A major reason so many small businesses go out of business is due to Cash Flow, even though they have a profitable Gross Margin. How can that happen?
If your business or part of your business is involved in buying or producing and selling products, then this article is for you. Keep reading.
Why are so many businesses struggling with Cash Flow issues?
The answer is in your Balance Sheet and how you manage your Working Capital. The definition of Working Capital is: Current Assets minus Current Liabilities. In simpler terms:
Working Capital = Inventory plus Trade Accounts Receivable minus Trade Accounts Payable
Every business that is growing will experiences growing pain for a simple reason. To achieve higher product Sales, you need to invest in more Inventory, which ties up part of your Cash. Your higher sales of products result in higher Accounts Receivable (A/R) and not all your customers pay in time, which ties up more Cash. On the other hand, your suppliers typically are insisting on timely payment, pushing your Accounts Payable (A/P). The result is a longer Cash cycle of invested money from the time you must pay your supplier to the point when you see the money back in your bank account.
The answer lies in efficient working Capital Management.
You get your first clue by looking at your Balance Sheet and whether your Inventory and Accounts Receivable have grown. Have you invested additional Cash in Inventory and A/R in the last few months or compared to last year?
If the answer is yes, stay tuned, as we will show you how to improve your Cash Flow through Inventory Control, A/R and A/P Management.
Mastering the Follow-Up
Everybody would like a one-call close. However, 99% of sales calls do not close in one call. You have to master the follow-up process.
At Josh Turner’s session on “Follow-Up Funnels” at Ascend 2017, he showed this graphic from a Microsoft study. Take a moment to absorb the graphic.
The Key Takeaways from this study are:
- 85% of sales people give up after the second contact with a prospect
- This is interesting because it typically takes up to five contacts to even become a factor in your prospect’s mind
- By contact number eight, you are most likely the only person to make eight contacts with this prospect (i.e., you’ve officially out-worked the competition)
- By contact number nine, you have a 90% chance of being the one who is called when your prospect is ready to buy
- On average, it can take 12 touchpoints to turn a prospect into a client.
What are you doing to master the follow-up, out-work the competition, and turn a prospect into a client?
Treat Prospective Clients Like a Future Spouse or Friend
Getting clients is (not) picking up girls…
After spending some time discovering, understanding, and applying solid principles of any good methodology, you notice they are actually quite familiar and also very simple, at the same time. As with anything of value that lasts, they require a FOUNDATION and some ONGOING attention.
If you are looking for clients and struggle to convert and retain them, remember what you’ve learned from seeking a life partner or friend, for that matter. Sure, it’s easy to meet people, strike up a conversation, have some fun, and move on. Any relationship that lasts requires time. You know something about each other. You share something that differentiates you from everyone else. You have some common interests. You keep in touch. At some point, they know, like, and trust you, and the relationship has a reason to continue over time. This means you can do more stuff together that you probably wouldn’t do on the first, second, third, or 10th interaction.
You’re more likely to find a lasting relationship if you know what they’re like. If you live in The City and don’t like country things, it probably doesn’t make sense to find that special person on a farm. Similarly, you wouldn’t seek someone in a retirement home if you want to start a family. You have a PROFILE of the person with whom you want to connect. This same process applies to finding a prospective client. You need to define the demographic, the psychographic, the title/position, the industry, the location, the revenue, the maturity. It’s no different than finding the right person. You’ll know when you come across it.
At some point, you need to POSITION yourself to that prospect. It might work to walk up to them and just ask them if they want to do something, but that’s less likely to last. Wouldn’t it make more sense to somehow differentiate yourself from everybody else? What makes you special? Better yet, how do they know you’re special? Now, some people are fortunate and have special differentiators. A-listers, billionaires, models, Nobel prize winners, and professional athletes come to mind. Good luck with that. If you plan on having a lifetime relationship, you’ll probably spend considerable time demonstrating how you’re different and why you deserve their attention. You build some level of authority and are a leader to them…somehow.
Unfortunately, not every ‘attempt’ (even with time) pans out. You have to play the numbers and PROSPECT. This isn’t Andy Griffith, where you can just pick up girls and see how much they weigh. You might have to properly introduce yourself. Maybe meet a couple times. Learn something about each other. Have coffee. Go somewhere they like to go. Meet the parents. Make sense? You need to understand where they hang out and you might even need to meet more than one such person.
Let’s pretend for a moment we’re talking about friends here. We all have best friends, but things happen in life where even best friends move. It’s a good idea to have some other friends. This requires time and attention to CONNECT and BUILD the DATABASE of prospects. All of this foundation is regular and ongoing. In a business, it doesn’t stop until you exit.
Now that you have your foundation, you have to keep the relationship. You want the prospect to know, like, and trust you, so that they will pick up the phone when you call them. MESSAGING never stops in a relationship. You’ll always have communication to reinforce that trusted connection.
