Adding capacity

For a growing business, deciding when to add capacity can be a tricky.

Too early and profits and cashflow are adversely affected. Too late and service levels to customers will suffer.

I lean towards adding capacity (in the form of people, space, other resources) sooner rather than later. The boldest businesses have followed this path and for the most visionary it has paid off handsomely. Transport and distribution businesses like railways, airlines and international couriers are good examples. They didn't wait until they had enough customers to justify the investment. They built the infrastructure (in the case of the railroads at significant cost) and the customers followed afterwards.

What about in a small business where access to capital can be difficult and margins are tight? 

I still believe that with a robust plan for future growth, investing early in additional resources is the best approach. If the decision is postponed until the extra resource is urgently needed, this places additional strain on the business and there will be a further delay before the resources are in place due to lead times for recruitment, negotiating leases etc.

For professional service businesses like accountants the extra capacity we need to grow is usually people and space. I still regret to this day that when an adjoining office became available I didn't snap it up but decided it was a little bit too much of a stretch at the time. The landlord said to me, 'Fred, it's a little bit like a farmer where the neighbouring field is up for sale. When it's gone it's gone'. He was right of course.  He ended up letting  it to another tenant who resides happily there to this day. We have had to manage with 'just enough' space and our situation has only eased a little recently as more capacity has become available.

Taking on additional employees ahead of an expected increase in workload can be a challenge. It is also an opportunity however to give them a thorough induction and make sure they are trained and prepared when the rush comes.

If capacity is added early it is critical to ensure that the expected growth occurs to cover the additional costs and to make extra profit in the medium term. That's where the robust growth plan comes in and ensuring that it is delivered.

For a growing business adding capacity just a little bit ahead of the curve makes sense to me. It makes growth more manageable and orderly and I believe will have a more beneficial impact on profits in the longer run.

Getting this right is not a precise science. 

I know from experience that I have rarely regretted taking on capacity too early but I have had regrets and felt the pain where I have waited a little bit too long.

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Every business should have a structure

Many small businesses owners muddle through.

Every day is a challenge to get through the things that come at them. Buying the stock, dealing with a difficult customer, speaking to the bank manager, paying the latest tax bill, sorting out an employee problem and so on. A relentless treadmill of stuff to be done. And it feels never-ending.

There is a better way. 

Michael Gerber in his seminal book about small business, 'The E Myth Revisited', advocates drawing up a structure chart for roles and duties in the business from day 1. 'There's only me in the business!' I here you say. That is pretty typical. A start up may initially just be the business owner doing everything. Even so, Gerber argues that listing what needs to be done and then drawing up a structure chart with the different roles, provides some organisation from the outset.

Initially the business owner will fill every position on the structure chart. Importantly though, they need to wear those different hats at different times and ensure that essential work gets done. The marketing, the selling, the invoicing, collecting the money.

As the business grows some of the positions on the chart start to get filled. Maybe a part-time bookkeeper first, then someone to help in the shop whilst the owner places the orders. Gradually the team starts to take shape and the job descriptions ensure they do the right things.

Creating the organisation chart is not a one-off exercise. It needs continuous review as the business grows and develops. Every now and then it might need a significant overhaul as processes and activities are revised to adapt to new challenges or opportunities.

Businesses that don't have a structure chart and clear roles and responsibilities can still get by and many do just that.. 'Muddle through' as I said in the opening paragraph. They do tend to stay small however and business life can be uncertain and a little chaotic.

So if your business doesn't have a clear structure, do give this some thought.

I came across this quote from a chap called Henry Cloud which kind of sums it up, 'Boundaries are basically about providing structure and structure is essential in anything that thrives'

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Failing is overrated

We see articles all the time saying how great failure is. 

It’s an opportunity to learn the lessons, dust yourself off and do it differently next time. 

Great thinkers and great inventors like Einstein, Edison and Archimedes are quoted. Failing hundreds or thousands of times and then...Eureka! 

Success at last. 

Learning from failure and being resilient enough to try again are of course important and can be a path to future success. This is particularly true when blazing a trail in a new field like inventing stuff or astro physics. There is no roadmap to follow so experimentation is the only way.

On a personal level, learning from failure and trying again is a positive thing. We try some public speaking which doesn’t go as well as hoped, or try a particular approach with a customer or employee which falls flat. Stopping, reflecting, learning and trying something different next time makes perfect sense.

Ok, so I agree that learning from failure has its merits. 

