I was recently reminded of the old accountancy joke,
What’s the definition of an accountant?
A person that knows the cost of everything and the value of nothing!
Unfortunately in my experience this trait is not limited to the accountant, many business owners approach their financial decision making in much the same way.
My experience of using ‘Lean accounting’ thinking requires you to think differently about the finances in your business, to cost and price differently and to make your decisions differently. If you can change your mind set and approach I believe you can grow your company faster and more sustainably
Mind set change 1- don’t base your buying decision solely on COST.
Comparing the cost of service 1 versus the cost of service 2 e.g. the cost of delivering an IT support service to your business is cheaper from supplier 1 versus supplier 2.
For the SME the quality of delivery of the service is going to be so important Often there is no expertise in house to be able to modify, problem solve and setup. Cost is just one facet of the service, more importantly will be the delivery quality in terms of the support given, reaction times to your queries and issues, frequency of downtime or malfunctioning and accessibility to support. Non delivery in any of these areas is going to add additional cost to your cost base in terms of lower capacity output for your staff. This is hard to quantify I know, but a crude measure based on the simple metric of how much sales per hour or day is generated in your business can help.
Sales revenue per annum / 1380 hrs (average available hours per year)
Hence for a £2m turnover company, knowing that every hour your company is unable to operate fully it is losing £1500, or every day it is losing £9000 in potential sale revenue, can be a determining factor in helping you to make a decision. Especially if you are unsure about the reliability and quality of delivery from your supplier.
Mind set change 2- Don’t cut costs, manage them
I was amazed to learn that a book keeper had advised one of my business owners in the past to stop spending money as they had cash flow problems. A typical knee jerk reaction I guess, but often a SME needs to understand that if their business model is basically profitable it is not about spending less money, it is about managing their cash better.
A subtle difference I know, but one which will make the difference between you achieving sales growth or embarking on the downward spiral that inevitably follows a company who is taking a purely cost cutting approach.
Managing costs is about releasing the bottle neck in the cash cycle so you can spend more. Managing costs is about spending on your growth areas and making more efficient your existing established areas.
Which nicely leads me to my final point
Mind set Change 3-Think as if you were already a big company
Big Companies think differently to small companies. Not because they have more available money necessarily, but because they can attract the in-house capabilities which think in a more strategic way.
Your business will be a reflection of the talent you employ and talented resources have to be attracted. So spend money on ensuring you attract the right talent
If you are looking for growth these will be your key areas of focus:
- Marketing and sales talent, who have a proven track record of success –Set achievable targets and measure the achievement of these. Don’t hire on hear say, hire slow and fire fast.
- Operational talent who can help you scale your business, there is no point striving and achieving higher sales when your business support infrastructure including resourcing cannot deliver this for you.
Failure to spend in this area can only result in disappointing your customers. Worst still, your cost base may rise disproportionately with sales increase as you throw ‘emergency’ resourcing at the problem. What is also known as running twice as hard to stay in the same place in terms of profitability!
- Consultants who will open your eyes. Consultants are expensive but if they can truly help you to see the blind spots in your thinking then they are worth every penny. The business owner is only limited by his own self beliefs therefore it may be yourself that is holding your business back. You cannot possibly know what it is in you, that is holding your business back so seek a second opinion and more importantly, be prepared to act upon the advice.
A quick rule of thumb when choosing consultants, give them a small piece of work to do and see what value you get from this. Did they show you something new? Did they give you a view that was different and got you to start to thinking in a different way? Did the work they do lead to you (or your business) tangibly increasing sales revenue?
Most importantly though, in all of this, are you looking for a different way?
I think it was Einstein who said, ‘The definition of insanity is doing the same things over and over again and expecting a different result’ If you have been trying to grow your business for a long time and are not getting past a certain point perhaps it is time to start thinking differently about how you use your financial data to make your decisions.
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