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.
Oct 29, 2014 | Marketing, Small business, Strategy
Any business that has done business with the supermarkets knows that they are not there to do you any favours. They have shareholders to keep happy, customers to sell to at the lowest prices possible consistent with their margin objectives , competitors to beat, and shelf space for sale to their suppliers.
In order to survive and prosper selling via supermarket distribution takes a business model that is tailored to the demands that the retailers make.
Following are 10 strategies that have worked in the past, the more of them you cover off the better, and the first few are mandatory.
- Understand the supermarket business model. The supermarket business model is based on three factors: high volumes, lowest possible supply chain and transaction costs, and low prices. With some minor category exceptions for some retailers, they do not vary from this model, in Australia or overseas. Given the scale of their operations, they get to set the rules, and there is little room for negotiation, even for major suppliers.
- Be savvy with data. Mass market retailing is a data intensive game. The retailers have mountains of data at their disposal, and plenty of suppliers willing and able to interpret it for them, with the obvious disadvantage to those who do not interpret. Scan data, combined with the loyalty card data increasingly being used is a goldmine of demographic, behavioural, and promotional information. Being in a position to present data with your interpretation, and having the credibility to interpret the retailers and your competitors data is a price of success.
- Aggressively execute on Category Management. Category management disciplines are the foundation of the retailers ranging, promotional and in store product placement strategies. It is data intensive, and an integral part of he business model, and as such sufficiently important to be treated as a separate “to do” for those to whom success with supermarkets is essential. Allowing your products to be “category managed” by your competitors is simply not sufficiently competitive , or aggressive. You need to execute on category management in partnership with the retailers, even if you are not in the “category captain” role.
- Build a brand that has relevance and connection to consumers. The alternative to having a brand that has at least a small but demonstrable group of consumers your brand has no effective substitute, and who will perhaps change their choice of retailer for, is essential. To be a price taker with no leverage at all, is to be an irrelevant supplier who is absolutely dispensable.
- Recognise you have two customers. The supermarkets may be your direct customers, but the consumer is also your customer, indirectly. As a part of brand building, you need to open communication channels with consumers, so that they are predisposed to buy your products. This may seem like brand building, and it is, but it is more short term direct, and actionable than building a brand which is a long term investment. Direct promotional and communication activity can now be a part of your tactical marketing plans in a far more directed manner than has ever been possible before.
- Remove transaction costs. Transaction costs have two basic causes, the first is not getting “it right first time” requiring rework to correct, and the second is the penalty of small scale. It costs the same to raise and process an invoice of $1,000 as it does for an invoice of $100,000. To the extent that technology can be applied to process the invoices, the costs will not be material, but if people are involved, the costs of the $1,000 invoice is 100 times as much as the $100,000 invoice. This relationship is reflected throughout the supply and distribution chain, and even minor improvements can deliver substantial savings. 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 focussing on the reduction of transaction costs of all types, and passing the savings on to consumers as lower prices.
- Collaborate for scale. Small suppliers to supermarkets have to find ways to apply leverage to their opportunities. Collaborating to reduce various forms of transaction and supply chain costs , as well as pooling data and data capabilities are logical if challenging tasks. Many produce suppliers have found ways to collaborate, but their produce is unbranded, and commoditised by retailers, so it is harder for branded FMCG but nevertheless possible.
- Constantly innovate. It is almost a cliché, but nevertheless true, that to stay still is to be left behind. Innovation is a part of the necessary armoury of success. Not just innovation in the product supplied by the means of its production and supply require constant innovation.
- Build agile value chains. Commercial agility is the ability to alter processes in the face of changed circumstances without resorting to non value adding discussion and debate, and without losing sight of the objective. Agility is not flexibility, which implies that things “bend” then go back to normal. By contrast, agile value chains have the characteristic of being able to evolve rapidly, and improve in the process.
- Do not play. The last and most obvious strategy is to ignore the supermarkets, and play in channels they do not control where the value in the product is able to be recognised in some way that is impossible in the high volume low margin supermarket game. Depending on how you measure, and what category we are talking about, supermarkets control between 50 and 80% of FMCG sales, which leaves some 30 billion of Australian FMCG sales left over, not an insignificant sum.
That is an awful lot to do, and the best time to start was a while ago. However, the second best time is now, so go to it. If you need a bit of assistance, just get in touch, and I will bring along my 35 years of experience with this stuff and put it at your disposal.
Oct 20, 2014 | Customers, Marketing, Small business, Social Media, Strategy
Most Aussies will probably recognise the diagram above, the London Underground.
The first time anyone arrives in London, an underground map is a vital piece of paper, even in these days of mobile phone enabled GPS tools.
The underground system in London is pretty complex until you figure out how it works, and when you take into account the interchanges with London buses and British rail, it is not something you approach without a clear understanding of the details of your intended journey. To get anywhere, you need to know just two things:
Where you are
Where you need to go.
After that, with the map, you can figure out the best way to get there ,what the route options may be, what it will cost, and how long it should take to get to the destination.
Why is it that people understand this instinctively for a sojourn on the underground, but fail to do it for their business?
Social Media is the shiny new toy around at the moment, everyone knows it is there, some dabble in it without a map, and get lost, have their pockets picked, and decide that from now on they will catch a taxi, if they really have to get somewhere. Other wise they will just stay in their hotel.
