“If you believe it will work out , you’ll see opportunities. If you believe it won’t, you will see obstacles” observed the psychologist, Wayne Dyer.
“If there is one thing I hate, it’s quotes like that,” says Sheila, the owner of a once vibrant, now struggling furniture factory, based deep in Nairobi’s Industrial Area. “Thanks to the slowdown caused by corona, we have not been paid for large orders that we supplied this time last year. How is that an opportunity?” says the entrepreneur, as she sips her morning coffee.
“I don’t need the accountant to tell me, that to survive, we need to be like a magician and pull a white rabbit out of a black hat.”
For Sheila, like most businesses in these interesting times, a turnaround begins with awareness.
A change in perception of how to do things, to see what is possible.
To make better choices, that with time, lead to better results. For Sheila and her furniture business awareness revolves around, for instance: • Creating a culture of making small constant daily improvements, and • Examining the finance numbers, looking at customer sales, and lifting the veil on product profitability.
TAKING SMALL STEPS FORWARD
So how does one get things done? All we can do is what we can do today, right now. Sounds stupid, but it’s true.
One myth from ancient Greece, dating back to the Sixth Century BC tells the story of Milo of Croton, who developed his strength by lifting a newborn calf each day, from the time he was a boy. In a few years, he was able to lift a grown cow.
Perhaps, this is an earlier version of Kaizen, the originally Japanese practice of making constant daily improvements, championed by Toyota. Often tiny, what may seem barely visible, insignificant daily improvements can all add up to impressive results. Exactly like compounding interest, that eventually grows the principal to a large number.
Having an operational perspective works for a while when business is good, and the orders are just flowing in, but in tough uncertain times, it helps to do a quick diagnosis, crunch the numbers and see what they are saying. All to come up with a distinct leverage point approach — a strategy.
Often a business owner does not know where they are making money, which products or services are most profitable? It may be the case, that when you ask your accountant or bookkeeper to provide these figures, they say this will take some time. That’s fine, but in the meantime, get out your laptop, there are some ways you can quickly move ahead and can get a rough picture, that can be refined later.
The first approach — would be to extract the accounting data and put it on several Excel spreadsheets. The first spreadsheet would be a listing of all your customers, ranked by sales volumes, starting with the big spenders at the top. Based on an 80/20 Pareto principle you may find that 80 per cent of the sales are coming from 20 per cent of the customers. However, on doing the analysis, you will likely find that the results are more skewed, more surprising than you suspected.
Do the analysis and you’re just about guaranteed to have some insightful surprises. For example, it may be that five per cent of the clients are generating 50 per cent of your revenues. Once you know who these profitable ‘key accounts’ are, it makes sense to reach out and ask them: How you would be able to serve them even better?
Likely, that you have a fair number of ‘long tail’ customers, who have purchased once or twice in the not too distant past. Though they make up a big chunk of the client base, they risk being forgotten. How in this age of social media can you be imaginative and turn these into repeat customers?
The second approach — would be ‘profitability segmentation’. Knowing the true profitability of your products or services will likely provide some unexpected revelations. Products you thought were profitable may not be, and those you may have ignored may turn out to be lucrative.
The first step would be to segment the product range, which could be by, for instance, category, customer, or geography. Once you know the top end sales numbers, then allocate all the fixed and variable costs to each segment to get an idea of profitability. This is where things get tricky. One approach to allocating costs would be on a percentage of turnover basis. So if dining room tables represent 12 per cent of revenues, allocate 12 per cent of costs.
While that is a good start, you may soon realise some products or services are more difficult, more expensive [in the cost of production] to deliver than others.
In the case of the dining room tables, it may be that the final finishing, requires additional inputs and time, if so, then allocate a greater proportion of costs.
Go through the same process for all the products and you will get a rough estimate of an allocation of the fixed and variable costs. End of the day, you will have a rough estimate of the profitability of products. No, it won’t be perfect, but by working with your accountant you can refine the model.
With all the obstacles on the road to smooth sailing, it would be nice to just go to the beach and wait till all of this over. But, like for Sheila, and all of us, we need to be in action now, and create some magic.
These unusual times remind of one of the words of the Spanish philosopher and writer Jose Ortegay Y. Gasset who said: “Life cannot wait until the sciences may have explained the universe scientifically. We cannot put off living until we are ready.
The most salient characteristic of life is its coerciveness: it is always urgent, ‘here and now without any possible postponement. Life is fired at us point-blank.”
David J. Abbott is a director at aCatalyst Consulting. [email protected]