Thursday, 13 September 2018

Why I like financial forecasts

Most of accounting is about compliance (doing stuff for the tax man) or looking back (looking at financial performance for last year or last month etc)

Much less is about looking forward. From a business management perspective however, I believe this is where most of the value can be gained.

Now one thing we all know about forecasts is that they are likely to be wrong. As the famous saying goes, 'Forecasting is the art of saying what will happen, and then explaining why it didn't!'

But I think it's worth the effort. I had a good apprenticeship on the benefits of forecasting as a management accountant at Tesco Stores, the U.K. Supermarket chain. I was slow however to implement forecasting in my own accountancy business, focussing more on historical management accounts and targets. It was an external consultant who introduced me to his simple forecasting model and it's something I've used ever since.

Basically its an Excel spreadsheet that I update most days and sometimes several times a day which forecasts sales, cost and profits for the financial year. So if I gain a new client or lose a client (not a regular occurrence) or put a proposal to a new prospect or have an unexpected increase in a major area of cost, these all get fed into the magic spreadsheet and out pops my new profit figure

It's great because it keeps me in control and reduces the risk of  being caught out by any surprises. Once set up it takes hardly any time to maintain and I think it is the best financial management tool I have in the business

Henri Poncaire' was a very clever man who was one of the creators of chaos theory. He said, 'It is far better to foresee even without certainty than not to foresee at all.'

If it's good enough for Henri, it's good enough for me

Saturday, 8 September 2018

Value, like beauty is in the eye of the beholder

It's a truism that the same thing will be worth more to some than to others.

For individuals the value of something will also change depending on their circumstances. A glass of water is worth much more if you are lost in the desert than if you are sitting at home watching tv.

Despite this most products and services we buy are a standard price. There might be regional variations but broadly the price is uniform. That makes sense for 'commodity' products and services where there are multiple units and each one is identical or very similar.

Where products and services are unique there is an opportunity for businesses to be more flexible with their pricing. 'Value pricing' is nothing new and there has been and still is much research and debate on how businesses can do this effectively.

The Wikipedia definition of value pricing is, 'Value-based price is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices'.

I like this definition and the key phrase is pricing based on, 'the perceived the customer'. How many of us do this in business? Surprisingly few I think.

Surprisingly, because the thing about value pricing is that both the seller and the buyer end up happy. The seller because they have maximised their selling price and the buyer because they have purchased something at a fair value to them.

One area where value pricing comes into play and has been exercising me recently is selling a business. Value here can vary tremendously between each prospective buyer. Some may see synergies with their existing business or opportunities for improvement that may not be apparent to other prospective buyers.

So the 'game' for the seller and their representatives here is to find out where the prospective buyer's value threshold is. There is an old saying in business, 'How much money did you leave on the table?'. For many sellers it can be quite a lot.

A seller may be pleasantly surprised at an initial offer and be tempted to accept. In most cases though, this is a time to step back and reflect. Put yourself in the buyer's shoes and think hard about what the real value is to them. This could mean that you leave less money on the table and both you and the seller achieve a good outcome. That is worth some time and mental effort I think.

Saturday, 1 September 2018

And it all started so well...

When broken down to its main processes - operations, marketing and finance,  running a business seems pretty straightforward - right?

Operations is making the product or delivering the service,  marketing is promoting and selling it and finance is sending the bills and collecting the money. No problems so far.

So why does it sometimes go wrong? Well of course it's a journey. At the start the business owner probably needs to wear all the hats and do everything. Many people are content with that and the business stays small.

If the business grows the owner needs to transition from being the 'Technician' to being a manager and then the entrepreneur, developing and growing the business. Michael Gerber describes these 3 roles - Technician, Manager and Entrepreneur in his brilliant book, 'The E Myth Revisited'. The E Myth or 'Entrepreneur Myth' is that business owners are entrepreneurs. In truth, we are mostly technicians building a business around our core skills and experience. Gerber argues that to be really successful and grow, business owners need to move on from being solely a technician and ensure they wear the manager and entrepreneur hats too.

