By Steve Grice 10 Sep, 2017
The biggest threat to any business is drift.

Start-up businesses and high-growth businesses are less likely to suffer from this problem.  They generally have well-thought out plans and a clear set of goals as a result of needing to raise finance.

But what about those small businesses that have been established for a few years?

These are the businesses that are most likely to succumb to drift.  They are typically not in high growth sectors, and whilst not quite lifestyle businesses, the owners have had a good living out of them for the past few years.

I see many businesses like this and they quietly dominate the local economy.  They tend to be small, less than £1M turnover and have little in the way of formal plans or vision for the future, other than a vague direction in the head of the owner-manager.  

There is often a general sense that next year will turn out much like this year with no major surprises.  Budgets are based around this year's performance... plus say 5%.

The assumptions of the owners are probably correct.  Most of these businesses will be there in five years' time.

So what's wrong with drift?

Because change is constant and failure to change will eventually lead to any or all of the following:

  • Moribund or patchy growth
  • Falling sales, margins and profits
  • Poor customer retention and satisfaction
  • Problematic cashflow
What is worse for the small business owner is that once these problems become manifest, solutions are likely to be imposed externally.  This could be from competitors taking your market share, customers moving away due to poor service, suppliers imposing pro-forma terms or your bank calling in your borrowing.  In extremis, external solutions may be imposed by an insolvency practitioner.

Drift can be characterised as an absence of control.

If you do not take control of where your business is going then, by default, others will.  

Drift is easy, control is not - it requires constant planning, monitoring and assessment.

By Steve Grice 10 Sep, 2017
Recently I had the opportunity to look over a small business whose Directors were struggling to expand.  

They had great products with a good deal of price elasticity, relatively low overheads and a desire to grow, but were finding it difficult to grow sales at anything like the rate they aspired to.  

The business was selling direct the public.  Their answer was to spend more money on marketing - printing brochures, revamping the website etc.

However, talking to them for an hour or so, it quickly became clear that this approach would not take them where they wanted to go and could very easily end up being dead money wasted.

The real strength (and the biggest problem) that the Directors had was their passion for the product.  

This had led them to create more than two hundred products and product variations, which left them with a huge pile of stock and money tied up in tooling. They were undoubtedly excellent at product design and development but it had run away with them - they were treating it as a hobby rather than a business.

Now, there's nothing wrong with lifestyle businesses:  They can provide a good living for some people to exploit doing what they do best and enjoying it.  But the Directors had wanted to grow the business to something more.

The basic action plan that we developed was:

  1. Rationalise the product range - focus on maybe a dozen products that will be liked by the widest number of customers and have a high sales potential.  The rest of the products are still there to be used as and when, but the focus in terms of energy and funds should be on a small core.
  2. Realise that for a small business to grow quickly, selling direct to the public will always be a limiting factor unless you've got very substantial marketing and distribution facilities at your control.  The Directors were very good at what they did, but they had no experience in marketing or distribution, so to achieve volume they needed to approach retailers (who are the experts in marketing & distribution) for a wholesale deal.
  3. Realise where your limitations lie and take as much advice as possible.  If you need to pay, buy the best advice you can afford.  As an absolute minimum, engage a good accountant - one who will do more than just prepare your books at the year end.  Make contact with free advice services where possible.  Interview two or three Business Coaches to find one who you can work with.  Yes, it will cost money but so does increasing stock regardless of sales.
  4. Think of what you are doing as a business; get your business model right - this is not a hobby.  Don't put money into product or marketing without having a thought-through strategy - poorly planned marketing spend seldom works well.  This is where good advice is invaluable.
The story here illustrates some of the problems with growing a business that's developed out of something that you enjoy doing and have a real skill at - too often there is more focus on the pleasure of doing what you're good at, or enjoy, rather than developing the business model.

By Steve Grice 08 Sep, 2017
How many people buy a 99p burger?

When MCDonalds introduced a lower priced option on their menus a few years back they demonstrated a great pricing strategy - to drive business in a downturn, you need to show that you can adapt to customers' expectations.

The basic idea goes like this - if your product starts looking expensive then you create a lower-cost stripped back product that sits below your main lines.  Charging less for this new product will inevitably mean some cannibalisation of your existing customer base, but it will also prevent loss of customers to your competition.

So, why not just cut prices on your main product line?  Why go to all the trouble of sourcing, costing and promoting a new range?  There are a number of good reasons, but chief amongst these is that if you simply cut your prices on your main lines, you will have difficulty putting prices up again.  A good secondary reason is that an 'entry-level' product range will attract more customers who do not pursue this strategy.

