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Challenges of Budgeting and its real value

Business owners and managers feel the need to prepare a budget, but very few actually appreciate the rationale behind the whole act of budgeting.

This was the main topic discussed by members at a recent meeting of the Business Exposure Group.

Should you have a formal business budgeting process, and ask yourselves why do we prepare budgets.

  • To assist in planning
  • Motivate and measure staff
  • To plan changes to your business / changes to your marketplace
  • Create objectives for the year and KPI’s
  • Address issues and problems
  • Provide financial forecasts
  • Consider investment requirements

However, if you have a mature business is there any point in budgeting when it will be much the same as last year.  A budget is not a forecast.  A forecast is a prediction of the future, whereas a budget is a planned outcome of the future.  Members were in two minds regarding the value of formal budgets.

A budget should be an ongoing process, not just a once a year routine.  Research shows that 87% of budgets are not used in reality, so is time spent preparing worth it?

Perhaps it’s better to always discuss financial decisions with your team.  Ask …

  • Does this align with our culture
  • Is there another solution which is better for our customers, even if more expensive
  • Is there something less expensive that provides the same value
  • Is the timing right
  • Do we really need to make this expenditure at all
  • What is the worst that could happen

Getting the employees acceptance of the budget is important.

  • When setting targets should they be aggressively challenging or easy to achieve?
  • What you don’t want is budget padding where some people introduce slack so their budget can be easily achieved
  • Setting high targets can result in loss of staff motivation
  • Allow staff to have some input of what they are measured on

Structured planning is the answer to improve profits, reduce costs and increase ROI.  Don’t allow yourself to get bogged down in the day to day problems of the business, make time to look at the bigger picture.

An important consideration when planning your budget is to allow room for flexibility, as quite often brilliant ideas and projects come up which have not been factored into the original budget, and it would  be wrong to discount the opportunities.

Be prepared to make changes to the budget as the year progresses; if money needs to be reassigned then don’t be afraid to alter it.  Budgets can be flexible.

One of the members of the Business Exposure Group stated ‘We abandoned the traditional budget.  We believe sound business decisions should be based on what’s best for our employees, our customers, our operation and whether the decisions will help us in the future – not on a budget’.

When setting budgets the members suggested taking into account the following.

  • Rolling 5 quarter forecasts eliminate the distortion caused by having financial incentives to meet a fixed target for a single financial year?
  • 13 week cash flows are better and easier to keep updated to the ebb and flow of your business and provide a better picture of reality to make business decisions?
  • A budget really helps you do a better job of belt tightening during recent difficult trading
  • Resource allocation should be about putting funds behind the right high value opportunities.

Our members left the meeting with lots of new ideas to put into practice in their own businesses.


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Building a Cash Management Culture

Do you manage cashflow or do you just rely on being careful?  Do you have a formal strategy for improving cash flow?  Do you have a cash management culture?

These were questions posed to members of the Business Exposure Group at their recent meeting.

82% of business failures are as a result of poor cash management.  60% of businesses have inadequate cash flow.  In many industries cash is difficult to access which creates problems for you to remain competitive, maintain financial stability and pursue growth.

But, how do you encourage a cash flow discipline in both good and difficult trading times.  Do you link compensation to achieving specific cash flow targets?

During the meeting our members came up with the following points:

Use email to send invoices rather than post, this should speed up billing and collection.

Reduce error rate on invoices.

Don’t wait to invoice at the end of the month, and have a regular schedule to follow up on all collections

Ask for a deposit or milestone payment.

Incentivise customers to pay faster by offering discounts.

Exhaust current stock and delay expenses.

Request better supplier payment terms.

Finance purchase orders.

Sell or lease idle equipment

Turndown or postpone work

Don’t pay early, pay electronically and on the last day the payment is due.

Sometimes more flexible payment terms can improve your cashflow more than a bargain basement price, so don’t always focus on the lowest price when choosing suppliers.

