FULLY ENGAGED CUSTOMERS:

These customers are

• Responsive – this means that they pay their bills promptly;
• Positive – they show a consistent pattern of effective use of your business’s service infrastructure because they learn about your business, and they are willing to try any new products and services, that you may provide.
• Listeners – They are most likely to welcome any of your innovations and try new products and brand extensions.
• Fair – They are least likely to submit unreasonable restitution claims.
• Sustainable – They value long-term relationships with their brands and provider organisations – your business, as their supplier of choice.

A fully engaged customer sounds something like this:

“I thought that buying things was something that we just had to do, something to satisfy our basic needs.  But in the course of getting to know your products and being in contact with your organization I have learned that I can enjoy being your customer.  You have made me feel important and valuable; I can always count on you. I often ask myself this question: “Why didn’t I contact you before?”  You are not only the best there is – the way you make me feel as a customer is truly legendary.” (“Follow this Path” – emphasis – mine.)

ENGAGED CUSTOMERS:

These customers:

• Collectively represent 20 to 25 percent of a company’s customers.  This group also includes customers who contribute a lot of their business but have not allocated the greatest proportion of their business to a single organisation.
• Are sensitive to improvements in products as well as pricing policies.
• Represent primary targets for products and may expand into additional services if a stronger emotional bond is formed.

An engaged customer sounds like this:

“I’ve flown with you a hundred times in the last year.  I’m supposed to be a Gold Card member with you and yet I ask myself this question:  “Did you see how badly the check-in clerk treated me?”  Actually I don’t think she discriminates among passengers.  She just treats everyone badly.” (“Follow this Path”: Curt Coffman & Gabriel Gonzalez-Molina.)

THE NOT-ENGAGED CUSTOMER.

These customers:

• Reveal a pattern of relative indifference to the current engagement capabilities of a brand or an organisation.
• Are inattentive and unresponsive to additional products or offers due to low purchase levels and usage of brands and products, or because of poor or non-existent levels of personal interaction with the organisation’s service infrastructure.

The not-engaged customer can sound like this:

“It doesn’t matter to me where I go to buy what I need, as long as the price is good and the place is nearby.  I pride myself on being a good shopper and searching out bargains.  Every store has them; it’s just a matter of finding them.  When I do, I get a whole lot of satisfaction.  As far as sticking with one store goes, why should I?” (“Follow this Path”: Curt Coffman & Gabriel Gonzalez-Molina.)

THE ACTIVELY DISENGAGED CUSTOMER:

These customers:

• Account for the largest per customer service costs.
• Are resentful and will take advantage of any opportunity at their disposal to cause you harm, either directly or indirectly.
• Are resistant to any attempt by your employees to switch from a negative perspective, into a positive, restorative mood.
• Are very unprofitable when one combines the relatively high costs with usually lower levels of revenue.
• Are very hard to turn around.  It requires a significant effort or improvement in the experience to engage them, and many never become engaged.

The actively-disengaged customer sounds like this:

“This company is out to get as much as they can from customers; they mark up merchandise and then run “sales” to try to convince people they’re getting bargains.  I take pleasure out of pointing out to them that lower prices are available elsewhere, just to show them how wise I am to their tricks.  And I never think twice about complaining if the service or product isn’t up to par, which they usually aren’t.  You want to know why?  I hate these guys.  I won’t let my friends ever shop there.” (“Follow this Path”: Curt Coffman & Gabriel Gonzalez-Molina.)

Believe it or not – these guys actually exist!  Actively disengaged customers can be real trouble, and especially when you realise that as much as 20% of your customers may be in this category!

Remember, you don’t have to survey your customers to establish which category they fall into; you just have to know how engaged your employees are!  That will tell you all about your customers!

Research internationally has revealed that the scary thing about all this is the fact that almost half your work force will probably fall into the ‘engaged’ and ‘not-engaged’ category; and – when you add this to the ‘actively-disengaged’ category – it means there’s a huge opportunity for improvement.

The good news is that something can be done about it!

• Cash flow – because this is where reality bites!
• Being able to monitor your trading performance, through a simple but efficient business intelligence system
• Hiring, keeping and motivating good staff

Now we’re going have a look at the area that, for me, is probably the most important of the lot.  And it’s quite simple really – without customers you don’t have a business and the rest is of no consequence!

CUSTOMER SERVICE

 The latest terminology in this regard is “Customer Relationship Management” or CRM.  The market abounds with new software to make this task easier, but it doesn’t come cheap – especially for small business.

There are also hundreds of books on the market about marketing and customer service, – most of which will contain much more specific advice on the concept than I could hope to cover in a few short pages.   However, I do want to address a few basic aspects that I believe most small businesses tend to overlook, – aspects which I believe are vital to the health of a business (and particularly those businesses in distress), and which should not be under-estimated by management. 

These aspects can all be included under the heading of “engaging” your customers.  The Gallup surveys revealed one important relationship – there was a direct correlation between the level of engagement of employees and the level of engagement of customers!

So, – as much as you want to be engaging your employees, you want to be engaging your customers.  If you don’t get the first one right, you can forget about the second one!

To explain this in more detail, lets have a look at the categories of customer engagement as defined by the Gallup Organisation: (in the book “Follow this Path”by Curt Coffman & Gabriel Gonzalez-Molina)

FULLY ENGAGED CUSTOMERS:

These customers are:

• Responsive – this means that they pay their bills promptly;
• Positive – they show a consistent pattern of effective use of your business’s service infrastructure because they learn about your business, and they are willing to try any new products and services, that you may provide.
• Listeners – They are most likely to welcome any of your innovations and try new products and brand extensions.
• Fair – They are least likely to submit unreasonable restitution claims.
•  Sustainable – They value long-term relationships with their brands and provider organisations – your business, as their supplier of choice.

 A fully engaged customer sounds something like this:

“I thought that buying things was something that we just had to do, something to satisfy our basic needs.  But in the course of getting to know your products and being in contact with your organization I have learned that I can enjoy being your customer.  You have made me feel important and valuable; I can always count on you.  I often ask myself this question: “Why didn’t I contact you before?”  You are not only the best there is – the way you make me feel as a customer is truly legendary.” (“Follow this Path” – emphasis – mine.)

Ken Blanchard, in his book entitled, “Raving Fans: A revolutionary approach to customer service” says this:

Great service is not an accident. It starts when you decide what kind of experience you want your customers to have — when you articulate a clear vision. You keep it alive by empowering your people to go the extra mile for the customer. When it’s innovative and comes from the heart, great service keeps customers coming back again and again.

Blanchard goes on with:

Tony Hsieh, CEO of Zappos.com, understands what great customer service — or, as they call it at Zappos, WOW service — is all about. Once you read the following excerpt, you’ll understand two things. First, you’ll figure out why Zappos quickly became the biggest online shoe store. Second, you’ll know the company is not exaggerating in calling it WOW service.

