Are your business growth plans aligned with the current economic reality? The most important impact of the current economic slowdown on SMEs is the forecast that liquidity will dry up. Collections will become difficult, credit from suppliers will start to shrink, the cost of raising funds will go up, and sales will slow down. In this scenario, do you know what to do to weather the storm? More importantly, do you know what not to do? Here are five deadly sins that can spell trouble for businesses- and how you can avoid them in your enterprises:
1. Wishful thinking
Perhaps the deadliest sin you can commit while running your enterprise in these troubled times is wishful thinking. When you start making decisions according to what seems to be pleasing, as opposed to objectivity and rationality, facts and evidence, and good, old common sense, you distort your vision and things start to fall apart, sooner or later.
It is easy to fall into this trap of wishful thinking. Your Excel sheet looks good. Your PowerPoint presentation is smashing. Your business plan shows healthy growth curves. Your forecasts have negotiated the toughest of scenarios, factored in all the key variables, balanced all conflicting forces, and crosschecked all the ratios- you feel such an exhilarating sense of achievement the minute your business plan is drafted.
Unfortunately, your plan is likely to be full of faulty assumptions. Sample this:
- Your Plan: Increase sales by 10%.
- Your Wishful Thinking: ‘This is our declared goal; the sales team will make it happen.”
- Your Assumption: The sales team is willing, and able, to increase sales in the present scenario.
- Your Result: Big gaps between your plan and actual performance.
In order to avoid the above scenario, consider this antidote for the wishful thinking deadly sin: either lower the sales target, or micro-manage the sales team. Once you base your decisions on ground realities, your grip on your business will get tighter, leading to expected results.
2. Faulty thumb rules
Most businesses are run on thumb rules that the owners make as they go along. Now, if those rules are faulty, you are likely to go on making mistakes over and over again.
Consider one such thumb rule. For each product or service, you offer, you know, more or less, what your gross margin percentage is. This helps you to take calls to close the sale. The prospect typically asks for a discount, say 10%. You need the sale. You know that your gross margin is about 22%. You agree and close the sale, feeling victorious. Typically, this sale is never diligently tracked to find out whether you made money or lost money.
Company heads generally rely on the operative expense sheet (OPEX) that their accountants prepare. As it turns out, accountants generally take a convenient way out– they believe in “measuring what they can measure,” as opposed to “what they need to measure,” resulting in a dangerous and faulty gross margin percentage assumption, an assumption on which sales-closing decisions are made, offering discounts within a belief what the business can afford and absorb.
Here is an actual example: a landscaping company had, for many years, assumed its gross margin was 43%. The accountant had carefully divided the costs into two categories, variable and fixed. And he had followed the age-old wisdom of including everything in the fixed cost, if the business did not make a single sale.
Whilst this is logical and rational, there is a small fallacy. The business is a “going concern;” in other words, it has been, for a longish time, making sale after sale after sale. In such a case, it would be very wise to include everything you possibly can under the head “cost of goods sold” (COGS) to compute the gross margin. The landscaping company had, for years, clubbed the workforce salaries under “overheads,” creating an inflated gross margin percentage of 43%.
When the OPEX sheet was re-cast, salaries of all the workers were transferred to COGS, and the re-worked gross margin shrank to 18%. This had a huge impact on how the company started to close sales. A prospect would ask for a typical 20% discount. Earlier, the company would offer up to 10% discount, believing it had still captured 33% gross margin.
After the reworked OPEX sheet, it created an internal policy of restricting discounts to no more than 5%. The company’s profitability improved, and, to its surprise, it found that cutting discounts did not impact conversions.
As a result, these three steps make for a powerful antidote to the use of faulty thumb rules in business:
- Analyze your expenses, and transfer everything you possibly can to COGS.
- Prepare a new OPEX sheet.
- Make key decisions based on revised gross margin percentage
3. Obsession with topline growth
Most business owners are obsessed with topline growth (sales), to the extent that they neglect the bottom line (profit). A services company had been struggling to meet its topline goals for two years. It had an expense base of US$150,000 per month, and needed to generate sales of $200,000 each month to balance cash inflow and outflow. The company’s yearly budgeted growth plans showed a healthy increase in revenues. But the company failed to meet its sales target.
A careful analysis threw up startling findings:
- The company’s effortless sales revenue was $150,000 (from repeat orders, loyal customers).
- Approximately 40% of its sales staff produced zero results.
- The company was stuck with its desired sales target, and felt trapped.
A very simple suggestion was offered: reduce your sales target to match what is already effortless, and reduce your cost base from $150,000 to $100,000. After some hemming and hawing, management accepted the suggestions. Three months down the line, the company experienced a dramatic turnaround.
So if you find your business in the throes of this deadly sin like the aforementioned company, here’s how you get past it:
- Identify “low hanging fruit” sales volume (sales volume that is easy for you to achieve).
- Identify and trim costs to support this lower sales volume.
- Once the tide has turned, focus on innovation to grow your bottom line (profit).
4. Cash flow bottlenecks
Like every chain has weak links, every business has bottlenecks, or weak links, which govern the output of cash, sales, profit, satisfaction, valuation and so on. The amount of cash the business produces is governed by its own unique bottleneck. The trick is to find this one key bottleneck and to figure out how to break it, or how to exploit it to increase the throughput of cash. This begins to take the guesswork out of the equation and we start to apply simple laws of physics to increase cash flow.
A generic bottleneck that seems to fit most SME businesses is the push-pull of firefighting for short-term survival, whilst pining for developing long-term value creation. In the famous Capability Maturity Model, five levels of maturity have been identified: Chaos, Repeatable, Defined, Managed, and Optimizing. Globally, 97% of SMEs operate at Level 1, which is Chaos, throughout their lifetime!
To improve the throughput of everything the company produces, it is essential to move up the Capability Maturity from Chaos to Repeatable. Once this shift happens, the results start to improve.
So, in order to get rid of cash flow bottlenecks, here’s what you need to do:
- Identify, map and diligently flowchart your cash flow process.
- Write down all the non-desirable habits- for instance, not invoicing in time, poor collections follow up, etc.
- For each of these non-desirable habits, design a robust and Repeatable process.
5. Delayed realization of problems
Most companies do not know whether they made a loss or a profit on a day-to-day basis. If companies had a method to tell them where their numbers need to be, and where they are presently, they could take micro decisions to keep themselves afloat at all times. These three steps are a powerful antidote to the delayed realization of problems:
- Daily income: quantify daily amount of value produced (like creating daily interim invoices for internal use).
- Daily expense: Track your expenses and break them into daily amounts.
- Populate an Excel sheet with this daily income and expense to see if you won or lost each day.
Once you implement these steps, you will note how your cash flows and profits will start to improve.