If I reflect on the many businesses I have worked with and am still working with, surprisingly few are what I would call real 'entrepreneurial' businesses. By this I mean the owners are focussed, to the point of obsession, on building something big and valuable and they relentlessly pursue this goal. I have worked with a few - some of whom have had successful exits with a pot of money and some where it all went wrong and the businesses failed.

So to go back to the original point. If business is simple - operations, marketing and finance, why did these smart and driven people end up failing?  In almost every instance I can think of, failure came down to a lack of balance. One or more of these key processes was not done well enough. I've seen brilliant marketeers and sales people who sell stuff but don't deliver it, businesses that expand without having finance in place, people who make great stuff but can't sell it and so on.

Those that don't give sufficient attention to any one of operations, finance or marketing are unlikely to stay the course.

Tuesday, 28 August 2018

Sharing out the business cake

Never, ever, under any circumstances give away any shares in your own business. Period.

I'm paraphrasing Felix Denis, the late publishing billionaire here. He believes that business owners and entrepreneurs should hold onto their share capital as their greatest opportunity to retain wealth and as a fair reward for their enterprise and risk.

That's not to say he didn't believe in rewarding his employees. He argued that rather than through shares, this should be done by giving them a fair 'slice of the annual pie' of profits.

As a general rule I agree with Felix. Including employees and others as shareholders adds complexity and creates tensions. It also takes some incentive away from the entrepreneur to drive the business forward.

Are there exceptions to Felix's golden rule though?

I think there can be in cases of succession or exit or in exchange for providing finance and specialist knowledge, skills or contacts (Dragon style) but the entrepreneur should tread carefully and consider the pros and cons before taking this step. Once ownership is diluted things will never quite feel the same again for the founder so my default view is, 'Don't do it' unless there are compelling reasons.

As Felix says, 'Getting rich all comes down to ownership. Every single percentage point counts'.

Of course there is more to creating and running a business than getting rich but his point is well made. As the owner you are the one who has made sacrifices, had sleepless nights, strained your personal relationships, worried about paying the mortgage. If you give away the fruit of your endeavour lightly you may have a long time to regret your decision.


Tuesday, 21 August 2018

Grinding it out

Ray Kroc, the founder of the McDonalds empire has always been one of my business heroes.

I didn't know much about him until recently, apart from the fact that he started McDonalds at the ripe old age of 52. As a late starter to business myself, that was enough for me, along with the ingenuity of the McDonalds concept - simple, effective processes, brilliantly executed can make for a great business.

So I was delighted to stumble upon Ray's autobiography, 'Grinding it out' in a second hand bookshop a couple of weeks ago. It's an honest, fast paced read about his rise to fame and riches. As the title suggests it wasn't an easy ride and success didn't fall in his lap. He earned it.

His work ethic was incredible. Ray was first and foremost a salesman. But he had other attributes as well. Not least he was an accomplished pianist.

In his early years he sold paper cups. Rising at 6am to pound his beat looking for new orders. He finished around 6pm and dashed off to his evening job - playing piano on a radio show. After the 6 to 8 shift he nipped home for a couple of hours to have tea and spend some time with his wife. Then back to the studio for the 10pm to 2am shift!

I've had periods of working fairly hard every now and then but Ray was at another level.

Of course his obsession with business left casualties. He was married three times and had some big business dust ups too. Business came first, rising to the top of his industry selling paper cups and mixers and then building McDonalds.

So why isn't McDonalds called Krocs? Well the McDonald brothers had already opened a successful burger restaurant with the signature attributes of simple processes, well executed and quick and friendly service. They were happy with their one successful store and had no desire to expand. Ray saw the opportunity, did a licencing deal with them and the rest is history. It was a fraught and strained relationship but the McDonalds brothers became rich beyond their wildest dreams when Ray finally bought them out many years later.