It's fairly straightforward strategy to apply if you're a large retailer, but what if you're a smaller B2B business?

Let's say you're a distributor of air conditioning equipment to the trade and you have a main, branded supplier that has a reputation for high quality units.  Imagine that lately you've seen sales decline as a result of customers perceiving your prices to be too high.  The knee-jerk reaction would be to lower prices. This means you have to make savings in other areas of your business - sales or admin maybe.  The reduction in margin may even mean you make a loss.  You will inevitably find it extremely difficult to raise prices later on.

A better strategy would be to find a supplier of an alternative aircon unit that you could sell alongside your main brand - it has a lower price point, but the margin you make on it is the same or even a bit more than you make on your main line.  You may need to do this via a separate company to preserve the integrity of your main line, but at least you're now only losing price-sensitive customers to your other company rather than to a competitor.

This is an approach that many businesses use - all the main car manufacturers have 'entry-level' models; major supermarkets have economy ranges which have become more prevalent since the recession; a walk around B&Q will show you the value ranges in their tools.

And while you're eating your 99p burger, consider the amount of effort and strategic thinking that has gone into it........
By Steve Grice 08 Sep, 2017
Many, many small businesses are run by the Founder under autocratic control.

But it can be very lonely at the top.  Decisions can be made without fully running 'make sense' tests or gaining the input of others who may have previous experience. Sometimes this can lead to the wrong decisions being made.

It's not just large businesses that benefit from having a Board.  Small businesses can benefit as well from having an advisory Board.  The idea is to hold the management to scrutiny and critically examine current trading and future plans.  This means that you get asked the awkward questions that many small business owners avoid.

Here's some guidance:

  1. Ask people you trust and respect, and who have some distance from the business.  This means you will have to explain your underlying assumptions and norms within your industry in greater detail, which  means they can be critically examined.
  2. Board members will be volunteers.  You may want to pay them a small amount.  
  3. Board size should be limited to 4 or 5.
  4. Meet once a quarter.  Any more, and you'll be taking too much volunteer time; any less will not be worthwhile.
  5. Open yourself and your business up to scrutiny.  This may be uncomfortable at first, but the idea is to make the business stronger.  Listen to the Board's questions and make sure you follow up.
  6. Information is important - the Board members need to have full disclosure from you prior to the meetings.  This means Management Accounts at the very least.
The best businesses that I see are those that are open to advice.  Be clear though - this does not mean that you cede control of your business.  You are still in charge and the final decisions are yours.  The purpose of your Board is to give you different perspectives and be a critical friend to you and your business.

By Steve Grice 08 Sep, 2017
With the help of Excel, most business owners should be able to construct a working weekly cashflow forecast without input from the accountant. To help you focus on what cash your business needs, I'd always recommend keeping a rolling 13-week cashflow forecast.  This will give you at least 3-months notice of any problems.  For manufacturers this is crucial because of the length of time of the sales and build cycle - this time represents cash tied up on working capital.

A rolling cashflow forecast means you're going to be updating your cash position at least once a week.  Keeping a close eye on your cash position means that you will have the opportunity to sort out any issues in good time.  An unexpected crisis position with your cashflow is a sign of poor management.

Overheads should be relatively easy to predict over a three-month time frame.  You will know the cost of rent, rates, insurance etc.  For most businesses, staff wages are also pretty fixed over this kind of timescale too.  A quick tip for capturing all your regular fixed costs is to look back over your bank statements for the last three months.  You will also know from your incoming invoices or purchase orders who you owe money to and when it needs to be paid.

Predicting Sales:
Whilst predicting overheads is relatively easy for an existing business, predicting sales can be less so, although it is easier over a shorter period.

If you're a manufacturer, you'll have a bunch of live quotations out with customers at any one time.  You should be able to predict reasonably accurately from past experience what proportion of these will turn into firm orders.  You should certainly know the length of your manufacturing cycle and what terms you're selling on.  From these pieces of information, you can predict when you'll be receiving the cash.

For wholesalers or retailers, that sell on a more immediate basis, you need to look back at your historical data at sales in the relevant week last year and adjust by what you know about major customers, or whatever else is happening in your market now.

Keeping it maintained:
Every week you should set aside time in your diary to update the cashflow forecast.  Add another week onto the end of it and modify any numbers that you know have changed in the past week - for example, if one of your customers has told you that payment will be delayed for another month.  Alter the numbers and have a look at the difference this makes to your cashflow over the coming weeks.

