Many people think that risk management is only for large corporations. This is not the case! Risk management is a NECESSITY FOR EVERY BUSINESS. The hard part is to properly align risk management processes to each unique organisation.
The world is undeniably riskier. Change is ever more rapid, and this has been accelerated by COVID. Increasing digitisation of business processes will inevitably increase cyber-security risk. The world is still highly connected, and McKinsey estimate that supply chain shocks will reduce profits by 42% of annual EBITDA profits every 10 years. Geopolitical risk, climate change, border closures and business disruptors (new business models, social media etc) will all play a part.
• RISK MONITORING
It’s important not to let risk slip off the radar, and for to you be aware of possible issues. Talking to people in your industry can give you insights from other perspectives. Being sucked into day to day operations can leave no time to think about strategy and risks. Moreover, when implementing these strategies, try to consider the related risks by staying close to your business analysis and industry trends. Talking to a CFO, who with a wealth of experience and a fresh pair of eyes may give you new perspectives and insight!
• RISK APPETITE
Decide how much risk you are willing to accept. This depends on the operational and financial strength of the organisation, as well as the business strategy and your risk versus return profile. What’s the takeway? Risk is part of doing business, but make sure it is within your limits, and you are in control.
• RISK MANAGEMENT
Understand how to mitigate risk, e.g. insurance, experts, financial tools or internal controls.
Work on simple scenario modelling to understand implications and solutions. Simple cyber security audits can also be useful.
Curtail activities that exceed your risk limits.
Restructure staffing so that owners/managers have some time to think about risks and strategy.
Ensure risk management is embedded in the organisation.
Ensure internal controls are in place so you have confidence that risks are controlled and reported.
Risk management is a must do. To be successful it needs to be correctly sized, using appropriate techniques. If this is not done, risks can damage or destroy the business. Too complex and it will detract from the real world task of running the business (and probably wont get done anyway!).
Gary Campbell is a CFO Centre Principal based in Melbourne, Australia, advising SMEs on finance, strategy and governance. He is a qualified accountant, MBA, and graduate of Australian Institute of Company Directors. He can be contacted on [email protected]
A client recently said to me: “I want to grow our business and stop the cash burn – how do we do this? When is it the right time to invest and grow?”
What a tough question to answer. Each business is at a different stage.
We spent a day examining his business and determining what the growing pains were. He had started the business a few years ago and it grew from scratch.
It was generating a great turnover and growing but they never had any cash.
“Why?” he asked.
After reviewing the business financials it was quite clear that the internal systems were not in place. He could not possibly understand the profitability of the products they were selling due to these inadequate systems.
Therefore they could not take the next step.
The first question I asked was: “Where do you want to take this business – what’s your goal? To build up the business and exit down the line, or are you looking to exit now? Or is this business a keeper if we can generate a great RoI?”
The response was: “We don’t know the numbers or where this business could get too as we have no clarity on the numbers”.
Something I see very commonly here in the SME businesses I work with – no clarity around the financials.
Next Steps
Step one for this particular client was to build a reporting framework around their products to determine what was profitable and what as not. If there were non profitable products (or those that deliver little profitability), should we dump them or only include them bundles in the online offering?
Step two: Build a fully flexible 3-way financial model (P&L, Cash Flow and Balance Sheet) for the next 3 years. Play around with the assumptions, i.e what other products can we put into the offering to customers?
Step three: Monthly reviews against the plan – what worked, what didn’t work and the whys around both.
The right time for a business to grow is when they can balance new customer demand with their internal systems and processes. Moreover, in the instance of this client, increasing recurring revenue streams. Growing faster generally costs more per customer as they need to engage more expensive channels within the business model.
Scalability is about continuing to engage customers with new offerings, and to engage new customers with your offering to the market.
To scale a business one must consider how the business model will affect the bottom line when you expand operations. If you have low capital expenditure and can grow your business with the same revenue / expense % it is much easier to deliver greater numbers in the long term and provide greater options to your customers.
It is early days working with this client but the potential is endless.
When your company is facing yet another cash flow crisis caused by late-paying customers, it can be hard to believe there might be a solution. But there are steps you can take to overcome the problems delinquent payments cause and to avoid them happening again.
Late payments are something that hundreds of thousands of SMEs experience. They can threaten SMEs ability to trade, and stifle appetite for growth and recruitment. In worst cases, it can lead to insolvency.
