Business plan – why the journey is more important than the destination?

‘A goal without a plan is just a wish.

Antoine de Saint-Exupéry – French writer and pioneering aviator

What is a business plan?

It is a formal statement of future business goals and a plan for reaching those goals.

In their 2017/18 SME Research Report, Australian financial and business advisory  HLB Mann Judd found a staggering four in five businesses do not have a working business plan. Of those with a business plan, only one in three regularly spends time refining their plan. Similar results were found in the UK  in 2015 in a survey by Barclays Bank. Only 47% of all UK small- to medium-sized enterprises (SMEs) had a formal written business plan.

Should this be of concern?

Yes.

Failing to plan increases the likelihood of failure, whether in business or at a personal or professional level.

What should be in a business plan?

A business plan should commence with a vision, mission and values statement. It should set goals, realistic objectives and attainable targets. These targets should also be stretch targets to challenge management  and include strategies as well as a plan of action.  A business plan is not static. It must be a dynamic living document, providing a mechanism to resolve problems and maintain profitable growth.

What are the benefits of having a dynamic business plan?

Change is inevitable. A dynamic business plan can provide a framework to manage internal change and to  meet the challenges and opportunities of external change. The process of developing a business plan commences with a Strengths Weaknesses Opportunities Threats analysis (SWOT). The SWOT, if performed well, will identify the opportunities and threats to the business and its strengths and weaknesses. My clients tell me the best SWOT sessions should be conducted by an external professional facilitator, who does not necessarily have an intricate knowledge of the business or industry. They are less likely to have internal business agendas or conscious or unconscious biases. The best SWOTs are derived from a well-facilitated process.

How can a business plan fit into the annual running of the business?

In writing a business plan, some of the greatest value is derived from the time spent thinking about the business – understanding its background and the external and internal aspects of the business and industry. A SWOT is a good example of this process.

The next step is to write a business plan. There are many different models and templates that can be used to write a business plan, and the choice of model  is a matter of personal and professional choice. In my experience, the best plans result from a team effort – which includes input from key managers and provides greater scope for involvement and commitment. Even as the business owner or CEO, you may not be  the smartest person in the room.

The ongoing  value of a dynamic business plan is in monitoring the plan. I use the model below  which breaks down the plan into 90-day projects, 1-year goals and a 3-year  vision. This is aligned with the annual budget.

 Dynamic Business Plan

The business plan is presented in manageable and achievable bites, like eating an elephant. At monthly management meetings, 90-day projects are monitored to check progress towards the overall vision. Small projects build towards the 1-year goals, which in turn form part of the 3-year vision. The power of this approach is that those involved can measure the progress against the plan and are therefore more committed. At the same time, financial performance is checked against the annual budget. If circumstances change, priorities can be easily adjusted. With our logistics business, our goal was to be recognised as the pre-eminent provider of floor-ready merchandise services for suppliers to major retailers. When the retailers established distribution centres in Asia, we were forced to change our strategy to providing full warehousing services to SMEs.

Remember: business planning – like life – is a journey, not a project.

Do you have a business plan for one year or three years?

 

So who were Burke and Wills?

“No expedition has ever started under such favourable circumstances at this”.

Robert O’Hara Burke – leader of Burke & Wills Expedition

Yesterday over 160 years ago, watched by 15,000 cheering people, 19 men, 26 camels, 23 horses and six wagons loaded with 20 tonnes of supplies, including 80 pairs of boots, a cedar-topped oak desk with matching chairs, a bath, rockets, a Chinese gong and six tonnes of firewood, left Royal Park in Melbourne heading north. It was the first expedition in Australia to use camels for transport. This was the start of the famous Burke and Wills expedition. Sponsored by the Royal Society of Victoria the expedition was attempting to be the first to cross Australia, from south to north and return. By the second day at Essendon, only eight kilometres from Melbourne, three of the six wagons had broken down.

