5 Drivers to Business Success e-Zine

are you financially well organised?

Business Planbusienss context

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The forgotten gold mine!Most businesses are capable of being sold; it’s just a matter of how much they are worth. Even for those businesses that are rarely sold (such as specialist medical practices), the same principles apply.

It is a matter of developing strategies and solutions to maximise the value of your business. After all, your business is the only asset you can control the value of.

Businesses are valued in many different ways. A potential purchaser is likely to pay more for your business if the risk to their return income is less. The purchaser will then retain their capital and increase their income. This is referred to as earnings multiple.

To explain earning multiple using some figures: If a business is earning $200,000 profit and the purchaser considers there is a higher risk that the income won’t be maintained for the long term, they might apply an earnings multiple of 2 to 3, which values the business at $400,000 to $600,000.

When looking at your business value you need to consider the following two factors:1. Increase the earnings multiple by reducing business risk; and

2. Increase the earnings

Regardless of wanting to sell your business or keep it, you need to consider the above key factors. You can then develop strategies to lower your business risk and increase your earnings.

The first place to start is setting your business goals and objectives. You need to think about where your business is now, where you want it to be, and how you are going to get it there. It’s important to make sure your business goals align with your personal and financial goals.

Then you need clear action plans – implementation is the key.

Following the 5 Drivers to Business Success will ensure you focus on increasing profits and reducing business risk.

The 5 Drivers to Business Success are:




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Business ContextContext gives meaning to the contentYour business will make sense if you make sure you are clear on why your business exists, its contribution to the community and society, the important role it plays, and the solutions and opportunities it provides to people. Some famous corporate contexts are:

organisational responsibility

business context

leadership

financial management systems

revenue strategy

To make people happy

To solve unsolved problems innovatively

To bring inspiration and innovation to every athlete in the world

Walt Disney, Disneyland

3M, Post-it Notes

Nike, Sport Shoe




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When you think of these companies and the products they produce, they just make sense. It’s because we understand why these businesses exist, what they stand for, and the contribution they make. We understand their context. It can be called a Mission Statement, or a Vision Statement, but most people confuse this with what they want to achieve, not why their business exists.

So, how do you develop your business context? Start with the following exercise...

Write down the word to describe “blue”Your answer may have been: colour, sky, sad, depressed, aqua, light, extent to which a steak has been cooked.

Each person will have a different answer to this question, dependent on your own experiences and interpretation. In every respect your answer will be correct, but does it describe the word blue in the way you were asked to describe it? Were you clear on the context? Did you have to stop and think, “I wonder what you mean by blue?”

Because the context was vague and broad, the meaning of the content became difficult to understand. So, let’s try it again:

Write down a word to describe the “colour of blue”Aqua, navy, sky, light, royal...

This time it was much easier to understand what was being asked. The context was clear and descriptive, and the content made sense. Your business should be exactly the same. If you are clear on the context of your business and can articulate what this context is, your business will make sense to those involved; your clients, suppliers and the public.


Business Plan organisational responsibility




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You may wear these hats and many others as you move from responsibility to responsibility within your business. What you may not realise, though, is the more reliant your business is on you (the owner) making all the business decisions, you are increasing the risk to a potential purchaser that the profits aren’t sustainable if you’re not in the picture. This will potentially lower the value of your business.

To address this you need to look at what’s stopping you from delegating responsibilities. Is it a fear of not having someone you can delegate to? Or are you worried that the wrong decisions will be made?

The three step approach you should take in overcoming any fears about

delegating day-to-day decision making, which will ensure:

Responsibility and accountability

Consistency in decision making

Management of behaviour which aligns with your business core values

You should also ask yourself which of the 5 Drivers of Revenue below you are passionate about, play to your strengths and build a team around you that supports the responsibilities you would like, and the areas you can delegate to others:

1. Product: what you sell. Do you enjoy creating the product or service?

2. Marketing: lead generation. Do you thrive off generating the sales lead?

3. Sales: converting the lead into revenue. Do you enjoy the sales side of things?

4. Production & Delivery: Would you like to do the work and deliver it to your client?

5. Client Relationship Management: Would you like to manage the client experience so they buy again?

To work out what aspects of your business you are passionate about and your strengths, consider what you love doing? What is your ideal “to do” list? What is your ideal day/week at work? First and foremost, you need to understand that your decision making structure should align with how you make your profits.

