economies is disproportionately strong. In effect, they are jumping the stage of fixed line infrastructure developed economies went through. If you want to do business in Asia and India, go mobile.
- Government policy, regulation and use of the net lags public usage substantially, around the world
- The number of hours a day people are spending in front of a screen s still growing, and though it has flattened off a bit, but it is 9.6 hours/day. (US data)
- The number of productivity tools becoming available is still exploding, as is the number of platforms for distribution of information and data
- The nature of work is changing rapidly, as is the location of those doing it.
Whoever you are, if you are in business, and want to stay there, it is worth flicking through the report.
PS. June 13.
Mary Meeker released a presentation of her amazing report, listening to her talk through the report makes it easier to absorb, way easier than just looking through the huge pile of slides.
Everyone should watch this, absorb it and figure out how to leverage it for your business.
Apr 10, 2015 | Management, Small business
It is interesting to consider the notion of ‘knowledge’ and how experts are given that label.
Often it just means that someone who is seen as an ‘expert’ may have just a little bit more knowledge that those who are listening.
Consider the primary school teacher, teaching maths to 10 year olds. To them, the teacher is an expert, knows it all, but could that same teacher teach maths at high school, graduate, or post graduate level? Probably not.
In primary school they are a relative expert, but the depth of knowledge required to teach maths at a post graduate level is far higher than primary school. On the other hand, could the teacher of post graduate maths teach 10 year olds?
Often not, as they do not relate to the level of knowledge that exists, and the way these kids will think and learn. The Uni professor may have all the maths skills, but often no skill at relating to their 10 year old audience, often simply because of the assumed level of expertise .
“How could they not know that?”
This post evolved out of a series I am doing, teaching basic software skills to small businesses by relating them to the things they need to do in their business every day, cash flow, P&L, and the other basic stuff that are absolutely essential to a business, but ignored by many small businesses simply because they do not understand what is being said.
There are legions of free “how to” videos, manuals, and the rest, readily available, but still I see small businesses every day who do not understand the importance of actively managing cash flow, or if they do, how to go about it.
Accountants know this, but they have generally failed dismally to communicate it to their small business client base. Generally it is not because they do not want to, but rather because they fail to communicate at the really basic level many small businesses require. On the other hand, owners of small businesses are often loathe to engage their accountants in this sort of conversation at $200/hour when they know they will not understand a thing.
Clearly the assumed level of knowledge is too high they get confused, and do not relate, but that is not their problem, it is that those setting out to teach the stuff have failed to understand their audience.
Mar 27, 2015 | Management, Marketing
Digital evolution
It is fascinating to observe human behavior. Of great interest to me is the intersection with the practices evolving to deal with the digital world, manifested in all sorts of unexpected ways.
One is the huge range of digital tools now available using the so called ‘Freemium” model. Give away a subset of the software’s capability for free, thus getting trial and hopefully conversion to the paid versions. This has been very successful for many platforms, LinkedIn, Mailchimp, Surveymonkey, and is increasingly being applied by platforms to generate advertising revenue as they offer free user access to the platform.
On the other hand, over human evolution, there are lots of common characteristics evident, three in particular that are relevant to any discussion of the freemium model that most would recognise:
- People want what they cannot have.
- People chase things that are moving away from them
- People value what they have to pay for, irrespective of the payment being in effort or some other means of exchange.
At first glance the Freemium software model is breaking these evolutionary rules, but on closer examination they are actually using them to their advantage.
By making the paid capabilities of the software explicit as free users try to do more and more with the familiarity that comes with software use, they get frustrated with the limitations and upgrade to the paid version.
For small businesses, whatever the business they are in, from the local retailer to service provider, combining these forces can work for you.
For example, if you want your car serviced, do you want it serviced by the bloke who can fit it in today, or the bloke who is so busy you have to wait 2 weeks?
It might also cost a bit more.
Creating some tension, then enabling people to resolve the tension, generally delivers greater satisfaction with the outcome, as those converted find ways to justify to themselves the value of their decision.
