So many small-to-medium business (SMB) owner-managers we meet and chat to don’t have a formal Business Strategy (3 to 5 years), business plan (1 year) or business budget.
Research suggests that in excess of 70% of SMBs don’t have a formal Business Strategy, attributing this to what is referred to as an ‘entrepreneurial strategic planning process’, more simply put, the strategy or plan for the business exists only in the business owner’s head.
One might argue that 68% of SMBs in Australia have no employees, and therefore who would these business owners want to communicate the Business Strategy to? There may be some merit in this argument, however even in these situations we’ve found considerable value in getting the business owner to capture his or her thoughts on paper, and then by bringing structure, and focus on key issues, we help to clarify a clear direction toward the achievement of the desired outcomes.
A simple exercise that we find considerable value in stepping through with our clients is what we refer to as a (3 to 5 hour) Business Model Generation exercise, wherein we ‘whiteboard’ and ‘stress-test’ the business owner’s views on the company’s activities and strategic position in its chosen market. Admittedly there’s an art to this, and if conducted properly will invariably unpack some meaningful value. A company’s business model typically has 9 key components and if carefully explored a high level of ‘so-what’ and ‘so-that’ can be achieved, and at times important business model innovations discovered.
A good way to think about a company’s business model is as an activity system comprising of numerous moving parts. How well this activity system works, as with any system in life, will determine how successful it is. Conversely, if one or more parts of this activity system are not working well the whole system will struggle. It might be suggested that a company’s competitive advantage is derived from its activity system, or business model. The first thing to consider in this exercise is what we call the people process, because if this is ‘broken’ very little else in the business model will work.
In everything that we do with our clients we always come back to one key question, that being: ‘what will be the financial impact on the business of the decisions made and actions taken’. We often refer to this as the ‘economic logic’ of your business strategy. There must be a direct link between the business strategy you pursue and the financial outcomes you intend to achieve. Very often there is no clear connection or link between the business’ desired financial outcomes and the business strategy the owner-leader intends to implement, implementation being a big subject on its own.
So often business owners will tell us that they intend to double their revenue over the next 5 years, however their strategy will quite clearly not deliver on this expectation. This phenomenon is exacerbated when taking into consideration the business environment the particular business operates in. The environment may simply not be conducive to the ambitions of the business owner, and often we see businesses committing scarce resources to growth aspirations that will be near-impossible to achieve in the current environment. What this in fact does is heighten the company’s vulnerability and risk levels as its operating reserves are depleted.
As a starting point this is where a ‘strategy 101’ SWOT analysis offers good value. By methodically capturing the business’ strategic (Not operational) Strengths, Weaknesses, Opportunities and Threats and inserting what we refer to as a ’SWOT Crucifix’, inter alia, it can quite quickly be determined what strategic position or ‘context’ the business finds itself in, and how strategically ready it is to embark upon its chosen strategic path – illustration 1.
Clearly if the crucifix points to a dominance of weaknesses and threats over strengths and opportunities (as illustrated) this must be very carefully considered before blindly setting off on a growth strategy, because as previously mentioned, all that might be achieved in doing this is that you will amplify some of the business’ weaknesses and threats, most notably, exhausting limited cash reserves and putting unnecessary pressure on key people in the business, in my experience that most often being the business owners who are already under considerable pressure, and wearing too many hats.
To cap this part of the discussion off let me draw your attention to what we refer to as an Environment-Strategy-Capabilities GAP Analysis. By conducting a detailed analysis of the business’ environment and the business’ capabilities (via the application of the SWOT tool), GAPs will begin to show themselves in the business’ strategy and stated strategic objectives which it may be possible to address, or if not acknowledged and addressed appropriately may prove extremely damaging to the business. We refer to this as the process of reconciling the business strategy – does it make sense and feel right? This question is clearly easier to answer if one has stepped through this process 100 times and has a broad understanding of the numerous disciplines in business.
The bottom line is that as one approaches the end of any period, your business plan and budgets should already be in place for the period that lays ahead. In fact you should be considering what we refer to as your revised estimates (RE’s), in other words, any adjustments that need to be made to your budgets given your past period’s actual results achieved and how the business environment is shaping up.
This is particularly relevant in a rapidly changing economic environment. Not only do business owners have to contend with significant structural changes and disruption within their own industries, but all business owners also have to come to terms with rapidly changing economic trends. Business owner-managers should constantly translate this into their business strategy and plans, and distil all of this information and strategic insight into a very well-constructed set of three-way financial rolling forecasts.
A three-way financial forecast entails a detailed P&L budget, a forecast balance sheet and a forecast cash flow statement. In an environment which is changing quickly, the old adage, cash is king is always paramount. Not only is it important to have sufficient cash and operating capital, but perhaps more importantly, business owners must have a very firm grip on cash movements within their businesses, spending habits and spending controls, pending liabilities and provisions, and from a cash and near-cash availability point of view, how close to the line the company not only is, but also will come in 1 week, 1 month, 3, 6 and 12 months.
Without a clear strategy, business plan and robust three-way financial forecast your company is flying largely blind. This is not only very risky but in changing and challenging environments could spell catastrophe for your business. It is past the time to get your plans and budgets in place, so please ‘go-dark’ on your business to carefully consider how you can achieve far greater productivity and efficiency gains via applying a strategy of stretch and leverage – a topic for another day.
If you would like any further assistance to review your business position or to create a robust strategic plan that drives results, chat to us, one of our business advisors would be happy to help.