Excerpted from Chapter 5 of Delivering Happiness: A Path to Profits, Passion, and Purpose – by Tony Hsieh

We receive thousands and thousands of phone calls and e-mails every single day, and we really view each contact as an opportunity to build the Zappos brand into being about the very best customer service and customer experience. Looking at every interaction through a branding lens instead of an expense-minimization lens means we run our call center very differently from most call centers.

Most call centers measure their employees’ performance based on what’s known in the industry as “average handle time,” which focuses on how many phone calls each rep can take in a day. This translates into reps worrying about how quickly they can get a customer off the phone, which in our eyes is not delivering great customer service. Most call centers also have scripts and force their reps to try to upsell customers to generate additional revenue.

At Zappos, we don’t measure call times (our longest phone call was almost six hours long!), and we don’t upsell. We just care about whether the rep goes above and beyond for every customer. We don’t have scripts because we trust our employees to use their best judgment when dealing with each and every customer. We want our reps to let their true personalities shine during each phone call so that they can develop a personal emotional connection (internally referred to as PEC) with the customer.

Another example of us using the telephone as a branding device is what happens when a customer calls looking for a specific style of shoes in a specific size that we’re out of stock on. In those instances, every rep is trained to research at least three competitors’ Web sites, and if the shoe is found in stock to direct the customer to the competitor. Obviously, in those situations, we lose the sale. But we’re not trying to maximize each and every transaction. Instead, we’re trying to build a lifelong relationship with each customer, one phone call at a time.

A lot of people may think it’s strange that an Internet company is so focused on the telephone, when only about 5 percent of our sales happen through the telephone. In fact, most of our phone calls don’t even result in sales. But what we’ve found is that on average, every customer contacts us at least once sometime during his or her lifetime, and we just need to make sure that we use that opportunity to create a lasting memory.

The majority of phone calls don’t result in an immediate order. Sometimes a customer may be calling because it’s her first time going through the returns process, and she just wants a little help stepping through the process. Other times, a customer may call because there’s a wedding coming up this weekend and he just wants a little fashion advice. And sometimes, we get customers who call simply because they’re a little lonely and want someone to talk to.

I’m reminded of a time when I was in Santa Monica, California, a few years ago at a Skechers sales conference. After a long night of bar-hopping, a small group of us headed up to someone’s hotel room to order some food. My friend from Skechers tried to order a pepperoni pizza from the room-service menu, but was disappointed to learn that the hotel we were staying at did not deliver hot food after 11:00 pm. We had missed the deadline by several hours.

In our inebriated state, a few of us cajoled her into calling Zappos to try to order a pizza. She took us up on our dare, turned on the speakerphone, and explained to the (very) patient Zappos rep that she was staying in a Santa Monica hotel and really craving a pepperoni pizza, that room service was no longer delivering hot food, and that she wanted to know if there was anything Zappos could do to help.

The Zappos rep initially was a bit confused by the request, but she quickly recovered and put us on hold. She returned two minutes later, listing the five closest places in the Santa Monica area that were still open and delivering pizzas at that time.

Now, truth be told, I was a little hesitant to include this story because I don’t actually want everyone who reads this book to start calling Zappos and ordering pizza. But I just think it’s a fun story to illustrate the power of nothaving scripts in your call center and empowering your employees to do what’s right for your brand, no matter how unusual or bizarre the situation.

As for my friend from Skechers? After that phone call, she’s now a customer for life. (emphasis – mine.)

One can see from that excerpt that fully engaged customers result from the efforts of fully engaged employees.

In the next Newsletter, we’ll have a look at the other categories of customer engagement – I think you’ll be surprised!

The following statement, though a little harsh, is a generalization:

Small business owners in South Africa do not tend to treat their people well. 

Many employees are generally regarded as just labour for hire – much the same as hiring a piece of equipment.     The prevailing attitude toward them by many small business owners is this: do the job and I’ll pay you, and that’s the sum of our relationship! 

Over the last 25 years, the Gallup organization has interviewed over a million employees, asking them hundreds of different questions on every conceivable aspect of the workplace.  Their aim was to sift out those few questions that were truly measuring the core of a strong workplace. 

They discovered that it can be simplified to twelve questions; “questions that measure the core elements needed to attract, focus and keep the most talented employees.” 

(These questions all form part of a number of books written by various members of the Gallup Organisation, such as “First, break all the rules”; “Now, Discover your strengths”; and a host of others.)

We have adapted these questions, made them into statements, and then we ask employees to either agree or disagree with the statements, as they experience it, in the workplace. 

As a small business owner, set this up in your own workplace, and hand out the statements to your staff, asking them to write down their views on a piece of paper.  In fact, take the series of questions below, and set them up on a spreadsheet.  (You can use it again and again, and thereby monitor the engagement of your employees.) 

You can then analyse the findings to ascertain just how engaged (or disengaged) they are.

This is very important. 

If you don’t measure up you will probably find that you have been unable to keep any superstars on your payroll or that you employ mediocre people who only care about their monthly pay checks. 

The statements are:

1. I know what is expected of me at work.
2. I have the materials and equipment I need to do my work right.
3. I do have the opportunity at work to do what I do best every day.
4. In the last seven days, I have received recognition or praise for good work.
5.  My supervisor, or someone at work, does seem to care about me as a person.
6. Someone at work encourages my development.
7. My opinions at work do seem to count.
8. The mission/purpose of my company does make me feel like my work is important.
9. My co-workers are committed to doing quality work.
10.  I have a best friend at work.
11. In the last six months, I have talked with someone about my progress.
12.  This last year, I have had opportunities at work to learn and grow.

“Much of the power of this measuring stick, then, lies in the wording of the questions.  The issues themselves aren’t a big surprise.  You may also be wondering why there are no questions dealing with pay, benefits or structure.  This doesn’t mean that they are unimportant.  It simply means that they are equally important to every employee – good, bad and mediocre.” (With thanks to Marcus Buckingham and Curt Coffman, co-authors of the book, First, Break all the Rules.)

 The authors go on to say:

“The results of such a questionnaire will determine whether your employees are either:

1.         Engaged – those employees who pack the biggest punch on all the important business outcomes such as productivity, customer retention, low turnover, safety, profitability, and growth.  They are involved in generating ALL of an organisations profits and customer engagement.  They represent the positive economic force that fuels an organisations profitable growth.

2.         Not engaged – those employees who may share the values and mission of their team and organisation but lack precision in terms of the expectations of their role. Many of them are just waiting for an opportunity to become fully engaged.

3.         Actively disengaged – This group accounts for most of the waste in terms of lost workdays, incredibly high safety costs, higher levels of staff turnover, low productivity and customer defection. They represent a negative economic force actively at work within organisations and to a large extent, undo the great work of the engaged employees. They stagnate the growth of a company and represent the most significant challenge to its profitability.  They are living and breathing obstacles to meeting customer requirements.  These people are real trouble!