Flexing and Modelling:
You can also use your rolling cashflow to answer 'what if?" questions.  For example, what would happen if I got an unexpected large order, or my key supplier suddenly wanted payment on delivery rather than allowing 30 days credit.  You can also model the impact if you changed your payment terms e.g. if you wanted to take less of a deposit upfront.

By getting into the discipline of updating your cashflow each week, you will have a much better grasp on how your business works and which operational areas drain cash from the business.  Targeting these areas will help liquidity and solvency of your business and allow you to sleep better at night.

By Steve Grice 08 Sep, 2017
What's Your Strategy?

All businesses should have a strategy - a medium to long term plan of where they are going.  All large and medium sized businesses will have this - but most small businesses do not.  At best, there is a kind of fuzzy idea of a plan in the head of the owner.

I'm not talking here about a business plan.  This is the short-term planning document that all businesses should have that says what they are going to achieve over the next year or two.  What I'm writing about here is the longer term strategy of where you want the business to be in five or ten years.

Often this is a difficult question to answer precisely, and the answer will need to have some built in wiggle room to allow for contingencies.  However when you are thinking about where you want the business to be in 5-10 years you'll need to think about some of the following:

  • Do I still want to be running the business then?
  • Do I want to sell, or retain control?
  • What size will the business be by that time?
  • How will my customers have changed?
  • Will technological change have an impact?
  • What will the financials look like?
Note again, that this is thinking on a longer timescale than the business plan.  The most fundamental questions are probably the ones that are most personal - the top two in the list.  It is important to say that there is no right answer here - what suits you will depend on your circumstances.  It may be the case that you want to sell the business within five years and retire aged 30.  Or you may want to continue working in the business until you're 90.  Neither answer is right or wrong.  What is not so good is not having the understanding of what you want from the business.

There are lots of professionals out there to help you implement your strategy (accountants are usually a good place to start), but before you contact any of them, take some time to really think through what you want from your business.  Is it simply a cash-generating machine to pay your wages?  Or is it something you absolutely love doing and couldn't imagine giving up?  Do you have children that want to come into the business?  Is the business still going to be around in a few years time, or will market changes have made it obsolete.

Much of this falls under the heading of succession planning, which is largely about personal motivation and realising the long-term value in what you have created.  To do this, you need to consider how this is going to be achieved.  For example, can you achieve your personal goals if your business is suffering from long, slow decline?  If not, then you will need to look at the nature of the business, and this is where personal and business motivation go hand-in-hand.

By Steve Grice 08 Sep, 2017
Cash is the lifeblood of your business.  It is lack of cash that makes businesses fail.  Poor cashflow can be a symptom of a range of underlying problems like low margins, bad debts or declining sales.  Cash is vitally important because it is what enables the business to finance sales and this is the reason why more businesses fail when the economy comes out of a recession than during the downturn itself - because working capital has been depleted and as orders increase they can't be financed.

Cash is something that needs to be thought about from the beginning - effective management of cash needs to be built into your business model.  Consider the working capital cycle of an average business:

Average time to collect payment from customers      60 days plus
Average days sales held in stock             25 days less
Average days taken to pay suppliers         35 days equals.... 
CASH CYCLE                     50 DAYS 

This means that you need enough cash in your business to finance 50 days worth of sales.  

If your sales are £1,000,000, you will need cash of £136,900.  In practice, your business will probably need more cash available than this to pay for rent, rates, wages etc.  You may also get cash spikes at the quarter end if you pay VAT.

The working capital cycle is a critical part of your business and your business model should address it directly - this means you need to think about the implications of the example above for your own business and either modify your business model or ensure an appropriate cushion of finance - either from profits or borrowing.  The key question should be "How can I raise £136K to fund the working capital of my business?"

Using the example above, if you were to insist on all your customers paying cash on delivery, then you would have, on average 10-days worth of sales in cash in your bank account (0 days + 25 days - 35 days).  If your sales were £1,000,000 then you should have a cash balance of around £27K.  This is a far easier position to work from and it means that your suppliers are financing your business.  A retail business should in theory always have positive cash balances, because it can sell products quicker than it has to pay suppliers.

For many small businesses, the working capital cycle has simply evolved with little thought around managing it.  This often means that borrowings are higher than would otherwise be the case with good management of working capital.

To help you focus on what cash your business needs I'd always recommend keeping a rolling 13-week cashflow forecast.  This means you're going to be updating your cash position at least once a week and should be able to spot problems before they occur.  

The worst scenario any business can face is unexpectedly running out of cash.  This also reflects badly on the competence of the management. 

