It’s a horrible feeling. That sudden realisation that the wrong fuel has gone into the car. I’ve done it myself – in fact, I did it the other day. I made the fatal mistake of putting petrol in my diesel vehicle, but fortunately I realised what I had done before starting the engine. From what I understand it is not an uncommon mistake, particularly for those that regularly swap between diesel and petrol cars.
After several phone calls I realised that the only thing I could do was to engage a ‘fuel removal specialist’. Although I had a busy day in front of me I had no choice but to wait for two hours at the filling station for the expert to arrive so he could suck the petrol out of the tank and thus avoid serious damage to my engine. Not only did this cost two hours of my time, it cost $275.00 for the service. A costly experience, but a small cost in comparison to what I would have had to pay for engine repairs, had I started my engine.
On reflection, there are two reasons why this incident happened; I was rushing and I wasn’t truly present in the moment.
Relating this experience to business, how often do employers make a rash decision because they are rushing and not present in the moment? Maybe they make a poor hiring decision and promote the ‘not quite suitable’ person from within the company, or employ an external candidate even when their gut feeling says they shouldn’t – but they do so anyway because it seems the easiest option and they just want to get it done.
I have made this mistake too and it is one that I always regretted. Like the fuel scenario, hiring the wrong person can be detrimental to business – much like putting petrol in a diesel engine. Not only can this lead to a financial cost to the business, it can also undermine the culture within the team. In this example, your investment in an effective recruitment process to ensure you have the right people on board will pay significant dividends over time and will more than compensate for the time and effort you put in.
We live in a busy, sometimes chaotic world, so we need to raise our awareness around this propensity to rush. Rushing affects our ability to be present, it increases our stress levels, it can lead to mistakes and it can inhibit our ability to make effective business decisions. So take your time – and don’t ruin your business engine.
New Zealand has one of the OECD’s lowest levels of productivity and to stand alone in an uncoupled world this is something we need to improve – and a very practical way to start that improvement is by understanding your businesses labour efficiency.
In his book Simple Numbers, Greg Crabtree details what he refers to as the Labour Efficiency Ratio or LER.
It is a simple calculation as follows:
Sales – Cost of Sales = Gross Profit before Direct Labour.
If you then divide your direct labour costs into the gross profit before direct labour, it tells you how many times direct labour is covered. Generally, a score of anything less than two is problematic with the goal set above three.
Let’s look at some examples where direct labour has been managed differently using automation, more flexible staffing and other approaches. Notice the correlation between the LER and percentage net profit before tax.
Note: it is important to ensure all direct costs are captured in your cost of sales. Too often equipment hire, project travel and accommodation and other direct costs are shown in overhead expenses. These should be recoded as COS to give a true contribution margin. Similarly, direct labour needs to incorporate all those in the making of products or delivery of a service. If supervisors spend more than 50% of their time on the job, then include them as direct labour, otherwise show them as indirect labour as an overhead expense.
As you can see from the examples above, getting productivity up impacts on your bottom line.
So how can the LER be improved? Here are some ideas;
Use subcontractors until there is sufficient business to support a full time equivalent
Employ more part time staff and map them to periods of demand
Ensure people know what is expected of them
Remove obstructions to production
Employ supervisors who are independent and capable of effective supervision
Know your error rate – DIFOT (Delivery In Full On Time) for products or IFOTIS (In Form, On Time, In Specification) for service delivery. Target 98% or better
Follow up on all complaints and respond with a ‘Correction Action Process’
Post Audit Quotes & Estimates
Conduct post audits on project work
Review and recalibrate processes from findings
Constantly incorporate learnings into Standard Operating Procedures (SOPs)
Regularly debrief and reset SOPs – again, people need to know what is expected
Look at using machinery to do the mundane
Look to introduce robotics to significantly increase throughputs
Use systems to capture any manual processes like books or paperwork showing units input, outputs, labour hours etc. Electronically capture and utilise API’s etc to put directly into the system.
Proactive Equipment Maintenance
Ensure your equipment is always functioning at full capacity
Monitor equipment downtime within
Have planned back up processes when failure occurs
Although not related to staffing, the following will favourably affect your LER.
Price increases – when was the last time you put them up?