It was the best equipped expedition in Australia’s history, sponsored by a Victorian Government, flush with the wealth from the Gold Rush, and the Royal Society of Victoria. It was led by an Irish-born police officer, Robert O’Hara Burke.  Initially the second in command was George Landells, but he left the expedition less than two months later following disputes with Burke, so, William John Wills replaced him. The first night, Burke rode back to Melbourne to see Julia Matthews perform at the Princess Theatre as he was infatuated with her. It is alleged that Burke’s main motivation for leading the expedition was to win Julia’s heart and her mother’s approval. It took the expedition two months to reach Menindee in western New South Wales, even though it took a mail coach just over a week to make the same journey.

Burke, following a questionable army career where alleged gambling debts meant he had to resign his commission, joined the Irish Constabulary. When dissatisfied there, he boarded a ship for Australia. With the Gold Rush in full swing and the resulting chaos, and a shortage of police he managed to secure a position as a Police Inspector. He gained a reputation as an eccentric, a gambler, a risk-taker, and a strict disciplinarian with a “talent” for getting himself lost. Through connections and lobbying Burke somehow got himself appointed as the leader of the expedition. Burke had no knowledge or experience in managing an expedition and had never travelled in the Australian Outback. Wills in contrast, was a surveyor and scientist and was considered by his friends as dependable, rational and intelligent.

By June 1861 over eight months later, nine of the original 19 men had died, including Burke and Wills. When it became apparent that the expedition was in trouble, four separate expeditions went into the Australian interior and not one person lost their life.

So, what went wrong?

It was obviously a well-equipped expedition, backed by a government and a Royal Society.

By the time the expedition reached Cooper’s Creek in central Australia, the outer limit explored by Europeans it was early summer. The sensible action would have been to wait until after summer when the severe desert heat had subsided. However, Burke decided to make for northern Australia with three other men to beat a rival expedition from South Australia, led by John McDouall Stuart. Burke instructed a party to wait behind for three months. In the searing summer heat, the expedition walked up to 30 kilometres a day until they reached the north coast of Australia. By then, the animals and men were exhausted. Instead of spending time recuperating they headed back, not before letting some of the camels go which could have been used as food.

On the return journey, the men became exhausted and began to run out of food. One of the men, Gray died, and they began to eat the remaining camels. By the time they reached the Cooper’s Creek depot over 4 months later, the depot party, who were starting to suffer from scurvy had already left, ironically in the early morning of the day they arrived.  Malnourished and exhausted they were too weak to catch the depot party heading south. The survivors’ meagre supplies soon ran out and despite trading their fishing gear for some fish, they failed to befriend or observe how the local the local aboriginals were able to hunt and gather food. Burke had little respect for the local people and in one incident fired over the heads of some aboriginals who tried to offer them food. Just over two months after arriving at the depot, both Burke and Wills died of starvation. Only King survived. He was taken in by the local Aboriginals.

What management lessons are there for managers in the failure of the Burke and Wills expedition?

Here are three lessons I think we can learn from Burke and Wills.

  1. Leadership – the lack of sound leadership often leads to failure. Clearly Burke was a brave man, clearly irrational and mentally unfit to lead such an expedition. Moreover, bravery is not an alternative to experience and leadership.
  2. Planning – there is no substitute for sound planning. Right from the start the expedition was poorly planned. It had too much equipment, much of it not needed. Travelling in the Australian Outback in summer with its extreme temperatures was ludicrous. Furthermore, Burke had no bush skills and left a trail of confused orders and wasted equipment. The 20 gallons of lime juice to prevent scurvy was dumped early in the expedition leading to the depot party suffering from scurvy. In contrast explorer John McDouall Stuart, Burke’s rival in crossing Australia was an experienced bushman. He carefully planned and after several exploratory expeditions in previous years, successfully crossed Australia in 1862
  3. Bureaucracy – Governments and bureaucracies do not lead to the most appropriate outcomes. Flush with government money and with issues of egos, arrogance and prestige, the Royal Society selected an expedition leader who was clearly unsuited for the job and who purchased inappropriate equipment. For example, why would you need six tonnes of firewood, a bath and cedar-topped desk?

If you are interested in learning more about the expedition, I recommend the following book:

“The Dig Tree”, by Sarah Murgatroyd 2002

Retaining long term good customers…

‘Customer satisfaction is worthless. Customer loyalty is priceless.’

