Let’s get real: Inadequate Financial Management

Failure in business is unavoidable when the cash finally runs out. You close the doors and pack it in.

The failure was apparent for some time ,maybe years and is frequently the result of poor management skills.

Let’s get real.

Mahan Khalsa uses that term in his book of the same name. For me let’s get real refers to the capabilities a business must poses to survive. See diagram below and click to enlarge it.

Business model diagram

I repeat. The business to survive must be strong in all these areas.

Today I want to address financial management. Below are problems that indicate inadequate financial management.

 

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Did you validate your business idea?

What follows is a step by step series of validation steps building or disproving the case for starting a business. This act of validating a business case will significantly increase the odds of success in a world where most new businesses go quickly out of business.

 

Identification of Business Opportunity or Need

No business should be started without identifying an existing concern shared by the stakeholders in the industry and without identifying this as an opportunity to provide a solution. For instance, say that the nearest pizza outlet is 50 kilometers away and they won’t deliver to our location. That’s an existing concern and the opportunity is obvious. If on the other hand the area is well serviced by enough pizza outlets, what’s another outlet going to do? It will not satisfy the market any better, Instead another vendor has been added to an already saturated market.

I used pizza as an example but the same applies to any service provider  such as a dentist, chiropractor, optician, physiotherapist, renovator, painter etc . The same applies to products such as car dealerships, appliance vendors. retailers in general. The market doesn’t need more of the same.

Becoming one more provider of the same product or service reduces them all to a commodity. Being a commodity provider means competing solely on price.

Confirming the Existence of a Need

Identifying a need and possessing the capability to provide a solution is the first required step. The next phase is to operationalise and confirm our viewpoint.

  • It’s important to run our viewpoint past others. We need to establish the case for change and clearly define the need for the investment. These should be individuals capable of confirming or discounting our premises. They should confirm the need for a business such as we are proposing.
  • The next stage is to identify actual prospective users (customers) of our solutions and hear whether they want and are willing to pay for our product/service. This is a reality check because if we can’t find them, they may not exist.
  • It may well be a check of our understanding of how currently the customers solve their problems and what is being left unsolved by the current providers. These same customers will tell us what trade off they will make if our solution cannot do it all.They will also tell us and confirm what problems they are trying to solve with the existing solutions.

Competitive Analysis and Competitive Advantage

The winners in sports have a competitive advantage over the losers. It’s easy in sport to say it’s due to the quarterback, the coach etc.

The same applies in business. Creating a competitive advantage is the source of persistent success.

The start of creating a competitive advantage is to understand where the competition is failing in providing solutions. It requires knowing everything about our competitors. We need to know the number of service/product providers that are out there already. It requires understanding the means by which the competition competes in the marketplace..We need to know how they advertise and market their products. We need to know what sort of reputation they have. We need to know which are most successful and why.

Market Research

So now that we have concluded that we have something to offer that the market is willing to pay for ,it’s time to crunch the numbers and see whether we can make it pay.

We must prepare a forecast showing our best and worst case scenarios. Can we withstand the worst case? For that we need a cash flow projection. We must calculate our break even volume.

We do a concept test. We test our product in a small pilot market and gauge its acceptance in real life. We keep tags on what features delight our customers and  what price they are willing to pay for these features.

We will seek advice – discuss our plans and ideas with an experienced business advisor, our accountant and our bank manager, prior to starting.

Market and Industry Attractiveness

It is better to have a business in an attractive market where the consumers are affluent and have the means to purchase our offerings. It is worse to be faced by a declining and cash poor market. We also want to be in an industry where the participants are successful and the industry outlook should offer good prospects for profitability.

Thus when considering a business venture one must know the industry’s business and economic traits. Among them the nature and strength of competitive forces, what is driving industry change, what strategic moves are rivals likely to make next. It is also best when forces align in our favour..Ideally we want to be in an industry that is not concerned about newcomers because it is too difficult to break in. It is also best if we have power over our vendors and customers and can dictate terms and prices.