That’s all good but a better and smarter way way in most cases is learning from success. What sets humans apart is access to knowledge and best practice. Observing and learning from successful people, successful teams, successful leaders and so on is a quicker and less painful route in most cases than learning from failure.

So in business we can start up a new venture and plough our own furrow, making mistakes as we go, tweaking, adapting and moving on after each setback. Or we can learn from the best - the Jobs', Bransons, Krocs and Disneys of this world. Or maybe that guy you met at a networking group who started his business at a similar time to you and seems to be doing brilliantly well. What did they do that led to their success? Can you take the best of what they did and sprinkle it around your business?

We can also learn from success by surrounding ourselves with experts and mentors who have knowledge and experience they can share to help us get things right, the first time we do it.

So by all means let's learn from our failures but let's also be hungry to learn from success.

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What business are you in?

A deceptively simple question. 

It was first posited by management guru Peter Drucker who argued it is a fundamental thing which all businesses should ask themselves and consider carefully before deciding on the answer.

An accountancy firm ‘does’ accounts and tax, a restaurant serves food and drinks - simple?

Well...maybe not. 

How that question is answered can shape the culture, behaviours, investment strategy and development of a firm. 

If an accounting firm does accounts and tax -  do they also provide advisory services? 

A restaurant provides food and drinks - to what kind of customer? What kind of customer experience do they create?

Let’s look at some examples. Blockbuster probably thought they were in the video rental business, at least that’s where they stayed. If they had been in the ‘home entertainment’ business might they have diversified or been more alert to the advent of streaming and pay per view channels? Maybe if their definition of the business they were in had not been so narrow we’d be selecting our Friday night TV viewing from a Blockbuster channel alongside Netflix and Amazon?

The classic example of a firm who have an innovative and broader view of the business they are in is Disney. They made the leap from Mickey Mouse shorts to big screen movies to TV to theme parks by being in the business of ‘show business'. To quote the great man, “I never called my work an ‘art’. It’s part of show business, the business of building entertainment.”

We may not all be as visionary as Disney but small business owners should think hard about this question. 

An accountancy firm may well ‘do accountancy’ but they may have a market niche (like dentists or consultants etc) or maybe they are in the business of helping their business customers achieve their goals? 

Many businesses bumble along quite happily without having absolute clarity about what business they are in or maybe having too narrow a focus. Blockbuster survived quite nicely for quite a few years. 

I go back to my opening line. It’s a deceptively simple question.

The answer doesn't have to be obvious. It can give your business a unique identity and purpose.

It may end up defining its future direction and longevity.

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The billable hour is dead!

Or it should, be according to business guru Ron Baker and others. 

But it lives on. Buoyed up by years of habit and entrenched thinking.

Ron is a writer and radio host and one of the founders of Verasage, a US think tank committed to researching and promoting best practice in professional firms. I first came across Ron when I went to my Institute’s conference for accountants working in practice just before starting my own practice 16 years ago. The other speakers at the event were pretty forgettable and Ron stood out as the one with the most radical and authoritative message. His delivery was good too. Confident in his subject and put across with a dry humour, laced with anecdotes. His brilliant book, ‘The Firm of the future’, co-written with Paul Dunn, is 16 years old now but still feels fresh and innovative and full of great ideas.

So in my own accountancy practice I have tried to avoid timesheets from day 1 and reject invoicing customers on an hourly basis. I say ‘tried’ as I haven’t always been imaginative enough to avoid returning to the dreaded billable hour. 

Ron and his acolytes advise pricing based on value. Start with the price and the hours expended and other internal costs really shouldn’t matter to the customer.  Although sometimes it does. Occasionally when I quote a price a customer will want to know how long the project is going to take or afterwards (very rarely) they may ask to see a time log. Maybe for some people their perception of value is still based on how long it took to deliver it? As customers we don’t ask that about cars or the latest iPhone but in some cases we do it seems about professional services.

Value Pricing’ as the term goes is, ‘The highest price a customer is willing to pay for a product or service’. 

Wow! What business wouldn’t want their customers to pay the highest price for their product or service? The important phrase here is ‘willing to pay’. In value pricing both the seller and the customer are happy as they have achieved what is valuable to them.

Lets be clear. This is not about over-charging. In accountancy firms some services like monthly payroll and a basic tax return might be 'commoditised' and the price standardised and set by the marketplace. For more complex advisory work or for a bundle of services where a customer's requirements and perception of value are unique, value pricing can be a win/win for the seller and the buyer.