Jeffrey Gitomer – internationally renowned expert on sales and customer loyalty

How many sales executives are given sales targets for new customers rather than nurturing and maintaining current long term customers?

Too often in business today, the focus is on finding new clients – often at the expense of existing clients. Generally, there are two types of salespeople with different personalities. They can be best described as either hunters or farmers. In the business sales process, they have different roles. A hunter’s role is a sales role – find new clients. A farmer’s focus is maintaining accounts and developing long-term relationships with existing customers – an account management role.

Attracting new customers is a challenge and, although it can be rewarding, it involves planning and hard work – and it costs money. International consultants Bain & Company found that the cost of attracting new customers was seven to eight times more expensive than retaining existing customers. They also found that an increase of 5% in retaining current customers could increase profits from 20% to 80%.

While acquiring new customers is important, retaining current profitable customers is a far more cost-effective strategy. Listening to current customers and actively seeking their feedback provides an opportunity to improve service, develop new services and provide a new source of referrals.

Remember: over 65% of customers leave due to indifference.

Do you have a system in place to nurture and manage current profitable customers?

I was providing advisory services to a business who were faced with two of their largest customers threatening to leave. There had been a history of poor service and strained relationships. Both client businesses were headed by difficult and often unreasonable personalities. Careful analysis of each business showed that one was not growing and was unprofitable to service, whereas the other was growing and profitable. To the credit of the business’ general manager, and despite pressure from the owner, he took action. While it forced the unprofitable customer to leave, at the same time he developed a strong working relationship with the other customer – which resulted in the signing of a new contract with increased rates. The customer also recommended the business’s services to another company. This is a good example of successfully managing an existing profitable customer.

Are farmers more important than hunters as salespeople?

No.

It depends on the business’s objectives. Both are needed for a business to grow. It is very important to maintain the current profitable customers, as it is cheaper for the business and offers other opportunities to improve and expand both services and products. The emphasis is on ‘profitable’ customers as, according to the Pareto Principle, not all customers are profitable. Making and maintaining sales need not be a difficult task. It requires an understanding of the business and must be aligned with the business’s plan and goals.

Do you know who are your most profitable customers?

Why are they the most profitable?

Which customers are you not making money from?

The Charge……the lessons

“ With bayonets drawn, they charged the town, they were a fearsome sight

But they had fulfilled their orders, they took the town by night”

From the poem “The Wells of Beersheba” by Warren Eggleton

105 years ago during World War I, British, Australian, New Zealand, French and Empire troops stormed ashore at Gallipoli in western Turkey on 25th April. The plan was to seize control of the strategic Dardanelles Strait and open the way for their naval forces to attack Constantinople, the capital of Turkey and the Ottoman Empire. The campaign failed. The Turks never succeeded in driving the Allied troops back into the sea, and the Allies never broke out of their beachhead. After eight months of bitter fighting the peninsula was evacuated in December 1915.

On 25th April, each year ANZAC Day (the acronym ANZAC stands for Australian and New Zealand Army Corps) is commemorated in Australia and New Zealand with marches and ceremonies, even though the Allies were defeated. This year due to the COVID-19 pandemic, ANZAC Day will not be publicly celebrated, for the first time since 1916.

Ironically Australia’s first great World War I victory, the Charge of Beersheba that ended the Battle of Beersheba is barely remembered or celebrated. It is considered history’s last great cavalry charge and provides some great lessons for managers.

Beersheba (now Be’er Sheva, in modern-day Israel) is situated in desert terrain and was a strategically important town. Here the Allied advance into Palestine was blocked as it was protected by over 4,000 well-armed Ottoman Empire troops in trenches. Beersheba an important transport hub had water wells that were vital in the desert for both men and horses.