Tighter terms of trade – stop discounting and provide transparent terms based on volumes and true costs to serve
Improved account management to increase sales
Improved or increased effective marketing
Look at your main basket of goods and get people to bid and achieve EDLP (Every Day Low Pricing)
Ask your suppliers for improved terms – you will be surprised
Know your costings
Forensically cost all your product lines and or services – the devil is in the detail
Know what margins each of your products and services deliver
Re-engineer unprofitable lines or services or delete them
Following all or some of these will improve your business performance.
A guide to Net Profit before Tax
Less than 5% and your business needs life support – meaning its dying.
Between 5 – 10% you are on your way to recovery, but you have a way to go.
Between 10 – 15% you are running a good business, retaining sufficient profit to manage growth and any business shocks.
15% plus puts you in a good niche but keep an eye on your competition. Unless you are nicely niched, over time, you may be seen as too pricey which will encourage new players to enter your market.
These are volatile times, and it is important we have balance sheet strength to help us get through. What is good is different for each business but as a rule of thumb, if you can access resources to sustain you for three months of overheads without any sales, then you will be better off than many others.
Simple Numbers by Greg Crabtree is available on Amazon.
As the year draws to a close and we get to take a much-needed break, it may be worth taking a moment to fully appreciate what we have individually and as a nation achieved in the last 12 months.
The early and decisive lockdown actions that sheltered us (so far) from the worst of the pandemic and made New Zealand an enviable place to be.
The uncertainty of the impact the pandemic might have had on us as individuals, employees and business owners.
The resilience and teamwork we showed as a nation in navigating the dark months of April and May.
The adaptions we made in learning new technologies and working from home, often with children requiring our time and attention.
Living without the usual connection to close family members, particularly those residing in care homes.
Moving into the post lockdown world, blinking in the light but equipped with new coping mechanisms around how we now manage ourselves (working from home is now much more prevalent) and our businesses (preparing for the unknown with scenario development and cash flow forecasting).
How will we approach the New Year? Certainly with more of a cautious outlook than we did in 2019, I suspect, ready to adapt to whatever is brought upon us and without the false optimism that is typically associated with the start of January. Combat ready – but even fighters need a break!
Enjoy the rest that we deserve. Spare a thought for those less fortunate than ourselves. Come back ready for another round – Round 2021!
As we marvel at the speed and agility of the four America’s Cup teams on Auckland’s harbour this weekend, it is interesting to reflect on how they got there and how they continuously innovate and improve.
To innovate you need an open and collaborative process and sometimes, businesses of all types rest on their laurels and forget the creativity and passion that got them started. Many years ago, Edward De Bono developed the Six Hats thinking process to encourage productive discussion and innovation in organisations, rather than blame or arguments. The Thinking Hats take away ‘right and wrong’ and encourage people working in a team to take different views.
First is the ‘Blue Hat’ that facilitates or conducts the process and keeps the team on track.
The ‘White Hat’ analyses – for example, it produces the engineering data which helps the high performance teams work out how to get the boats to go faster.
The ‘Green Hat’ is the creative hat full of alternative ideas – who else would have thought of leg-powered bicycle grinders on our boat in Bermuda?
The ‘Yellow Hat’ is the sunshine – full of optimism, it looks for benefits. In our Bermuda bicycle example leg muscles are larger than arms. This gave the AC50 grinders more power to supply the hydraulic systems which raise and lower the foils and pull in the huge wingsail.
The ‘Red Hat’ is the intuition hat, driven by emotion. “My gut feeling is this will or will not work.” Intuition is often built on complex judgement based on years of experience and may be an art rather than a science. Boatbuilding is an art and it is worth reflecting that, in business, restructuring often fails because the human element, the emotion, is not properly taken into account.
The ‘Black Hat’ is the caution or critical judgement hat. Engineers try to make sure the loads on these boats are safe. Get it wrong and death is a real possibility. However, imposing too much health and safety too early can kill creativity.
The boats we see in January and February will be very different to those we see this weekend. The ‘Blue Hat’ will oversee continuously trialing and optimisation on the water – proof that innovation is a continuous process.
As a small business owner, you’ll be wearing many hats – De Bono’s colourful collection and the Captain’s Hat too, as you steer your enterprise through the choppy waters of 2020 and beyond. A start up business is often born from a Green Hat creative idea, or from an optimistic Yellow Hat applying someone else’s crazy thinking. Bridging the ‘valley of death’ and not running out of cash in a start-up requires a big Blue Hat to navigate uncharted territory. Often it takes many years – and continuous innovation – to get your business model right.
