Saturday, 22 September 2018

Breaking up is hard to do

Small business is a bit like a family. 

We probably spend almost as much time with our work colleagues as we do with our real families - often in a crowded office, working (hopefully) towards the same goals, sharing successes and less successful moments and occasionally falling out

So as a business owner when someone decides to leave it can get emotional. Of course it happens. Of course people are entitled to do what is best for them. But that doesn't make it any easier. Someone has worked for you for many years, you have tried to develop and nurture them and they are liked by everyone in the team. You didn't see it coming.

In a big corporate if someone leaves there is no drama. HR step in, plans are made, vacancies are advertised, agencies are notified. The leaver is patted on the back and leaving drinks are planned. The business quickly moves on and the gap is filled.

In a small business one person leaving might be 20% or 10% of the workforce. Replacing that individual is often costly and time consuming. They know your values, ways of working and your customers know and like them. The business owner who may have stepped back a little and is enjoying more free time outside the business may need to roll up their sleeves and get stuck in again. It's not easy

But it can also be an opportunity. A good time to restructure and reenergise the business by bringing on other team members or bringing in new talent.  When I look back at times we have lost 'key' people over the years, after the initial change and disruption, the business has kicked on and ended up in a better place than before. It can be a spur to fix underlying issues which may have been a trigger for this individual deciding to leave.

I guess it's the emotional cycle of change - shock, hurt and disappointment are often the initial feelings. In time (and it may be weeks, months or even years later) there may come a gradual feeling of acceptance that it was all for the best.

Thursday, 13 September 2018

Why I like financial forecasts

Most of accounting is about compliance or looking backwards

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.