The battle for Beersheba began at dawn on 31st October 1917 when the British infantry began attacking with artillery and air support combined with infantry attacks. By mid-afternoon the British had failed to capture the town. The situation had become serious – horses and men needed water. In the late afternoon, looking at a potential defeat the order was given to the Australian Light Horse to charge the Turkish trenches protecting the town.  800 mounted Light Horsemen, armed with bayonets not cavalry sabres, charged over 6 kilometres of open ground towards Beersheba. Initially the Turks opened fire with shrapnel. This was ineffective against the widely spaced horsemen. They then used machine guns. which were quickly silenced by British artillery. The charge caught the Turkish defenders off guard. They failed to allow for the speed of the charge and had little time to recalibrate their weapons for close range fighting.  The Light Horsemen, whose horses could apparently smell the water, jumped over the trenches. Some men dismounted and attacked the enemy with rifle and bayonet from the rear. Others galloped ahead and captured the town and its vital water wells.

If the Allies had failed, over 60,000 troops would have been stranded in the desert without water. If they didn’t prevail, men and their horses who had already been without water for two days faced dying of thirst. It was also the first major victory for the British army over the Turks in World War I. More importantly, the Battle of Beersheba was a precursor to capturing the city of Gaza. The city barred the way north to the important cities of Jerusalem and Damascus. Within a week Gaza fell, and the Allies marched north routing the Turkish troops. The campaign to secure the Sinai Peninsula ensured the Suez Canal remained open to Britain and its allies and led to the collapse of the 400 year old Otterman Empire.

So, what are the lessons for managers from the Charge of Beersheba?

Here are three lessons, that as managers we can learn from the Charge of Beersheba.

  1. 1. A leader needs to be flexible. The Australian commander, General Chauvel had planned to make a dismounted attack on Beersheba but as evening approached, ran out of time. The alternative was to make a cavalry charge. The traditional strategy was to dismount and attack with rifles from a distance. In the open desert this would have made the Light Horsemen vulnerable to shrapnel and machinegun fire. Clearly a different approach was required so a new strategy was devised. The Light Horse attacked like a cavalry unit, with bayonets in their hands like sabres, thereby catching the Turks by surprise. Their speed and determination outweighed their limitations of protection and weapons.
  2. Planning. There is no substitute for sound planning. Fighting a war in a desert required careful planning as Beersheba was surrounded by desert. This posed obvious logistics challenges for moving troops and equipment, particularly mounted troops. British army engineers established forward supply dumps of water and reopened wells that had been blocked by the Turks. This secured sufficient water for the troops and horses as they moved across the desert. Although the town was protected by a system of trenches, there was no barbed wire on one side because the Turks believed they would not be attacked through the desert from the southeast. The British-led forces, by careful planning and doing their homework  proved this to be a false assumption. Logistics planning and doing your homework is critical whether in warfare or in business
  3. People. Success in any organisation depends hugely on the quality of the people. The importance of experience and training is critical. Many of the Light Horse men involved in the Charge of Beersheba were battle hardened from fighting on the beaches at Gallipoli, and most were tough Australian bushman who were experienced horsemen and used to tough living conditions having also trained extensively in Egypt for desert fighting before the Palestine campaign. The Turks led by German officers, were poorly trained as evidenced by them failing to set their rifle sights correctly and not being able to adjust to the changing circumstances.

What do you think the management lessons from the Charge of Beersheba are?

If you are in Australia or New Zealand on ANZAC Day please don’t forget to remember the sacrifices made by service men and women in your country’s defence.

Note: if you are interested in reading about this event in more detail, I would recommend reading the following books:

Paul Daley, Beersheba, Melbourne University Press, 2009

Roland Perry, The Australian Light Horse, Hachette Australia, 2009

Management lessons – why the Schlieffen Plan failed: the What vs the How

“In western Europe the military machine, with its thousands of wheels, costing millions to maintain, cannot stand still for long. One cannot fight a war for one or two years, from position to position, in 12 day long battles until both combatants are completely exhausted and weakened and forced to sue for peace. We must attempt to defeat our enemies quickly and decisively.”

Count von Schlieffen, German strategist, 1905

What was the Schlieffen Plan?

Long before 1914, Germany was preparing for war. In 1905, Count von Schlieffen, the German Chief of Staff completed what became known as the Schlieffen Plan in which planning commenced in 1897, based on the theory that Germany would be at war with France and Russia at the same time.