I am currently working with a customer whose Black Hat thinking began an innovation process, building an automated system that manages lead generation and marketing through to sales, operations, accounting and pricing. Any information technology system implementation requires all the hats to get it to work, and because of the new automation his net profit margins are now much higher than his competitors.
As your business matures, it is easy to become stale – competitors whittle away your super profits and you continue to cut overheads. If you look at breweries, beer is in decline, and they have had to develop or acquire new categories to achieve growth or sustain profits. Innovation and creativity is the lifeblood of your business and is underpinned by your passion for what you do. Keeping your creativity alive is essential, as is innovation because, if you stop innovating or let your creativity stagnate, you can end up like Kodak.
Kodak was so blinded by its success in selling film it completely overlooked the disruptive potential of the digital camera invented by Steve Sasson, one of its engineers, in 1975. However, the real disruption occurred when cameras merged with phones and people shifted from printing pictures to posting them on social media. Kodak missed the trend and had to deal with the resulting consequences.
So remember as you watch the boats fly through the harbour this weekend, every captain must innovate, be prepared to change course and adapt – or run the risk of losing the race.
Skilled workers are getting harder to find – as our Spring Pulse Check revealed. The big question is how do you keep your employees happy and engaged so they’re not tempted to head somewhere new?
In pre-COVID times a pay rise might have been just the thing to keep them onboard but as times get tougher that may not be feasible. How do we tackle this tricky topic in these difficult days?
Pay and conditions are top of the list for many employees but in today’s world people look for more from their employer including the opportunity for personal and professional growth. Excellent internal communication is vital to ensure your employees know what is going on and that they feel listened to and understood. Small businesses frequently report that their staff are like family but sometimes, as can happen in any family, people don’t talk to each other enough and problems arise.
All businesses – small or large – must remember that while employee engagement is important, the employee experience is now a critical consideration. The employee experience has a number of different aspects, internal communications being one, with the others including training and development, recognition of their work, how change is managed, flexibility and a sense of purpose.
You may not be able to provide a pay rise at this point in time but the other aspects of the employee experience are within your grasp.
Focus on training and development and, again, if budgets are tight, look for help and support through schemes like the Regional Business Partner Network. Communicate constantly – keep your employees briefed on the changes and challenges the business may face and celebrate the wins. Recognise their efforts – it could be as simple as publicly acknowledging a job well done – but let them know you appreciate their skills and abilities.
After our year of working from home, working through disruption or not working at all, we all understand the need to keep people engaged when the organisation is operating remotely and there are many approaches to help with this but don’t forget to maintain the good communication habits you cultivated during the crisis and stay connected to your employees.
If you find you can’t recruit someone who has the skills necessary to support your business look to your existing staff – there may well be someone already working for you who is willing to grow and is capable of doing the job but they will need you to invest in the extra training or development to undertake the role and, of course, pay them appropriately for their work.
Above all, be a trustworthy employer. Your employees will be looking to you to lead them through this period of time and effective communication, a good employee experience and a demonstration that you care will help keep your ‘work family’ together and growing happily.
Our recent Business Pulse Check showed 7% of respondents have experienced more late payers and defaults, while 4% are struggling to pay creditors. In recent client coaching sessions, I am also noticing that there is an emergence of fiddly credit issues that are starting to take up a little more time for both business owners and their credit staff. These issues range from company liquidations, more creative excuses for not paying, down to just not paying on time, or paying later than normal. In some cases, the debtor has grown their exposure with the company over recent months without any further analysis of the increasing credit risk.
In a paper I wrote earlier this year on the Changing Face of Credit Risk I emphasised the need to continue to be vigilant with your credit control processes and procedures.
With the Christmas break coming up it is critical that everyone makes sure they have robust processes in place for collecting outstanding debts – including pro-actively following up overdue amounts expediently. Anything left outstanding on Christmas Day is unlikely to be paid until late January, with the resultant impact on your company cashflow at a time when it is most needed.
In the meantime I would suggest you remain focused on the following:
Watch for changing signs with any clients i.e. increased exposure/delays or excuses in paying.
Where appropriate be pro-active in updating Terms of Trade, particularly in cases where you may not have personal guarantees and exposure is increasing.
Use credit checking more regularly for clients who are showing different patterns in their payments.
If appropriate, consider registering under the PPSR register.
For clients showing changes in trading/payment patterns consider putting in place credit watch processes.