It has certainly worked with me, and it allows small businesses particularly to experiment at low cost, with nothing at risk apart from a bit of time.
Mar 23, 2015 | Collaboration, Innovation, Leadership, Management, Strategy
Plan backwards
All sorts of planning activity is aimed at defining the point where we want to be, then assembling the resources and capabilities to get there.
That is how planning is done, almost always, because by and large, it seems to work, and it keeps the spectator crowd happy.
Libraries have been written that describe all sorts of methods and models that can be used. They can be very useful and thought provoking, providing a framework to help articulate the factors that will impact the business, and the options you have in responding, but they rarely offer an antidote to the malaise affecting the development of really distinctive capabilities, genuinely new products, processes and business models.
The real innovations, the things that change everything seem to come from a different place, “left field” being the most common description.
Most planning ends up being just an extrapolation of the past, despite the well meaning and significant effort to make it something else.
Perhaps a better way is to put yourself in the future place, then work backwards, identifying the steps that need to have been taken to reach the point where in your mind, you are now.
Be specific about the end, articulate it clearly, and then “Plan Backwards” by considering the factors that delivered value for you. I generally call this process ‘Hindsight Planning’.
- What did you do that worked, and conversely, what might you have done that did not work?
- What capabilities did you need to develop?
- What trends drove changes to the industry you were able to leverage?
- Where did the technical innovations you leveraged come from?
- Which markets and customers were successfully addressed?
- What big customer issues were addressed?
- What did the business model(s) you used look like?
- And finally, How were you able to extract value for all these things?
This sort of analysis, if it is to lead to a positive outcome, requires that you recognise and deal with two types of barriers:
Management barriers.
People like consistency and predictability, so when the forecast future looks very like the past, just a bit blurry, they are happy with it, endorse it, and resource it. By contrast, being the harbinger of change that will affect the status quo is no way to get ahead in most organisations. However, it remains a truth that the future never looks the same as the past, no matter how much we would like it to be so.
- Idea averaging. Management absorbs and usually just “averages” or applies committee thinking to a good idea, but at worst, just rejects them for a range of reasons that sound absurd and utterly naive with the benefit of hindsight. Existing businesses are rooted in the networks and frameworks required to make them successful today, and are usually intolerant of new things that involve risk. Usually successful incumbents are well evolved, so are resistant to change, their current way has enabled the current business to be successful, why change? There are many examples of this phenomena, Kodak being a standout, Polaroid another, Cobb & Co another. The current attempts by the taxi industry to resist the encroachment of Uber in my hometown, Sydney, is an example unfolding, and the music industry prosecuting their customers for using their products is an example of one that is just about folded.
- New business models. The successful commercial execution of a real innovation generally requires some new way of delivering the value to customers and extracting value for the suppliers. In short, a new business model. Industry incumbents rarely completely disrupt themselves, by definition, they have too much to lose. Therefore, there needs to be new strategies and supporting business models developed by those outside or on the fringes in some way of an industry. Uber and Apple came from way outside the industries they disrupted, and can you imagine Hilton, or Accor funding that mad idea AirBnB that was gong to crucify their budget tourist dollars?
- The Profit paradox. Profit is counted by looking backwards rather than forward, rewards came after the fact. Forecasting profit, or “fortune telling” is inherently risky, as the only think you know for sure is that you will be wrong, the real question is by how much, but the consequences of getting this brand of fortune telling wrong are significant. However, in the long term, you are only truly profitable if your returns are greater than the cost of capital. If they are equal, you may as well put your money in the bank, because it is safe, less than that and you are long term destroying capital. This simple fact is ignored in almost every profit forecast, statement or review I have ever seen. The conundrum is that to generate a return greater than the cost of capital you must take risks and do stuff differently, some of which will not work out, or only work out in the long term, therefore risking the current profit. It is pretty easy to ramp up the profit made today at the expense of tomorrow, but in this case, tomorrow does actually come.
Creative barriers.