The aim was not to fight the war on two fronts at the same time, in the West against France and in the East against Russia. The plan was to first defeat France within 6 weeks by invading through neutral Belgium and capturing Paris before Russia could mobilise its army. After the fall of France, German troops could then be diverted to the East and attack Russia.

The Schlieffen Plan failed spectacularly as World War I became a war of attrition, bogged down in trench warfare in eastern France and Belgium, well short of Paris. The Germans believed that neutral Belgium would not resist and that the British through their 1839 treaty with Belgium, allegedly described as a ‘scrap of paper’ by the German High Command would not come to the support of Belgium. Furthermore, the Germans believed that there was no need to fear the British Expeditionary Force (BEF) which the Kaiser called a ‘contemptible little army’.

What are three management lessons from the failure of the Schlieffen Plan?

Lesson 1: inflexible and arrogant leadership leads to failure

Apparently over 80% of the German soldiers were not professional soldiers. The schedules were prepared by a military hierarchy for fit regular soldiers under ideal conditions, not for non-regular soldiers who were not for physically or emotionally fit to march 30 km per day with heavy packs. The German High Command refused to modify the plan when the advance faltered. There was no Plan B

Lesson 2: under estimating and not understanding your opponents and their tactics

The BEF was not expected to support Belgium but they helped delay the plan. This led to atrocities being committed often by the inexperienced and untrained German troops. The bureaucratic minds of the German planners justified these actions as nothing should stop the plan’s operation. These atrocities in turn assisted in portraying the image of the ‘evil Hun’, which mobilised public and political opinion, first in Britain and later in America, indirectly allowing America into the war several years later.

Lesson 3: not understanding and taking into account logistics in your plan

The Schlieffen Plan was partially successful in the first month of the war, as it resulted rapid penetration into France. However, the speed of the initial advance created its own problems, placing a strain on the supply lines as well as placing great strain on the German troops, where the majority were travelling on foot and also having to fight on the way. They became fatigued, sunburnt and developed blisters reducing their fighting capacity. The daily needs of feeding the hundreds of thousands of horses and men, and providing ammunition was a logistical nightmare (logistics in your business). The army moved away from the railheads at 30 kms per day resulting in the supplies being brought to the front by horses. It is estimated that the German army needed 3,900 tonnes of food and fodder each day, clearly a difficult task when overwhelmingly horses were used for transport. Clearly logistics limited the operational success of the plan.

There were other reasons for the failure of the Schlieffen. However, as managers that we can learn from the three management lessons from the failure of the Schlieffen Plan.

In conclusion, the questions you need to ask yourself are:

Post note: The Russian Army mobilised quicker than the Germans had predicted which meant a war on two fronts.

How NOT to celebrate Christmas…

“Every Who down in Whoville liked Christmas a lot

But the Grinch who lived just North of Whoville did not!

The Grinch hated Christmas! The whole Christmas season!

Now, please don’t ask why. No one quite knows the reason.

It could be, perhaps, that his shoes were too tight.

It could be his head wasn’t screwed on just right”

From the book “How the Grinch Stole Christmas!” by Dr Suess (Theodor Geisel)

So, what relevance does a children’s book of rhyme about a grumpy, solitary creature who tries to end Christmas by stealing Christmas-themed items from the homes of a nearby town Whoville have for managers?

In previous Christmas blogs, topics covered  included the need to have rules on behaviour, the importance of taking the opportunity to celebrate, thank staff and display leadership as well as a time for renewal and evaluation and setting the tone for the next year

John Cleese the famous comedian and Antony Jay one of the authors of TV show “Yes Minister” made a fortune from training videos that emphasised what not to do. With the large number of articles on management and leadership easily available today, I find it inconceivable that managers still display appalling examples of how not to do things. In these times where communication is spread quickly through social media it is even more important to ensure communication to staff in particular, is considered and done carefully.

This year I was sent a copy of the following Christmas notice posted on a company notice board.

From the text it would appear there have been problems of behaviour at the company’s Christmas parties in the past. As a manager, what do you think of this Christmas message to staff?

Here are some questions to ponder…

What is the underlying message in this Christmas notice?

Is it positive?

Would this communication help lift employees’ morale and get them working to improve performance?

What tone is set for the future?