The Gallup Organisation conducted a national benchmark of the engagement index in 2001, for eight countries. 

The results were sobering to say the least.  On average, 17% of employees were considered to be “engaged”, 65% were “not engaged”, and a scary 18% were “actively disengaged.” 

What this means is that over 80% of employees are just going through the motions, when they come to work – not much ambition, not much interest! 

Now I guess one could say that there’s more to business than the attitude of one’s employees.  However, the Gallup organisation has found that there is a direct correlation between the level of engagement of employees, and the level of engagement of customers. (and we’ll address this a bit later on.)

Clearly, if your employees are all scoring between 1 and 3 on each statement, you have a problem.  Consistent scores of 4 and 5 indicate a high level of engagement.

I have found that in many small businesses, employees are often not clear on what their duties entail, and that:

• very often, they do not have the wherewithal to do the job well;
• they get drawn into areas where they lack skill and therefore lose motivation;
• praise is the absence of criticism;
•  they have no idea that the business even had a mission in life other than making money;
• no one really cares about excellence or about personal growth and development. 

In fact, I have found that in most cases where businesses are struggling, it’s usually because of a people problem.  The problem does not lie with the people themselves – it’s a management/leadership problem.  People don’t leave businesses; people leave people!

 “Leaders create an environment where people come to work to prove themselves over again every day.  No one gets paid to budget their efforts or pace themselves.” (Dave Anderson)

Ultimately, it is the ratio of engaged workers to disengaged that drives the financial outcome of the organisation, particularly where active disengagement is concerned.  Your employees are actually all you’ve got.

If you’re not paying enough attention to them, it’s quite likely you’ll not have a business too much longer.

At the same time, I must emphasise that it is usually not by intent – it is usually by oversight, or even ignorance of the basics!

 THREE AREAS OF CONTENTION

There are three main areas of contention.

Firstly, many small-business owners in South Africa today, are very nervous about hiring anyone! 

 The Labour Relations Act in South Africa has to be one of the most liberal pieces of legislation around, and while it is certainly comprehensive, there is no doubt that it tends to favour the employee.  Now, I know that there are unscrupulous employers out there who manage to get away with ‘murder’ almost, when it comes to the way they treat their employees; but I also know that it is extremely difficult for employers – especially when they are small business-owners, with small budgets and even less time – to get rid of a troublesome employee. 

Almost without exception, any employee that has been dismissed – even for all the right reasons – still has the right to go to the CCMA (Commission for Conciliation, Mediation and Arbitration) and be heard – and will usually go there anyway.  This means that every employer will have to appear at the ‘hearing’ as well, all at great cost to them in terms of time and money.  The two words that made America great – “you’re fired!” – will never wash here!

Secondly, when it comes to hiring staff, small business owners tend either to employ people on trust and gut-feel, and not based on some sound selection criteria, or they tend to employ people based on what those people are prepared to be paid for the job.

Thirdly, small business owners tend to be guilty of not engaging their employees in the warp and woof of the business.  This has the effect of alienating employees – it makes them feel they’re not trusted and that they’re not appreciated.

HOW SHOULD YOU EMPLOY PEOPLE?

“The best time to fire people is before you hire them.” (Dave Anderson)

So, how should you go about employing people if you run a small business?

Personnel consultancies are expensive, charging as much as 20% of the annual salary of the employee, as a finder’s fee.  Even in the case where someone is being employed in a clerical post, the fee can seem enormous. (Placing a monthly salary-earner at a cost of R5,000 per month will attract a fee of anything between R7,000 and R12,000.)

 Most small businesses see that as far too much to pay and so they employ relatives, rely on referrals from friends of friends, gut-feel, etc.  At the end of the day, the cost to them can be far greater in terms of poor workmanship, poor productivity, poor attitude and ruined relationships.

 On the other hand, there are a number of Personnel Consultants out there who do not have the necessary expertise in every field of employment to fit the right person to every job.  They base their recommendations on the research they do, and a rather narrow band of selection criteria. 

If a person has built up a good referral base, consultants will be happy to recommend them – even if they may not ‘fit the bill’.  I have had occasion to use consultants a few times, and it has always irritated me when I receive a written report from them containing their opinion that “the applicant is ideally suited to the job”.

And this same opinion will be relevant to all four applicants they sent me, and which I now have to interview.  Well, which one really is ideally suited to the job? 

I have also been approached by Consultants for references on certain people who I have either worked for, or who have worked for me in the past.  I am appalled when the person asking me the questions is clearly just reading them off some standard questionnaire.  I wonder how they are able to get a true idea of what the prospective employee is really like, and in the right context?  I have had to comment on the work habits of some highly qualified people in fairly senior posts at times, and I’ve been conscious that the ‘interviewer’ representing the Personnel consulting firm, probably only has about five years work experience, and I doubt would be able to provide an objective opinion on the ability of the applicant.

We have managed to assist clients in quite successfully in the past, but only in the area of our own expertise – which is accounting and administration.  We follow a simple research process, and then rely on our own experience working in similar environments:

• We design the JOB DESCRIPTION (profile) in accordance with the client needs.
• We preview the applicants’ CV’s ourselves and create a short list.
• We get the client to do the same, and then we compare short lists.
• We get the short-listed applicants to complete a StrengthsFinder Profile test on the internet.  This can be accessed at http://www.strengthsfinder.com/113647/Homepage.aspx
• We match the Job profile with the applicant’s strength profile to get the best fit.
• We interview the applicants who match the profile the best, along with the client.

 Personnel consultants may be horrified at this – we may even be stepping on their turf – but so far it has worked pretty well. And, we don’t get involved in employing people outside our own field of expertise!

 Small business owners don’t have time to mess around trying people out only to find they don’t fit.  They also need to know that the new employee has the initiative and can innovate if need be.

I would suggest you adopt the following basic principle: – get a specialist in a certain field to hire someone for you to perform a special job in that field. The specialist should have a sound knowledge of how small businesses work, and the environment they work in, as well as knowledge of what will be required to get the job done.

EMPLOY THE VERY BEST PEOPLE YOU CAN!

John Maxwell, in a teaching series on Excellence in the workplace, recommends that entrepreneurs should make an attempt to employ the very best people they can in every position in the business.  In fact, he goes one step further – he recommends that we should employ top people, even if we do not have a job for them immediately. 

The best people, – the top people, – are net value creators.  In other words, they have the ability to create value greater than their cost to an organisation, – value that was not necessarily there in the first place. It won’t be long before they’re actually generating income which will not only cover their cost but increase the profits in the business as well.

 Dave Anderson, in his book, “Up Your Business” says

 “People are not your greatest asset; the right people are.  The wrong people are your greatest catastrophe. Mediocre people are your greatest drain on resources.”

