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Posts Tagged ‘small business’

Car Washing and Cash Flow

Car washing and cash flow are connected

Start at the bottom to see realities

Received wisdom says that you should hand wash your car from the top to bottom. You start by rinsing your car and loosening off the dirt. Then you get a sponge, dip it into a bucket of warm water containing that special car shampoo and start to wash the top of the car and work your way down. The problem with this method is that at the end of the whole process you can see where you missed with the sponge by the scattering of dirty patches around the car. It’s infuriating. 

Much the best way to hand wash your car is to start washing it from the bottom to the top of the car. You can see exactly where you have washed or not and you don’t get fooled by by your soap suds dripping over patches of dirty bodywork making them look as though you have cleaned them. It seems odd and I have had occasional mocking rebukes from friends saying I am talking rubbish. But it works.

So, what the heck has this got to do with cash flow? 

Anyone who has ever run a business will know that cash flow is one of the most important aspects of financial planning to get right to enable your business to survive. Get your cash flow wrong and your business dies. You might have orders in the pipeline, purchase orders and sales coming in. But, if the cash is not coming in and cash is going out faster than it comes in then a business that looks profitable on paper will go bust quickly. (If you want an example of a near miss for a business that could have gone bust then read my earlier article about a small business I know that could have easily gone bust).

When you put together a cash flow forecast on a spreadsheet, received wisdom will, generally, tell you to start at the top of the spreadsheet with your sales and other income each month for the first year. You might even forecast your sales or the first few months on week by week basis . Then you are told to write out your variable costs (those costs which increase depending on the number of sales of your product or service that you sell) into the cash  flow forecast for each month. And, then you add in your fixed costs for each month such as your rent, broadband costs, and salaries, for example.

At the bottom of the spreadsheet, using some simple formulas, you subtract your fixed and variable costs for each month from your monthly forecasted sales income. This then gives you a figure of how much cash will come in and out of your business bank account each month. It shows you how much money you need to fund your business at the start-up stage. It is likely that your cash flow will show that more money will go out in the first few months of your business than will come in. This is very important to understand.

But it is wrong. 

By starting at the top with your sales income, you start the whole process of building your cash flow forecast on a false premise. A fantasy. Forecasting your sales income is the most difficult thing to do and starting at the top of the spreadsheet is a massive mistake. You will fall into the trap of entering sales income figures which look right rather than those that are possible. And when you finish putting together your cash flow forecast, you sit back and feel good because your spreadsheet shows that you have a great business idea which is going to make you lots of profits. You start your business full of cheer and six months later you wonder what happened to your great business idea as it collapses around you.

You can avoid this trap. You avoid it by putting together a cash flow forecast from the bottom up in the spreadsheet. Costs to your business are definite. Sales income is a ghost at this stage. You can find out exactly how much everything will cost you down to the last penny. Find a sense of interest and intrigue in discovering your costs to your business each month that others will find baffling. Because finding certainty in your costs is the only sure thing which you can do for your business finances at this stage. 

When you have done this and used your simple formulas to work out your fixed costs and the costs you will incur when you do sell a product, which will be your variable costs, you can begin to work out what you need to sell and when you need the cash to come in to cover your costs. When you know this, you can work out how you will get your sales. This is sales strategy. You can research your potential customers. You can ask them if they would buy your product. You can work out if your product or service is too expensive or too cheap. You can work out what else you will need to do to sell and market your product or service. 

When you know these highly important details, you will know whether your business idea is not just a good idea but something which you will be able to sell profitably. You will save yourself a lot of trouble and money too.  

And why should you believe me? Because I started a business with a cash flow forecast at the top of the spreadsheet and completely overestimated how much I could sell and underestimated when the cash would come in. The business went bust. It was painful but it taught me the right way to plan a business and its cash flow forecast.

So, when you are next planning  to start a business and you are planning your cash flow, take a few moments out and hand wash your car. But do it from the bottom to the top. You won’t miss anything then and you will see that the received wisdom of hand washing cars the other way round is wrong. And then go back inside and do the same with your cash flow forecast.

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How to Win – Focus and Speed

Focus your resources and create panic  

Focus your resources and create panic

When you are in the thick of your business, especially if it is a small business, finding time to step back and take stock of where your business is going is very difficult. You are working in the business, packing boxes or trying to find new customers, or doing the books in the evening that by the time you get time to look to the future and evaluate your strategy, it is midnight and you are shattered. Even the large businesses I have worked in, that had more resources at hand to help them build their sales and profits than I care think about, had trouble taking the time to understand what was going to make them successful in the future. 

