Mind the gaps: Don’t forget the fundamentals of business
Paula Kensington
Mind the gaps: Don’t forget the fundamentals of business
Earlier this year, I had a three-month contract working as a CFO in a private manufacturing business in regional NSW. It was an established manufacturer with a good pipeline of work, a national network of leased premises and a workforce of about 250 staff and contractors. On paper it should have been thriving. Yet the business was bleeding cash.
What had gone wrong? I believe the business had lost sight of the basics. There was a lack of effective leadership, little strategic direction and a dearth of reporting capabilities. Not only had business plateaued, the company had lost direction and stalled. It was missing clarity and a strategic plan.
Irrespective of age or maturity, the fundamentals are important to ensuring the lifeblood of the business is known, understood and sustainable.
As a finance professional who has been trained to have a good balance of scepticism along with strong ethics and trust, which all feed into my passion for future-proofing, I always like to challenge my thinking. Basically, I need to make sure I, and my business, don’t rest in the comfort zone for too long.
This has led to me to reflect on gaps that we leave when we fail to think about our business (or career, for that matter) with a healthy dose of scepticism balanced with emotional intelligence (or EQ). We should be looking for where we need to push boundaries, challenge conventions and try to disrupt some of our thinking.
I categorised these gaps into three areas:
the Expectation Gap; the Certainty Gap; and the Knowledge & Measurement Gap
Expectation Gap
What could you realistically expect from this business (or from your career move, for instance)? How much do you know about it? How much time do you spend thinking about what lies ahead? A lot of people go into business or careers hoping, or assuming, it will work out and figure they will fix any issues as they arise. By failing to do due diligence, or failing to review and reflect, they blindly step over an expectation gap that can leave them shocked, flat-footed and slow to respond when things catch them by surprise.
It’s not that you can necessarily be 100% certain of how things will go (see the Certainty Gap below) but giving yourself a good heads-up will help you manage expectations, which is often the first step in managing the unexpected.
Certainty Gap
The traditional way of jumping into a business case, to get approval, funding, investment or resources, is to plan three scenarios in our models covering the best, probable and worse cases. We then compute a ratio of dollar-investments and return over a period of time. But this model feels really old-school and doesn’t reflect current business practice, which is more often than not looking at investing in uncharted areas. This has been especially true during this pandemic, with businesses around the world forced to rethink in the face of a sudden and profound threat to their existence.
So, how do we build uncertainty into our business models? Surely it’s not as simple as +/- 5 or 10% margin of error? Do we measure and weigh all the relevant risks to the business idea and then take cover to explain why we are where we are at certain hurdles and milestones in the project? Do we move our measure to a value-based objective return instead of time- and outcomes-based
We live in an increasingly uncertain world, and we probably need to expect we will never get all our ducks in a row – but we need to find ways to be ready to counter, or even work with, the inevitable uncertainty.
Knowledge & Measurement Gap
The reason for my interim appointment in the business I mentioned earlier was to re-establish month-end reporting after the previous CFO left. It didn’t take long to realise the business and finance function needed much more than simple reporting. This didn’t surprise me. Rather, it cemented in my mind the fact a lot of companies are forgetting the fundamentals of doing good business.
It’s true that business can only manage what it measures, so it’s not a huge surprise that those who don’t have good reporting and measures in place can’t seem to understand why the profits are in hiding and why cash is flying out of the open window.
The lack of good processes along with poor tracking and reporting around pricing, profitability and utilisation all add up to unsustainable business models.
Six measures that matter in business are:
· Customer and/or product profitability
· Cashflow generation
· Utilisation of assets (StafF and intangiblE)
· Overheads as % of revenue
· Sales conversion and win rates
· Lifetime value/sales cycle/cost of customer %
Such measures can shine a light on something that allows us to move forward, to see things we hadn’t seen before, to find solutions.