The amount of time SMEs are kept waiting beyond their previously agreed payment terms can be a big issue. Almost a third of companies face delays of at least a month beyond their terms. Additionally, nearly 20% are having to wait more than 60 days before being paid.
Fortunately, there are measures you can take to protect your company from the worst effects of late payments. Furthermore, ensure that you are paid promptly in the future.
Some of these measures include:
Research prospective clients – Before accepting a new client, carry out a credit check and find out if the company has a reputation for paying on time.
Agree on prompt payment terms – Create contracts and terms & conditions that specify when they must pay your invoice and any overdue fees. Include your payment terms on every invoice.
Send invoices promptly – Don’t delay in sending out invoices. Check that the details are correct to avoid delays.
Offer a range of payment options – Make it easy for customers to pay you. Offer them a variety of payment options such as Direct Debit, PayPal, and credit card. If your clients are based in a different country, accept payment in their currency.
Use invoice finance – Invoice finance will give you essential working capital (up to 90% of the approved total invoice) while you wait for the outstanding invoice to be paid. You’ll receive the remaining 10% when your client pays your invoice.
Use an invoice tracker system – You’ll receive an alert when invoices are overdue.
Keep to a schedule – Invoice on the same date every month so that your clients know when to expect your invoices.
Set up internal invoice reviews – Hold regular weekly or monthly internal finance meetings to review your invoices.
Don’t back down – If you have late fees for overdue invoices then make sure you follow through and charge them. By law, you can claim interest and debt recovery costs if another business is late paying for goods or services.
Hire a part-time CFO – For a fraction of the cost of a full-time CFO, the CFO Centre provides highly experienced senior CFOs. Your part-time CFO will assess your company’s cash flow position and take the following steps:
Identify and address all the immediate threats to your business
Determine where improvements and savings can be made.
Instigate the use of regular cash flow forecasts. This way you’ll know in advance of a cash shortfall, and can therefore, make arrangements for extra borrowing, or take other action.
In the 1950s, strategic planning was around budgetary planning and control, then we jumped to 1970s which focused on corporate planning; 1980s focussed on strategic positioning, 1990s strategic competitive advantage; 2000s strategic and organisational innovation; 2010 complexity and rapid change.
Now, we are talking about North Star Metrics (NSM). The term has been in around since the 2000s and was used primarily in Silicon Valley. It has taken a while to reach Perth.
Here is our view of what the North Star means for SMEs.
If you are not familiar with North Star, it is another form of goal setting. Remember SMART goals (specific; measurable; achievable; realistic; and time-based)? And what about vision boards, or stepping stone goals or even a more recent fad of bullet journaling?
A North Star goal, in its basic form, has also been referred to as the Big Hairy Audacious Goal. It is a goal so big, so far out there and it is not about the destination but more about the journey.
One article recommends to think of them “the way sailors view the North Star: A way to stay on course, no matter where you are. And if you don’t know where to go or what to do, all it takes is a quick glance to get back on track”.
If that is the basic form, let’s have a look at the metric in more detail.
Key steps for creating a North Star Metric
1. Start by Understanding How Customers Get Value
And not just any customers, but instead the “must have” customers who say they would be “very disappointed” if they could no longer use the product. Your goal is to expand this “must have value” across your existing and new customers. Your North Star Metric is how you quantify expansion of this value.
2. Should be Possible to Grow NSM “Up and to the Right” Over Time
A good rule of thumb is to choose a metric that can be “up and to the right” over a long period of time. This is why “Daily Active Users” is an example of a good NSM for consumer products like Facebook or online games.
3. Consider the Downsides of a Metric
Think through some scenarios where growing the metric could lead the team to behave in ways that are against the long-term interest of the business. For example, if you made your NSM “average monthly revenue per customer,” then the fastest way to grow this number would be to eliminate all customers that have a relatively low value — even if they are profitable customers. This would likely reduce your overall customer and revenue growth rate.
4. Keep it Simple
Remember that the point of the NSM is to align everyone on your team to work together to grow it. So, it’s important that it is simple enough for everyone to understand it and recall it.
5. Why Not Just Focus on Revenue Growth?
Revenue growth is very important, so this is a natural question that many people, especially business owners, ask. The challenge is that if revenue growth outpaces growth in the aggregate value that your product delivers to customers, it will not be sustainable. Revenue growth will eventually stall and start to decline. But if we can continue to grow aggregate value delivered to customers over time, then it becomes possible to sustainably grow revenue.
For example, let’s take the CFO Centre (CFOC).