In one large business I was in, I recall an internal meeting where a new Sales Director had been appointed to lead our sales strategy for the division. In one open meeting with the sales and marketing teams, he was asking for our feedback about how to grow the business. That was good, but it soon became obvious that the new sales director had no idea about his sales strategy. Phrases he made like “I can see we need broad focus to be successful” filled me with a sense of foreboding that this guy was not going to last long in his position. Surely, ‘broad focus’ means no focus or ‘wide angle’ at the very best. ‘Broad focus’ conjures up images of trench warfare, stalemate and no forwardprogress. 

The word ‘strategy’ sounds so grand that it does not seem appropriate to a small business. In a large business, people often make strategy a far more complicated activity than it needs to be, or they think strategy is just for Generals. Simply put, strategy is how you are going to meet your objectives. Tactics are about what you are going to do to make the strategy or strategies work. 

But everyone needs to be clear about their objectives, their strategy and the subsequent tactics to help them win and few know where to start in my experience. A very good place to start in learning from the past. For instance, a great wartime leader was Erwin Rommel. His brilliance enabled his smaller force to drive the ‘British Expeditionary Force’ out of France at Dunkirk which he did by being very clear about his strategy.  Lord Nelson at the Battle of Trafalgar used a very similar strategy to Rommel decades earlier at the Battle of Trafalgar. 

Both of these leaders overcame their larger enemies by focusing their resources in a small number of locations and driving hard and fast through those critical points. Rommel surged through the Ardennes with fast, mobile forces, encircling the British. Nelson split his fleet into two and charged through the French and Spanish fleets at two points, and both of them created panic and chaos within their opposition. 

So, their strategies were clear. Speed, mobility and concentration of resources into a small number of highly critical locations. No broad focus. Always narrow focus with as many resources as you can spare behind them. This is the same in business.  A small business does not have the resources to ‘create awareness’ in a potential market. A large business equally needs to make sure it specialises in what it does best and uses it resources wisely to support its strategies. 

But strategy is all very well without having a thoroughly good knowledge about your market, otherwise known as ‘intelligence.’ Although we live in a more competitive world than our ancestors in business, we have far better intelligence available to us to understand our markets than they ever did. It never ceases to amaze me just how much you can find out about your competitors, customers and prospects to help you plan your strategy. 

But the point is that the key to winning is focus. Focus your strategy on a small number of key areas and ensure you dominate them before looking to win in other areas. If you try to do a bit of everything in your market, then you will be easily beaten. And if you still don’t feel confident about developing your strategy, then read sometime wartime biographies and learn from the masters.

Think Inside Someone Else’s Box

Think inside the box first

Think inside the box first

 

How many times have you been asked to think “outside the box” at work or on a training course?  Countless times, no doubt. It is a cliché now although it remains a good practice for problem solving. But when you are finding new clients the one thing you need to do is to find out about your prospects or customers and their challenges or opportunities. You have to get to know them, to ‘think inside their box’, so that you get to know what it feels like from their position. 

An example of this from my military experience was learning about an Army officer serving in Northern Ireland who had become the most successful platoon commander to that point in finding caches of terrorist weapons. He and his platoon became experts in finding where the IRA hid their weapons. The officer thought like the enemy and began to understand their methods and soon cracked their modus operandi and forced them to rethink how they hid their weapons.

And today, in a regular business breakfast networking I attend, I heard one business who was thinking inside their customer’s boxes. His business supplied telecom services to small businesses which is a fiercely competitive market. Many of his competitors had far greater resources to market themselves, with slick sales teams and slick marketing. But his competitors failed to live up to their promises of what they would provide and constantly called their customers and prospects to sell them more products even though they had failed them. 

He understood this and some of his competitor’s customers were at the networking meeting and told us how they had been treated. His business revolved around being straight and honest with his customers. He simplified and lowered their telecoms bills and regularly checked whether their solution was working. He found new customers by networking, relating to his customers and by doing what he said he would do. 

And this is where larger business are going to face major problems from now on. Because marketing is no longer about slick brochures and coiffured salesmen. It’s about being useful to your customers and prospects and providing them with an experience that will make them believe you and come back for more. Giving away some of your expertise for free through your blog, web site, through Twitter or at a networking event are just a few simple ways to win against fierce competitors with deeper pockets but less ability to understand the customers. 

So, before you start thinking outside the box, do some thinking inside the box. It will give you a competitive edge without costing you an arm and a leg.