Organisational ResponsibilityMarketing? Operations? Administration? Which hats do you wear in your business?

1

2

3

profit = revenue - expenses

revenue will drive cash inflow

expenses will manage cash outflow




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Managing expenses & day-to-day decisions

Most small and medium sized business owners spend too much time managing their expenses and making day-to-day decisions about the following “systems”:

These system areas are essential components required for your business to open its doors every day and operate effectively so it can deliver its products and services. These areas are often despised by business owners. If you don’t like doing something, you will be frustrated managing it and not give it the attention it deserves. Most business owners prefer to be generating revenue and developing business strategies, not approving an order to replace printer cartridges or calculating weekly wages.

You should start by removing the systems area of your business from your day. Develop a strategy so the activities and decisions around the systems area of your business are looked after by someone else who is passionate about those things. You still need to set guidelines, manage the people you put in charge of these areas, set budgets and approve action plans. And most importantly, you need to make sure you hold these key people accountable for the decisions they make.

HR

IT

Accounting & Finance

administration

premises

legal




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5 Divers of RevenueThe revenue of any business is made up of the 5 Drivers of Revenue:

Most business owners are passionate about one or more of the 5 Drivers of Revenue. Ask yourself what you prefer? Creating the product or service, generating the lead, converting the sale, doing the work or managing the relationship with the client?

It’s then about making sure the key people in the areas you don’t manage on a day-to-day basis are given the responsibility and authority to make decisions in their area. But remember, as the owner of the business it’s your job to provide them with the clear guidelines and strategies for them to implement and manage.

Horses for courses - systems and revenue areasYou should never have the same people responsible for day-to-day decision making in both the systems and revenue areas. It takes a different kind of person to manage costs and cost-related processes, than it does to produce increasing amounts of revenue.

If you have the same person doing both, they will predominantly revert to the pre-conditioned operating style, either systems or revenue.

Take for an example; when times are a tough, the systems style decision maker will look to limit activities so cash flow is conserved, when the right strategy at that time might be to grow revenue. When times are good, the revenue style decision maker will tend to just focus on more revenue, without focussing on costs, which can be the undoing of the business when the cycle turns.




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The key is to make sure that the business owner provides them both with clear outcomes, required from their roles, and has an effective communication system between them so they can complement and support each other. By delegating day-to-day decision making in your business to others in the areas of Systems and Revenue, you free yourself from the business so that you can spend your time doing those things that you want to in ‘your ideal day or week at work’.

By removing yourself from the day-to-day decision making in your business, and ensuring that you have the right people taking responsibility for managing the key strategies in the key systems and revenue areas of your business, you can effectively:

It is important to remember that a potential buyer of your business should feel that the business would operate profitably when you are no longer the owner. Successful delegation and decision making of duties will ensure this.

Decision making - what is stopping you?As the owner and CEO of your business, you must be clear on your role in decision making. It’s about strategy, only managing the revenue areas that you are passionate about and delegating the rest.

Vision/Business Context Owners / Board

CEO

revenuesystems

Strategy

Activity (day-to-day)

drive your profits higher x

reduce the business risk =

higher business value




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You may have some fears in relation to delegating decision making – it’s common for business owners to worry they don’t have anyone to delegate to, or they are worried the wrong decisions will be made.

There are 3 steps to help you overcome these fears:

Responsibility and accountabilityIf you want to maximise the chances of someone making the right decisions, you must delegate the responsibility of these decisions to them. Stephen Covey, author of 7 Habits of Highly Effective People, refers to being responsible as response-able. As a business owner, if you delegate responsibility you are then responsible for holding your decision makers accountable. If you delegate responsibility but continue to make the decisions, your behaviour undermines the delegation which will result in a lack of responsibility.

Remember, structure determines behaviour. Think about signs at the zoo, “Don’t Feed the Animals”. It allows the zookeepers to manage the animals’ behaviour so they can to keep it as closely aligned to their natural environment as possible. Feeding the animals will cause a different behaviour.

If you build a structure where you delegate responsibility, but don’t hold your team accountable for their decisions, the organisational responsible structure will produce poor decisions. This means that you will continue to be involved in the areas of decision making you shouldn’t. The more involved you are in these areas, the less likely you are able to spend your day doing the things you are passionate about.