In the next newsletter, I’ll cover the issue of how to retain those good employees.

This newsletter is the next in the series on “what we have to manage” if we want to avoid constant stress in our business lives.

BE PREPARED

Preparing for “war”.

There’s an old saying that goes, “if you want peace prepare for war.” (Sun Tzu). 

If we apply this in the business sense, we will see that it’s necessary to adopt a conservative approach to all our forecasts and planning as this will help create a bit of a cushion for the shocks which are bound to occur.  In many ways, one could say that it’s worthwhile planning for the worst, while expecting the best! It will also enable us to consider monthly provisions for those annual infrequent expenses, which crop up from time to time.

Have a War-Chest

In this regard, I also encourage business-owners to establish what I call a ‘war-chest’. 

This is quite simply a reserve of cash for those ‘rainy days’ – for those tough times that are sometimes beyond your control, which can occur every now and then.  As a guide, I believe this war chest should ideally consist of cash reserves equal to at least three months total overheads.  This may sound like a lot, but if you start small, it won’t be long before you have built up the necessary amount and this provides one with a great deal of comfort during those tough times.

Early Warning Signals

Sometimes small business owners have very little time to pour over copious screeds of financial reports, with row upon row of numbers, many of which might not mean much.  All they need really are a few key numbers – performance indicators – that will enable them to glance up, make a simple adjustment, and then carry on.  It’s rather like driving your car.  Every now and then, you cast a glance at the dashboard to check your speed, your temperature gauge, and to see that there are no flashing warning lights, and then you carry on. 

In business, it’s much the same.  Unlike a motor car, though, your business doesn’t come with a built-in dashboard – you have to create one.   This could be a simply one-page report which contains a half-dozen-or-so key ratios and trends, which are available each month from most accounting systems.  These dashboards can be purchased as ready-made software, or they can be easily created for you from your own system – customising them as it were.   The ready-made software is quite expensive and probably more intricate than most small businesses need, but it’s relatively simple to get your accountant to design one for you, within your existing system. Or, if you like, contact us and we’ll be glad to help.

Every system of internal control should provide a battery of early warning signals to management. 

They should happen automatically and not only when the business owner requests them. These signals should alert even the most non-financially-oriented business owner if all is not well!

The way to do this is to develop the dashboard based on accumulating data, which will provide the business owner with trends in certain areas of the business. Once-off indicators can be misleading, so we always advocate trends over time in this regard.  The best kind of dashboard, and one which grabs the attention of most people (and especially the busy ones) is made up of graphs and charts.

Using Graphs:

The best way to view this data for most people is by way of monthly accumulating graphs.  If you don’t really know your way around a spreadsheet, it is wise to get your accountant to set these up as standard charts for you so that they’re easily update-able.  (We can also set these up for you online if you want.)

Some of the more commonly used trend graphs may be:

• Debt collection period in days. –   This graph will plot the average number of days it takes for you to collect your money from your credit customers.   If the trend is upward, it could imply that the collection efficiency is dropping, or that you are allowing more credit than you should. (Or, that your sales are going down).  Either way, it will have a negative impact on your cash flow.  If the trend continues, it may prompt you to have a closer look at specific customer’s accounts, and this could prevent a major bad debt from occurring.
• Supplier’s payment period in days. – This graph plots the average number of days you take to pay your suppliers for goods and services bought on credit.  If this trend is upward it could show that cash flow is deteriorating, because you have to make your suppliers wait longer for their money, or that you are carrying too much stock relative to your production capacity.
• Stock holding period in days. – This graph plots the average number of day’s worth of stock you are carrying, at the average cost of the stock.  If this trend is upward is could imply poor stock management,  -that you are carrying too much stock ; or that you are carrying the wrong mix of stock; or, if you’re a manufacturer, that you’re taking too long to manufacture your goods for resale – all of which means more cash out of the game!
• Break even sales on fixed cost overheads. – If the BEP goes up on a trend basis, it could mean your overheads are increasing, or your gross margins are dropping, or it could be both!  There will be more on this very important subject in a future newsletter.
• Variable Cost % of Sales – Variable costs are those which are generally only incurred when you sell something – it’s a direct cost of sale.  This graph plots the efficiency of all direct variable costs in relation to sales.  Fluctuating trends here could imply all sorts of production-related problems and need to be closely monitored. (Amongst a host of others.)  One of the most important of these variable costs in a manufacturing environment, for example, is the consumption of raw material in goods sold.  Some manufacturers run their entire business on the basis of this one consumption figure!
• Budget versus Actuals for expenditure. – Budgets should be adhered to and not simply studied. Excesses should only be accepted if there is a very good reason for it.  And if the budget was only drawn up to keep your bank manager happy, then you’re really in trouble.  Budgets should be prepared as carefully and accurately as possible.  Any variances should be followed up.

In this instance, I am referring to employing suitably qualified and experienced people to maintain the financial records of the business on a daily basis. 

Far too often, I come across someone in the accounts department of a business, who has some form of general office experience but is not a trained bookkeeper or accountant.  This has happened largely due to the fact that the owner of the business was trying to keep costs down and has the attitude that since bookkeeping seems such a simple task, why bother with someone too ‘high-powered.’ (And consequently expensive!)

This attitude has been exacerbated by the prevalence of easy-to-use accounting software, which allows just about anyone with an atom of intelligence to capture data, – and the plethora of basic “bookkeeping” courses available from a variety of “training” institutions – which give people permission to call themselves bookkeepers when they are not! 

We don’t need data capturers – we need people who can extract information from this data ocean and use it to make vital decisions. 

As resellers of the very popular Quickbooks accounting systems, we often come up against people who have purchased the software and think that it makes them accountants! Wrong! Don’t underestimate the importance of accurate reporting.  One of the most mistakes that business owners make is to go out and buy this kind of software (and you can buy this off the shelf at a number of the mass market stores), and then because it seems so simple, they have a go at setting it up themselves.  There’s no problem with that, provided, you as the business owner, understand something about accounting, and also have an idea of what you want to extract from the data that is going to be captured.  Like most things in life, if you do the basics – the foundations – well, then it’s likely the rest of the job will stand up to anything.  If a house is built on shaky foundations it will eventually fall.

This is very dangerous!  And – it can prove to be extremely costly in the longer term, when someone qualified has to be brought in to fix things up!

The difference in cost between employing an excellent person and a mediocre one will be more than made up by the value created by the former, and in a very short time. Remember, – the other side of the coin is this – if you pay peanuts, you’ll likely get monkeys!

When specific skills are required for specific non-frequent tasks, outsource them. Even if the cost is quite high, it will be far more effective than if you tried to do the job yourself – and it’s a one-off cost too!

Now, – even though I’ve said that its important to employ the right people (and I must emphasise this), the advent of new technology and the Internet means that outsourcing this kind of expertise has never been easier.  For example, we can help clients – anywhere in the English-speaking world – by logging into their computers using the internet, and checking the work done by a small business-owner’s employees. (if you want to know more about this, check it out on our website.  It’s relatively inexpensive and all you need at your end is an internet account and an ADSL broadband line.)