How customers get value: CFOC provides highly experienced CFOs to SMEs on a part-time basis.
Grow NSM: the number of active clients
Downsides: CFOC needs to be able to service active clients and this is directly related to number of CFOs
Keep it simple: CFOC wants every SME to have access to a part-time CFO.
This is a big hairy audacious goal. We understand that the number of clients is limited by the number of CFOs but a North Star Metric isn’t necessarily pragmatic or utilitarian. It does, however, provide a direction for the SME and the business owner.
What is the North Star Framework?
In addition to the metric, the North Star Framework includes a set of key inputs that collectively act as factors that produce the metric. Product teams can directly influence these inputs with their day-to-day work.
This combination of metric and inputs serves three critical purposes in any company:
It helps prioritise and accelerate informed, but decentralised, decision-making.
It helps teams align and communicate.
It enables teams to focus on impact and sustainable, product-led growth.
Personally, I would add to this:
Imagine you have your North Star Metric, next you define sub-metrics (break down big goal to smaller goals), define the outputs (key elements of success) of those goals, define how you will achieve those outputs (needs to be measurable) and finally, what are the inputs to reach the outputs.
The CFOC question
At the CFO Centre, we ask our clients: what do you want your business to do for you?
This is an important question as our goal is to build a relationship with a business owner and the questions starts our journey to better understand what is important to them.
The answer to this question can also be the basis of your North Star.
Is the North Star relevant to SMEs?
Overall, I like the concept of setting a North Star for a business but I much prefer the more basic approach: Big Hairy Audacious Goal.
I was in conversation with one business owner who had his North Star, or rather his Big Hairy Audacious Goal. He wants his business to be valued at $1bn by 2029. I thought this was brilliant and I think this is what North Stars are about.
Set your big goal but remember, it is more about the journey than the destination!
Final words
To qualify as a “North Star,” a metric must do three things: lead to revenue, reflect customer value, and measure progress.
Make it bold, tap into your dream and start the journey.
Manufacturing Tips – Let’s take a step back….and go back to basics: Production Scheduling!
The last 12-18 odd months has been a time for many people to self-reflect. So why not apply this logic to your business?
We are often creatures of habit and do many tasks out of routine, but do not look behind the curtain.
There are literally dozens of articles on the internet and in business magazines on manufacturing financial tips, or top tips to improve your business fast. Everyone starts throwing out the buzz words like: cash flow; inventory management; procurement savings; marketing and e-commerce and better working capital management, the lists goes on.
For most business owners, your eyes have already started to glaze over. Or, you’ve just clicked the close button on the internet browser. I did on several of the online articles I googled!
In other words, in my experience, you need to take a few steps back and go back to basics.
Look behind the curtain and optimise your production schedule.
Step 1.
Identify the key product (Group A) that your business manufactures and sells. What do you want the market to know you as? What is the goal? Is it to increase the productivity of product X and increase sales by X percent?
Step 2.
Secondly, you can consider looking at the other products (Group B, C, D etc) that your business manufactures and sells. What is the goal with these products? Ask the questions for this step that you asked in step 1 for your key product.
Step 3.
Thirdly, analyse the volumes of these product lines and determine what your realistic manufacturing capabilities are (with and without overtime, additional shifts, equipment change overs if required, etc). Do the calculations! If you are not sure how to do the analysis, get some outside talent to assist on a short-term basis.
Step 4.
As a next step, develop the production schedule. With Group A as your primary production, you can factor in peak sales periods and additionally, in “quieter times”, you can manufacture the other products (Group B, C, D etc). Remember to factor in equipment change overs and maintenance requirements, and consider warehousing constraints for raw materials and storing of finished goods.
Graphical Example of Production Schedule:
Step 5.
Setting the production schedule flows to your procurement requirements and timing and as a result, this then follows onto your inventory management. These two areas are driven by your production schedule (not the other way around!).
Golden rule: Do not change the schedule!!! You may need to tweak and adjust for the unexpected, however, chopping and changing the schedule can cause productivity losses and create instability in the organisation.
Step 6.
To manage the manufacturing process from end to end, you need timely reporting and metrics to track the performance. After that, review the reports regularly – some might be hourly, daily, every 2-3 days, weekly or monthly (just depends on your operations).
If your current software system cannot meet the reporting requirement, develop reports that meet your business needs. If you do not have resources internally to develop the reporting, get short-term outside talent.
