3 STRATEGIES FOR ADDED VALUE
There are many ways you can plan for future growth. 3 strategies that build added value are:
- Getting Clarity
- Controlling Cashflow
- Building a Solid Platform for Growth
Within each of these headings there are 4 key activities that are immediately implementable and will move your business forward.
For a video on business value insights, click here
ADDED VALUE THROUGH CLARITY
Clarity has 3 distinct parts:
- BUSINESS PLAN
- KNOW YOUR NUMBERS
- RELATIONSHIP WITH YOUR BUSINESS
MAKE A BUSINESS PLAN
Most businesses have either never produced a business plan or have one in the bottom of a drawer that no one understands. Without a plan how can the business know where it is going or when it has got there?
The purpose of a business plan is to get everyone in the business working towards common goals with milestones to measure progress along the way. A business plan can be as simple or as complex as the business needs it to be – but it must be understood to be of added value!
The main steps are:
- Set long term GOALS (write down what success looks like when you have achieved the goals
- Break the GOALS down into 90-day milestones (tactics), describing what that looks like
- Identify what needs to happen for each of the milestones i.e.
- How many leads do you need?
- Conversion rate to sales expected.
- Operations are required for delivery.
- Cash is needed and
- Who are the people / roles required?
This will all add up to a comprehensive action plan for your strategic (long term) GOALS.
Key Foundations for a Business Plan
- What makes you different?
- Who buys from you?
- Why buy from you?
For more on understanding the current value of your business, click here
“Greatness starts with a clear vision of the future” Simon Sinek
KNOW YOUR NUMBERS IS ADDING VALUE
Is your business VIABLE? If you do not have an understanding of your key business numbers, you may be operating a business that will grow its way into insolvency! Business numbers are not just math or to be “delegated” to someone else.
One of the biggest holes in many business owners’ knowledge is a basic understanding of the key numbers. Not just Profit and Loss, Cash Flow and Balance Sheet, but the main drivers and levers within their businesses. The added value of knowing these is immeasurable.
Not knowing your numbers is a major handicap – you cannot plan or forecast effectively, you cannot manage cash flow (unless you always have a significant surplus) and you won’t know what products and services really make you money and profit! There are some critical questions to ask about your business that only the numbers can tell you.
Each business has its own drivers and essential numbers i.e. property will be % occupancy rates and rents outstanding, manufacturing will measure stock levels and utilisation. There are some basic numbers that all business owners should know and have access to on a regular basis – at least monthly.
- Sales (value and volumes)
- Gross Profit Margin
- Break Even Point
- Staff costs
- Cost of customer acquisition
- Marketing Return on Investment (ROI)
- Revenue per employee
RELATIONSHIP WITH YOUR BUSINESS – ADDING VALUE?
When you first started out in business you were excited about it. It possibly made you feel a little bit queasy – but you did it anyway! Are you thinking about a big pay-out in the future, which will reward you for the sacrifice now?
Very quickly the business takes over every aspect of your life and you find yourself working long hours, feeling isolated and wondering how you got here. You’ve lost your connection with what gives added value to the business.
Being on your own can be draining and demotivating.
You get too close to the business to be able to see it rationally – after all it’s your baby! You are financially and emotionally invested in its success. It is difficult to stand back, really look at the problems and then find solutions.
There are a couple of ways to keep your spirits up and keep going strong:
- Find a Mentor
- Join a Mastermind
- Find a network of like-minded people or
All the above!
How does your business serve you?
- Time freedom
- Cash freedom
- Less stress
- Long Term Wealth
- Short Term Income
One final point:
STATE YOUR VALUES!
Values are what you stand for in business and what you expect from others, including staff, business partners, customers and other stakeholders.
Having a clear set of common values builds sustainable, solid teams where everyone is aligned to the company goals with the same standards of behaviour. The expectations are sackable offences if they are not met! Values are not mission statements or single words in strategically placed motivation posters! They are living behaviours and added value to the business.