Whatever you do, make sure that the information is reliable, regular, up-to-date and accurate.

INSTALL SIMPLE BUT EFFICIENT SYSTEMS OF INTERNAL CONTROL.

Accountants are notoriously pedantic when it comes to installing systems of internal control.  Don’t get me wrong – the systems they install WILL work. The problem with them is that they’re often designed for Accountants and as a result they’re often not simple for the average small business owner. 

And quite often, they haven’t been sufficiently customised to the needs of the business.

In a small business environment, it won’t be long before people start taking short cuts to make their lives easier. (including the Boss!).

Systems of internal control should be designed to achieve two main purposes –

• to enable the flow of funds in and out of the business to be properly managed relative to the skills of the people using the system, – and
• to cater to the leadership style of the particular business owner.  Some leaders love detail, and others don’t!

I have come across administrative systems that are so complex they dictate to the enterprise what needs to be done.  Systems are there to manage what you tell them to, and not the other way around. 

The system should be able to accurately record all transactions and enable the handling of all queries in the quickest possible time.  The use of paper should be kept to a minimum.  Developments in modern technology make this eminently possible.

At FINSERV we specialise in setting up such systems – they’re relatively inexpensive, and they work!

USE A COMPUTER.

It is surprising how many small business owners still avoid the use of a computer to assist in the management of their businesses.  Many of them still see it as being a modern accounting machine, to be used only by accountants and bookkeepers.  They have no idea that for the sake of an hour or two in front of the computer each day, they will be able to keep on top of the daily performance of every aspect of their businesses.

In an article written by Michael Plumstead for SUCCEED magazine he said this:

“Identify which daily or monthly tasks are critical to your very survival and then start talking to everybody you can find about the right technology to cover those important areas of your business… Start small and grow slowly.  If the technology saves you time, saves you money and enables you personally to work more efficiently, then buy it and learn to use it.  Do not over-learn…Technology is a means to an end – to grow and manage your business. It must not be used to plug weaknesses in your personal skills. Use it thoughtfully to improve your strengths and either to save you money or to increase your income.” (emphasis – mine!)

Today’s computers are cheap, efficient and provide a host of management tools to free up enormous amounts of a busy entrepreneur’s time.  Apart from financial record keeping, they provide Daily Planners, electronic banking, access to the wealth of data available on the world wide web, calculators, data storage & sorting facilities and a host of other features.  Modern software has also eliminated the need to be able to type quickly as programmes exist which enable voice-activated data capture.  Letters can be typed by just talking to your computer.

Most importantly, they have enabled modern business owners to analyse the performance of their businesses in a matter of minutes – a task that forty years ago would have taken hours and even days by a highly qualified accountant.

In this high-tech information era in which we live, we need as much (meaningful) information as we can get, to stay ahead of the pack in our enterprises. The comment “I’m old-fashioned about computers!” won’t wash with me any more.  And if you really feel strongly about not using one, then at least employ someone who will!  Either way, you can’t afford to be without one!

Today, margins are constantly under pressure; new products, new fads and trends are coming on to the market at an ever-increasing rate, so if a business owner wants to keep his head above water, he simply has to keep his eye on the numbers.

Many business owners don’t do this and operate on the basis of “as long as I’ve got cash in the bank, I must be making a profit.”   While this is generally true, to a certain extent it disguises the fact that the business could be under-achieving and any negative trends may not be seen until it’s too late. 

Most small business-owners have some idea of what the break-even point for their respective businesses is – it’s a sort of gut-feel!  They operate on the basis that as long as they’re exceeding their ‘break-even’ they’re doing alright.  That’s a very negative way of trading and is likely to cost a great deal in the long term.  Even though business is all about the bottom-line, it’s not just about the bottom line!  Does this sound crazy? Well, we do have to make a profit if we want our businesses to stick around and grow, but monitoring your trading performance is not just about checking on the bottom line.  It’s more about what happens between your sales and the bottom line that matters – because there’re huge amounts of opportunity lurking in every expense account, every product, every customer, every supplier – and even in the productivity of your employees.  Do this well, and the bottom line will take care of itself – and will surprise you!

The fact is most small business owners could be doing very much better if they knew how to apply a few basic rules.

With margins so low and competition so fierce, we need to know TODAY, how well we did, YESTERDAY! And we need to have some sort of financial analysis of our performance that will help us to fine-tune that performance for TOMORROW.

 John Maxwell, the popular author of a number of self-help and leadership books, penned a law of teamwork – called the Law of the Scoreboard, which states: “the team can make adjustments when it knows where it stands.” (The 17 Indisputable Laws of Teamwork – emphasis – mine.)  He goes on to say that the Scoreboard is essential to understanding, to evaluating, to decision-making, to adjusting, and to winning.  Simply put, he says that “When you know what to do, then you can do what you know.”

These are important aspects to consider and I want to unpack them a little more:

• Understanding. There are thousands of small business owners out there who know very little about basic financial management.  They rely heavily on an in-house bookkeeper, or a firm of practising accountants for information, but inevitably, these folk tend to be reactive in nature,  and they tend to only respond to requests from the employer or client; very rarely to pro-actively offer advice when its needed.  This is also largely because they only have sight of the financial information a long time after the fact.  So, – if you’re one of those business owners, then you need to get out there and attend a course on financial management for non-financial managers.  (If there isn’t one readily available in your town, contact us and we’ll make a plan for you.)  Get to know the basics; so that you understand the elements of costing, the difference between mark-up and gross margin; labour productivity, among others.  You may know your product better than anyone, and you may make it better than anyone, but if you don’t understand the financial concepts that go into it, you will lose out.
• Evaluating.  Once you have an understanding of how the various cost components come together, you can very soon see which products are the most profitable; whether you should be making certain products at all; whether certain customers are worth selling to, and whether your overheads and drawings are in keeping with your income.
• Decision-making.  Now, I don’t know about you but if I don’t know what’s going on in any given situation, then I find it very hard to make decisions; and what’s worse – this just leads to stress.  In fact, indecision is the mother of stress!  And, if you don’t know what’s going on, and you do make a decision, it may well end up being the wrong decision – and simply because you did not have the correct information to enable you to call it right first time!
• Adjusting. Once again, if you’re monitoring your trading performance on a regular basis, and you understand the fundamentals that make the business tick, and you’re able to evaluate the results and come to a decision – you can make the adjustments you need to, quickly! I can’t tell you the number of clients I’ve worked with over the years who vacillate on the important decisions, and it ends up costing them money.  If you’re bleeding and you make the decision to stop the bleeding – guess what? It won’t happen unless you make the relevant adjustments – unless you implement; or execute – unless you do something!
• Winning.  Well, this goes almost without saying doesn’t it?  If you’re on top of your game in this regard – you understand the business dynamics; you’re able to evaluate the results, make quick decisions, and implement your action plans – you will win; you will succeed!