What do you think of this company’s culture?

Do you think that culture effects profitability?

Between January 2016 and late 2019, the price of the commodity this business mines rose 40%, however in two of these years this company made losses and did not pay a dividend. Anecdotally it would appear that culture could be a contributing factor to less than satisfactory financial performance.

My advice to managers and business owners is “don’t be a Grinch-like at Christmas”. It is traditionally period of goodwill. Celebrate the occasion display graciousness, thank your staff and their families…

Take advantage of the opportunity, provide hope for the future and display leadership.

And to all the readers of this blog, thank you for subscribing and I wish you and your families the compliments of the Season and best wishes for the New Year.

What is a processionary caterpillar manager?

 “What matters in learning is not to be taught, but to wake up.”

 Jean-Henri Fabre – father of modern entomology

In the 19th Century, Jean-Henri Fabre the famous French naturalist, conducted an experiment with Pine Processionary caterpillars. He arranged the caterpillars in a continuous loop around the rim of a flower pot, where each caterpillar’s head touched the end of the caterpillar in front of it so that the procession formed a full circle. He then placed the favourite food of the caterpillars in the middle of the circle of caterpillars.

What happened?

The caterpillars went around and around in circles formed by the procession, blindly following the caterpillar in front. Despite the food being less than 3 centimetres away, they all died of hunger and exhaustion. All they needed to survive was to change direction to get the food.

The caterpillars were following instinct – habit – custom – tradition – past experience – precedent – opinions – ‘standard practice’ or whatever you may choose to call it..

What are the lessons for managers?

  1. Activity is not accomplishment. How often are you busy, but not accomplishing anything?
  2. Are you “caught in a rut” by following traditional routines, habit patterns, or schedules and not achieving the outcomes the organisation requires to be successful in the future?
  3. As managers, balancing tradition and implementing new strategies is difficult. Success is based on the willingness to plan, fail, learn, and move forward, so the existing strategies support a successful and productive future?

So, are you or your staff acting as processionary caterpillars and mistaking activity for outcomes?

If so, what new ideas and activities are required to ensure continued success?

What habits and activities do you need to stop doing?

What are the three warning signs that a business is on the verge of failing?

“Failure isn’t fatal, but failure to change might be”

John Wooden – American basketball player and coach

Sadly, hundreds of businesses collapse each year in Australia, often owing millions to creditors and employees.

As a business owner or manager, what are the warning signs?

Please remember, we have to be honest with ourselves, have an open mind and put egos and denial aside.

“Confront the brutal facts”. This is what Jim Collins says in his book Good to Great.

Here are 3 warning signs that a business may fail:

  1. Revenue is dropping

As a manager or business owner, measuring revenue and recording it month by month over a significant period of time for at least 2 to 3 years is critical in understanding and managing the business. Many businesses have seasonal fluctuations. For example, retailers’ revenues peak before Christmas and chocolate manufacturers’ peak before Easter. It is important to understand the nature of your business.

Understanding the fluctuation in sales over the year allows you to manage your cash flow.

There is an extremely important principle in business that is often misunderstood:

Revenue is different from sales as revenue is money collected”

A sale is not a ‘true’ sale until you collect the revenue. It is important to have a cashflow forecast combined with sales and revenue recording in order to understand the implications and relationships.

A sudden drop in revenue  could result in a business not meeting their legal obligatory costs such as superannuation payments and tax payments. This is a warning sign that the business is in trouble.

I once saw a business claim to have increasing sales to a major retailer only to find out that most of the sales were on a sale or return basis. This business went broke.

  1. Cash Flow Shortage

Many businesses can be profitable but fail due to running out of cash to pay their creditors. Cash is the lifeblood of any business. For example, sales and profit may be increasing, but due to not being able to collect the sales revenue in time, the business runs out of cash.

Here is a second important principle that needs to be understood:

There is a massive difference between profit and cash.

It is therefore very important to forecast and track cashflow. By using a cashflow budget, the discipline of collecting from debtors monthly can more easily be implemented. Running out of cash is a good indication that a business is in trouble. Debtors who are slow payers and are a significant proportion of a business’ sales can put the business at risk.