Getting back to why I occasionally fail with this and revert to the billable hour. It tends to be on projects which are ‘open-ended’ and you don’t quite know what is going to be involved or how much effort and time will be expended. An example might be a tax enquiry going back several years. Under value pricing you would quote a fixed price to achieve certain results and offer appropriate guarantees. I usually ‘bottle it’ and quote an hourly rate and the prospect is invariably happy. Value pricers would argue that the prospective customer is looking for a solution and certainty and a fixed price would be more attractive than an open-ended bill based on time spent on the project. Next time this comes up I will try to be braver and see how I get on.

The accountancy sector is slowly changing and more firms seem to be moving away from timesheets and billing based on these. There are even software products which help firms set prices based on their own set of rules. I have tried these and I couldn’t get on with them. Although I set the rules, the price the software churned out didn’t necessarily agree with my judgement of the where the value point was for my prospective customer or for me. It felt like I was passing the pricing decision over to a machine.

That’s not for me although I can see the benefits of standardisation and rules for pricing. 

But going back to the definition of value pricing, “The highest price a customer is willing to pay...’. How can software decide that unless it is very clever software indeed? 

Value pricing seems to be an art rather than a science.

A dance between the seller and the prospective customer. For the seller to establish the needs and wants of that prospective customer and then address them with a compelling proposition with service guarantees, a certain outcome and a price which reflects the value delivered.

I will be sticking with my judgement for pricing for the time being but who knows, with the progression of AI maybe the machines will take over before too long.

That really would be the death of a salesman or maybe, more accurately, the death of a value pricer

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What's on your 'To do' list?

For a typical business owner it will be a wide range of things.

From the strategic to the tactical. From the long term to the shorter term and the downright urgent!

It strikes me that the contents of your 'To do' list can tell you a lot about how you are managing the business.

If the items on your 'To do' list are leaning more towards the tactical/short term/urgent, you are probably still at the 'Technician' phase of managing your business described by business guru Michael Gerber. You are still very hands on 'doing' and delivering the product or service to your customers. Strategy? Whats that? I haven't got time to breathe never mind think about being strategic!

If your 'To do' list content is more long term/strategic - recruiting a new senior employee, negotiating terms with a prospective new customer, looking at a new IT system to improve effectiveness etc you are probably in the Manager/Entrepreneur phase. You are thinking in the longer term and perhaps engineering how your business can continue without your day to day input. That is a much better place to be for a business owner.

Well that's all well and good but an urgent list is an urgent list and this stuff needs to get done! 

That is true. When I get into overwhelm mode - it happens to us all from time to time, I review the list and set priorities. Is there anything on the list that can be delegated or deferred? With some tinkering, planning and thought the list can be made more manageable.

That sorts things out for the immediate future but what about the longer term? 

If 'overwhelm mode' is the normal state of affairs for a business owner, some time needs to spent on thinking how things might be made more manageable over time. That might need some time out from the business to think things through and work out a plan. An external facilitator can help here to help you look at things afresh and bring new ideas.

So do think about this if you feel trapped by your jobs list. We all need plans and 'To do' lists. They are what move us forward. For business owners, your list should be motivational and moving you towards a longer term goal.

If that's not the case with your list, it's time for action.

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Letting go

Every business owner wants to be set free from their business.

At least they should want this. A business which can run effectively without day to day input from the owner is much more valuable than a business which is reliant on him or her.

Value aside it must be much more rewarding in a practical sense having a business which works for you rather than just being being your place of work. 

That’s the theory. The practice is much more difficult.

If being ‘the boss’ has been your raison d’etre for 10 or 15 years, to morph into someone who is not needed and maybe even gets in the way a bit, is a difficult transition.

Part of the DNA and make up of business owners and entrepreneurs is being driven and busy. Long ‘to do’ lists, not enough time. Demanding customers, challenging suppliers,  employee problems. Stress. Adrenaline.

When you stop being essential to the business its hard to let go of old habits of jumping in, fixing problems and doing things the way you’ve always done them.

So what’s the solution?

Well I’m no expert because I am still fairly hands on with my business. My employees would be the judges of how needed I am. Maybe I’ll ask them. 

But getting back to the solution, I think the first thing is to learn to let go of the guilt. It’s ok not to be busy. It’s your business. You’ve put in the hard work. You’ve built the team. Now let them get on with it.

You can of course put your energy into something else - a new hobby, a new business venture or developing a new stream of your existing business.

If you have managed to find your freedom be sure to celebrate it. It’s a nirvana that many business owners never reach.

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