While it may not be as simple as ‘picking up girls’, it is as easy as:
Profiling, Positioning, Prospecting, Connecting, Messaging
Before Selling or Exiting
Most business owners hope to exit at some point. Typically, this means you, as the owner (President, CEO), are no longer there or are not there as often. Whether you plan to sell, pass it on to the next generation, or be a helicopter-CEO, there are seven things you need to do before you step away. The bad news is that you should have started this process from day one. Yes. From the day you started the business.
The good news: you are actually reading this and thinking about the steps. Your mindset (1) is the first step. If you only work ‘in’ your business and never work ‘on’ your business, then you are the business. In this scenario, when you step away, the business loses its greatest asset: You.
You have this great idea (a business), now what? If you step back and think about how you direct others, the answer is clear: processes (2) and procedures (3). Your people need some rules to play by and it is your job to provide that direction with constraints. If you fast forward to your ‘exit’, you may know exactly how everything in your business works, but you won’t be around to ensure that same outcome. Now is the time to provide guidance.
Once you actually have some traction, you will need to continually build efficiencies (4). Hopefully, you are focusing on what to improve and how to make it happen. When you’re gone, will this continue to happen?
Now that you have a business that is focused and improving, it is critical that you have the right team (5) to keep the business growing. Remember, you will be gone at some point. You’re better off building and testing your team when you’re around, and gradually step away. As your team develops, you can work from home, take a day off, and maybe even take a vacation.
As you can imagine, business owners expect profit (over time) and they don’t like surprises. Any prospective buyer (or CEO) will look at your finances (6). This is more than your balance sheet and P&L. Buyers will want to peel back the layers and look around corners.
While you may have guessed the last item, we encourage you to be diligent (after all, you will encounter due diligence) and read the full white paper.
If you are really serious, answer 20 simple questions to assess: is your business ready to be sold?
A Systematic Approach for Achieving and Maintaining Operations Excellence
We’re almost half-way through 2017. Are you working on your business or simply reacting to fires? Do you have a playbook for operations?
More than two-thirds of middle market companies (defined as annual revenue of $10 million to $1 billion) feel they “have trouble making improvements stick.” Based on experience and data (survey of 400 C-suite executives), The National Center for the Middle Market shows that companies do better, “when they approach their operations as systems, with parts or subsystems that can be fine-tuned both individually and in concert.”
Their guidance is simple:
- Manage Operations through Governance of the following subsystems:
- Strategic Alignment
- People Development
- Daily Management
- Stay Close to the Work through leaders (managers) who are “visible and engaged” to your operation, resulting in:
- Faster problem-solving
- Better understanding of customer needs.
- Choose an Operations Method that Works by having a formal method that is comprehensive and systematic.
- Share Your Strategy such that everyone’s work aligns with your mission and vision.
Each of the subsystems require attention individually and works in sync with the overall operations system:
Strategic Alignment guides employee action by setting priorities based on a clear understanding of the overall strategy. This starts from the top down and requires that leaders check in with employees to review priorities and challenge processes.
People Development enables employees to address customer needs in the operation by building their capabilities and skills. People must understand their roles and be able to perform them. The EOS (Entrepreneurial Operating System) Model sums it up this way: they get it (their role), they want it (they like and believe in what they are doing), and they have the capacity to do it. Once the people are in place, the key is building a learning organization (we will post more on this shortly).
Daily Management allows leaders to identify issues and/or gaps to get the right work done. The first step is to have visual controls to track progress and coordinate across functions. The second step is accountability. This requires knowing what each person is responsible for at any given time. The third step is “leader standard work” or “management by walking around”, which means routinely checking that the work is getting prioritized and completed.
Problem-Solving ensures that people can quickly address problems when they occur. This first requires having some system to report the ‘problem’ and then prioritize what to address first. In this process, it is critical to identify the Root Cause of the problem, a skill-set which may require training. Often, the solution may involve working across functions and levels within the organization (i.e., teamwork with transparency into roles and responsibilities).
Finally, operational excellence requires Measurement. In the survey, they identified the following metrics to judge operational excellence: Customer Satisfaction, Profit Margin Changes, Productivity Changes, Employee Satisfaction, and Employee Training Hours.
In conclusion, while middle market companies may struggle to make improvements stick and may be less inclined to formalize an operations method, they do have some advantages over larger companies. Typically, they have greater focus on customer satisfaction, and senior leadership is more involved in operations than at larger firms. Ultimately, good governance is the key to operational excellence. Know what your company is all about. Share that from the top down. Have a formal operations method and stay close to the work. Make sure your subsystems are in sync.
We encourage you to take the Operational Excellence Questionnaire at the end of the report.
Read the full report here.
Courtesy: National Center for the Middle Market