Creative barriers evolve around points of the assembly of ideas, where information, insight, experience, are mixed up to create the otherwise unlikely connections that are the foundation of a creative solution to a problem, situation, or challenge. These are the barriers that most businesses try and get around by the off site strategic planning sessions that rarely seem to be able to deliver the promise of the day. The energy and drive in the workshop room gets absorbed by the day to day of being back in the business. Removal of the barriers is a high priority challenge for management.
The barriers to creativity are many and varied, often overlapping in many places. Following is a ‘brain-dump’ list of the ones I consistently find.
- No commitment from the ‘top’
- It is not OK to be wrong.
- Give up too easily. Edison’s famous quote “Now I know 999 ways that do not work” whilst experimenting to develop the lightbulb resonates still.
- Creativity is hard to quantify, and is therefore often not measured. The old adage what gets measured gets done is right, so creativity is extinguished.
- Lack of resources, time, equipment, money, are all used as excuses for being too willing just to accept the status quo.
- Enterprise culture eliminates risk as far as possible, and creativity is inherently risky and “out there”.
- Rules rule. Particularly in public enterprises, and creativity is not in the rules.
- Challenging orthodoxies, assumptions and the status quo is frowned upon.
- Lack of what I call ‘environmental intelligence’ or an understanding of the macro trends and individual movements in the commercial and strategic environment in which you compete. Seeing trends that impact an enterprise, and their intersections is a rich source of creativity.
- Lack of discipline. Perhaps counter intuitively, creativity includes a range of activities that if subject to some disciplined and focused thinking can deliver great results.
- Not having the right people. Creativity is perhaps the most collaborative of human activities, well, almost. Not having the right people is a commonly owned albatross.
- Everyone can say “no”. Formal layers of approval for ideas act on creativity like a wet blanket on a campfire.
- Creativity is not a required contribution from everyone, it is assumed to be the product only of the young, or the marketing department, of the boss’s wife. Creativity should be everyone’s job!
I could go on, the list is huge, it is a wonder that creativity survives at all given the barriers.
An idea is the outcome of all that has gone before, and the triggers around at any given time, rarely is it the ‘Eureka’ moment. Ray Kurzweil who has a stellar track record in seeing the future in technology believes we need to become comfortable with what he calls “Hybrid thinking” and I can only agree but see that the ideas he articulates have a far greater range than just creativity and innovation in technology.
Mar 19, 2015 | Customers, Governance, Lean, Management, Small business
Image courtesy of ddpavumba at FreeDigitalPhotos.net
Remove transaction costs. Easy to say, hard to do.
The concept of transactions costs is generally attributed to British Nobel prize winning economist Ronald Coase, and the publication of his 1937 paper “The nature of the firm”
Transaction costs will always be present, they are the enablers of an organisation. The challenge is squeezing the maximum productivity out of the transaction costs you will inevitably incur.
Like all costs, transaction costs fall into three categories:
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- Those that are necessary for the sale, and that add value to the customer, so they would be willing, if you asked them (and this is the big test) to pay for it. Things like delivery of physical products fall here, and we all know there is no such thing as “cost free delivery”. ,
- Those that are necessary, but do not add value to the customer. Costs associated with compliance, your training and innovation programs, taxes and charges all fall here .
- Those costs incurred that do not add value in any way, just consume time and money, such as rework, picking up wrong deliveries, or correcting wrong invoices. You generally do not need an activity costing initiative to know that this third category is usually uncomfortably large, and should be eliminated.
The bloating of transaction costs has three basic causes:
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- Not getting “it right first time” requiring rework to correct the mistake. For small businesses, the costs of mistakes are relatively much harder to absorb than they are for a large enterprise.
- The penalty of small scale, expressed in the variable operational costs incurred, and the productivity per dollar of overhead spent. The flip side is that small operations can be far more agile than large ones, as the distance between a decision being made and actually getting something done, is much shorter.
- Less than optimum processes, or the ways that businesses manage the things that need to be done to support and document a transaction.
If you chose to take a deeper look at these three causes, they are all rooted in the way people go about doing their jobs on a daily basis, and for small businesses, with less people, and far easier personal communication, this is where the leverage can be applied by continuous improvement.