With this in mind, there are a couple of basic requirements that I believe are non-negotiable for small businesses, if up-to-date and accurate trading results are going to be available.  In the next newsletter, I’ll go into those in more detail.

If you’re making a profit every month yet still battling with cash flow, there’s every likelihood your book debts – the amounts owed to you by your customers on credit – has got out of hand.  Now, it’s clear that if your business is growing then it’s likely that your customers’ ‘book’ is also growing; and one needs to take that into account when considering strains on cash flow – but, what is vital is that your ‘book’ is not growing out of proportion to your sales.  A key performance indicator to keep tabs on in this regard is what is known as the “debt collection period”.

Extending credit to customers can be very risky, especially in the retail sector these days, when job security is a thing of the past.  In fact, for most small retail business, I would suggest you don’t sell on credit at all.  It’s cheaper, in the long run, to let the Credit Card institutions carry the risk – even though the initial charges they levy are – in my humble opinion – nothing more than a legalised protection racket!  So, if you’re going to be buying raw materials to make something for a customer, make sure you take a deposit in advance to cover what you’ll be buying.

If you’re in the business of extending credit to the commercial sector, you need to be even more diligent.  In today’s business world, credit agreements are signed with gay abandon and often without thought of being honoured.  Investigate your commercial customers carefully – before they become customers.  Take into account the business sector they operate in – because some sectors are worse than others!  And, whatever you do, don’t allow too much leeway beyond your normal credit terms.  Customers will very quickly learn to take advantage of you.  Whatever you do, be consistent so that your customers know exactly what to expect from you, every time!

Nowadays, we have a highly mobile working population in South Africa, many of whom can be difficult to trace.  If customer expectations or the nature of your business compels you to sell on credit, you need to manage the risk with a great deal of diligence.   People today also tend to be shameless when it comes to honouring their debts.  In fact, quite often, they will deliberately close a business down today, to avoid having to meet their obligations, and open another one tomorrow, selling exactly the same product!

This is even more important nowadays (2009) after the introduction of the New Credit Act in South Africa. If you don’t screen potential credit customers well enough, you may find it almost impossible to recover your money from them through the courts!

Customers who pay late (or not at all) cost you money by reducing your cash flow and directing your time towards collections rather than making more sales.

The person you employ to do this collecting job should be experienced in the art of debt collection (because it is an art!).  I like to refer to them (fondly!) as “dragon ladies.”  This doesn’t mean they are completely unapproachable, (or that they breathe fire!) but they have learned, generally speaking, not to take ‘No!’ for an answer. 

The job function can best be described as that of Debtors Controller or Credit Manager.  Employ the best one you can, pay her well – she’ll be worth her weight in gold! (And please – I’m not inferring that men cannot do this job – it’s just that women seem to reign supreme here in most businesses!)

And don’t avoid getting involved in the collection process yourself!  In fact, it will probably be critical if your business is going to survive.

It may be worthwhile, particularly with those ‘sensitive’, large customer accounts that, though they tend to pay late, they buy a lot from you.  Get to know your customer’s business and his routines with regard to payment, and then use it to your benefit.  You may need to get in the car and go and collect the cheque yourself.  People find it very hard to say no to someone eye-balling them from across the desk!  Once you’re there, talk to his staff, have a good look around – and listen to other suppliers who sell to him.  You may pick up a disturbing trend – that his business is already on the slippery slope – and in this way you can negate any further losses.

STOCK MANAGEMENT

Some of you may ask, “What has stock management to do with cash flow?”

Well, every bit of stock on your premises, that remains unsold, ties up cash.  It is quite simply ‘cash on the shelf’.  And, the longer it stays on the shelf, the more it deteriorates and, of course, the longer it keeps cash out of the system.

It is vital therefore, that every item of stock is analysed on a regular basis.   Make sure you take time out to study your inventory list.  Your analysis should include some of the following

• The number of units of a particular stock item sold in an average month.  This often referred to as its ‘demand’ or ‘volume’.
• How profitable these units are.  This is sometimes referred to as the marginal profit per item.
• How long it takes to turn them over.  This often referred to as the ‘stock turn rate’ or the ‘stock holding period’ and is usually measured by the average number of times it turns over in sales in a year; or in the latter case, the average number of days it remains in stock. 

Unless you have a computerised stock management system, or you have very few items of stock, this analysis will be very difficult, if not impossible for most small businesses to do.   I would definitely advise having such a system in place, particularly if you carry a wide range of stock items for re-sale. 

When it comes to stock management, it is generally accepted that The Pareto principle will apply.    For those of you who haven’t heard of this principle, it is often known as the 80/20 Rule.  Richard Koch, who authored a book with this title, says this:

“The 80/20 Principle can and should be used by every intelligent person in their daily life, by every organisation, and by every social grouping and form of society.  It can help individuals and groups achieve much more, with much less effort.  The 80/20 Principle can raise personal effectiveness and happiness.  It can multiply the profitability of corporations and the effectiveness of any organisation.  It asserts that a minority of causes, or effort, usually lead to a majority of the results, outputs, or rewards.”

To look at this principle practically from a stock management point of view, it is quite likely then, that 80% of the number of stock items you carry will account for only 20% of the value of your stock.    Therefore, if you spend time just looking at those items which account for 80% of your stock value – and that will usually only be 20% of the items you carry – you will invest a great deal less time managing a great deal more of your investment.

It is also likely that the number of stock items which account for the greatest portion of your sales (say 80% by volume) will probably only account for about 20% of your gross contribution to overheads and profit, by value. 

It is important, therefore, to be able to identify where most of your risk lies, so that you can take steps to maximise your profits right down the line; and – enable you get rid of those slow-moving stock items, which tie up a lot of cash.

By managing your stock in this way, you will be able to identify the goods that generate a higher return, and you will be able to minimise the effects of the lower margin items on your overall profitability.   It also means that you will more than likely carry an optimum level of stock, minimising the amount of cash tied up in it.

There are a number of different stock management systems around, some of which are very sophisticated and will never be used by small business.  (This includes ‘Point-of-Sale’ (POS) systems).

However, I would recommend that most small business adopt the following view with regard to their stock on hand – and for ease of reference I will refer to it as the ABC system.  Quite frankly, you can call it whatever you like, as long as it means something to you and you’re consistent in your application of it.

 Businesses that use this system divide their stock into three different categories:

• The A group includes those items that account for the highest Rand-value investment and will more than likely be made up of goods which number 20% of the total number of items and 80% of total stock value.  These are also the highest ‘risk’ items, because losses are likely to cost you dearly.
• The B group are those items that account for the next largest share of the total investment.  They are more than likely to be those goods which have an average unit cost and account for about 80% of the 20% of stock value left.
• The C group are those goods that account for a small Rand investment.  These are very often, quite literally, the ‘nuts and bolts’ of your stock holdings, and in reality may only account for about 20% of 20% (or 4%) of the total stock value.

