Showing posts with label Business Strategy. Show all posts
Showing posts with label Business Strategy. Show all posts

Tuesday 29 April 2014

Profit or Cash - which is more important?

Jim Stockton, Senior Lecturer in Finance at the Warrington School of Management (University of Chester), discusses profitability and liquidity planning – essential elements for every business to succeed!

Introduction

There are many reasons why these failures occur-some relate to the lack of a coherent business strategy, some to the absence of a focussed market research but many are simply due to the absence of some rudimentary financial planning, or to be blunter, basic budgeting. This brief article seeks to point out some fundamentals on this often neglected skill or to quote Monty Python the “bleedin obvious”!


Budgeting

Budgets are generally regarded as having at least five areas of usefulness:-
  • Budgets tend to promote forward thinking and the identification of short term problems
  • Budgets can help, in larger businesses to co-ordinate activity and ensure a common understanding exits on priorities-for example there is little point in the sales team aiming to deliver optimistic targets if the production team have a different aim in mind
  • Budgets can motivate managers and staff to improve performance if “stretch “ goals are set
  • Budgets can help control a business-simply put does actual performance, measured monthly, compare favourably or adversely with the budget?
  • Budgets can also act as a means to authorise spending within a business
coinsThe purpose of this article is to concentrate on the difference between profit and cash flow or, put another way, highlight the fact that profitability AND liquidity are opposite sides of the same coin when it comes to business survival. Business may fail through lack of profitability but its running out of cash that actually sends them to the wall. Indeed it is entirely possible for a profitable business to go bust by failing to pro-actively manage cash flow (known as overtrading)


Profitability

Let’s consider some basics-business has to generate profit in the medium to long term-after all, in our capitalist society, that is what it is all about-why take the risk otherwise? Business entrepreneurs see an opportunity in the market place to launch a product or service and to do so in a way that will generate a profit possibly with an idea or expertise that others will find difficult to copy. A business plan can be developed around this which should be capable of being expressed in financial terms-in other words- a profit forecast based on the sales compared to the cost of those sales. All pretty straightforward so far hopefully.    This forecast or budget can and should be expressed over a reasonable time scale and should be as detailed as possible especially in the early days of the business-certainly for the coming year (broken down into months) and hopefully for another two years after that in order to give a reasonable perspective on the future of the business.. Let’s assume our small business compiles a profit forecast and that it looks reasonable-losses can be incurred in the early months as long as the longer term position indicates future profitability on a sustained basis. This profit projection can be enhanced by compiling a forecast balance sheet which will indicate:-
  • The assets the business will own
  • The liabilities it will generate
  • The impact on the owners initial and subsequent investment
It is important at this stage to differentiate between the long term (investment in fixed assets such as premises, machinery and vehicles) and shorter term assets such as stock, debtors and free cash). Equally a distinction needs to be made between short term financing obtained by trade credit from suppliers and an authorised bank overdraft and longer term funding via a formal bank loan for example.


Cash flow/liquidity

It’s at this point where the cash flow forecast becomes important-even vital. Our profit forecast can and should indicate business profitability based on the assumptions made by the owner of the business. However the next question to be asked is how does this affect cash flow going forwards? Just because the profit forecast is positive does not mean that the business will generate a positive cash flow and enable the business to meet its short term liabilities which includes those nice people from HM Revenue and Customs as well as suppliers to the business. The profit forecasts need to be converted into cash flow forecasts that take account of:-
  • Credit terms to be granted to customers
  • Credit terms obtained from suppliers
  • Stock holding levels to prevent stock outs but avoid overstocking
  • Investment in longer terms business assets
  • Use of any agreed overdraft facility
  • Longer term financing facilities
Plugging this information into our cash flow forecast should reveal any problem areas regarding whether the business will run out of money or need to increase any of its financing sources i.e. additional overdraft facilities, a longer term loan arrangement or increased investment in the business from the owner. At this point, it should become clear whether the business has a chance of financial survival or whether a complete rethink is required concerning the business assumptions built into the profit forecasts. Sometimes numerous iterations are required (know rather grandly as “sensitivity analysis”) in order to arrive at a business plan that meets the business owners’ aspirations but is also grounded in commercial reality as far as the generation of cash is concerned.


Summary

This article is necessarily brief and skips conveniently over numerous issues in order to deliver a fundamental point-(remember Monty Python above?). Business must financially plan to in order to succeed and that planning must involve profit planning and liquidity planning. One without the other is a business disaster waiting to happen.  


  Jim Stockton, Senior Lecturer in Finance at the Warrington School of Management (University of Chester)    



    

Friday 14 March 2014

Success and Failure in Small Firms: Take a SMaRRT Approach


Small firms are the backbone of the UK economy; they account for around 99% of all
registered firms and employ 50% of all workers. Professor Lawrence Bellamy provides
expert advice on how small companies can ensure strategic success.