“Social Media” used as a noun, has some similarity to the underground, in that it is complex, but navigable with a map, where it differs is that it changes, evolves, even mutates, every single day, in some meaningful way. However, if you understand the structure, where and how it all fits together, navigation can become relatively easy, relatively risk free, and open up the opportunities of a wonderful tool.
Need a map?
Oct 17, 2014 | Branding, Marketing, Strategy
Majors Bay Rd Concord, Sydney.
No business can do everything, so the easy way to start is to do the thing you can do well, as long as it is at least partly the thing that also makes you different.
In a suburb not far from me in Sydney, there is a street that over the last 5 years or so has evolved into an eclectic mix of cafes and restaurants, occasionally separated by some other hang-over shop from a previous age. There must be 25 or 30 of them down both sides of the street, each vying for a share of the dollars the punters bring in from all over Sydney.
One of the cafes, on a corner, not only has plenty of outside room on the footpath, friendly service, and a good range of only mildly over priced cafe meals, and treats, they also roast their own coffee beans. This just reinforces that they have the best and freshest coffee experience in the area, supported by a blend of service, location and that aroma as they roast.
Intoxicating.
It also confirms them as “knowing their coffee” an important cache in an environment where coffee-wankery is reaching disturbing proportions, and cafe’s are springing up like mushrooms after rain.
It cannot be too hard to set up a roasting operation, it delivers a great marketing advantage to the cafe, offers an added income stream from bagged coffee sales, and, oh, did I mention the aroma?
Differentiating yourself is a must in this homogenising world, and doing it in a way that reinforces the marketing story in the way this cafe has done merits competitive success, which by my observation every time I go there is substantial.
Oct 15, 2014 | Change, Management, Strategy
There is no such thing as “equalibrium”, just constant change.
I have a mate who is an academic economist, a really smart guy used to arguing a point of view, and with a box of stats on call to support any contention he makes, alternatively to pull down anything that runs contrary to his argument.
He is very convincing.
An ongoing debate has been around the nature of management, and particularly marketing in the face of the changes that have been wrought by the digital revolution. His view, if I can summarise, is that the forces that have emerged will find a new point of equilibrium, and it is our task as managers to identify that point, minimise costs on the path towards it, then be in a position to leverage for the maximum outcome when it is reached.
Economics 101.
My contention is that the assumption that an equilibrium will be found is flawed, and that the better analogy is the ecosystem, constantly evolving and changing in response to the adjustment of the forces that interact on the inhabitants, and the better strategy is to assume that everything will change, some things over night, some with a bit more lead time, and the forces that are interacting to drive the changes are not necessarily evident from wherever it is you sit.
My evidence, in contrast to his is all anecdotal and perspective, challenging for an econometrician.
Often I refer him to the antitrust suit brought by the US government against the “monopoly” that Microsoft had, an action that was finally binned by President Clinton. The equilibrium argument suggested that the Microsoft empire would endure and continue to crush competitors, and that the brakes had to be imposed externally, when the reality is that Linux came along, followed by the rise and rise of Apple, emergence of Android, and within a very few years Microsoft was relegated to the role of an also-ran, albeit one with a mountain of cash.
Enterprises of any type and size that fail to accommodate the ecosystem metaphor, preferring to rely on an emerging equilibrium that they can leverage is in for a long wait, and ultimately a visit to the insolvency practitioner, unless of course they are a public body in which case the just continue to cry poor, and suck at the teat of the taxpayer.
My conclusion therefore is that there is no new equilibrium on the horizon, continuous and pervasive change is with us and the only thing that will change is the speed of the changes themselves, and our ability to respond.
Planning to disrupt your apparent equilibrium, the existing business model that has served well is a confronting undertaking, but a necessary one for commercial survival. A depth of experience an understanding of the traps can save much heartache, so I would be happy to apply my experience to help navigate a path.
Oct 6, 2014 | Communication, Governance, Marketing, Social Media, Strategy
Seeking a simple metaphor to explain how SEO fits into a digital strategy to a “digitally challenged” client running a successful small business, I struck upon the map of the London Underground.
If you look at the map, there are stations on single lines, stations with several lines running through, and stations with multiple intersections, some to other networks outside the underground, busses and British rail.
At any time, there are people in various stages of a journey. Some are waiting on a platform, some travelling towards the underground entry and exit points, and some on a train going to some predetermined end point of their journey.
Imagine now that every person had a descriptive tag attached, which was stored waiting for a request about that person, that could be read, and communicated to anyone asking.
SEO calls this process of asking for a location and description as “Crawling” and “Indexing”.
Each piece of information, if it has been appropriately tagged, or described by the person putting it onto a site, is “indexed” by the search engines, and when someone types a search request into a box, the engine crawls through the indexed material and returns a link to the location and description of the item to the searcher.
Back too the metaphor.
Each person with the tag on the underground, can be found, and returns the requested information to the enquirer. Location, what they are wearing, who they are, what they look like, with links to others who may be with them, and where they are going.
There are just two dimensions to having an effective SEO strategy.
- Get the technical stuff right, and this can be really complicated, and to the novice, even many professionals, is challenging. Find someone you trust to get it done for you.
- Have a strategy and action plan, without which you will be lost irrespective of the quality of the SEO.
Back to the underground metaphor. You never (perhaps rarely, a late night can make a difference) climb onto an underground train without knowing where you are going, and what the best route is under the circumstances that prevail.
Why should it be any different for an SEO strategy?
