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Performance Problems

The full title of this book by Kristen Cox and Yishai Ashlag is

Stop Decorating the Fish: Which problems to ignore and which problems really matter

In my review posted to Amazon.co.uk, I gave it 2 Stars.

Here is my review.

Nice idea, disappointing delivery

I thought this was a very good idea but, as soon as I opened the kindle book, I realised there is a problem. It’s not in the normal kindle format but instead, a two page pdf style book in landscape format. This has the advantage of presenting the diagrams and images fairly well but the disadvantage that the text was a little too small to read easily and I couldn’t highlight sentences of interest. [continue reading…]

in Other Business Books

If your business is stuck and your performance has stalled in terms of sales and profit, or worse if things have turned down, you need to take action.

The first thing to ask is…

Do You Know Why Your Business Is Stuck?

In detail? Meaning you have identified specific causes?

Or have you made an assumption based on gut instinct. If so, beware. These attributions are often wrong.

Do You Know What To Do And How To Do It?

For change to happen, you need three things:

  • To know what to do.
  • To know how to do it.
  • To have the commitment to take the necessary actions.

[continue reading…]

in Business Problems And Mistakes

Right from the start of my career, I’ve been fascinated by the idea of helping turn around businesses in trouble. When I was being interviewed as a trainee accountant in 1981, I expressed interest in the firms’ business recovery departments.

My career as an employee had its share of highs and lows. I was seconded to a start-up company in a group and had the true “cradle-to-grave” experience as I eventually closed it and sold off the assets. I was also the Finance Director of a business that found itself caught in a savage price war and I’ve never seen profit drain away from a business so quickly.

When I had to write a dissertation for my MBA, it seemed obvious to choose a topic that looked at how small businesses in financial difficulty might be rescued before collapse. It involved extensive research into the causes of failure and how businesses can achieve turnaround and I really threw myself into it. So much so that I had to ask for a six month extension. When finished, the dissertation was received a Grade A Distinction, which meant it qualified to be permanently bound and placed into the Manchester Business School library.

I’m telling you this because one of the interesting things thrown up by my research was the issue of causal attribution and how business managers and owners deceived themselves, at the risk of the future survival of the business.

Let’s have a look at what I discovered. [continue reading…]

in Business Problems And Mistakes

When you have a problem as a business owner, it’s very easy to feel unsure about what you need to do next to improve your business.

You feel stuck (see symptoms of being stuck) and it’s hard to get unstuck on your own.

Quite simply, you’re too close to see things objectively.

This makes it hard to move from the symptoms to the underlying problem so the temptation is to try to cure the symptoms again and again.

It’s like playing whack-a-mole. [continue reading…]

in Business Problems And Mistakes

The Symptoms Of Being Stuck In Your Business

Sometimes you know you’re stuck because you have a problem going around and around in your head without reaching an answer. Other times, you or your business might suffer from some of these symptoms:

  1. You’ve lost the feel good factor of being your own boss.
  2. You feel conflicted about your business, as if you’re being pulled in at least two directions at the same time..
  3. Profitability is lower than you want.
  4. Cash flow issues regularly arise like being paid late by customers or having to fend off suppliers who want to be paid before you’ve got the money.
  5. You get to the end of the day and feel as if you’ve acquired more new jobs to do than you’ve completed in the last ten or twelve hours.
  6. Your employees seem to create more problems than they solve. Morale is down and you might have lost or be in danger of losing your best employees.
  7. You know your customers are disgruntled because you can’t give them the service they demand and you want to give.
  8. You’re unsure where you should focus the time you do have for business improvement in the future.
  9. Customers continually encourage you to cut prices just to keep their business, let alone increase it. You’ve lost ground on the factors that used to make your business attractive to customers because it was different from your competitors.

[continue reading…]

in Business Problems And Mistakes

What Is A Struggling Business?

I’ve designed my business to help business owners who are struggling.

That begs the question…

“What is a struggling business?”

It’s one that is performing at a level below the business owners realistic expectations and desires.

The business owner (and his or her family) is having to make sacrifices in the way they live their lives. [continue reading…]

in Business Problems And Mistakes

Why Business Growth Can Cause Financial Problems

It’s ironic that after years of a struggling economy and firms doing whatever they can to survive, a big threat lies in the signs of recovery.

That’s because growth can cause financial problems.

It’s another reminder of the adage:

Turnover is vanity, profit is sanity but cash is reality.

As A Business Shrinks, Working Capital Was Released Back Into Cash

When businesses traded as the economy went into recession, profit reduced and some may have even slipped into the red before overheads could be trimmed back.

However, it’s likely that they received a cash boost which more than compensated for the loss at the bottom of the Profit and Loss Account.