Despite decades of research on small firms, there is still a lot to learn about when it comes to success and failure. Whilst there are no easy answers, there are some indicators - common mistakes made and examples of good practice. Most of these can be linked back to strategic awareness and the ability to operationalise ideas. One way to consider these is to use the SMaRRT acronym:

STRATEGY

The ‘market’ is constantly changing. What worked one month may not work the next. Small firms don’t suffer from the ‘oil tanker’ problems that large firms do and, therefore, one of their key strengths is
adaptability (but they need to be alert to new possibilities). Trade magazines and journals often provide information on key industry changes and new technical developments; this information is useful but tends to be historical. The most up to date information tends to come from key customers and suppliers - by maintaining contact, you can gather data on a daily basis, enabling you to respond to market changes (but
you need to review what you are finding and check it with other information too).


Do your research!

Whilst it is important to deal with the day to day, it’s also important not to lose sight of the ultimate goal. Having a long-term vision allows you to view key decisions as steps towards an ultimate objective. Are
the things you are doing moving you in the right direction? As the business develops, your knowledge grows and the market evolves it may be reasonable to adjust your long-term direction. Whatever you decide, try to
make your offering distinctive. Why should customers choose you?


MANAGEMENT

Lack of management skills are often cited as the root of many problems when it comes to success and failure in small firms. It is an easy assumption to make, as you can always criticise a business after something goes wrong and blame the management. However, this area can be broken down into specifics - delegation
is a big problem for many owner-managers. They have started the business, built-up the customer base and probably done most of the roles within the firm. They hate to let go!

If it is a specialist task, then employ a specialist. Release your time to work on something else of
importance and which you are good at. Planning, innovation, budgeting, people skills and
managing risk are also important.


RISK

Manage the downside: in approaching any situation think about the risk involved and
how it can be minimised. Making a significant purchase? Could you dispose of it easily and what would it be
worth? Would it be better to lease? Taking on new staff? If the projects they are working on don’t go forward then can they be reallocated? Would you be better outsourcing that operation?

Get your planning right and reduce the chances of failure. Run through scenarios when making key decisions; if ‘A’ happens, how could we respond? Could we prevent this from occurring? Use specialist insurance if you need to. If you are lacking experience, then use a mentor to assist you. Build up your personal ‘knowledge bank’ and prevent yourself being ‘blindsided’ by an event; critical thinking skills are crucial.

RESOURCES

Finance, for small firms, is probably the largest single problem cited as a cause for failure. This can occur in a number of ways - liquidity problems occur simply because the time it takes customers to pay the firm is greater than the time you take to pay your suppliers (i.e. cash flow). In bridging the gap, firms fail to manage their debtors-creditor balance well and banks are often less helpful than they might wish for.

Small firms also tend to be underinvested; ‘make do and mend’ rather than invest in equipment which will make you twice as productive. Assess your investments carefully and look at the payback. Firms
really need to get a handle on what their fixed and variable costs are, especially in set up or growth phases when these can change dramatically. Monitoring and budgeting is crucial. When it comes to equipment (whether it’s for IT, your fleet or anything else), you need to have a renewal plan. Old kit is potentially unreliable and less productive than new. However, new kit depreciates quickly and financing costs can be high.

If you are running large premises plan your maintenance and if times are hard, you can leave replacement and renewal a little longer without too much detriment. People make your company perform well… invest in them. It’s not always about the money either; try to engage your employees by letting them try new tasks, recognising them with encouragement and personally engaging with them. Get to know your staff
and what motivates them - can you use the information within their job design?

TARGETS

Organise your firm through targets and measure them: new business gained, margin achieved, output levels, cost reduction, response time. Measure the things which matter, though. Break your business down into periods of operation and assign projects for completion within them, e.g. development of new products,
website update, IT upgrade, new area promotion, customer account review. Whilst running the day to day, projects will take the organisation forward. Cascade targets down to your employees and get them involved in the challenge, with appropriate support.

Ultimately, all owner-managers get to a point where they feel that it’s time for something new. So you also need to have an exit strategy. After all if you can be successful in one business, why not three
or four? There is always a right time to move on if you’re working SMaRRT.

Professor Lawrence Bellamy is Associate Dean at the Warrington School of Management, University of Chester Warrington (Padgate) Campus.




Do you feel like your business needs a boost?

Warrington School of Management is launching Ignite Business Club on Wednesday 26th March  - an initiative designed to help businesses increase sales through: a business diagnostic, ongoing webinars and master classes, access to grants and a mentoring network. 

This launch event is free to attend and provides local business people with the opportunity to network and find out more about the Business Club. You will also get the opportunity to hear the inspirational story of local entrepreneur, Adrian Lomas who set up his business from a spare room in his house to grow it into one of the most successful digital agencies in the UK, with a multi-million pound turnover.

Book your ticket now