Improve productivity, generate cash

In a small business as in any business, productivity is about the whole company not just operations or manufacture. As business consultants we advise our clients that the best measure is net margin per employee - this really focusses the mind on what productivity improvement is about.

Now I know I should not be blogging about this whilst on holiday, but on our first evening we were sitting in a sea-front restaurant we know well and I was struck by the capacity utilization of the waiting staff - there were 4 handling 35 to 40 covers each.

Although margins would be low, the whole business seemed to be set up to make as much money as possible out of the short holiday season - maximising sales and hence margin per employee.

And there was a great atmosphere, so they must have been doing things right from their customers' perspective.

What is it that determines productivity? 

A good business process supported by good records, and well trained and motivated staff who work the process to deliver the results.

A good business process?

Marketing - generating enquiries; selling - enquiry to order; fulfilment - order to payment; and customer satisfaction leading to repeat business.

You can think of the restaurant having a core process that is operated by the customer-facing staff - the waiters: customer walks in, gets seated, gets served, gets billed, pays and leaves.

At each step there is an indicator or record to show the waiting, kitchen and till staff where each client is in the process: menu left with the client immediately on being seated and after the main course is cleared; and tickets with order details.

Effective use of this process information is fundamental to productivity.  For example if the client is not given a menu on being seated, the waiting staff will have to think harder about where in the process the client is, and if the waiter has 35 to 40 people to think about that is a lot of unnecessary thinking!

Supporting this main process will be other process loops aimed at maximising the waiting staff efficiency, for example a menu, buying, preparation, cooking and serving process that gets the food to the customer when he or she expects it.

Training

We take it as read that our waiters are highly skilled in the basis - for example which cutlery for which food - you could not run a high-pressure restaurant if they were still learning those things.

What we do mean is training in the business process - how to recognise the stage each customer has reached and what they would want next; how to record their orders and convey the information to the kitchen; and how to know which table to deliver food to.

In our example the French waiters were so skilled at that - they were making decisions on the fly like highly trained fighter pilots - that things seemed to run like clockwork.

Motivation

And they get that of course from the satisfaction of a job well done under pressure and the little thanks and tips from their satisfied customers.

Continual improvement

Restaurants probably come second to yachts as ways of spending lots of money - it is said that owning a yacht is like pouring money into a hole in the sea. It is quite hard to make a decent living out of owning a restaurant, but some do it.

They have highly skilled staff and a well-worked process that makes them money, and they are always looking at where they can tweak the process to improve efficiency, to make more money. If they have good process records they can analyse them for improvement ideas - this is much harder to do if all you have is your memory.

Need help with your business processes? Contact us and we'll send someone out to talk to you - you get up to 2 hours free of charge on your first meeting.  We are on enquiries@sussexbusinessadvisors.com.

How productive is that?

Make money by not spending money on your debtors

Last week I arranged for my friend Graham Sands to give a talk to my local association of business consultants and business advisors on debtors and credit and their impact on cash flow and profit.

Graham is a specialist in this area and he gave us some very simple and clear messages that we could take back to our clients that apply whatever the size of their companies - start-up, sole trader, micro business, small business or SME.

In a nutshell, the message is this: send out the invoice as soon as you ship the goods, and contact the client regularly to progress the invoice through to payment, on time. Pretty obvious really, but not being done by a surprising number of the business we advise.

DSO - Days Sales Outstanding

Also known as debtor days, this is the average number of days your clients take to pay their invoices.

Let's take a business that has a turnover of £1,000 per day - £365,000 per year - typical of many small businesses with a couple of employees. If its clients owe them £75,000 then their DSO is 75 days - 75 days at £1,000 per day - that is what it means.

The DSO for your business is just the total debt owed to you divided by your average daily sales.

What does DSO tell us?

Well, the £1,000 a day turnover company traded on 30 days terms so it could reasonably expect to get paid on 45 days - if you invoice in the middle of a month the earliest you could expect to be paid by most customers is the end of the following month - and so it could reasonably expect to have a debt of £45,000.

Just imagine the impact on cash flow of reducing the DSO to 45 days - a £30,000 improvement. Even a 10 day improvement in DSO for them would improve cash flow by £10,000 - worth going for.

Effect on overdraft

Graham reminded us also that companies often find they have to borrow to fund the excess credit they give to their customers. Lets say our sample company had an overdraft of £30,000 at an interest rate of 12%  - essentially funding the gap between 45 days and 75 days DSO.

The cost to them of funding that gap would be an additional £3,600 in bank interest, not counting the bank charges that go with it. That is an extra £3,600 cost to their business for giving their clients excess credit on interest-free terms - madness really.