Arrange a line of credit from the bank, even though you don’t need it immediately.

Ask suppliers for extended payment terms.

Ask you best customers to accelerate payment.

Offer clients fixed rate retainer packages for some of the work, this way you get paid up front.

Suggest payment by monthly direct debit, instead of by cheque.

Offer finance as part of your product package to ensure that you get paid on time.

Operate a ‘just in time delivery’ to eliminate dead stock.

Offer discounts on lower demand products.

Source items from low cost countries, but beware you may need to pay upfront and buy in large volumes, so it may be false economy.

The popularity of financial software has made cash management easier, but as difficult as it is for business owners to prepare projections it is one of the most important things that have to be done.  But, does an educated 3 month cashflow forecast work in reality, and should you continually review your projections? All members agreed that you should have a line by line projection for every significant outlay in the month.

A further problem is managing cashflow in a seasonal business which is never easy.  You need to clearly identify the highs and lows of the yearly cycle and be confident that your projections are realistic.

One of our members commented:-

‘To our surprise we were called by our bank for a meeting shortly after we filed our annual accounts.  We were seen as high risk, despite being profitable, having sales growth and cash in the bank.  We were told that we would have to pay higher interest rates and would have restricted access to funding.  The problem was inadequate cashflow.  So, we reduced debtor days by 5 days (75 to 70) and inventory by 15 days, which improved our negative cash position by 60% and restored our relationship with the bank’.

This subject created a lot of debate amongst members of the Business Exposure Group and they went away with additional ideas of how to improve the cash management in their businesses.

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Are you controlling growth – or just letting it happen?

Part of any business owners dream is to have rapid growth and an influx of business.  But increased demand puts pressure on your systems, people and cashflow.

So, how do you handle an influx of business?  Have you been able to maintain the same level of customer experience?  Have you made any changes in how you service your customers?  Do you have a strategy for growth?

This was the topic discussed by members of the Business Exposure Group at our recent meeting.

Some of the barriers to growth are – lack of business plans / muddled marketing / running the business in the same old way / meddling and misspent time / wrong objectives based on just sales / no financial strategy and poor controls.

Check your systems, processes and procedures are up to date and adopt a proactive management approach with a quality control system where everyone uses the ‘same scripts’.  The ability to grow must be influenced by your willingness to devolve certain decisions to staff.  You must have a strategic plan for the short, medium and long term growth of the business.

To achieve growth – invest in ‘safe bets’ / identify strategies with a good probability of success / start with core business and eliminate secondary products on a regular basis.

Good information equals good decisions.  Can you deal with a sudden influx of orders with no way to fulfil them?

First of all spend time finding out what is causing growth and understand why your company is suddenly getting more business, as this is could be important to many of your future decisions.  It is also important to understand the reasons why business is slowing down.

One way to overcome barriers to growth is to invest in staff development.  Try to plug the skills gap in your business to move your business up a level.  Identify staff responsibilities and make sure you employ and retain the right people.

Be careful not to expand too quickly, look at whether you are growing to be more profitable or is it growth for growths sake.

Many fast growing companies change their goals too often; they never quite complete a plan before starting the next one, and because of this will get into all sorts of difficulties when business growth stalls.  It’s important to retain the culture of your business when taking on new staff.  Be careful not to let them dilute the personality of your business.

Ask yourself when looking at growth:

  • Do I have the qualities and diversity of people
  • Do I have systems in place
  • Do I have the ability to delegate
  • Do I have enough cash

And finally, ensure that it is not your mind set that is holding your business back.

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Planning for a downturn in Business

Strengthening your business doesn’t just involve financial management, it includes strategies to maintain and broaden your customer base, keep morale high amongst staff and improve business practices.  Chamber of Commerce figures show that three quarters of SME’s are concerned about the economy but few have plans in place to protect their business, if business takes a downturn for the worse.