We want to know the size and growth rate of the market, so that if the product catches on, we should have a substantial upside.

The Team

No matter how large and fast-growing a market may be, entering it in the face of other competition is likely to be difficult, since customers are probably already satisfying their needs – though perhaps not optimally – in some way.

The competition will not roll over and allow us to take market share from them. We must make an assessment of the competition’s reaction to our entry.

Our team need to be well connected up, down and across the value chain so it is quick to notice any opportunity or need to change its approach if conditions warrant. Specifically the team must be evaluated for the strengths it provides at each position. What does it do well? Is it sales, marketing, operations?

Where is it weak? What activities and processes lack effectiveness and need strengthening?

Our Target Market

We cannot and should not cater to the entire market. We don’t sell to anyone that wants to buy. Instead we should identify a much smaller segment of customers within the overall market. They will be the ones that will be most profitable to our business.

To help identify this segment we answer the following:

  • To whom do we offer a clear and compelling benefit?
  • Are these benefits different from and superior in some way to what’s currently offered by other providers?
  • How large is this segment? How fast is it growing?

Take a self diagnostic and assess the viability of starting your business

Conclusion

The above is more work than most start-ups engage in. However to reduce the risks of failing we need to ask ‘Why will this new business work when most will fail?’ Or, to put it more realistically, ‘What’s wrong with my idea, and how can I fix it?’

Doing this means a lot of upfront work but a lot less later when the business is struggling.

How To Make A Business Case For Starting the Business

How To Make A Business Case For Starting the Business

Businesses get started for many reasons. Some of them are not very valid. Far too often it’s to provide a job for the owner. At other times it is an entrepreneurial seizure (see M Gerber ,”The E Myth”). The future owner simply decides that enough is enough. The scenario may look like this:

  • The owner has a skill, a trade , or a profession and thinks this is enough to go into business on their own
  • The individual wants to be independent and not have a boss to deal with
  • The individual sees how much money the owner makes and wants the same. Why be an employee? Have it all.
  • The individual is unable to hold down a job. Constantly getting fired or quitting
  • The individual is unable to find a job so being self employed becomes a necessity
  • It may search for a better lifestyle with more free time
  • There is the personal satisfaction of taking on a challenge
  • It may be an attempt to build a future for the family

Some of the above are tempting to most of us and we may have all been there at one time. However the above are all the wrong reasons for starting a business.

They all center on the business owners and their needs. Instead valid reasons should be concerned with the customers that the business owner wants to serve.

What are valid reasons for starting a business? The focus must be on the customer and not on the owner. By this I mean that the business must provide value for the prospective customers.

There are only 2 valid reasons for starting a business:

  1. We have identified a market need not being filled and we can fill that need
  2. We can provide a solution that is more effective than what currently exists in the market place. We are faster, cheaper, in general better in some way.

It must never be that of satisfying the owner’s needs.

Take a self diagnostic and assess the viability of starting your business

Managing Through a Financial Crisis

When faced by a financial crisis a business owner must focus on the following three important areas:

  1. Reassessing the business model
  2. Changing operations to reflect the new environment
  3. Ensuring that enough cash is available

The Business Model

A business model does several things:

  1. It explains why customers buy from your company. It’s seldom because you do the best work. Other dentists, builders, accountants etc. are just as competent. It’s not because you have the best team, as others also have great players. The reason your customers prefer your company vs. your competitors may be for a variety of reasons, such as price, convenience, location, inertia (too lazy to change), trust, or other intangible factors. For example, perhaps you provide 24/7 service and the competition does not.
  2. It explains how you are able to charge prices that provide a profit, and how you provide enough value that customers will pay for what they receive from you.

The importance of a business model cannot be taken for granted. Environments change quickly, and the value you once provided may no longer be so special. In fact, your company’s added value may have become mainstream, and now all players in the industry are providing a similar service (remember when banks closed early and stores were closed on Sundays?).