Alternatively paying creditors later can significantly improve a business’ cash flow and provide funds for expansion.

In our logistics business we tracked our cash needs 6 months ahead and then tracked them against our actual performance. Wages were over 35% of our overall costs. In Australia, wages are normally paid weekly whilst collecting from creditors takes between 30 and 45 days. A single decision to outsource  our production labour with 30 day payments terms released cash into the business negating the requirement to seek external finance to grow the business.

  1. Opaque Accounts

Sadly, many business owners do not understand their accounts. Many rely on their external chartered accountant to provide them with their profit and loss figures, which are often not delivered in a timely manner. Accountants tend to report profit and loss in terms of tax compliance and rarely do the accounts provide an operating perspective.

There is a third important principle for managing business accounts:

“Variable costs, fixed costs and overheads must be clearly identified in the profit and loss statement”

I had a client whose accounts were prepared and forwarded by their external accountant up to 3 months after the end of month. The business had no idea what was making a profit. They only knew that the business made a profit. Following some discussions and correctly categorising costs into variable, fixed and overheads, we determined that there were actually three businesses or sub-businesses and that only one was making a profit.

We immediately engaged a book keeper, broke the business reporting into the three businesses and set up the accounts to reflect the operating environment. Within 6 weeks, the owner was receiving P&L information within 3 days from the end of the month. In 9 months the business had grown 50% as they could concentrate on the areas where the business was profitable. The owner now knew their gross margins, breakeven points and profits.

What are the lessons?

While the three warning signs of business failure are financial, there are two other non-financial reasons for business failure.

The first reason for business failure is poor management and systems.

They are generally symptoms of poor leadership. Management systems, both financial, sales and operational that are robust, timely and accurate are essential to manage a business both on a day to day basis and for the long term. They enhance management’s capacity to understand what is occurring in the business.

The second reason why companies fail is related to the people in the business.

In particular those in leadership positions. For example, allowing egos to undermine the evidence by believing that everything positive is due to your talents and genius and anything negative is the result of another party or the government.  This approach of internalising the positives of the business and externalising the negatives is not facing the brutal facts. Hubris and exaggerated outward confidence will mask the true situation of the business and hard decisions are not made.

In conclusion, while decreasing revenue, poor cash flow and opaque accounts may be a sign of a potential business collapse, these are often symptoms and warning signs of a potential business collapse.

The three questions you need to ask yourself are:

  • Do you recognise the signs of a potential business collapse?
  • Are your actions and attitudes part of the problem?
  • What should I do now to prevent the risk of my business collapsing?

 

3 Major mistakes business owners make with financial reporting

 

“Stay on top of your finances. Don’t leave that up to others”

Leif Garrett – USA singer and TV personality

Many business owners I meet tell me that their external accountants do their monthly accounts. In fact, one owner had his external accountant and his book keeper on site each week, and another waited 3 months to get his monthly profit and loss statement (P&L) which he didn’t look at anyway.

Did they provide financial reports that helped these owners manage their businesses?

This depends on the type of reports being created.

However, the answer is almost always………NO

What is usually provided is a service to input financial data and/or accounting services required for taxation purposes, that is to meet compliance requirements. The owners would then be given a profit and loss (P&L) statement, showing consolidated revenue less total costs to determine the profit.

Why is this a problem?

This is a problem because these P&Ls are not an operational P&Ls. This brings me to one of my favourite issues with managing businesses. The financial results that are being currently reported do not help in operating the business.

In my experience, there are 3 mistakes business owners make in financial reporting:

  1. Incorrectly categorised costs

Many businesses do not understand the difference between fixed, variable and overhead costs. Furthermore, external accountants generally do not categorise those costs as this is not required for compliance or taxation purposes. For example, it is important to know what your direct or variable costs are which vary with output or sales revenue. By not categorising costs correctly and having them in the correct section of the accounts, you cannot determine your gross margin, sometimes called your cost of goods sold (COGS) and net margin …….which leads to the next mistake…..