Have a plan which outlines a comprehensive menu of cost savings which could be implemented in a downturn.  Adapt products to be more suited to customer’s current needs, diversify to protect from the loss of a significant customer.  These points were posed to members of the Business Exposure Group at their recent meeting.

Cash equals survival, does this need to take precedence over profit if business goes awry.  Having a contingency plan to produce short term profit, despite a drop in revenue, can make all the difference.  A decline of 10% in revenue could wipe out the entire bottom line and most companies have a relatively narrow margin for error.

So it is important to develop your forecast on optimistic, realistic and worst case scenario basis.  But, who does?  Businesses generally fail because problems are noticed too late, so thinking about vulnerabilities and opportunities early on can be a big advantage.

Identify and maintain your strengths and your best customers.  Identify your highest-margin customers and understand what you are doing right for them.  Instead of cutting costs, be ready to shift resources to retain high margin customers and continue to be creative in how you can add value for your customers without increasing costs.  Look through your costs and identify what’s inefficient, what’s nice to have, what’s there historically, and what isn’t creating value like it used to.

Be ready to take a knife to anything that isn’t adding value.

So, how recession proof is your product or service – is it a necessity or a luxury?

Quite often banks have a level of credit granted but some levels may no longer be required, which may mean you should move them to other areas.  If business is good consider increasing your line of credit and establishing new credit facilities, even if you don’t need them at present.  Perhaps look into unconventional sources of finance as a fall-back.

Look at speeding up working capital to release cash.  If sales fall can you respond so as to avoid excess stock?  Review your sales forecasts, keep an eye on your stock inventory and reduce the number of slow moving products.  Look at other sources of income such as sub- letting part of your premises.

Review and delay your expansion plans and the purchase of high ticket items.  Categorise your company’s assets into, underperforming v high performing, and strategic v non-strategic.  Try to lock prices with your suppliers to stabilise margins.

Look at buying optimistically or defensively a competitor to stop them falling into the hands of another competitor.  Monitor advertising by competitors, if they are cutting down now is your chance to do more.  It’s equally important for your business to find new markets.

In conclusion, the best time to prepare for a downturn is when the company is operating well.  Plan ahead so that if needs be you can react in a controlled fashion.

Above is a snap shot of the comments made during the discussion at the Business Exposure Group meeting.

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Has the ‘Sales Machine in your Business had its day?

Many businesses have a sales machine, designed to replicate the star performer.  But recently sales have been caught off-guard by a dramatic shift in customers buying behaviour; longer sales cycle time, lower conversion rates, less reliable forecasts, reduced margins.  Has selling become harder and why?

This question was posed to the members of the Business Exposure Group at their recent meeting and the following points were discussed.

Process driven sales fall short because it gives the sales rep no room to exercise judgement and creativity when dealing with highly knowledgeable customers.  Sales team should not just compete on price.  It is not a good idea to have a price driven quick sale as opposed to a longer sale that offers a better solution and best value.  Support your sales team rather than direct them; give them greater latitude. ‘It’s not the journey but the destination we have to focus on’.  Reward the sales team for long term focus rather than short term deal volume.  Do not let sales reps simply sell products rather than solutions, purely to boost their figures.

There is now a new world of sales

Customer has a definite need Customer is uncertain
Find someone with authority to spend Find someone open to change
Demonstrate value in your solutions Disrupt the customers thinking and assumptions

Perhaps the answer is to have adaptive sellers who challenge customers with disruptive ideas and offer unexpected solutions-‘Insight selling’.  Demand should be created early in the sales funnel rather than responding to it later on.  Instead of making the sales rep work through a checklist of sales activities focus instead on the customer’s behaviour, and let the customer acknowledge that the status quo is not working.  Verifying whether a customer is open to change is a prerequisite to pursuing a sale.  It’s not enough to do a demonstration; you need to first establish with the customer that the existing approach is underperforming and that a new solution is necessary.

