Benefits of systemising your business

Why is systemisation so important?

• The value of a business depends on its growth prospects, profitability, cash conversion and the degree to which that future cash flow is at risk
• One of the main risks for small businesses is their reliance upon key personnel, particularly the owner, who know and do things that no-one else knows or can do
• This risk is present even if you have no plans to sell the business.  If you the owner or one of your key staff are unable to work for an extended period what happens to your business?
• Systemisation is the process by which the processes of the business are  documented and standardised and reliance on any one individual is removed
• This process also makes a business scalable; the processes can be replicated, additional staff can be selected and trained and the business can grow beyond the constraints of any one person

How can a business be systemised?

Document all your processes.  Start by asking all your staff (including you) what they spend their time doing and build up a diagram of the different flows of work from the start (say a customer enquiry) to the end (say an invoice paid)

• Post-it notes are a good way to do this.  Use different colours for different people or departments and put a different task on each note.  Record key dimensions on each task – how many times, how often, how long it takes.  Record problems or issues with the task.  Organise the notes into sequences of tasks (processes)
• Turn the hierarchy and sequence of notes into your draft written Operation Manual

Identify where only one person has the skills to carry out a particular task and examine ways to enable more people to do this

• Delegation and recruitment
• Training
• Cross-skilling, so that people can turn their hand to multiple roles
• Altering the task so that it becomes less specialised

Look for opportunities to improve processes

• Complexity that has arisen for no good reason over time
• Bottlenecks
• Different ways of carrying out what is essentially the same task
• Specialised resources being used for mundane tasks

Automate where this is practical

• Streamline and speed processes up using computers and the internet
• Look for opportunities to provide self-service – this reduces cost and improves customer service

Finalise and issue the Operations Manual

• Institute regular audits to ensure the manual and the reality match

Starting with you, the owner, develop a succession plan

• Named individuals selected or recruited to replace the people above them
• The appropriate development plans in place for these individuals

Key elements in customer service

Why is customer service so important?

-          In the long run, good customer service is the only way to grow a successful business.  Satisfied customers come back to buy more and also tell other potential customers about your service

-          Good customer service forms a virtuous circle with employee satisfaction.  People like to work for a business that they can be proud of and they like being able to make customers happy

-          Poor service will produce the opposite effects and eventually destroy a business

What are the key elements in good customer service?

-          Communication

o   Understand your customer categories and the benefits they seek

o   Engage customers in product development and service improvements

o   Respond quickly and effectively to enquiries via the people who can provide the best solution to their need

o   Agree with each client up-front what is to be delivered and how success will be measured

o   Be accessible to customers at all their preferred times and using all their preferred channels

o   Measure customer satisfaction regularly, publish the results and make sure the results provide a basis for action – then take it

-          Culture

o   Make explicit your values that tell everyone the customer is the top priority

o   Train all employees in customer service and your values and then empower them to do what it takes to deliver great customer service

o   Have an accessible complaints procedure focused on resolving the issue for all customers and all time

o   Measure customer service and reward or acknowledge individuals who excel

o   Do not tolerate poor customer service

-          Processes and outcomes

o   Define how you measure good customer service in your business and what key performance indicators (KPIs) are relevant for controlling the end-to-end process

o   Include targets for these measures for all staff and review performance monthly and annually.  Include them in your incentivisation scheme if you run one

o   Publish actual performance figures against target

o   Carry out regular and post-project reviews.  Learn from mistakes and successes and capture improvements in revised processes

o   Benchmark against the best performers inside and outside your industry

Key Performance Indicators

What are key performance indicators?

• Key performance indicators (KPIs) are the few (six to eight) vital measurements that tell you whether your business is going in the right direction or no
• They form a dashboard for your business

How can you identify your KPIs?

