Pricing for profit

It’s nothing new that different industries and sectors can learn from each other.

In my previous life as a management accountant with a major UK food retailer we learned from ‘Just in time’ supply chains in the car manufacturing sector. Modern computing and more famously non-stick pans were by-products of the space race. So how about accountants learning from builders?

Something which builders tend to do better than accountants is pricing their jobs. They put a significant amount of effort into it. They really think hard about what is involved. What time will be spent by people with different skills and knowledge, what materials and resources will need to be deployed, what stage payments are appropriate, what the possible risks are, what the timeline will be and so on. And the price. Yes they think very hard about the price.

The detailed scope of work and price are presented in a professional proposal and guidelines are included for ‘Variations’. These being the steps to be followed if something unexpected crops up, outside of the anticipated scope.

All very sensible stuff and managed well, it works.

The customer gets what they want at the price they were willing to pay. The builder gets a fixed price with stage payments at agreed milestones to assist with cashflow.

In my experience, accountants aren’t terribly good at this. 

The worst of us still charge based on time. Imagine a builder turning up to quote for your extension and saying, ‘We’ll log our time and materials, see how we get on and we’ll give you a bill when we’re done.’ I suspect this builder would not get much work.

Almost as bad is agreeing the scope of work and price and carrying on regardless, despite the nature of the work changing significantly when the project is underway. The inevitable result of this is an unhappy accountant and ultimately an unhappy customer. Instead of a win/win it quickly becomes lose/lose.

Variations or ‘Change orders’ as pricing guru Ron Baker calls them are the answer. If a builder starts work on your extension and finds special engineering expertise is required to hold up a supporting wall, he doesn’t just grit his teeth and ‘crack on’. He discusses what the additional work involves with the customer and they agree a price before he continues. All very sensible, fair and mutually beneficial. 

Sometimes these conversations about variations can be difficult. The customer expects a fixed price and in their mind, a fixed price is a fixed price. In these cases the customer should be referred back to the scope of work and the assumptions made about the work involved. Polite, informed discussion about the scope and the nature of the variation can help to get things back on track.

In the best business relationships, both parties win. The customer gets a great product or service and the supplier makes a fair return. 

That takes careful management, not just of the project delivery but dealing with variations too.

We can learn a lot from the builders.

www,base52.co.uk

What’s the best piece of advice you’ve had in your career?

We are bombarded with advice from every quarter. 

Inspirational quotes on Social Media from business leaders and life coaches, occasionally from our peers and colleagues, from TV and the print media. Some of it’s good and relevant, sometimes its froth and a distraction.

It got me thinking about the best advice I have ever received. What really stuck and made a difference? 

For me there is one nugget that stands out. it relates to my most recent venture as a business owner of an accountancy practice.

When I left my previous role as an accountant (and latterly project manager) at Tesco head office I was lucky enough to be given the opportunity to meet with an ‘Outplacement’ consultant to help me decide what to do next. I was pretty clear straight away that I didn’t want to get another job but wanted to set up my own business. Talking this through with someone was a big help. One bit of advice my consultant gave me which stood out and stayed with me was, ‘Use your network’.

What she meant was keep in touch with people you already know, let them know what you are doing and ask them (directly or indirectly) to spread the word about your new direction. 

I did this. 

One or two of my ex colleagues came to our launch event. We had no clients so it was friends, family and people who knew us. 

My first tax client was an ex work colleague. My first business client was a chap starting a building firm that had just won a project refurbishing a building where I was meeting some ex work colleagues. I was introduced and he decided to work with us. This pattern continued in the first few years of my new business. Old work colleagues either became clients when they decided to change career and start their own consulting businesses, or they introduced me to someone they knew in a similar position.

16 years on my business has branched out in different directions and we have business clients covering all sectors spread far and wide. I’ve developed and nurtured new networks with business groups, clients, new work colleagues and so on. I still get referrals from old work colleagues though - more typically now these are second or third contacts rather than someone I knew personally. 

A network is a wonderful thing and the tentacles run deep and can be long-lasting.

So I am incredibly grateful for that piece of advice.

It got me started with my new business and has helped to sustain it and keep it growing.

In my current position I see many people starting on a new business venture. Along with advice on business structure, finance, tax registrations, setting up accounts etc I always throw in, ‘Don’t forget to use your network’.

It worked for me.

www.base52.co.uk

Process improvement and paradigms

Business Process Improvement (BPI) was a big thing in the corporate world in the nineties.

It may well still be a thing. I've been out of the 'big' corporate world for a while now so I wouldn't know. It was definitely a thing though. Large consultancy firms promoted it as a way of transforming business fortunes and profits. Smart, young MBAs toured the Boardrooms of the corporate elite with their BPI toolkit of process maps, change management methodology and new organisation charts.

It delivered results. 

I saw first hand as a management accountant at a large Supermarket retailer how reviewing and improving processes could change things for the better. A good example was getting product on the shelves for customers. Historically these had been delivered from distribution depots  on pallets or on 'cages'. The products were then 'hand-balled' from the pallet or cage in the store's backroom onto a smaller cage for wheeling to the shop floor and stocking the shelf. BPI came up with the idea of 'dollies'. Smaller, maneuverable devices on which the stock was loaded at the depots. On arrival to the store they could be wheeled straight onto the shop floor for shelf filling saving a huge amount of time and labour and providing fresher product for the customer.  

BPI was (and I'm sure still is) important. The example quoted delivered significant savings but they were more incremental than transformational.

Another phrase bandied around in the nineties was 'paradigm shift'. Similar and more commonly used now is 'disruption'. A paradigm shift is defined as 'A fundamental change in approach or underlying assumptions.' That is much more radical than BPI and changes the rules completely for a business or a business sector. An example in the supermarket world was the introduction of Internet shopping. The new paradigm removed the need for the 'bricks and mortar' store and delivered the product direct to the customer.'Bricks' and 'clicks' now exists side by side but the change has been and continues to be truly fundamental.

Small businesses need to be alert to the benefits of BPI and the threat and opportunity created by shifting paradigms and market disruption. Businesses organised around clear processes and routines aligned with job roles are much more likely to be successful in the longer run. The best managers and entrepreneurs will continually review and update their processes to ensure they are effective and customer-focused.

Having great processes may not be enough though if there is a significant change in a market. High street bookshops may have ultra-efficient processes and routines but when their customers can have the product delivered to their home for a lower price on the same or next day by Amazon, efficient processes count for very little.

Process improvement has its place for both large and small businesses but the biggest threat or opportunity still comes from paradigm shifts and market disruption. 

Even the smallest businesses need to be alert to the next Amazon appearing on their doorstep.

www.base52.co.uk

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.

www.base52.co.uk

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'

www.base52.co.uk

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.

www.base52.co.uk

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.

www.base52.co.uk.