By Steve Grice 08 Sep, 2017
Gross margin is the difference in price between what you sell at and what you buy (or make) at.  It is what covers your overheads and gives you cash left over to distribute or invest.  Clearly, in the present environment, most businesses have pared back overhead to bare bones; when I  am visiting clients for example I see a lot of empty reception desks. Given that it's difficult to cut any more without shutting down, a keen focus on gross margin is one way for a business to survive and prosper.

Gross margin is one of the most important levers in a business to improve profitability.  A small percentage change in gross margin can become a very large change in net profits because the extra margin applies to each £ sales made.  A business turning over £1m that can improve gross margin by 2% would add another £20,000 straight to the bottom line.

Gross margin improvement has a number of components, any or all of which may be appropriate for your business.

  1. Better buying - most of the techniques here depend on having adequate cashflow to support them.  For example early payment discounts can be taken or negotiated.  In some industries these are prevalent so that suppliers can get cash in quickly.  Volume discounts can be negotiated for large orders, or a volume overrider at the end of the trading year.  You could also look at alternative suppliers.
  2. Pricing of your products - if you are using cost-plus pricing, do you need to move to a market driven pricing structure?  Do you pass rising prices of commodities e.g. fuel or steel on to your customers?  Hauliers commonly pass on fuel surcharges and manufacturers were commonly passing on material price rises as steel prices went up before the recession.
  3. Product mix - for businesses that sell a number of different products, volume business may look good but it is generally lower margin - why not try to sell some of the lower volume, higher margin stuff to your regular customers?  Another consideration if you reach your customers via a sales force is how the salespeople are paid - against a revenue or a gross margin target?  Is margin information communicated to the sales force?
  4. Customer mix - which of your customers are your most profitable?  Do you have this data and do you use it to manage customer accounts?  Finding out which of your customers brings you in the most margin, rather than the most turnover can be instructive.  It may be that your largest customer is destroying your profitability.
  5. Efficiency of sales - do you monitor your sales pipeline?  What's your conversion rate?  Can it be improved?  What about waste - both materials and time?  One client of mine sold bathrooms.  Each individual quote was profitable on paper, but in reality he spent too much time revisiting jobs over snagging issues.
If there is one action that I'd recommend to start with it would be to have good data - without knowing what margin you earn from each product, service or customer there can be little chance of improvement.  Often simply collecting this information will be a spur to action which will lead to improved gross margin.

By Steve Grice 06 Sep, 2017
All sales forecasts are estimates, but vary somewhere between complete guess and justified, considered calculations.  

Having more confidence in your sales forecasts should give you more reason to believe that they will be achieved and will allow you to place more reliance on your cash flow forecast.

There are a number of methods to forecast sales - most of which may seem blindingly obvious but it is worthwhile going through the process to force you to examine your underlying assumptions.  All of these methods are part of a good strategic review of your business, a wider method of business growth planning.

Best practice is to run several scenarios and generate a range of predictions.  This will give some insight into best case and worst case scenarios and also give some idea of what are the median numbers.  This will allow you to plan realistic resources which can then be expanded or contracted as necessary.

  1. Past sales method:  This is the most commonly used method by small businesses, because it is quick and easy.  Generally it takes the form of 'Add 10% to last year's sales' but there are a number of problems with this.  Firstly, not putting much effort into the forecasting means that you don't own the projections as fully and are consequently not as committed to them. Secondly, not paying attention to potential changes means that the forecasts can easily become a stick to beat yourself with and add to the pressure if things aren't going well.  Thirdly, this kind of incrementalism does not challenge you to produce a step change in the business.
  2. Ask your customers:  For those businesses that have regular customers ask them what their plans are for next year.  Do they expect any large increases or decreases in business?  How is this going to affect your sales?  This conversation can be part of a wider marketing effort to sell more product to existing customers - always the easiest route to growth.  One past client sold his product through distributors; changing one of his distributors led to an instant uplift to sales forecasts because the new distributor was better connected.
  3. Review the market:  What is happening in the external environment?  It seems obvious to say, but what's going on in the next twelve months that may affect your market?  I have seen a flag manufacturing client be affected by events such as the World Cup and the Jubilee.  These are big national events, but on a smaller scale changes such as government spending reviews can affect sales forecasts - many businesses are having to plan for a reduction in sales.
  4. Review the competition:  Your industry experience and intelligence should allow you to know what is happening with the competition, but you can also look at their financial strength through Companies House filings.  Are they growing or contracting?  What are they doing with their pricing?  Is this a sign of desperation or an aggressive sales strategy?  What your competitors do will inevitably affect your sales.  Is a competitor planning to open up next door?
  5. Scope of the market:  Make sure what you are predicting looks sensible.  What is the size of the market for your product or service?  If you're selling mobile phones, the market is very large; if you're selling high-end bathroom suites, the market is somewhat smaller.  Next look at what share of the market your sales imply in relation to revenue; I see too many plans that are based around reasoning like - "The market for soft drinks is worth £80bn per year, so we should be able to capture 2% of this".  Two percent market share may look reasonable for one industry.  For others, it may look completely wrong.  Mintel or Keynote reports are good background.
  6. What's your capacity?:  If you have a capacity to produce 60,000 widgets per day, or charge out 150 man-hours per week, then how does this compare with your sales forecast?  If projected sales are a very large proportion of your capacity, how reasonable does this look?  On the other hand, if projected sales are well above capacity, how is the extra going to be serviced?
The degree of accuracy that you will achieve in your sales forecasts will be limited by the volume and quality of information that you can access.  
Another limiting factor will be timescale - forecasts become less accurate as they project forward in time.  