• Start by writing down the things that limit your growth, the things that limit your profitability, the things that irritate customers in your industry and the things that prevent your staff excelling.  Try to identify a measurement or ratio that captures each 
• Some KPIs, such as revenue or profit growth, are common across most businesses.  Others will be specific to your industry, such as billable hours for professional services firms or customer churn for a mobile phone operator.   Find out how others in your industry measure their performance
• Review the set of KPIs chosen and check that they cover the major activities of the business.  They should include both forward-looking and historical measures and reflect your strategic objectives
• You need to be able to measure your chosen KPIs without significant difficulty or expense
• Review KPI performance at your monthly management meeting

Example KPIs

Area	KPI	Remarks
Finance	Revenue growth %	Historical
	Gross margin %	Historical
	Net margin %	Historical
	Return on investment	Historical
Customer	Customer satisfaction	Forward looking
	Customer attrition %	Historical
	Customer lifetime value £	Forward looking
	Average order value £	Historical
	Order book £	Forward looking
	Number of new leads	Forward looking
	Number of active customers	Historical
Process	Productivity	Historical
	Utilisation	Historical
	Defects	Historical
	Cost per sale	Historical
	Non-productive time %	Historical
	Debtor days	Historical
	Billable hours %	Historical
	Stock turns	Historical
Capability	Employee satisfaction	Forward looking
	Employee attrition %	Historical
	Training spend/head £	Forward looking
	Employees qualified to do x %	Forward looking

 

Managing Costs

A formerly profitable local business had started to lose money.  The owner was at her wits’ end.  The business had lots of good customers – in fact turnover had grown over the last year – but the losses kept growing.

She had tried various marketing initiatives and had even laid off some loyal staff but nothing seemed to help.  She was on the point of closing the business but first of all decided to take further professional advice.

The main problem was identified to be her reduced gross margin.  It became clear that in expanding the business she had lost touch with purchasing and pricing, which were now done by employees.  Installing new processes, controls and performance measurements meant her staff could run the business profitably.

  

In a nutshell, what was lacking was cost control.

Why is cost control critical to business success?

- Reducing costs is the easiest way to improve profitability

• Assume 40% gross margin and 10% net margin: to grow net profits by £1 requires £2.50 of additional sales – but only £1 of cost savings. Cost savings go straight to the bottom line

- Constantly focusing on sustainable cost reduction forces innovative efficiency measures. If you aren’t doing this you may be being left behind by your competitors. If they aren’t then you will build a competitive advantage

 How do you control costs?

- The start point is a budget which sets out what you expect to spend on any line item

- Individual budget holders must have achieving budget near the top of their annual objectives

- This budget must form the basis of your monthly management review, where actual expenditure is compared to planned

- Overspends must be identified and explained, with appropriate remedial action initiated

- Annual budgeting (or a decrease in profitability) should be used to review key cost drivers and identify steps to reduce them

• Productivity
• Utilisation
• Supplier choice, terms and management
• Product or service design
• Organisational structure
• Automation and processes
• Outsourcing
• Standardisation and off-catalogue purchasing
• Customer, product or market profitability

- Build a culture of cost control and commercial awareness

 A word of caution

- Relentless attention to costs is a good thing but it must match your wider strategy

• If you compete on stock availability and breadth of supply then you would need to exercise caution when reducing stockholdings
• If you compete on product quality you would be foolish to continually source the cheapest components

Understanding your market

It was great to hear from one of my clients the other day that they had just had their best three months’ turnover ever.

We have been working together for some months on marketing and sales.  Prior to that, his efforts in this direction had been sporadic and lacked any coherent targeting or message.

After analysing what was different and better about his service and what his target market looked like we started to build a marketing strategy.  The strategy sets out what message he needs to get to which prospects and in what ways (such as email marketing, events and so on).  With my guidance, he has built and implemented a simple marketing activity plan that he can follow to make this marketing happen.

The results speak for themselves.

Here are some points to consider:

What is your market?

-          Your market is a subset of all the prospects who might conceivably purchase from you

-          These prospects have a number of attributes in common

-          These attributes mean that you are in some way able to achieve superior margins when selling to these prospects

-          This is often called your market niche, or market sector

-          You may have a number of different markets for different products

What common attributes constitute a market?

-          Pains or desires – the need to feed a growing family on a budget, the need to reduce the costs of IT in a growing business, the desire to flaunt wealth

-          Geography – Acacia Avenue or Slough or Berkshire or the UK or the World

-          Size – number of employees, or waist measurement

-          Industry – also known as a vertical

-          Income – for consumer sales (or turnover for B2B)

-          Attitude – early adopter, or risk averse, or conservative, or thrill seekers

-          Age – for consumer sales or age of business for B2B sales

-          Event – divorce, retirement, birthday, acquisition, recruitment – also known as market triggers

-          Existing products – BMW owners, or oil-fired boiler owners, or Linux users

Why should you target a specific market niche?