They are best described by think about:
- Qualities you value and look for in other people
- Characteristics do you detest in business people (you can state the opposite of these as values)
- People you have fired and the reason why
- Any one you SHOULD you have fired but didn’t / couldn’t
- The last person to really rattle your cage and why
Values are best expressed as actions for example one of mine is “I am pathological about confidentiality – I won’t share anything you tell me unless I have express permission to do so” which could be written as Honesty or Integrity, but a sentence actually shows what that looks like and how much added value it brings.
ADDED VALUE THROUGH CONTROL OF CASHFLOW
There are 3 vital steps for controlling cashflow:
- PROFIT MARGINS
- CREDIT TERMS
- OVERHEAD REVIEW
The amount of gross margin made per sale acts as a contribution towards the company’s overheads. Knowing how many sales you need to break even and cover your overheads gives you clarity for setting targets and managing cash flow.
Gross margin is a critical business number that every company needs to monitor and track. A failing of many start-ups is not having an understanding of the margin needed to maintain a healthy company. One of the main causes of business failure is lack of cash – this is often a symptom of poor margin control.
A relatively small change to the gross margin can have a significant impact on the business as a whole. You need this number to calculate your breakeven point.
Can you identify your margins on every product and service you offer? This immediately implementable task could save your business and certainly improve cash flow very quickly. A tiny tweak in margin can be a lot of added value to how easily a business operates.
“WHEN YOU LEARN HOW MUCH YOU ARE WORTH YOU WILL STOP GIVING PEOPLE DISCOUNTS.”
THE RIGHT CREDIT TERMS ADDS VALUE
The credit terms given to your customers can have a devastating impact on cashflow if not thought through properly. Plus, how long do your customers take to pay? Is it longer than the terms allowed?
Keeping control of debtors (the funds owed to you by customer) is essential for good cash control. If you are giving your customers too long to pay (or they are taking longer to pay you than they should) then you are funding their companies. This was a practice used by supermarkets in the past – crippling farmers and other suppliers.
Quick ways to improve this are:
- Change trading terms
- Ask for partial or full payment in advance
- Get a consistent credit controller process
- Charge interest on late payments
- Pre-credit screen your customers
- Understand your rights and the court process for debt collection
- Stop supplying bad payers (unless they pay in advance)
- Track your debtors’ days – and keep them low!
The break-even point is the levels of sales the business requires to cover their costs and make zero profit (but more importantly zero loss). Control of overheads means a lower break-even number.
A company’s overheads are all those costs that are incurred even if you didn’t sell anything this month. Overheads are any cost that would have been incurred regardless of the volume of sales activity.
You should be able to split out elements of your overheads into groups such as premises, staff, marketing, IT and administration costs. Tracking these numbers allows you to see if your costs are increasing and understand why. More importantly, it means you can take corrective actions quickly. A review of overheads often finds costs that can be eliminated without impacting the business, such as:
- Subscriptions for software or services no longer in use
- Retainers that are not providing value
- Purchases from suppliers with high prices
- Unnecessary spending that adds no value
- Overpayments of rent, rates, utilities
- Duplicate payments and deposits not returned
One final point:
CASH FLOW FORECAST
A cash flow forecast helps you keep control of your cash and prepare for when there are peaks and troughs in your cash.
Having a handle on your cash flow is one of the most important aspects of business management – because cash is the life blood of any business (even not-for-profit and social enterprise). Cash Flow forecasting sounds complicated, but it should be very simple and relatively easy – it’s mostly about finding the model that works for your business, that makes sense to you.
Keep it Simple.
The more complicated you make something, the less likely you are to maintain it. Equally, if you have someone producing reports for you, make sure you can read them – if you don’t understand them, then they are a waste of time!! Review the cash flow forecast as often as your business needs to. Always start with the current cash position.
At first using any model might seem a bit fiddly, but with practice, it becomes a useful tool to test the cash resilience of the business.
ADDED VALUE FOR GROWTH
There are 3 critical factors to take into account for growth:
THE RIGHT PEOPLE
No successful entrepreneur has ever built a business bigger than themselves without a supportive and talented team. Whilst founders may be the ones who take the first brave steps, it is their ability to recruit followers, supporters and challengers that keeps their businesses in the top 20%.
