Hints & Lessons to help your Business Succeed

This is Part 1 of a 3-Part advisory for those wishing to start their own business or who are already running one and want to do everything possible to ensure success.  Millions of people have been furloughed over the last 16 months which has allowed them to re-evaluate their work/life balance, start new businesses, and is adding to labour shortages as many refuse to return to the daily slog of an employed corporate wage-slave.

I have compiled these notes from my 30 years’ experience of running my own businesses and seeing literally hundreds of companies, large and small, through my consultancy work.  I hope and trust that you will find it, or some of it, informative.

PART 1 – Lessons Learned (in no particular order):

Not understanding, or not accurately preparing, the financial statement:  No sports team would compete without a precise way of keeping score. But, incredibly, many companies operate without having accurate financial statements that owners fully understand.

In one case, the company controller didn’t understand the difference between cash and accrual accounting.  A more common mistake is carrying old inventory on the books at inflated values, masking the company’s true financial health.

The lesson: Make sure your financial statements are current and accurate, or you risk flying blind. Reports & Financial Statements should be prepared monthly, and no more than 10 working days after the month end and must include cashflow updates, which are crucial, as well as Treasury Management which is vital in today’s market conditions   An understanding of macro-economic trends will help position the company and its products to meet the challenges of rapidly changing market parameters.

It is important to recognise that financial statements are HISTORICAL and useless for determining a projection into the future.  “The past is no valid indication of the future”.   A properly formulated BUSINESS MODEL, which includes budgets and forecasts, will allow monthly results to be measured against the budgets and initiate the critical cashflow projection updates required to give early warning of impending liquidity risk going forward.

Many profitable companies fail because of cash shortages resulting from growth and successful trading in general.  They literally exceed their credit limits before management are even aware of a problem.  The result is a continual fire-fighting exercise, wasting resources, and driving the company into a spiral downward to ultimate distress.

Keeping money-losing customers: Some customers simply aren’t worth having. They place too many demands on management time or negotiate pricing targets that invalidate standard, internal cost disciplines.  Yet companies desperately fighting for revenue often hold on to them, miring themselves in a downward spiral of unprofitability, and excusing the tactic as “gaining market share” or “ reaching for critical mass”.  Don’t be misled, only large, monopolistic corporations are stable enough to price competitors out of a market.

The lesson: Get rid of them now. “Shedding money-losing customers is vital to work towards stable operations in the future. Always remember and apply the 80/20 rule: 80% of your profits come from 20% of your customers.  This doesn’t mean dump them all but start here and survey them carefully including contact and communication time and cost.

Not understanding costs: Turn-around experts have a joke about the misguided entrepreneur: “We’re losing money on every job,” the fellow concedes, “but we’ll make it up on volume.”  This is a common attitude among struggling companies that don’t know how to calculate their costs or unable to realise how important it is to use effective cost management systems and production control Manufacturing Resource Planners (MRP)

The Six-Sigma company philosophy can equally apply to an SME albeit within a reduced data set.  TQM should be at the core of any company’s ethos.  The Japanese concept of “Kaizan” (Continuous Improvement) applies to all enterprises small, medium or large.

Unless constant cost management is in force the company can’t know which products or services are boosting the bottom line and which are dragging it down: i.e. whether prices need to be raised or cost centres reviewed.

The lesson: Understanding your costs is imperative. If you don’t know, take a crash course in modern cost accounting or hire someone who can do it for you! Check out:

http://en.wikipedia.org/wiki/Kaizen       http://www.valuebasedmanagement.net/methods_kaizen.html

Not having a formal Organogram: With no clear chain of command, organisations become less effective.  Companies often stand or fail on the efficiency of their internal systems.  Customers become extremely frustrated when negotiating intractable paths to answer their enquiries which often results in loss of business.

This is an area which is mainly addressed by ad hoc implementations of inadequate or inappropriate information flows designed, not by a systems specialist, but left to the inexperience of department managers.  A systems audit starts with an Organogram and ends with flow-charts to ISO systems standards.

An example of a simple organisational fault is an American company that was cited for failing to comply with FDA regulations but they did have an organizational chart.  However, when the company’s Director of Governmental Compliance was questioned together with the Director of Quality Assurance as to who was responsible for ensuring FDA compliance, neither had any idea which individual was accountable.  When one was chosen to be in charge of the next FDA inspection they gave the company its first clean “bill of health”.

The lesson: Companies can’t perform effectively without clear lines of authority and responsibility together with internal system structures. If missing, a ‘blame’ culture develops, as management seek scapegoats for system failures: “Good systems don’t fail, People do”.  Always have a current Organogram and have it published on the ‘About Us’ tab on the company website. A regular systems audit is vital because systems are dynamic and by nature are constantly changing.

Failing to control expenses and conserve cash: Every company should create a plan to see how long the company’s cash will last at any given timeframe, and then take whatever steps are necessary to make sure it doesn’t run out in the foreseeable future. Cashflow projections over one year ahead are about as far as a company can reasonably predict and these should be updated each month based on actuals.  Much will depend on the nature of the enterprise because manufacturing, distribution, services etc require different systems.

Controlling costs doesn’t always involve laying people off, but more often it means stopping unnecessary expenditures.  Lay-offs are a last resort because loss of experienced and qualified personnel impacts on the company’s effectiveness.  Besides fancy cars, companies need to moderate their spending on equipment they don’t need or has little commercial value/return and avoid pandering to inappropriate management ego-trips often masked by imaginary ‘market’ justifications.  The hubris displayed recently by the likes of the Banking cartels illustrates this classic failing.

The lesson:  Cash is ALWAYS king!  As the greater recession and credit crunch have shown, it’s critically important to hold under review all expense items by operating prudent accounting standards ensuring that precious resources are not being wasted or lost.

Quality execution of a great idea should not exclude Sales & Marketing: Success, in my experience, is the relentless, quality execution of a great idea. The need is to combine the stellar execution by people of an innovative idea for the greater chance of success.

Success is about execution by people, an idea cannot create itself but people do need an idea, a goal and a vision first, to realise successful outcomes.  Execution is the combination of people and an idea into an effective outcome.  Being too reliant on either the idea or the people creates vulnerability from the start.

Failure can be instigated by either incompetent people and/or poor ideas.  But the fact is, it is rarely one or the other.  Either a great idea poorly executed or bad idea well executed is problematic.  ‘Failures’ are more about the successes to be found in them:  Warren Buffet knows a thing or two: http://www.brainyquote.com/quotes/authors/w/warren_buffett.html

The lesson:  An idea alone is not enough.  Regardless of how technically effective the product might be it will require the selection and molding of group, capable and experienced, to form the core of the senior management team to take it profitably to market.

How often have you heard of the “Better Mousetrap” concept, where the entrepreneur is so taken with his innovative idea that he assumes that people “will beat a path to his door”.   Sales & marketing skills are crucial and it is notable that a survey revealed that the constituents of typical boards of directors of FTSE corporations lacked sales and marketing experience. https://www.aihr.com/blog/create-skills-matrix-competency-matrix/

Next week, Part 2 will detail the 10 Commandments of common business risks.

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Author: Austrian Peter

Peter J. Underwood is a retired international accountant and qualified humanistic counsellor living in Bruton, UK, with his wife, Yvonne. He pursued a career as an entrepreneur and business consultant, having founded several successful businesses in the UK and South Africa His latest Substack blog describes the African concept of Ubuntu - a system of localised community support using a gift economy model. View all posts by Austrian Peter