Like many super successful entrepreneurs he was multi-faceted. He was tough and driven but also had strong values of honesty and trust and had a knack for creating a strong, loyal team. He was also good at giving his team independence and freedom to make their own mistakes.

So this book in putting some flesh on the bones of Ray's life didn't disappoint. By today's standards he wasn't politically correct but it was a different era and I'll cut him some slack for that. He has left a thriving and enduring legacy and he remains for me a brilliant and innovative entrepreneur. He is an inspiration for me and other over 50s that it's not too late to do something great. Maybe not something as ambitious as a global food empire but something nonetheless.

Monday, 6 August 2018

How to finish big

I've just finished reading 'Finish Big' by Bo Burlingham. 

If you've read Bo's other best seller, 'Small Giants' you'll know that he's a journalist who's passionate about small business and entrepreneurs and loves digging into what makes them both tick.

Bo argues that 'Finishing big' or exiting well from a business is one of the biggest decisions that entrepreneurs make, having profound and far reaching implications on the rest of their lives, but many give little thought to it.

The book is full of absorbing case studies of people who have exited well and those who haven't. The emphasis is on the 'Medium' within the  Small and Medium Enterprise' cohort. So for most business owners these will be quite large enterprises with tens or hundreds of employees and multi million dollar turnovers. For British readers there are some americanisms like ESOPs (Employee share schemes) and venture capital played a bigger part in some exits than it does over the pond.

Although the businesses may differ the issues for the exiting entrepreneurs are very similar wherever they are based and Bo tries to distil the common themes which make for a good exit.

Four stood out for me:

1. Start early

Entrepreneurs need time to plan for their exit and to shape the business in a way which achieves the best outcome. Some of the time is needed to allow for making mistakes - finding the right successor was problematic for example in several of the case studies

2. Think about the exit you want

It's not just about the money. What do you wants to happen to your employees? Are you worried if the culture and values in your business change after exit? What kind of legacy do you want to leave? It's important to think about these things before exit.

3. The best advisors have been through it

This was an interesting one. Many advisors have facilitated multiple sales and the more they do, the better they get. The very best advisors though have sold their own business or ideally several businesses. They have the unique advantage of seeing things from the seller's perspective and Bo rates this very highly.

4. What will you do after?

Somewhat surprisingly, this was one of the biggest issues for the exiting entrepreneurs. Those who thought about it in advance and had something to do after exit, tended to finish big and well. Those that didn't ended up a bit lost, without purpose, full of regrets and unhappy, often for many years.

So I'd recommend 'Finish Big' to all business owners. If it gets you thinking about your exit now rather than when it's too late to finish big, it's a few quid very well spent.

Wednesday, 1 August 2018

A perfect pipeline

I'm not a marketeer but like all business owners who want to grow their business, I do marketing.

The nirvana we search for is a perfect pipeline. A method or methods of marketing which delivers a steady stream of leads, where we know the cost per lead and we know the liklihood of converting each lead or enquiry into a new customer.

If the cost for each converted lead is justified based on the price of your product or service then, Bingo! That's it! Growth plan sorted.

But its not normally that straightforward.

What I've found over the years is that something works for a while - a networking group, google adwords, telesales, a referral scheme...and then it stops. Sometimes this is an abrupt or sudden change. Your brilliant telesales person moves on, Google changes their algorithm, more competition - something happens to make your trusty lead generation star less effective.

Of course when this happens we try and change things. Find out why it has stopped working so well and try and fix the problem. But often tinkering doesn't work. The moment has passed.

So it's back to the drawing board again

I'm in that happy phase now where I've stumbled upon a lead generation method which has exceeded my expectations and is delivering impressive stats

So I'll be enjoying this while I can. I fully expect that just around the corner there will be a glitch. We will tinker and tweak but it may not be the same again

And then the search starts again for the next big thing...