  1. Reports do not reflect operational needs

When costs and revenue are not placed in correct place, they will not help operationally. By consolidating costs rather than categorising them, a manager or business owner cannot easily determine which costs increase and decrease with changes in sales, or what their overheads are for operating the business.  It is essential to understand and identify each of the different costs and how they vary with activity. Often a single business has various components or different activities that make up the total business. In one of the examples above, the business was actually three different businesses, second hand vehicle sales, vehicle servicing and second-hand motor vehicle parts sales. This business owner’s revenues were consolidated and he did not know which activity was profitable and which was not…………..which leads to the next mistake…..

  1. Not knowing which parts of the business are profitable

So, did the business owner know if selling second had cars was profitable or whether it was worthwhile to continue to provide motor vehicle servicing?

No.

Therefore, the first step is to identify the different business activities. Once this is done, divide the revenue by activity and then assign to the different business units. For example, second hand car sales, spare parts sales and motor vehicle servicing.

The next step is to categorise the costs by type, variable or direct costs, indirect costs and overheads. Then assign these costs into business units. Overheads will be assigned to the consolidated business, with the P&L looking like this:

By reviewing the P&L, the business owner can see that Spare Parts is losing money and vehicle servicing has a Gross Margin of 63% and is the most profitable with a Net Margin of 48%. Furthermore, Overheads are 18% of Revenue, which would seem high and may warrant further investigation. As Spare Parts is losing $25,000 per year, possible managerial actions could be to increase prices or cease selling Spare Parts as a business activity which would result in an additional $25,000 in profit.

These are examples of what a good management or operations P&L looks like and how managers and business owners can make informed decisions.

Remember there are 3 mistakes in financial reporting:

  • Costs are incorrectly categorised
  • Reports do not reflect operational needs
  • Not knowing which parts of the business are profitable

As a manager or business owner is your operational P&L provided in a format you can use to improve your business’ performance?

 

 

Before you move forward take a look back……..

‘’We do not learn from experience, we learn from reflecting on experience’’

John Dewey – philosopher, psychologist, and educational reformer

Each December instead of releasing my monthly blog on 21st of the month, I release it early in the month giving readers time to reflect before the Christmas ‘rush’. As it is coming up to the traditional Christmas and New Year holiday period in Australia where employees head off for holidays, it is a good time for managers and business owners to reflect on the previous year.

While it is normally considered a good time to plan for the year ahead, by setting goals and targets ready for the resumption of work after the holiday period, being well-rested, with batteries recharged ready for the challenge of the new year, it is also a good time to “look back”, that is to reflect on the previous year.

Is looking back bad?

No.

If you are not reviewing the previous 12 months you often lose perspective on what has been achieved and what has not worked out as planned. Here are three questions you should ask yourself and your team in looking back over the previous year.

  1. WHAT did we do well last year and WHY?

While it is important to recognise and celebrate wins, it is just as important to ask the questions

–  ‘How did we have these wins?’

– ‘What were the actions that we as a team took to get this great result?’

Note the reasons down, share these with the team and have a goal to continue this strategy.

  1. WHAT did we do badly this year and WHY?

Sadly, many of us blame others, and make excuses as to why things fail. It’s time to put our egos aside and be honest as to the causes of the failures.

– Where did we fail?’

– ‘Where did we not strive hard enough?

– ‘Where did we not act like a team?

– ‘When was the customer not put ahead of ourselves?

– ‘What happened and what did YOU do to contribute to that result?

Make a note of the answers to the above questions and ensure that we do not do that again. After all, as managers we are accountable!

  1. WHAT goals did we set this time last year that we did not achieve and WHY?

As Albert Einstein said, “Insanity is doing the same thing repeatedly and expecting different results”, so establishing the same goals and associated actions as last year will most likely give you the same result.

– ‘Why did we set them?

– ‘Why didn’t we achieve them?’

‘- Did these goals really matter?

– ‘Is it different this time?’

Discuss with your team as to whether the goals are still a priority, and should they be the same goals again for this year?

Having answered these questions, honestly and openly you and your team are ready to set goals and plans for the next calendar year.

Does your team have the skills, capabilities, work ethic and behavioural characteristics to be a ‘winning’ team for next year?

To my blog readers, best wishes for Christmas and 2019