That Was The Problem – They Weren’t Actually Very “Terrific”
Terrific Communications (not its real name) supplied communication services to a regional city market through a franchise that two telecommunication technicians had purchased. This is sometimes referred to as “buying a job”, which was not actually their original intention. What they really wanted was a business where they could get off the tools and spend more time growing the business rather than working in it.
Their business vision sought to develop a growing profitable business providing a high level of customer service and able to operate independently of the Directors. It had not yet reached that stage. Financially it was a profitable business but one with considerable variation in its operations. However, it had been under considerable financial strain for some years because they lacked the knowledge and skills to profitably grow the business.
Before Profit Leak Diagnosis and Action
- There was a lack of effective financial management, with cash flow a stressful problem, and the sole bank balance being their only indicator of success (mistake!).
- Sales were a problem. Better sales would keep the pressure off cash flow.
- The business was struggling to evolve. There was a lack of management skills.
- More emphasis needed to be placed on marketing and sales to generate the cash flow the business needed to grow.
After Profit Leak Diagnosis and Action
- Nett operating profits nearly tripled.
- A significant increase in sales volume
- Overheads more carefully controlled
- Pressure gone
- Surplus cash in the bank
- Able to pay creditors confidently on time
Readon to discover if your business can turn things around like “Terrific” did
So typically of many small business start-ups Terrific Communications is in effect a support mechanism for two telecommunication technicians. This is sometimes referred to as “buying a job”. I’m sure that was not the intention of the Directors.
Their business vision was to develop a growing profitable business providing a high level of customer service and able to operate independently of the Directors.
They were good techs and had grown the business to 4 employees and turning over nearly A$1 million.
Terrific Communications had been in business for 8 years so they had got through the critical first five years, the period where risk of failure is highest
A sample of clients were asked to complete a customer quality perception survey. They included builders and related businesses, plus catering companies and other food providers.
The survey results show that Terrific Communications was satisfying its current client’s needs and has an excellent reputation amongst its client base.
So what was the problem
Staying on the tools is a trap many technical trade-based small business owners fall into. The Directors needed to spend more time on the direction and management of the business. This does not mean that they should not do technical work or draw upon their depth of technical knowledge, but ultimately the business must be managed.
In essence a key decision was whether the Directors are telecommunications technicians or running a telecommunications business.
There is much to be done as there is no real management system in place.
Nor did they have a formal process to determine the direction of the business or plans in place to achieve their objectives. This could be because they have been “too busy to improve” but it needed to be done if there is to be a sustainable future.
The business had got by to-date based on the technical expertise and commitment of the owners. However this could not be the key determinant of the business as it grew. The company had experienced problems over previous years by working on a “reactive” basis and not being abreast of trends as they developed.
Although toolbox meetings had been planned they were not held. Monthly directors meetings were not planned or held.
Financially Terrific Communications was a profitable business but one with considerable variation in its operations.
It had been under considerable financial strain for some years. There appears to be a lack of financial management, with the sole control being how much money is in the bank. Better financial management on a regular basis was required to improve the business.
Cash flow has also been a problem for the company. Despite their good management of debtors, creditors were being strung out. This situation is ultimately related to a lack of sales. Better sales would keep the pressure off cash flow.
Over the previous two years sales had been declining, and despite improvements in gross profits nett profits had been declining. Overheads were a problem, eroding the increase in gross profits.
Given the 8 years Terrific Communications had been operating it was undoubtedly doing some things right, but there was much to be done if the objectives of the Directors were to be achieved.
Neither & Loss nor cash flow budgets are prepared. Cash projections have been done to check whether a particular expenditure can be afforded but these are both ad hoc and informal.
As with majority of small businesses labour rates are set by comparison with other companies rather than analysis of costs and forecast workload.
Data, Information and Knowledge
Terrific Communications had some data, but not information. Decisions were made on gut feeling and not data and information.
A range of data and information was available from both financial and job sources. However this data was not collated and analysed to give information of benefit to the business. Again this was an area recognised but not carried through to completion.
Information on sales by product groups or their profitability was not available. Similarly data was not collected on sales or profitability by customer groups, average transaction value, customer retention, and quotation success rate or customer complaints.
All are useful information in managing and growing the business.
More importantly no effort was made to track the trends in job profitability to determine whether some jobs are more profitable than others.
Information and knowledge should be used to inform decision making. And the trends that may arise can forewarn the business as to what is likely to happen, rather than reacting after something has happened. If nothing changes, then nothing changes.
However the Chart of Accounts in MYOB was not well set up and did not provide useful management information. Sales needed to be broken down against the 5 major products groups. Similarly Cost of Sales needed be allocated to these groups to enable the relative profitability of each line to be assessed.
The Directors came from a technical background and had no marketing or sales experience. The business needed to either develop or hire these skills.
It could be expected in a small business like Terrific Communications that personal selling would play a larger role but this had not been tried. In other words the company was relying on prospects coming to them rather than identifying and targeting prospective customers.
Documented systems and procedures are the heart of the business. They give management a sound base from which to grow the business and shorten the learning curve for new employees. Terrific Communications had no documented systems.
What to do?
Terrific Communications was a typical example of the problems that arise when people with good technical skills start a business, and, because of those skills, have initial success, and grow.
The underlying problem in such cases is that in acquiring those skills they don’t get the opportunity to acquire the other skills required to run a business; marketing, financial management and business management.
All the problems in this business come back to lack of knowledge in these areas. So the Profit Leak Detective’s job was to help them acquire the additional skills needed to successfully run a business.
1. The first step was to confirm the strategic direction of the business and help them develop a clear view of where they, as owners wanted the business to be in three to five years’ time.
The other steps then followed:
2. Turning the strategic plan into a business plan. This included clarifying the specific market segments on which Terrific Communications should concentrate, and documenting the systems and procedures which help the company succeed.
This included establishing the right business model.
3. Placing greater emphasis on marketing and sales, including a formal marketing plan.
4. Establishment of management systems to provide information on which management decisions can be made. This includes the chart of accounts, job analysis and pricing systems. A limited number of key performance indicators was developed, together with the information systems to collect the information without significant effort.
Informed decision making though having the right Information and knowledge.
5. Developing a financial plan and budget – The budgets projected both balance sheet and profit & loss statements for three years out, together with a projected cash flow statement.
Profits Leak Detective