This is what we mean by making money by not spending money on your debtors. You could save the cost of bank interest by improving your DSO.

Invoice on time

Strictly speaking DSO does not include your delay in sending out your invoices, but the impact is the same and the easiest way to eliminate that is to send the invoice out as soon as you have shipped the goods or supplied the service.

Manage your clients payment expectations

This is where Graham's advice is like gold dust! He advises contacting the client at least three times between invoicing and collecting the money:

• The day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied
• 5 days later to carry out the same checks, so that there no excuses on that front
• 5 days before you expect to get paid to make sure your invoice has gone into that month's payment run

That way your customers will get to know your expectations on payment. They will often delay paying their suppliers where they can get away with it to improve their own cash flow, but if you chase them - nicely - they will get to know that you expect to be paid on time and they should act accordingly.

We can help

So you are going to invoice on time and contact your clients regularly to ensure payment on time, but you still have a number of significant debts that are proving difficult to collect. You need help in collecting the debts and in ensuring that such debts are less likely to occur in the future.

Contact us by email on enquiries@sussexbusinessadvisors.com for a free initial discussion of your issues, and we can put you in touch with specialists such Graham if we feel that is the way you should go.

Make money by not spending money on your debtors - now there's a thought.

Handling complaints

What if you fail to meet your client's expectations and they complain? Do you deal with the complaint, or do you put it in your desk drawer and hope it will go away?

Actually, you get back to them promptly and talk to them about it. Promise to resolve it within a given time-frame - and do that systematically for every complaint.

Your clients might still be unhappy with what you supplied, but they'll be happier with you and your company as they know you have responded to their complaint and their issue is being addressed.

And if you don't talk to them, they'll talk to their friends and business contacts about you and your company, and your reputation will - slowly but surely - slip away.

Put in a process

• Devise a system to log, track and resolve complaints; 
• Decide which staff will be involved and get them some training if necessary - they may have to deal with frustration, anger or confrontation over the phone;
• Set target time-scales for contacting the client and for resolving their issues;
• Tell the client what these time-scales are, and talk to them regularly about your progress;
• Take it really seriously - carry out regular audits at director level to ensure things are being done on time;
• Use your audits to drive continual improvement; and 
• Carry your staff with you and reward them for their performance in a difficult role.

This sounds like a lot of work

Not really. If you have a culture of client satisfaction and continual improvement, you are probably carrying out most of these steps anyway. All you have to do is make this systematic - take out the uncertainty so that everyone knows 'who, what, why and when', with some steps of the process always being done by the same people.

And remember, most growing, high-performing businesses are process-led, so if you want to be like that I guess you'll have to start putting some processes in.

How can I get help?

A client asked me what was meant by a complaints handling system that conformed to the guidelines in IS0 10002.

Now, these International Standards don't normally tell you how to do it, but amazingly there is a really good explanation in ISO 100002:2004(E) of a process for a small business - look up Appendix A.

So if you feel confident to put in your own process I suggest you start with that - or you could take advice. We'd be only too happy to help.

And the last thing is - don't hide behind your Terms and Conditions. We've all experienced being given the brush off when we thought we had a legitimate complaint - it makes you think twice about using the same company again.

Half-day business plan

In half a day, you should be able to get the essential features of your business plan 'down on paper'. 

Now, by business plan we don't just mean a plan for the business as a whole, we mean a plan for any significant change you make to your business.

We firmly believe that doing a plan helps you to think through your proposition carefully, and forces you to set yourself and your team, objectives against which progress can be measured.

How can you do this in half a day? 

You follow a structured approach that facilitates getting your ideas straight at every stage: you build up your plan stage-by-stage, on well-thought-through foundations. In reality however, you will keep going back over it  - naturally, things will come up that you will need to feed back into sections you have already completed.

And a further discipline is that you don't write much! By being really strict with yourself, you should be able to get the essentials of your plan down on 1 page of A4. We'll explain it in terms of a business plan, but you'll see the approach can be adapted for any plan.

Aims, goals, targets, vision

As a business owner, the first stage is to think through what you personally want out of your business. Do you want to be really wealthy, comfortably-off, famous, a locally-respected business leader, eventually a politician, retire at 50, a brand - what exactly?

Get that straight - this is really important - and you'll then understand what sort of business you will need, what market you will address, what size it will have to be, and by when, in order to deliver your own aims, goals, targets, vision etc.

Markets and mission

What will you offer to your customers that will make them want to buy from you in sufficient volumes to fulfil your business vision? What is the real market for your offerings that will deliver the growth and margins you need to build your bottom line?

