The three main areas we look at are cash, profitability and management.
The key principles of cash management are as follows:
Cash is “king”
Get closer to the cash, understand the cash flow, take greater control, and improve your ability to forecast your cash accurately.
Communication and predictability
Open dialogue is essential to maintain the confidence of the bank and other stakeholders.
Implement actions that have been agreed to be taken and closely monitor to ensure you deliver what everybody is expecting.
Working Capital can be a major drain or generator of cash and it is important to understand how much cash is tied up in working capital i.e. debtors, creditors and stock. Once you understand the working capital cycle of your business you can try and release or reduce the capital tied up in the business.
Normally businesses can get by with using monthly cash flows to assist in the management of cash but when cash is tight, different measures are required and a rolling cash requirement projection could be necessary. Sometimes it can help to forecast daily for the first two weeks.
Profitability of your business
A particular part of the business may be underperforming and in order to identify problem areas and make informed decisions, it is important to understand the profitability by business unit and the main activities carried out.
In today’s world of cheap overseas imports, to be successful you may need to differentiate or add value perhaps by offering a quality or niche product or service or through the level of service you provide.
A lot of the businesses I visit are very much focussed on sales growth – perhaps too much so. Remember that additional sales require more funding, possibly more staff, plant and machinery and sometimes additional premises. It is normally easier to first look at ways of making more profit from your current volume of sales by reducing costs and renegotiating terms for supplies and the sales you make.
It never ceases to amaze me the number of businesses which seem to almost think they do not need to produce much in the way of management information or that it is produced to keep the bank happy.
You need good information to base decisions on. I will often see fairly comprehensive management information packs produced but they will not be available until sometimes a month to six weeks after the end of the period covered. In this fast changing world each business should consider having up to a maximum of ten Key Performance Indicators or KPIs, these will vary according to the business and your accountants and bank should be able to provide you with input on what you need to measure.
The KPIs will often be sales related so you can react and make decisions quickly to maintain the supply of the right product at the right levels and to monitor your key variable costs.
Managing your business
It is widely regarded that management actions or inaction can often be the main reason for companies failing. A common feature of life in recent years is that everything seems to happen quicker than it used to. Managers must recognise changing conditions faster than ever before and react accordingly. The time between the start of the deterioration of a business and the failure of a business is in many cases shortening.
A lot of family businesses do not have sufficient involvement at the management level of people from outside the business – sometimes they are reluctant to take advice – some do not welcome or are not comfortable with challenge/input from outside the family.
Do not deny the problem and hope it will go away – the winners are normally the ones who recognise the problem and act early.
Management cannot be expected to know how to deal with every situation – don’t be too proud to ask for help or to take advice from outside parties.
In this piece we have only just touched upon the three main areas that we focus on but that is not to underestimate how much of a difference committing time and effort to them can make.