 A perpetual inventory control system (A computerised stock program) is essential for managing the A group items on a daily basis.   These are usually high-value, fairly fast-moving stock items.  These systems are readily available today in most general, proprietary accounting software, and are also generally inexpensive.  There is no excuse, if you’re trying to manage your stock efficiently, not to have one of these programs.

The B group can be managed through periodic (weekly or monthly) checking.   This group is comprised of usually fairly fast-moving items, but they may be smaller and of lower unit value.  They also need a computerised stock program to be well-managed, but in this case, I would recommend checking at least once a month.

The C group can be managed more simply through something called the Red-Line Method.   In this case, re-orders of goods are only placed when enough stock has been removed from a bin containing the inventory item, to expose a red line that has been drawn around the inside of the bin.  A typical C group stock item would be bolts and nuts.  In this case, you just want to have reasonable idea of their security – that they’re not being pilfered on a regular basis!

The point of having these control systems in place is to manage your cash investment in stock.  Stock that remains unsold ties up cash and does not generate a profit until it is sold at a profit. 

If it stays on the shelf too long, it will deteriorate – or simply go out of ‘fashion’.  (Try selling a carburettor for a car these days!)

Quite obviously though, it is important that ALL stock items are kept on a computerised stock system from an administrative point of view, but the MANAGEMENT of them (which takes time!) can be done differently.(if you would like some advice on how to set up a simple, yet effective stock management system, please contact us.)

SPREAD YOUR FIXED MONTHLY PAYMENTS.

Most small businesses I know pay very little attention to the date they commit to fixed, and regular, monthly payments.  As a result, a number of fairly substantial obligations can arise at a time when cash flow is at a premium, and all at the same time. 

For example, a business may have three instalment sale loan repayments of R3,000 each, rent of premises of R8,000, the telephone account of R2,000 and the cell phone account of a similar amount, all happening on the 1^st day of the month. 

It may be that most of the income for your business is only received on the 7^th day of the month (because although people tell you they’ll pay you on 30 days, they’re invariably a week or so late!), which means that for the six days preceding, you will be sorely stretched to meet your cash commitments.

Analyse all your fixed monthly payments in terms of the date on which they will normally have to be paid.  Then try to spread these dates for payment out across the month (as much as is possible), and especially after most of your income has generally been received. Most financial institutions will be amenable to re-scheduling your monthly instalment dates if you just ask them.

LOOK AFTER YOUR BANK ACCOUNT!

One thing I have noticed in my thirty-odd years of dealing with a number of South African banks is that they have an amazing corporate (technical) memory.  This is especially true nowadays with the advent of high-tech communication and computers.   Although people work in banks, in truth, the banks are run by systems!

One may think that only the ‘black’ marks are notched up on record, and this may well have been true in the days when your local Manager had authority to oversee your account, but today, the computer is all-powerful and all-seeing, and even the good things are noted!

Therefore, as long as you’re prepared to make sure that you NEVER (and I mean NEVER!) transgress the arrangements negotiated with the bank, then over time, you will build up a most enviable reputation for creditworthiness.  Your Banker will be only too happy to recommend you as a good credit risk to all and sundry!

And do you know why?

Well, – banks all over the world use a system known as ‘behavioural scoring" (BS.) It is based on the manner in which the customers, (you and I) operate our accounts.  The system is computer-based and picks up customers’ behaviour in relation to how they run their accounts. (Good, - or bad!).

These characteristics are weighted in terms of their capacity to predict future behaviour of the customer and are reviewed from time to time in the light of how the account is actually run.  Some of the information that is recorded is – the number of times the overdraft limit is breached and by how much, – the number of transactions moving through the account, – whether items have ever been dishonoured, – and how old the account is.  Talk about Big Brother watching you!

Being computer-based, the system is consistent and fair as it applies the same criteria to everyone.  Generally, I think it presently only applies to current accounts but will be extended to others.

Keeping your bank manager informed, IN ADVANCE, is imperative.  Just as imperative is ensuring that whatever you have told him will happen, happens. 

Don’t make promises you can’t keep.   He needs to know that you are reliable and that the information you supply him with is just as reliable.  With on-line access to Internet Banking, it is easy to keep ahead and with a simple daily cash flow forecast, on a spreadsheet, you can make sure that limits will never be exceeded.

And, be a little conservative when you do these forecasts! If you’re going to ask for a temporary extension to your overdraft facility, make sure you never use all you ask for.  And, – if you say you’re going to need it for two weeks, make sure you pay it back in ten days.   In that way you will build up a huge reserve of ‘brownie’ points with your bank.  This may come in very handy one day!

Now, I know that cash flow can get very tight from time to time, and managing the old bank account becomes increasingly more difficult. While I certainly wouldn’t recommend this as an alternative in anything but the most trying times, it is easier to fall back on the broad shoulders of creditors than it is to run afoul of the banks’ BS system.

Not only is it easier, but if it’s only for a short time, it can be whole lot cheaper too, as most creditors don’t start charging interest until you’re about 30 days overdue. (And the banks are charging a chunk of cash for a dishonoured cheque these days.)  So, rather than bounce a cheque on a creditor (which will tick him and your banker off!), talk to him, get him to wait a little while, and you’ll score hands down. But, talk to him first, - don’t just do it!

MANAGE YOUR CASH FLOW ON A MORE REGULAR BASIS (WEEKLY OR EVEN DAILY)

In distressed businesses, cash is vital.

 "You can’t talk about the future if you’re going to hit the wall tomorrow," I’ve heard it said. 

Start by drawing up daily, weekly and 13-week (three months) cash-flow projections.     Monitor all money flowing out and, on the flip side, press for faster collections, taking on the job yourself, if necessary.

Most small businessmen I know will visibly sag at this point!

 “I don’t know how to do a cash flow projection”, most of them will say.    Well, if you would like some help, I have put together a few simple spreadsheets, which make up an equally simple 13-week (three months) cash flow forecast, which I have called a Cash Flow Focus.  It’s not too complex to use if you’re comfortable around spreadsheets.  Just contact us, and we’ll gladly send the templates to you.