We normally spend about 2 hours on these two sections to make sure the foundations for the rest of the plan are really sound. Then we spend the rest of the time doing the next 4 sections, and going back over what we have done to ensure consistency. 

SMART objectives

You then write down 5 or 6 bullet-point objectives that you you can use to measure your progress.  They should be Simple, Measurable, Achievable, Realistic and Time-bounded - SMART. 

Strategies

How are you going to set about achieving these objectives? What strategies will you adopt to deliver them on the time-scale you need, in areas such as market segments, staffing, training, compliance, accreditation, premises, IT - in fact any area that has a really significant impact on your proposition.

Plans

Now we get to being really specific. You have strategies to achieve objectives, but what do you plan to do about them, exactly - who, what, where and when?  You'll need another 5 or 6 bullet points to write these down.

Financials

And finally, to summarise the financial impact of the plan, you will need to include a small table, with months, quarters or years across the top, and as an absolute minimum, rows, to represent

• Sales
• Cost of Sales
• Gross Margin
• Overheads
• Net margin

You should be able to see at a glance where financial objectives occur, and the impact of specific plans on sales, cost of sales and overheads. You can include cash flow or balance sheet items such as capital equipment if your plan focusses on these areas.

Recap

You could do plans for: your business as a whole; launching a new product; selling into a new market; putting in CRM* or ERP**; buying a company; migrating from server-based IT to the cloud; expanding your leadership team; tackling a cash flow problem - as we have said, in fact any significant change or development you make in your business.

By taking a logical, structured approach you can get your ideas straight and then build on those ideas as you set out your plan.  You'll go over it a few times until you are happy with it.

The key features will all be on one page, and as a result your plan will stare you in the face every time you look at it! And you can use it to track your performance. 

And finally, unless you are really skilled at business planning, we think you would benefit from the support of a mentor or business advisor as you go through this exercise. They'll ask really searching questions and keep you on track - you'll be surprised at the difference that can make. 

Half a day really well spent.

* CRM is Contract Relationship Management

** ERP is Enterprise Resource Planning, of which MRP - Manufacturing Resource Planning - can be part

Set goals for dealing with your clients

You've probably set goals for what you want to achieve in your own life and for your business, but have you set targets for how you deal with your clients?

We all understand there are commitments made at every stage of a client life-cycle from initial enquiry, to order fulfilment, and on through long term after-care - have you set targets for those? 

Maybe you should, and in some businesses you have to, or you won't be able to sell your products or services.

So how about defining your service levels and setting up Service Level Agreements with your clients that you can both work to, to your mutual benefit.

Service levels

Why can't my service level be 100%? 

In practice this is unrealistic for whole variety of reasons: human nature, equipment failure, adverse weather, travel delays etc, and your true service level will be less than that. 

For example, let's say your business is to supply staff - cleaners, maintenance staff, nurses, guards etc. 

Your records show that in about 1 in 20 cases someone calls in sick or is otherwise delayed, and it takes you at most an hour to find a replacement.

Your service level is then 95% on-time and 100% within an hour.

If you explain that to your clients, in most cases they will accept it as realistic - you have been honest with them and your promise is based on history, not fiction: you have established a level of trust with your client.

 

Of course, those with good business reasons for needing a quicker solution can be dealt with individually, and you can establish acceptable service levels for them also.

What about your business?

So what is it about the way you deal with your clients that could make them turn to another supplier? Please think about it - these are the areas where you should set about defining your service levels!

For example, how long does it take to:

• Answer a telephone enquiry that goes to voice-mail or an answering service;
• Provide a quotation for a customized product or service;
• Be on-site to deal with an IT issue or a water leak;
• Provide a repair or replacement under warranty, or even out of warranty; or
• Respond to a customer complaint (we'll deal with complaints in our next blog post)?

No doubt you'll have a short list of time-critical activities that you could translate into service levels. 

Service Level Agreements

Having set their service levels, it is becoming increasingly common practice for companies to write them up into Service Level Agreement or SLAs that form part of their contractual agreements with their clients. 

And some have even published their SLAs on-line. 

If you think you should go down this path and you want to find out more, do a web search and see what comes up - there are plenty of good examples.

Continual Improvement

There is a hidden benefit to you, the supplier, too. If you have defined a set of targets you can set about measuring your performance against them - something you really can't do if all you have is woolly intentions.

And that will allow you to introduce a culture of continual improvement - regularly reviewing performance and making changes to drive up client satisfaction levels.

It is essential also for ISO9001 and accreditation in certain industries.

A high performing business, achieving and driving up its service levels, and as a consequence with great client satisfaction - wouldn't that be nice, eh?