-          A tight definition of your market niche allows you to focus your marketing efforts

-          A tight definition of the need allows you to develop a compelling proposition

-          A better fit between your proposition and the need makes you a specialist, differentiates you and increases margins

-          Focus on a particular niche makes you more memorable and allows you to develop a reputation (or brand) more quickly

 

Preparing for Exit

Would you know how to handle a sudden and unexpected call to ask if you would be interested in selling your business? This is exactly what happened to a technology reseller who had not considered this before and had no idea what his business might be worth. Although interested now, he was very nervous about meeting a potential purchaser and his advisors. Nonetheless he felt he should at least explore the possibility. He was also anxious not to be led into selling too cheaply or being 'turned over'.

The client asked me for help, so we produced a preliminary valuation, I was briefed and prepped for the meeting and attended it with him. After the meeting I advised on the strategic and commercial shortcomings of the buyer's position and the likely impact on his final offer. I guided the client through the process of how to prepare for exit in his own time, and for the best sale price. I carried out an internal due diligence for the client which identified areas of weakness and opportunities for any possible future sale. We then developed an action plan for the client to use to address these matters.

As a result the client was positioned to sell on his own terms at a time of his choosing and to achieve full value for many years’ of hard work. An important lesson learnt!

There are several other motives for selling your business: perhaps wanting a lifestyle change; the business is outgrowing you; the business needs further investment to grow or you simply want to bank the value created.

Whatever your reason, you should begin by conducting a thorough review of your business as if you were the potential buyer.  To get the best price you need to get into shape.  The best-run businesses are always fit for sale but the value of your business is whatever a buyer thinks it is worth.  However, the things that make the business profitable and manageable for the current owner also make it attractive to potential buyers: solid strategic positioning, good management processes, managed risks and strong cash flows.

Seek out and minimise inherent risks: for example, over-reliance on a few customers, suppliers or even employees; no formal contracts; or potential litigation.  You should look at the value of the business in terms of future strategy rather than past numbers.  Generate competition, look outside your industry and be ready to control the timing of any eventual sale.

Getting the best price for your business is a strategic, marketing and sales exercise.  Your business must be growing, profitable, well-managed and measurable, in an attractive market sector and delivering cash first, and well-marketed and positioned for sale second.  You should also prepare, position and market your business so that the price you receive reflects the motives of the buyer.

Better Cash Flow

There is no point in increasing turnover or improving margins if your don’t turn it into cash

-          The main ways you will leak cash are

o   Not collecting money from customers quickly and fully

o   Not managing your supplier terms and payments carefully

o   Holding too much stock

Collect money from customers quickly and fully

-          Have standard terms and conditions which are geared to getting money in quickly

-          Control the amount of credit you extend to any customer

-          Invoice quickly

-          Invoice accurately

-          Monitor payments

-          Use a factoring or invoice-financing service

-          See the separate Simple Guide to: Getting Paid

Negotiate the best terms you can with your suppliers

-          Aim to pay as late as possible within agreed terms

-          Include the credit terms they are offering in your negotiations with suppliers – try to get the payment time extended.  If you are having difficulty in paying make sure you communicate with them and try to arrange a slower schedule of payments

-          If possible get them to accept your payment terms and conditions

-          Try to match or exceed the payment terms that you offer to your customers

-          Pay as late as possible before the due date

-          If there is an error in an invoice or a dispute over the goods supplied tell them immediately but make sure that the agreed payment period is applied from the date of the replacement invoice

Hold the minimum amount of stock you can

-          Limit the range of items you sell as far as possible within the constraints of your market proposition

o   If your USP is range in stock or speed of delivery then your stockholding must support this

o   Control what your salespeople are allowed to sell – restrict the range

-          Set up consignment stock arrangements (you hold the stock but only pay your supplier when you sell the item)

-          Incentivise your salespeople to sell slow-moving or obsolescent stock

-          Beware volume deals unless you are sure you can sell the stuff quickly

-          Ship older stock first – adopt a strict first-in-first-out approach