Large sales driven organisations monitor sales reps by KPI’s, especially cycle times and closure rates, smaller businesses can and should be more agile and flexible.  We can track and report on a customer’s actions rather than on the sales reps activities, which would encourage the reps to focus on achieving outcomes with the best possible solutions.

Originally sales was about scheduling times with the decision maker; determining if they have a budget for the purchase and sending a proposal in writing.  Now, find out if the customer has agreed that status quo is unsustainable; does the current approach expose them to risk; how much is in their budget; can we help the customer think creatively about funding if money is not available in this year’s budget.

The Institute of Directors state that only 17% of existing sales people score high on the competencies required for ‘Insight Selling’.  ‘Hire people not in sales, but hire people who have good critical thinking and are willing to sell’.

If you used to recruit as follows –

‘Wanted experienced professional looking to maximise earning potential in a fast paced competitive sales organisation’.

Change this advert to

‘Wanted critical thinkers looking for an opportunity to exercise their judgement and assume significant responsibility for business growth’.

Businesses that continue to embrace the sales machine process are watching their margins fall.    Our Business Exposure Group members agreed that it’s better to hire good people, create an empowering environment and then get out of the way.

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Should we be ready to embrace Artificial Intelligence?

Historically SME’s tend to hold back in the face of new technology.  But with Artificial Intelligence the rules are different and holding back can be dangerous. ‘Think big, start small’.

What do we mean by Artificial Intelligence for small businesses, was the topic discussed by members of the Business Exposure Group at a recent meeting.

The history of technology is; Mechanics, Electronics, Information Technology and now Artificial Intelligence.

With Artificial Intelligence we can

  • Evaluate customers and understand how much they are interested in buying from us before we talk to them.
  • Fix problems for customers before problems even become obvious.
  • Have the understanding to show customers more of what they want and be right about it more often.

However a member of the Group said ‘Artificial Intelligence is the next shiny thing, but until you can show me how it’s really going to work day to day in my business – I’m out’!

Artificial Intelligence has the potential for a low cost accessible way to get insights from data faster, enabling businesses to make better decisions.  It is there to support the workforce, not replace it.  Tasks that require information from multiple sources to make timely decisions are great candidates for experimenting with Artificial Intelligence.

But, how can Artificial Intelligence help your small business?

with Automation – it can prepare invoices / update customer records / send targeted promotions

with Customer Communications – chat bots, so that the frequently asked questions can be answered

with Staff Solutions – Artificial Intelligence personal assistants can arrange meetings / stay on top of deadlines / arrange business travel

with Email Efficiencies – Google smart reply scans the contents of your emails and suggests suitable replies

Many businesses have started using Chatbot, but many people still prefer to speak to a living customer service rep rather than a Chatbot.  But the advantage of a Chatbot is that you don’t have to hang on for ages waiting for a call to be taken.  Artificial Intelligence driven Chatbots are perfect for answering the most common questions that companies get asked time and time again leaving your staff to focus on the more pressing individual cases.

Artificial Intelligence gives you competitor advantage and it is more appropriate for back office functions.  60% of SME’s in the group felt that they were not yet ready to adopt Artificial Intelligence.  They felt it was too complicated for what was needed.  Yet for some small businesses, with limited time and resources, the ability to work smarter and automate basic tasks could be a life saver.  So, spending hours sorting through spreadsheets, hunting down leads or tweaking marketing campaigns manually could now be a thing of the past.

SME’s with up to 20 employees cite ‘gaining better insights from their data’ as a top technology challenge, yet only 30% use analytic solutions.  Business apps not only automate time consuming repeatable tasks, but also help detect problems and predict outcomes.  Many members of the Business Exposure Group are already using some of these apps.