Working capital is normally defined as:

  • Stock and work in progress (or inventories); plus
  • Debtors (accounts receivable) and payments in advance; minus
  • Creditors (accounts payable) and other obligations to pay in the future

The way money flows across these elements in the balance sheet is known as the working capital cycle. Money invested in working capital increases as the business grows and reduces as sales revenue declines.

Provided stock turn (inventory turnover), debtor days (days sales outstanding) and creditor days (days purchases outstanding) remain consistent, the change in working capital is inevitable.

This may have been an unrecognised benefit of the hard times.

The problem will become very clear if the economy picks up and carries businesses with it.

If you’re a service business and you sell person hours rather than products, it’s likely you will have some kind of work in progress that can grow quickly as business grows.

This represents work down for clients but not yet invoiced. Because your main cost is labour, your potential cash problems may be even worse than for a stock business. You don’t have the benefit of delayed payment terms as your employees need to be paid each week or month.

As The Business Grows, Working Capital Increases

Depending on your terms of trade, you know that if you sell this month, you won’t get paid for two, three or four months time.

That timing difference between goods going out of your stock and money flowing into the bank causes problems.

If you think the increase in demand is going to continue and not be a one-off, you will want to replace what you’ve sold and increase your stock.

You will buy more.

This is the systemic effect of changes in demand that ripples through the supply chain and unfortunately amplifies the effect.

If you’re not familiar with this effect, please read

The Beer Game: Systems Thinking When Systems Bite Back

This can over-exaggerate the growth which causes demand to be stopped dead in its tracks as customers realise they are seriously over-stocked.

Is The Cash Problem Industry-Wide Or Company Specific?

If everyone is experiencing growth, then the problem is likely to be widespread.

The impact on individual companies depends on:

  • The length of their own working capital cycle. The shorter the better.
  • Their relative profitability. Profit will eventually put money into the bank so businesses with higher profit margins will have less of a problem than the lower profitability businesses.

Both factors can be measured in relation to sales revenue:

  • Working capital to sales %
  • Profit before tax to sales %

If growth isn’t spread throughout the industry, the individual business still risks the same growth in working capital and cash crisis. There is also the risk of price wars which carries very different risks to long term profitability.

In fast growing businesses, this shortage of working capital is known as over-trading and has caused many seemingly successful businesses to suddenly collapse into bankruptcy.

What Can Be Done To Manage The Cash Problem Of Business Growth

The first suggestion won’t surprise you.

Do a cash flow forecast and update it regularly.

Importance Of Cash & Cash Flow Forecasts

Look for ways to reduce your working capital cycle.

  • Can you reduce the stock to sales revenue?
  • Can you collect your debtors (accounts receivable) faster?
  • Can you negotiate delayed payments to your suppliers (accounts payable)?

The first sign of an increase in demand from your customers might not seem to be the appropriate time to squeeze their credit terms. In fact, you might be tempted to do the opposite and agree to their request for extended terms.

Be careful.

Just as an upturn in business can put your cash flow under pressure, so it can with your customers.

There will be plenty of businesses who survived the recession but can’t survive the upturn when it comes.

My advice is to credit check every customer whose non-payment would cause you the slightest difficulty.

It’s not infallible but it gives you information to make decisions.

Stick to credit limits and combined with your agreed credit terms, actively manage your customers’ debts. If necessary, take action on overdue debts.

If you try to sneak extra credit from your suppliers by delaying their payments, I recommend that you monitor this creditor stretch. Your bank balance and cash flow forecast are no longer showing the underlying position.

If creditors suddenly tighten up (as they hit their own cash crisis) or even go bust and you have to find a new supplier who holds you rigidly to agreed terms, your cash management can change dramatically.

Look at your stock / inventory levels and make cautious decisions about increasing minimum and maximum stock levels. These should be based on the lead times for supply and the variability of demand.

It might be worth paying a small premium in price to buy from a company who can delivery the next day rather than in four weeks time for some proportion of your supplies.

The last issue to consider is the profitability of the growth.

Again, at the first hint of a big order after lean times, it can be very tempting to offer a big discount to make sure you get it rather than your competitors.

Talk it through with your management team. Pay particular attention to the margin you’ll be left with. Is the prize worth a few cash management problems? How will competitors and other customers react if they discover this low price offer?

Low profitability makes the cash problem from growth more likely. Reducing prices from a low profit base can be suicidal.

Remember, turnover is vanity, profit is sanity, cash is reality.

What Do You Think?

Have you experienced the financial problems that come from growth?

What happened? What did you do?

in 1 – Your KPI, Business Problems And Mistakes