Longer term, you may need to look at upgrading your software system that grows with your business needs. Think strategically!
Step 7.
Lastly, communicate the production schedule to your organisation. Set the expectations, from the team members on the production floor through to finance, customer service and sales. You’ll find over time that the salespeople that understand the production schedule and work with it, tend to be more successful in sales and meet customer expectations.
Once you are in the rhythm of the production schedule you can work on cost and waste reduction programs. For instance, refining your inventory management, supplier reviews, productivity efficiencies and so on.
In conclusion, go back to basics, break it down into steps and do not be afraid to ask for help.
By Melissa Tirant, Chief Financial Officer, Victoria – The CFO Centre
“Freedom” is the most common reason small business owners started their businesses.
41% of respondents to a recent poll conducted by The CFO Centre Australia identified this as their primary reason.
When I started my business in 2003 I had this desire to be master of my own destiny.
And family was always the primary motivation for this freedom. A desire to be with my young family in their formative years. To share those sporting and other important moments as my children grew up.
But in my work as a CFO working with small business owners, the dream of being independent can often be just that – a dream.
The reality for many owners is they spend most of their time fighting fires. And working longer and longer hours as the business grows. Instead of getting more time with their loved ones, the demands on their time increases and they are at home less.
Business owners are often very good at working on the tools but lack the expertise in other critical skills. Without the business acumen or financial background to know what’s best for the business, they work longer hours trying to do it all.
What do you really want your business to do for you?
Does your business provide the freedom that you expected when you first set it up?
Are you stuck in the operational space with little time left over for what you really want to be doing, both in the business and personally?
I’ve seen this time and time again with business owners that we have worked with. At The CFO Centre we help business owners see the big picture.
This 2 minute video (click the big pink play button) shows some of our clients’ stories – from where they were to where they are now.
Written by Peter Crewe-Brown – CFO at The CFO Centre – Sydney Team.
Unless your company manages cash flow effectively and uses regular cash flow forecasts, your company is in jeopardy. Cash flow shortfalls mean:
You can’t pay suppliers on time
You can’t make debt repayments on time or at all
You can’t buy new inventory to meet customer demand
You can’t pay staff wages
You can’t compete for new contracts
You can’t advertise to attract new clients
You can’t hire new staff.
This will have a knock-on effect on your company’s profits, market share, and brand reputation. It could even result in your company going into liquidation.
One US bank study found that 82% of business failures are due to poor cash management.
How to Fix Your Cash Flow Shortfalls
Fortunately, most cash flow problems can be resolved with help from the right people. They will help you to identify the causes of cash flow problems in your business and advise the best way to fix them.
To find out how to fix your cash flow problems and prevent them from recurring, grab your free copy of the “Cash Flow” report NOW!
Causes of Cash Flow Problems
Conditions that can impact your cash flow include:
A fall in sales or a decline in gross profit margins. This could be a result of changing economic conditions (such as the most recent global financial crisis), increased competition, or a drop in demand for your product or service.
An unprofitable business model
Using a negative cash flow business model. You offer customers or clients credit terms of anywhere from 30 days to 90 days (or longer).
Having excessive debt
Having inadequate stock or credit and debtor management.
Your cash flow problems can be due to any of the following:
Late paying customers When a customer doesn’t pay on time, your business can experience cash shortfalls.
Poor debt collection processes Not issuing or chasing up invoices in a timely fashion can result in reduced cash flow.
Low prices If your prices are too low, but your expenses are rising, your company is almost certain to experience cash flow problems.
Low sales Too often business owners try to resolve poor sales by looking for new clients. But this incurs more costs in areas like advertising and marketing to attract those new clients.
Too generous payment terms Allowing customers to pay in arrears for goods or services received is a bit like giving those companies short-term, interest-free unsecured loans.
Overtrading Rapid growth means your company will have to invest in more stock, equipment, or hiring staff to meet demand. If you don’t have sufficient working capital, the company will experience cash flow problems.
Too much stock Every dollar or pound you have in inventory is a dollar or pound you don’t have in cash.
Too much debt If you’re overleveraged (when you’ve borrowed too much and can’t pay interest payments or principal repayments or meet operating expenses), you’re likely to experience cash flow problems.
Cash Management
Cash is vital to your business. Without it, your business won’t be able to pay suppliers and creditors and to meet its payroll obligations.
Finding and fixing the cause of your cash flow problems in your business and putting systems in place to manage cash effectively is vital for your company’s survival.
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