It costs the same to raise and process an invoice of $1,000 as it does for an invoice of $100,000. Therefore the transaction cost % of the invoice value is far greater for the smaller invoice. This relationship is reflected throughout the supply and distribution chain, and even minor improvements can deliver substantial savings. Technology offers the opportunity to reduce the absolute cost of processing to almost nothing, making the transaction cost irrelevant either way, but once people are added to manage the exceptions that cannot be handled automatically, the costs soar.
The source of Woolworths superior performance over the last decade compared to Coles has been the impact of their reductions in transaction costs that have dropped straight to the profit line. Wal-Mart became the biggest retailer in the world by focusing on the reduction of transaction costs of all types, and passing the savings on to consumers as lower prices to attract the volume creating a virtuous circle. Less obviously, they passed many costs back to suppliers, then continued to insist on and successfully extract cost reductions from those same suppliers in spite of increasing their costs, simply because of the scale of their sales potential for suppliers.
It seems to me there are two parameters to transaction costs:
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- The absolute amount of the costs in a whole process
- The productivity of the costs in the process.
Most systems just look at the quantum, and set out to cut corners, work the current system harder, but by looking at the detail of the things that generate the costs, you can eliminate those that do not add value. However, moving a transaction cost on to another link in the supply chain does little to eliminate the cost, it just moves it. Retailers generally have been expert at this moving of transaction costs, while often creating them as a source of revenue. Practices such as making minor claims on a supplier, and holding up payment of a complete invoice until the claim is dealt with, then making the dealing with the claim a minefield for small suppliers abound. A source of the success of Aldi in Australia has been their focus on the reduction of transaction costs, but in return they get their “pounds worth” at the invoiced price point.
In dealing with supermarket retailers over many years, a number of transaction cost types have become evident:
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- Cost of searching, storing, processing & managing information. Category management is a prime suspect here. Suppliers engage in a costly, data intensive exercise in the expectation (hope in most cases) that there will be returns from the collaboration that is hoped to occur, and from the opportunities good category management can unearth. While the costs of the data transactions themselves may have dropped precipitously over the last 20 years, the costs of the overheads to manage them have not.
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- Cost of negotiation. In almost any negotiation where one party has the power, and is happy to use it, the outcome is virtually pre-ordained, it is just the quantum of the cost that is in question. Knowing, and sticking to your “Walk away” point is an absolute must.
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- Cost of time. A vastly under measured cost in most businesses. We tend to have people on staff because there is a job to be done, and we pay them competitive rates to ensure we get the best people we can for the job, but we tend not to measure the value delivered by the doing of the job, its cost is just a part of the fixed overhead. Every minute spent costs a business, but apart from VC operators who use “burn rate” as a key measure, we tend to ignore it.
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- Cost of certification. The range of certifications that are supposedly “needed” from HACCP to OH&S, to quality verification of components in a product to various religious and quality standards are legion. Each costs time, money, effort, and carry heavy opportunity costs. A bit of effort to isolate those that are really needed, and to manage those that are with automated or at least consistent processes can save a significant amount of time and money
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- Cost of influence. People deal with people, not corporations, no matter how automated and impersonal our communications systems become. Getting to know people , building relationships and trust takes time and effort. It is time and effort well spent, to a point, and finding the point at which the costs outweigh the benefits is a management challenge most fail.
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- Costs of cock-ups and rework. This is probably the biggest, most pervasive source of transaction costs. From the wrong invoice to a truckload pf product turning up to be rejected, and turned around dumped or put into rework. It is not just the cost of the product, but the added time, lost sales, loss of reputation, and needless consumption of capacity that really hurts. “Lean” processes target waste, and this one is the biggest waste that occurs, and is often made up of a lot of low hanging fruit if you go looking for it, and know where and how to look.
Small businesses are in a great position to reduce their transaction costs, simply by being good at everything they do, and being “close to the action” can make the wrinkles that can be ironed out that more obvious.
The original post that started the series is here, followed by the more detailed posts, 1, 2, 3, 4, 5.