Support Local Business? Why Should I?

shopping

A village circular dropped through the door this morning saying ‘Save Our Shop.’ It is not news. The shop has been under pressure for some time to keep going. The owner recently lost his Post Office income when the Royal Mail, in a ludicrous manner, changed the service from one which was based in his shop to one which is an ‘outreach service’ based in his shop for which he just receives a commission on postal work. He has campaigned tirelessly to keep his Post Office income without success. 

Now, according to the circular from the ‘Friends’ of the Post Office, his income has halved over the last six months which has affected his ability to stock the shelves of the shop. Once this happens in a shop, it is a difficult spiral of descent to reverse. Customers enter the village shop to buy a ‘basic’ product but find that it is not there so they go somewhere else to buy it. If this happens on several occasions, then customers don’t bother to come back because they assume their village shop does not stock it anymore.

I don’t like to kick a man when he’s down. Running a business is tough. You can see that he is not a happy man whenever you go into his shop. He looks drawn and tired. But, he does not help himself. When you enter the shop he is usually listening to his MP3 player. The children get short shrift when they buy sweets. It is not a nice atmosphere to be in when you enter the shop. As the circular said, the shop “is the centre of village life.” But that’s the problem. It is not the centre of village life at all and here lies the problem.

The cliche ‘Retail is Detail’ is true. If you run a pub or a shop, the landlord or landlady or shopkeeper are equally as important as the products and environment in the shop or pub. If the landlord lacks ‘people skills’ then people don’t feel welcome. They can put up with the products being slightly more expensive or not quite the right brand if they enjoy the overall experience of going into the pub.

Several years ago in Oxfordshire, our village shop was going through exactly the same descent into closure as the village shop here. The shopkeeper tried to bring more business by offering a pizza service to the village but he shut his shop at 5-30 which was no good for people who wanted a pizza for supper who were just getting back from work. He complained every time you went in there about how bad business was so you felt as though your small purchase of bread, milk and a newspaper was unappreciated. 

However, a mile down the road was a village shop which was more expensive than our village shop and the supermarkets but the owner was so jolly and always asked how your family was that you did not mind paying a bit more for the goods.

But the worst thing about the desperate pleas for business in the parish newsletter and the circular are that people will only respond to them for a short time and only if they see a change for the better in the place. In the long run, the shop needs to market itself more effectively than just appealing for charity. If it is the ‘centre of village’ then it has to feel like a place in which you would like to spend a little time. The shop needs to use the parish newsletter to send out positive news such as special offers to attract customers to the shop and not as a ‘begging bowl.’ But above all, the owner needs to make you feel good about visiting the establishment. 

Nobody is owed a living. People will buy from people they want to buy from. And these days, shoppers are very sophisticated and they have choice. For a business which faces massive competition from national stores, whether it is a shop or a pub, then their main selling point is the people that own and run them. And if customers don’t feel as though they are getting a good service from their local businesses then they will just buy the cheaper option from a faceless national business.

Small Business Realities & the Credit Crunch

credit-crunch

Running your own business is a tough thing to do. Nevertheless, you can control most aspects of the business, although you may never seem to have enough time to do them thoroughly. You can control how much your product service or costs to make and market. You can control your cash-flow. You can control how much you pay yourself. But the credit crunch has highlighted aspects of a business which cannot be controlled. 

Someone I know well runs a retail lighting business in London and has done so successfully for many years. His family business has a warehouse in the midlands of the UK from where they run their international and mail order business. They have franchises in some stores in the USA too. Business is going well.

He had been considering investing in more property in London for some months before the credit crunch but he could not find anything suitable so he put off the purchase and kept the cash liquid until he found something suitable. However, this January the business had a disastrous run of sales and he had to dip into the cash he would have used to buy the property to maintain their cash-flow. The business also had to let some staff go to make efficiencies. 

Had the business not had this cash, he would have had to go to the bank to borrow the money in the form of an extended overdraft perhaps. Things as they are now mean that, in fact, the bank would not have lent them the money despite the fact that the business has a healthy track record and that the business has good order books into the future. 

Therefore, the business could have folded within a month had he not had the cash reserves to carry them over into a healthy month of sales in February. That is how the credit crunch is affecting small businesses up and down the country and across much of the world. 

No wonder the Government is trying everything it can to encourage the banks to lend money including plans such as owning them, providing guarantee schemes and using “quantitative easing” to get cash where it is needed. No wonder too that there is such a backlash against the rewards for failure which many bankers are receiving. 

Good businesses are folding due to circumstances experienced by my friend and his business because they have one bad month. There are no bale-outs for them.