Sales forecasting is a key business discipline and one that should be integrated into your strategic planning.  Practice will enhance the quality of output.

By Steve Grice 24 Aug, 2017
Obtaining the best funding solution, best suited to each individual company’s need, is challenging.  

With 30+ P2P platforms, each having a different credit appetite and each offering different options depending on whether you need a loan or working capital finance, there can be a confusing array of possibilities.

It isn’t just about choosing the right platform or the right product, but about getting the right deal that is right for you.

It is also about understanding all aspects of the process, particularly with regard to fees and repayment charges.

P2P lending comprises an online platform that connects investors with borrowers, in return for a fee.

These alternative lenders compete with mainstream lenders such as challenger banks, as well as high street banks.

The sector continues to expand rapidly with £4.2bn of loans forecast for 2017.

Loans from £5K up to several £M can be arranged.

Institutional money continues to back the sector, meaning many platforms now underwrite/fund their own deals. Revolving Credit Facilities (overdrafts) are also now available.

High street banks are not suitable for everyone.

They tend to have quite prescriptive lending criteria, which means that many SMEs will get rejected even if they are perfectly eligible for a loan. (See our article ‘What to do when the Bank says No" in our Newsfeed).

P2P lending is often a viable alternative as the company’s individual circumstances are considered; it isn’t just about meeting defined credit scoring parameters.

A survey by the British Business Bank for 2015/16 found that 100,000 small businesses were rejected for loans by mainstream lenders – equating to £4bn of missed opportunity finance.

P2P can provide more specialist finance solutions more quickly and with better service. P2P platforms are small and nimble making them much more flexible, reducing costs and making the process faster and simpler.

Whilst banks can take several months to complete a proposal, typical turnaround for a simple P2P proposal ranges from a few days to 4/6 weeks.

There is a strong sector emerging for fast deals up to £250K, but these tend to be more expensive and should be seen as the first step towards a longer deal.

The sector arguably has better appetite than the banks at present for MBO/MBI deals, property development finance and general working capital lending.

While criteria varies from platform to platform, P2P loans are often more suitable for businesses that are more established. Although there are some options available, Start-Ups are difficult, as are challenging turnaround situations.

There is a wide variation between platforms in the level of due diligence and security required, but most proposals can be accommodated if they are reasonable.

P2P loans are rarely cheaper than going to a high street bank – it really depends on the individual facility, risk and platform.

Typically interest rates are between 8-15% (as at July 2017) though we are seeing some downward pressure on rates as more institutional money enters the sector.

These rates are competitive bearing in mind the other benefits they can offer such as flexibility of proposal and speed of decision, and banks will continue with conservative credit policies for the foreseeable future.

Business finance should also be a progression through a number of steps: P2P funding is an enabler, often acting as the first step in a longer finance journey. It allows you to get the deal done so the business can reap the benefits quickly, then move on to mainstream financing options.

We often advise clients to run a parallel funding strategy – apply through your bank but at the same time, work with someone like Ludgate to have a back-up solution.

In many cases, we see banks prevaricating over a lending decision; we have seen some of them take 9-12 months to make a decision for an existing client.

P2P can be quicker than this, so another strategy is to use alternative funding to get the initial job done, then move to more mainstream funding later, at your leisure, when you can take your time to do the best deal. We tend to build this progression strategy in with all our clients, and careful initial structuring means an easier switch to the bank at a later date.

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