Responsibility and accountability is all about building a structure that determines the decision making behaviour in the business. To maximise the possibility of consistent decision making, you must take responsibility for building a framework for your decision makers to work within.

Your framework must comprise of the two core components:

• Decision making context

• Business core values

Decision-making contextContext gives meaning to content. It makes sense that if you are delegating the decision making responsibility, and you want to maximise the chance of correct decisions being made, your decision makers are clear on the context of how you want them to make decisions. Refer to the section on Driver 1: Business Context, which discusses the importance of being clear and precise about your business context.

A decision making context of your business must align to how you want everyone who connects with the business to “feel” when they think about your business.

To ensure your team are making decisions that align to your decision making context, you must define what it is. Once you are clear on what you want everyone who connects with the business to “feel” when they think about your business, you must be able to describe it in a word or phrase. It must be concise and articulate. Your team can then understand how they need to make decisions, based on your context.

1

2




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This approach will provide consistency in your business decision making.

Business core valuesAny business is a series of relationships: owners to team, to clients, to suppliers. They all interact with each other. So what makes one relationship more successful than another? What makes one relationship last a lifetime and another only for a minute? The answer is alignment of core values.

Think about your personal relationships. In most families, the individuals are very different. They look different, have different temperaments, different interests, different personalities. Some are loud, some are quiet, some are funny, some are serious. Some are good at keeping in touch, other you don’t hear from for ages. But when you boil it down, most families share the same core values.

Business is the same. A business is a series of relationships people have with each other as owners, team members, clients and suppliers. When the values of the business are aligned to the values of those who connect with it, there is a greater chance for success.

Successful companies have a limited number of core values that are clearly defined. For examples of core values, you only need to search the web for “business core values” to obtain information on companies and the theory of the role core values play in business.

Business core values provide the business with a common behavioural framework.

To reduce business risk and increase profits a business must maintain an organisational responsibility structure which enables the owners of the business to delegate the decision making, but at the same time develop a framework that ensures:

Responsibility and accountability;

Consistency in decision making; and

Management of behaviour aligned to the same core values

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3

2

1

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Business Plan financial management systems




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Cash flow is the lifeblood of any business. Too often excellent businesses fail because their Financial Management Systems cannot cope with their growth and expansion strategies. At the same time, businesses outperform expectations because their growth strategies are supported by sound financial management.

Without cash you cannot:

1. Payout profits to owners

2. Invest in new products and services

3. Pay your expenses

4. Purchase new assets

5. Pay your liabilities

6. Achieve your business goals and objectives

If cash flow is the lifeblood of a business, Financial Management Systems are the heart, arteries and veins that pump cash around the business body so the business operates without illness and disease.

The two Core Financial Management Systems for any business are:

Profit and cash flow plan

Timely and accurate reporting

For a business to be successful, it must:

1. Ensure that it measures its profit and cash flow monthly, if not weekly or daily; and

2. Ensure that the financial information is accurate and provided in a timely fashion so the key people in your business are making decisions based on sound financial information

“My business has made a significant profit for the year, how come it doesn’t show in the bank account?”

There is a difference between profit and cash. Take a look at the following product sale diagram.

Financial Management SystemsHave you ever heard the saying “cash is king?”

1

2




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In this example, the time between signing the costs agreement and receiving the cash is 105 days. However, the profit is recorded 60 days after the cost agreement is signed.

The fundamental focus of any profit and cash flow plan is to ensure that the time between receiving the cash and signing the cost agreement is kept to a minimum. You might think this is impossible but there are plenty of businesses that do it.

Think about the following. If you build a house, does the builder require a deposit when you sign the contract? When you buy a new pair of shoes do you have to pay for them before you leave the shop? If you go on a holiday, do you have to purchase your plane tickets before you get on the plane? Most successful businesses bring this gap between cost agreement purchase and cash receipt back to the bare minimum, and doing so means improved cash flow. This is called the cash gap (the time between the cost agreement being signed and cash receipt).

A profit and cash flow plan helps you understand the impact that the cash gap has on your business. This plan must be prepared for every business annually. Ideally, the co-ordination of this plan should be done by the person who is responsible for the expense area of financial management, and who has a clear understanding of the business expenses and margins. The profit and cash flow plan must be supported by 12 month action plans for each revenue and expense area of the business, which includes strategies to reduce the cash gap. The overriding principle is to increase the profit and reduce the cash gap.

