I was talking to a business owner recently who was worried what her end of year results would look like after the pressures of a global pandemic, economic uncertainty and operational constraints had had their way – and she was hoping that somewhere there would be an extra 100k to pay off the mortgage.
We talked through her business plans and goals and decided the right place to start was with a financial forecast so, equipped with her profit and loss, balance sheets for the last three years, a whiteboard, laptop and two large cups of coffee, we settled down to cast a weather eye on her financials.
We discussed the previous three years’ revenues, how COVID19 had affected one of their product lines – and forced them to create two new ones. Then we created a monthly sales forecast per product line. At this point – and very sensibly too – she asked me how she could forecast what she was going to sell so first we examined the different product lines, their gross margin, analysed market demand, production capacity and last – but not least – which product they enjoyed the most. Then we looked into production capacity and her wish to grow the business sustainably.
She decided to split the revenues of their four product lines as follows: 40% for the highest margin and enjoyable one, 25% for the second and 20% and 15% for the others. Thinking also covered the efforts to improve processes, increase capacity and get new customers, so she decided to increase the revenues every quarter by 10% for the two top products, maintain the third and reduce by 5% the lowest margin product line. Pricing also needed consideration and we decided to increase by 5% the prices of the first two lines every six months and once per year for the other two. By this time we had finished our coffee and had some sales goals set for the business.
But more caffeine was needed as we then had to look at the resources necessary to produce and sell the lines. We started with the Cost of Goods Sold (CoGS) or materials and subcontractors costs and estimated an increase of their buying cost of 2% per quarter. With Revenues and CoGS to hand, we could calculate her Gross Profit (GP) by subtracting them and comparing it to the previous year. All looked good, with an increase from 76% to 78%, which meant more money available for paying salaries and expenses.
Next was Direct Labour (DL) – the people who produce the goods. Our previous calculations made it easy for her to determine the number of hours and people needed and it was evident she would need two new employees in the third quarter. But when we calculated the Contribution Profit (CP) over the months, subtracting the DL from the GP we saw that adding both employees at the same time would affect the CP too much, so we delayed hiring the second resource for two months.
Gradually, we moved through Operational Expenses (OE), including Indirect and Administrative Labour (IL), expenses such as the lease costs, power and marketing. To achieve the new sales targets Mary thought that a new sales representative would be needed and as training was key to doing the job well, she decided to add that resource in the first quarter of the year. Subtracting OE from the CP we arrived at the Operating Profit (OP).
Then Non-Operating Expenses (NOE) and Non-Operating Incomes (NOI) were entered into the Forecast and the Net Profit (NP) calculated. At the start of the year it looked a bit low due to increased labour costs but as it was not below the new break-even point of 10% NP and, Mary was achieving her mortgage goal, we decided to go ahead with that configuration. The financial forecast was finished! Mary now had a plan with clear goals and deadlines for her and her team, so she was able to return home feeling more confident.
Forecasting can seem overwhelming – and confusing – at times but the good news is that some of the tools available such as Numereyes can be a powerful and easier way of working out where you are with your business – and charting where you want to go.
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.
For the third month in a row, small-to-medium size businesses outside the hard-hit sectors of retail, tourism and hospitality are proving confident, optimistic and actively planning for their future beyond COVID-19.
Our September Pulse Check shows exceptional levels of confidence and optimism with business levels booming or the same as last year, relatively unchanged levels of employment and sustained sales.
More than 80% of you are confident you’ll make it through, more than half report sustained or improved business levels, nearly two-thirds are optimistic about the next twelve months and 65% are already working on future strategies and getting business plans in place.
On the downside, 2020 has taken a toll with business owners feeling exhausted and that’s a real concern. Government support and business advisors have helped get through the difficult days of 2020 but despite weathering exhaustion, lockdowns, alert level changes and varying levels of uncertainty, you’re not giving up and have your head down, planning your way to the future.
For some, the forthcoming election, mainstream media stories and government policy are reducing confidence, while for others, their own resilience drawn from past experience, government policy, and the thought of open borders is a confidence booster.