The key to its success is to keep it up to date every day.  It is comprised of:

• A schedule of fixed monthly payments reflecting the date on which they are normally paid. Just by allocating the payments into the weeks when they will occur will give you an idea of your cash commitments per week, for the next 13 weeks, and an indication of when your greatest cash requirement will occur.  I have found that just this schedule contributes very positively to your time management in terms of priorities!
• A current aged analysis for each of your suppliers and customers, including your estimate of when the amounts are likely to be paid/received, over the 13 week period. This will be determined by pre-arranged credit terms and limits, and how negotiable suppliers are to extended terms.  When you make your estimates, ensure that you are not too optimistic about your collections.  Sadly nowadays, people tend to make promises they can’t keep – and can let you down at the last minute; and may not even warn you about it either!  And if your customers don’t stick to their commitments, you won’t be able to meet yours to your suppliers.
• A forecast of future income and associated expenses.  This should be based on a soundly prepared budget, which is grounded in reality and erring on the conservative side. Don’t forecast income based on wishful thinking – be realistic, and take into account seasonal fluctuations as well.  This is very important – especially if you’re really in a hole right now.  You must be able to see some light at the end of the tunnel, and if you can’t forecast an improvement within the next year, you may have to consider pulling the plug!
• A summary of what your cash flow is likely to look like in relation to your banking facilities.  Playing with the figures on a daily basis within this forecast will enable you to keep ahead of any surprises, will relieve you of stress, and keep your suppliers and bankers happy.  One of the great things about computer spreadsheets these days is that you can introduce some ‘what-ifs’ into the equation; simply moving certain collections a week forward, and certain supplier payments a week back, can make a huge difference to the entire forecast!  Remember – make sure that your facility with your banker is never prejudiced – you may need this friend in the future!    -  In the next newsletter, I’ll cover the two most important  aspects of cash flow management – collections and stock management.

Business stands or falls on its cash flow.  Let me emphasise this again: – Business stands or falls on its cash flow!   As a business owner you have to manage your cash flow!

So what is this thing called “cash flow”? And why is it something that gets so little attention, at least until its stretched to its limits? 

Well there are two types of cash flow: 

• inflows – usually represented by sales, and
• outflows  - usually represented by expenses. 

So, isn’t this just another way of talking about income and expenses?  Well, no, it isn’t! 

And one of the differences between the two is timing.    

I can sell something to somebody today and it’s referred to as a sale.  It only becomes an inflow, when I receive the money for it, which could be tomorrow, or next week or next month, depending on the terms of the sale. 

Conversely, I could purchase something today on credit, and even receive the goods, and it will be known as an expense of the business.  It only becomes a cash flow item – in this case, an outflow, – when I finally pay for it.

Another difference between the two is the nature of the transaction.  Cash flows can be both ‘trading’ and ‘capital’ in nature. 

I may decide to purchase a new machine for my factory.  It’s going to be used to manufacture products which I will be selling.  The cost of the machine is not a trading expense but a capital one.  I may also be paying for the machine over a period of years, so although it is a capital expense in the current period, it is a cash outflow each month over the term of the loan.  Sales are known as trading income, while the proceeds of a loan would be regarded as capital inflows.

IS IT EASY TO DO?

Surprisingly, even a number of experienced bookkeepers and accountants struggle to prepare cash flow forecasts.  This is simply because some businesses are very complex in nature, and their terms and conditions of trade are complex too.  At other times, its simply because the nature of cash flow is not fully understood. 

Paradoxically, it’s the most important function of financial management of a business and if not done well, can spell doom for any enterprise.

Most small businesses I know manage their cash on the basis of ‘what comes in, goes out – and what goes out, goes to the one who is making the most noise.’     

It’s called crisis management!  They are unaware of any potential cash flow crunches a few weeks down the line and any assault on their overdraft limit results in a frantic call to the bank manager for help! 

The cost to the business of this kind of cash flow management is enormous because everyone in the organisation gets involved. The salesman has to stop selling to collect outstanding receipts (which negatively affects sales), the bookkeeper stops keeping the books (which negatively affects the financial management of the business); and even the cleaner may have to stop cleaning to run down to a customer’s premises to collect a promised cheque.

So, there are a couple of key things to constantly bear in mind about managing your cash flow, if you want to keep control of it.  There are 8 of them:

• Make profits, not losses,
•  And if you’re trading at a loss?
• Make enough profit
•  Spread your fixed monthly payments
• Look after your bank account
• Manage you cash flow more regularly
• Improve your collections
• Manage your stock.

In this newsletter, we will deal with the first three, which is all about the effects of profits and losses on the cash in your business.

MAKE PROFITS, NOT LOSSES!

The first thing we must realise as business owners/managers/entrepreneurs is that unless we are making profits in the business, it is unlikely we will continue to have a positive cash flow.   

If you’re making money, you’ll feel it in your cash flow. And, – if you’re losing money, you’ll also feel it in the cash flow!

In the days when business was largely transacted on a cash basis, the business owner would know that as long as he had money in the bank, and that it was growing, he was making a profit.  It’s not quite so easy these days!    So, every attempt should be made to ensure that the business remains profitable, at all times.

HOW DOES THE CASH KEEP FLOWING IF YOU’RE TRADING AT A LOSS?

But – what if you are making a loss?

This is what I find usually happens: losses aren’t really known (the full extent of them anyway.) because of poor record keeping, so as soon as the cash runs out, many small business owners cover their shortfall by extending the payment due date to their suppliers.

I’ve even heard them tell an irate supplier, “well, I haven’t been paid yet, so you’ll have to wait!” 

The problem may have nothing to do with when you receive your money from your customers – it may have to do with recurring losses that you don’t know about! 

Losses have to be funded by someone, and if you’re not funding it by putting more money into the business, then it’s likely your suppliers will be doing so!  (And usually without their permission!) 

This creates a vicious circle because it initially disguises the extent of the problem. It later leads to other supplier-related problems, and inevitably, the eventual demise of the business.  In the wild, animals that become sick or are wounded eventually get hunted down by wolves or hyenas.  Its not too different in the business environment – if you’re struggling with your cash flow (you business lifeblood) and you’re financially wounded, it won’t be long before the supplier ‘wolves’ will close in for the kill!

MAKE ENOUGH PROFIT!

Even if you are making a profit every month, that profit should be enough to pay you a salary and to cover the capital portion of any loan repayments you have to make. 

Profits, remember, are calculated only after the interest portion of a loan instalment is accounted for.  This is particularly important as you near the end of the life span of a loan agreement because the capital portion of the instalment will account for most of that instalment. (Everyone generally knows that the first months of an instalment loan are usually made up mostly of interest!) 

If you’re only just breaking even every month, and your interest costs are low, then you may be in for a “cash” surprise because you won’t have enough cash to meet the capital portion of your loan instalments.

It is also important if you, as the business owner, are in the habit of drawing additional amounts out of the business “on loan account”.  These withdrawals have nothing to do with profits or losses, but are very definitely cash outflows. 

Don’t – and let me stress this again, – DON’T – take out more money than your business is generating in profits each month!  Far too often, business owners tend to regard their drawings in the same way an employee regards his or her salary – as a right and a business obligation.  You have to get it into your head that when you start up a business, you lose those rights.  At the same time, if the business is highly profitable, and cash-flush – you are at liberty to help yourself!