The results should be measured against the projections on a monthly basis (at least), with the projections recast quarterly until the end of the year. The action plans for achieving targets must be reported on, updated each month and measured against the key outcomes required for each area. These key outcomes are referred to as key performance indicators.

30 days 15 days 45 days

purchase stock/expense

pay for stock/expense

make a sale receive cash




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From a Financial Management System perspective, some key areas to focus on in developing any profit and cash flow plan are:

1. Ensure all sales are trapped and invoiced so the business knows its exact sales numbers, how much is owing by clients, and for how long it has been owing. Ensure that clients pay within the terms and that the money is deposited into the bank account promptly.

2. Ensure business expenses are managed within budget, all bills are identified so the business knows how much it owes to its suppliers, that suppliers are paid on their terms, and appropriate controls exist to minimise expense risk.

3. Ensure that the WIP is managed in a way that you can maximise margins on sales, and excessive WIP is not held so cash is unnecessarily tied up in unbilled revenue.

4. Ensure the payroll is managed and employees are being paid correctly.

Timely and accurate reporting

Like any business process, garbage in = garbage out.You must ensure that the appropriate care and attention is being paid to your financial reporting systems.

Business decisions are often made by owners on a hunch. They often perceive the financial situation to be different to the reality. They implement a marketing and sales campaign to drive the revenue up, but the cash flow systems aren’t working to manage the growth. While their profits might increase, so will the cash gap. The financial ramification of implementing such a plan must be known from the beginning, so the cash flow can be managed to support the strategy.

For you to delegate decision making to others, you must ensure they are provided with accurate and timely information so they can make accurate and timely decisions. As a minimum, you should ensure that your internal Financial Management System is computerised and can provide:

1. An accurate balance sheet and profit and loss statement. If you don’t know what these are, you need to implement a Financial Management System in your business quickly.

2. A list of clients that owe you money and details of how much they owe and for how long they have owed it to you.

3. A list of suppliers that you owe money, which details how much you owe and for how long you have owed it to them.

4. A list of employees pay and entitlements you owe to them such as holidays, sick leave and long service leave.

5. Accurate information on what WIP and unbilled disbursements.




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Remember this:

Garbage in = garbage out

Garbage out = poor decision making

Poor decision making = dysfunctional business

Dysfunctional business ≠ your ideal day at work

SummaryRemember that the two core Financial Management Systems for any business are a profit and cash flow plan, and timely and accurate reporting. A business must ensure it measures its profit and cash flow monthly, if not weekly or daily, and also make sure that the financial information is accurate and provided in a timely fashion so the key people in your business are making decisions based on sound financial information.



Business Plan revenue strategy




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Revenue StrategyMost businesses have a two dimensional revenue strategy. This can be referred to as ‘squeezing the orange’.Profitability improvements are driven by minimising costs, and squeezing the margin out of sales and ad hoc marketing activity.

People tend to focus on the results and the amount of sales, not on the five key activities that drive revenue. The correct revenue strategy for any business to follow is a five dimensional strategy:

production & delivery

ad hoc new revenue

activities

product

salesproduction & delivery

client relationship

managementmarketing




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Product = What you sell

Marketing = How you generate leads

Sales = How you convert leads to sales ($revenue)

Production and Delivery = How you build the product/service

Client Relationship Management = How you manage your clients experience so that they buy again

Each activity requires different skills and hinges on each other for revenue to grow.

Growing revenue is simply a matter of maths. This is best described by using the Revenue Growth Formula:

Current revenue = (current clients + new clients^) x transaction frequency^ x average sale^ x margin^

Where ‘̂ ’ means ‘make it exponential’. Every strategy you implement must work to leverage the activity so that it produces consistent growth.

This is your starting base.

Any strategies you develop to grow revenue must fall within one of the other formula components. If you analyse this further, each of the four remaining components relate back to the revenue strategy activities as follows:

With the ‘squeezing the orange’ revenue strategy, if you focus on margin only, you can only squeeze the orange until it runs out of juice. But with a 5 dimensional Revenue Growth Strategy, the growth in revenue can be exponential.