Stephen James observed: “Our members are, for the most part, outside the sectors acutely affected, such as retail, tourism and hospitality. It may seem that member confidence levels and optimism are at odds with other commentary but our small business owners are efficient and resilient because they have to be. Small business owners regard their employees as family, do their utmost to retain them and are able to adapt and evolve business practices swiftly with the right support, even among those hardest hit.
“It’s heartening – and speaks volumes for business owners – that so many have got through with relatively unchanged levels of employment, due in part to the government support people have turned to and a willingness to change where necessary.
“One of our priorities will be to help business owners cope with the high levels of exhaustion they’ve reported. We see this as a danger area as, no matter how resilient they may be, working through an ongoing crisis is hard and it is draining. Supporting our business owners helps them to help their business, so developing strategies and solutions to what we know will be an ongoing challenge is an area we will be working on with our boards and through our coaching sessions”.
A sudden slip into Alert Level Three, the blast of the emergency ‘COVID’ warning through our phones and once again we’re into the balancing act of keeping our businesses moving in exceptional circumstances.
Last month our Pulse Check results told us how adaptable and flexible New Zealand’s small business are, with business owners altering operations and changing practice in order to survive the challenges that 2020 has thrown at us all. Just as we have rolled out our August Pulse Check – which you can access here if you would like to participate – the beat has changed again and, in Auckland, we are facing at least three days at Level 3, probably more, with the rest of New Zealand parked up at Level 2 for the time being.
We asked our Auckland team for their thoughts on the current situation and their advice was simple — we’ve been here before, rely on past experience and know that it will pass.
The Alternative Board’s managing director Stephen James said: “Knowing it will pass, spend some time addressing a few scenarios. For example, if Level 3 lasts, as announced, for three days what do you need to do? Or, if it remains in place for two weeks or if Level 4 is declared and we have full lockdown for an indefinite period — what then? Develop plans of action for each scenario and communicate these to your staff and stakeholders.”
Many businesses just go with the flow but what happens when unpredicted things happen?
First reactions are often fear and uncertainty, then frustration as worrying questions come thick and fast. What is going to happen? How will I be able to continue trading and working? What will happen to my business and employees?
These feelings and questions are normal in the first moments of shock but it is possible to mitigate the effects of market upheaval for both the business and its people.
A business without goals – and plans to achieve those goals – is like playing football without knowing where the goal is. You can play well and have fun and even have a false expectation about getting good results but are these results the right ones? Do they improve the business situation you’re in or your position in the market?
The first step is to set goals and create a plan to achieve those goals. Then comes the tricky part: how do I set my goals if I don’t know what is going to happen next?
As Peter Drucker said, “You cannot predict the future, but you can create it” and the solution is to create scenarios. At minimum you should create two scenarios, the worst case and the probable case. You could add the best case if you want to.
Creating a scenario forces you to place yourself in a specific context, which can be out of normality, or focus on extreme conditions. This may create uncertainty or even fear but it also provides clarity on what you could do in a particular situation in order to achieve your goals. Once your goals for each scenario are clear, then you need to make a plan for each scenario and its set of goals.
Working with scenarios helps you to create certainty in a world of uncertainty. It allows you to be prepared for a wide range of possibilities, even those outside the scope of your imagined scenarios because, once the exercise is done, you have a broader view of the operating environment.
The ensuing reality will be different to the scenarios you created but two considerations here: the reality will generally fall somewhere between the worst and best case scenarios and, most likely, will be closest to the probable scenario you created – and this is not coincidence. If you follow a plan well, you will most likely reach the goals you forecasted.
If market forces make it impossible to achieve a goal, having planned a series of them gives you an advantage and a more positive position. You will not be shocked or unprepared. You will be ready to take action, drawing on your thinking from the various scenarios considered or, in the worst case, you will be able to set new goals and create a new plan.
How do you create good scenarios? Work with your team, do it with your coach or get the help of your board. You will get more ideas and will cover more variables. Two heads are better than one. The resulting collaboration will be a more robust and certain position for you and your business while your team will recognise your leadership and be more engaged in working towards your goals.