In a world driven by advances in technology that allow people to connect with greater ease, team work is still one of the biggest challenges in any size business. Many business owners simply do not “staff up” effectively or quickly enough to grow their businesses. Finding the skills and talent for each activity in the business – from operations to administration, finance, sales and marketing to customer service – is essential for growth.
One of the barriers many business owners perceive is the cost of employing expensive team members. Consider what the additional staff will be doing in your business. Be clear what value they will add, then think of it as investment. Especially sales people who should cover much more than their salaries very quickly.
An essential part of planning is the PEOPLE! See How to Fix Clarity for more on planning.
HIGH PERFORMING TEAMS
- Robust recruitment
- Clear, communicated goals
- Defined roles
- Effective and frequent communication
- Consistent effort and action
“TRAIN PEOPLE WELL ENOUGH SO THEY CAN LEAVE, TREAT THEM WELL ENOUGH, SO THEY DON’T WANT TO”
THE RIGHT SYSTEMS
Doing the RIGHT things is all about systems and processes! A process is simply any input that is changed into an output. A system is a set of processes that work together to complete a complex whole.
Systems are not just IT! Information technologies are tools used to operate and automate routine and repetitive processes. Systems are designed to be easily understood, teaching and optimising activities through the steps required to complete tasks. Processes invariably solve problems! Sometimes it’s as simple as a checklist on a piece of paper. “Keep is Simple” – the clearer the steps in a process are, the more likely it will be complied with. Then make sure you ONLY include activities that add value and NOTHING else! To get started from scratch:
1: Writing down what you currently do in a set of circumstances
2: Optimising the written instructions, testing them to see if they deliver the preferred outcome.
3: Repeat step 1 and 2
No process starts off perfect, but the idea is to get as close as possible. Try asking: What would the best in the world do?
- What is the desired outcome of this process?
- When does the process begin and end?
- What activities move the process forward?
- Who is or should be involved?
- What information is transferred between steps?
Remember to keep it simple
Over 25% of business have initial loan applications rejected by the traditional banks – many don’t even apply because they do not meet the initial criteria for consideration. But there are many alternatives in the market, if you know where to look.
Initial rejection of a loan application can often be because the application process was not followed. Always challenge a rejection – ask for reasons why. If it is “process” then you can reapply and often get a better result. Being prepared, having up to date accounts, bank statements and management accounts is always a good start. Consider the lessons in the How to Fix Cashflow download – you might not need as much as you think!
A little-known bit of legislation went live in November 2016 – the Small Business, Enterprise and Employment Act 2015 – and requires any of the traditional lenders to refer any rejected loan applications to alternative sources. Some key points to remember:
When looking for alternative finance check that the broker is registered with a regulated body for your own protection. Plan early, it gives you more choices
Don’t rush into giving away equity if it doesn’t fit with your strategic plan.
SOURCES OF FUNDING
- Cash from Operating Profits
- Revolving Finance
- Bank Loans
- Invoice Finance / Factoring Asset Finance
- Crowd Funding
- Angel Investment
- Private Equity / Venture Capital
One final point:
When seeking funding, it’s all about the quality of the information you provide – management reports show the most recent business numbers.
Often statutory accounts are so old that they do not show the true picture of the current business operations. Lenders, in whatever guise, are more likely to give you a better deal if there is up to date information showing how your business is performing.
It’s all about RISK!
The more comfortable you make a lender, the more likely they are to reduce your risk profile, directly impacting the cost of borrowing.
Management accounts show that you are on track (or not) and help you make better decisions – even identifying what funding you need and what you would be spending the funds on to generate the return needed to repay the capital. If you have produced forecasts for your funding application, management reporting can support your assumptions much better than statutory accounts because they are more recent. They allow the lender to build a richer picture of your business.
Management accounts and reports do not have to be complicated – keeping them simple and showing information that is most relevant for decision-making, that is clearly understood by the reader and that is produced in time to make a difference.
If you’d like to find out more about how to make the most of your life’s work, please call us 07887 538556 / 020 8088 7857
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For more help on EXTRACTING VALUE, here’s another quick read.