Consequently, when faced with a crisis business owners must immediately examine their business model to ensure that it has remained relevant and valuable. In fact, the savvy owner will have a clear understanding of how valuable their business model is, and if it is protected from or threatened by the competition. When the environment changes, a weak business model will lead to a loss in gross margins and overall profitability and market share.

Next month we will examine the changes that need to be made to business operations when a crisis looms on the horizon.

Industry Profitability

Industry Profitability

 

What determines the profitability in an industry?

 

Michael Porter provides several answers to this important question.  Today we will deal with one of the answers, the threat of entry.

 

Threat of entry

 

When examining the threats of entry into an existing or potentially new market, the following questions need to be raised:

 

  • How easy is it for newcomers to break in?

Can anybody enter?

Think of the example of another pizza parlour opening up in your neighbourhood. All of a sudden the market has more vendors than before, with everyone fighting for the same size of the pie .

 

  • Do  newcomers need to fear sharp retaliation from incumbents? Can the incumbents drive the newcomers out?

 

  • Is a minimum size required for entry? Does this provide the incumbents with a cost advantage that the newcomers cannot match?

 

  • Do incumbents possess  a strong brand identification? Have they created powerful customer loyalty, or will the newcomers have no difficulty taking customers away?

 

 

Whether you are already in an industry or contemplating entry, consider the above, and evaluate the threats.

 

You may need to re-examine your business model.

 


Considering New Markets?

Considering New Markets?

 

 

When considering new markets answer the following questions:

 

Does the market have high potential?

Is the market dominated by strong competitors or is it fractured among many small businesses?

Is the market easy to enter or are there strong barriers to entry? Will fresh competition find it easy to attack you ?

What is the profitability in the market? Is  it dependent on raw material costs that you have no control over and that cannot be passed on to the customer ?

 

Right  answers to the above will greatly enhance a successful entry into a new market.

 


Have You Been Blindsided and Now the Business is Stuck?

Does this sound familiar?

In the past the business had been doing OK. The results were not spectacular but it provided a living  and there was hope for better things.

Suddenly things have changed. For some years now there has been no growth, maybe even a decline.

At best the future looks no better than the present. At worst the business is on its way to closing.

You may have been blindsided

Being blindsided may mean a total destruction of your business. Suddenly a new technology, a new service, and/or a new product make your business model redundant. And you are gone. For example, we all know how digital music has impacted the music business, and how digital news has affected newspapers. More recently how on line shopping has decimated retail stores.

Jim Harris, in his book “Blindsided”, talks about blind spots that organizations have that makes them susceptible to being blindsided. He claims that we as managers are too concerned with problem solving, and not enough with problem seeing. It’s problem seeing and opportunity perceiving that will separate the market leaders from the losers.

Why do companies get blindsided? Some of the answers are:

  1. Reluctance to change. Much has been invested in the status quo. Our business model, our skill set, our organizational structures have developed over time and reflect our comfort zone.  A new innovation is a threat  and the tendency is to ignore it.
  2. Inability to distinguish noise from signal. There are thousands of potential trends out there. New technologies, shifts in consumer behaviour, new products, new competitors. How can we tell what is a real threatening signal and what is merely noise?
  3. Focus on our immediate tasks.  The busier we are with day to day problems the less time and energy we have to scan the horizon. Often we are stretched to the hilt, we work long hours and have no time to investigate, brainstorm, or assess what’s going on beyond our immediate horizon.
  4. Situations are complex. But we have a bias for action. As a result we treat symptoms, and not root causes. We think that a solution to the presenting problems provides the answer, but problems are interdependent. We search for simple solutions because we think there’s only one problem, but more likely there is a  set of  problems.

 

It’s natural to put the fires out, to service the existing customers, to market your products and services to new markets. These things are essential to business survival but they are not enough. Somewhere now, somebody is working on an idea that may kill your industry.

The key to security for our business is acknowledging that there is no security. However, we can prevent being blindsided through faster recognition and response to changes in our environment.

Learn how to deal with challenges such as being stuck by downloading our    diagnostics and see why your business is stuck.