New clients =

Transaction frequency =

Average sale =

Margin =

marketing and sales

product, marketing, sales and client relationship management

product, marketing, sales + client relationship management

sales, production and delivery




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The math of the revenue model is outlined below:

Current Improvement TargetNumber of clients 1000 15% 1,150

Transaction Frequency 2 25% 2.50

Average sale 2,500 15% 2,875

Revenue 5,000,000 8,265,652

Margin 60% 10% 66%

Gross Profit 3,000,000 5,455,313

Improvement in Gross Profit 82%

You can see that small increments in each component have an exponential impact on the result.

The focus is to develop strategies in each of the growth formula components and then drive the activities to produce the revenue results. For each revenue strategy, the activities must make the improvement exponential.

Some key strategies in each of the activities include:

Product• Increase the number of products you have on offer

• Develop products that allow multiple entry points and purchasing opportunities for clients

Marketing• Build a lead generation platform based on building relationships

• Continually implement strategies to grow your database

• Ensure your activities are structured and strategic to drive lead generation

Sales• Separate sales activities from marketing

• Must focus on sales meetings with prospects

• Develop cross selling and up selling activities

Production and Delivery• Systemise everything

• Manage KPI’s that support your operational objectives, not hinder them




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Client Relationship Management• Build a structured system so that client experiences aren’t left to chance

To summarise, your revenue strategy must:

1. Focus on strategies to increase and improve each component of the Revenue Growth Formula: new clients, transaction frequency, average sale and margin. Remember, small improvements in each component produces significant improvements in results.

2. Implement these strategies by allocating resources to achieve results in each of the components of the revenue activities: product, marketing, sales, production and delivery, client relationship management.



Business Plan leadership




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LeadershipWhile leadership is the last of the 5 Drivers of Business Success, it is also the most important. Have you ever heard the saying, “a fish rots from the head down”? This is very true in business. A business owner who doesn’t take responsibility for leadership cannot blame others if a business is not successful. The performance of a business is the direct reflection of its leaders. It’s just like looking in the mirror.

If business leaders are indecisive, the business will be dysfunctional. If leaders have poor ethics, the business will be unethical. If leaders don’t care about their employees, the employees won’t care about the business. A business owner who is clear on the role of a leader in the business, and practices what he/she preaches, will earn the respect and support of those around them and will find it easier to achieve success in the business.

For any business leader, the three words of the CEO’s mantra is essential in ensuring your fish doesn’t rot from the head down. These three words will support you in your business so you can lead by example and maximise the likelihood of your business success: context, energy, coach.

ContextAs the leader of your business, it is your primary job to ensure your business makes sense. You have determined your business context, you understand its purpose, you have defined the decision making context, and you live the core values of the business. You are the guardian of business context.

For the business to achieve enduring success, it is your responsibility to lift yourself out of the business content (what the business does) and guard the business context (what the business is). This is often called business integrity. As the guardian of context, it is your responsibility to ensure that every facet of your business makes sense and aligns to and supports the purpose. If it doesn’t, your business will not make sense to those who connect with it.

EnergyAs the leader of your business, it is your job to manage the energy of the business. If your business has energy blocks, it is your responsibility to ensure they are removed directly or by delegating, depending on the size of your business.

Remember that you are the apex of your business. You are the person everyone looks to for guidance, leadership and direction. So you must first manage your own energy. If you are the energy block around an activity, get out the way. If your personal energy is down, how do you think your team will feel? Remember, a fish rots from the head down. ake responsibility for your energy and the energy of your business. It’s your business; no one else is going to take responsibility for it.




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Coach As the leader of your business, you are the business coach. The coach of any sporting team picks the team, puts them into their positions, analyses strengths and weaknesses, develops the game plan, puts into place individual and team strategies, and reviews the competition. The coach’s job is to lead the team so they can maximise their potential on the field, with a view to winning. If the coach was a player on the team, who would watch from the sidelines to focus on areas for improvement? Who is going to see when the team needs to slow down or speed up? Who is going to watch the entire game?

As a leader of your business you must delegate every task and not participate in the activities that do not add value to the business. Activities like cost management and administration as a starting point. However, you cannot delegate the role of being the coach of your business. If you spend all of your time playing in the business game, eventually your team will lack direction and you will lose. If you understand your role as a coach in your business and you are frustrated, chances are you are spending too much time playing. Coach the team first, play the game second, but only in the positions you love to play and where you can make the biggest impact on the game.

SummaryRemember that as a business leader, the three words you need to remember are context, energy and coach. These three words will support you in your business so you can lead by example and maximise your business success.


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5 Drivers to Business Success e-Zine