  • Zero Accounting – Artificial Intelligence for accounting – Allows you to get insights into longer term decisions not just book keeping.
  • Quick Books – Which clients owe me money, it then tells the system to send reminders to clients to pay overdue invoices.
  • Translation – Microsoft have developed a real time translation system in Skype to help bridge the language barrier during web conferences.
  • Crayon – is a market intelligence platform that uses machine learning to scan millions of data sources, everything from web pages to customer reviews to tweets and it tells you everything it finds. did a competitor change how they are advertising a product / did they make an important change to their website.

Artificial Intelligence and machine learning solutions offer small businesses the means to offload mundane tasks to machines so that people can focus on more creative, value added activities to help their companies grow.

What is clear is that Artificial Intelligence is the future and any contemporary business must start to embrace the opportunities created by this next level of technology, because very shortly our competitors will, and business will get even tougher.

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Are Annual Staff Appraisals worth it?

It’s the first quarter of the year and time for appraisals.  Second only to firing, business owners cite appraisals as the task they dislike the most.  Is anyone a fan of appraisals or is it old fashioned nowadays.  A once a year review is too late and often comes as a surprise to the employee.  How can people judge an entire year of work, some of our members felt that they were a waste of time with forced ranking eliminating great people and damaging the business culture.

This topic was discussed by our members at a recent meeting of the Business Exposure Group.

Are there any benefits of performance appraisals?  Is it just documenting what is already known.  Should we feel obligated to do appraisals just because everyone else does them?  70% of businesses conduct appraisals only once a year, but are appraisals just for the employer to clarify and articulate their vision.

Often an appraisal is just based on opinion and not on performance measurement.  It can undermine harmony and fail to encourage personal best performance.  Disagreement over judgement can create conflict that can fester for months which is counterproductive.

Most of our members felt that appraisals should be separate to the annual wage rise. “Appraisals should be a fair validated way for salary reviews / record of low performance when we let someone go / way of monitoring effectiveness of the manager”.

But for some it is political correctness gone mad.  In sport you have a winner 1st, 2nd, 3rd.  So, why is it such an issue in the workplace.  Rather than talking about what the employees have learned and how they can grow, they instead resort to a number out of 5.  The most valuable part of an appraisal is the development planning conversation; what can be done to improve.  Yet, this is often left to a small bit at the end.  And, if that happens, then the appraisal just becomes an HR box ticking exercise.

A regular ‘performance management’ system is better than a yearly appraisal.  People are inspired by positive constructive feedback, and the appraisal process almost always works against this.  New ways could include:-

Feedback rich culture for all employees

Separate discussion about performance from career development

Let employees create their own goals

Force managers to give ongoing feedback

Force employees to self-assess

Encourage high performance

Set goals regularly. Quarterly goals in businesses with performance management show 30% better returns and those that do monthly goals get even better results

Some business owners questioned whether it is worth the cost, eg a manager costs £50 per hour, employees £30 per hour.  So say 3 hours each time allocated = £240 x say 20 staff = £5K in total to appraise 20 employees.  Apart from taking up too much time, it can also be unpleasant to rate someone.

An appraisal / performance management certainly has value in building relationships between employer and employee. In many cases, it is the only time an employee gets uninterrupted access to their employer.  One of our members commented that when appraising one of his employees they stated ‘In 10 years of working this is the first time anyone has even bothered to sit down and tell me how I am doing’.  But, if we don’t do performance appraisals well, then we are better off not doing them at all.

These meetings are where you formalise the performance of the employee, not where you spring bad news on them.  Forget feedback – it invites defensiveness.  Use feedforward, it focuses on what you want the employee to do in the year ahead.  It focuses on how they can do better, not what they have done wrong.

Employers are now starting to use cloud bases appraisals.  The technology of sharing relevant performance will turn performance management into an ongoing process.  It’s about targeting a specific area of weakness – not a career path, and it’s about inviting constant feedback from a variety of stakeholders who can have constant input into the work development of our employees.

Above are just some thoughts on how best to monitor individual staff performance!



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