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‘Discipline’ or ‘Purpose’ – which one wins in the race for growth? 1

‘Discipline’ or ‘Purpose’ – which one wins in the race for growth?

Jim Collins, the veteran author of Good to Great, believes that “10x companies” – i.e. those which outperform their industry average by 10 times or more – possess 3 fundamental and distinctive traits:

1. Fanatic discipline and monomaniacal focus on achieving goals.

2. Empirical creativity: an obsession with facts over opinion and a readiness to ignore conventional wisdom once armed with these facts.

3. Productive paranoia:  constant worry which fuels relentless preparation and precautions against even the most improbably bad events.

To illustrate 10Xers at work, Collins, along with his co-author Marten Hansen goes on to give some wonderful examples.

“Even his contingencies had contingencies”.

Drawing from outside of the business world, he tells the story of Scott and Amundsen’s race to the South Pole. While Scott took a somewhat relaxed and cavalier approach to the expedition, Amundsen’s level of preparation was truly extraordinary.

Even his contingency plans had contingencies. In some cases there were even contingencies to the contingencies within the contingency plans! He was the personification of productive paranoia which gave him the confidence to march forward, with a sense of knowing that when the inevitable challenges arose, his obsessive levels of preparation – the way in which he managed his risk – would be forgiving when mistakes were made or unforeseen circumstances arose.

Relentless Tester

Amundsen was a relentless ‘tester’ – In preparation for his journey, he ate raw dolphin meat to see if it could provide a decent energy supply. He loaded up with far more supplies than Scott to serve a much smaller team. And, tellingly, for Collins and Hansen, Scott took just one thermometer, which disastrously broke, whereas Amundsen brought four.
Amundsen reached the pole more than a month before Scott and made it back alive. ‘Amundsen and Scott achieved dramatically different outcomes,’ Collins and Hansen write, ‘because they displayed very different behaviours.’

By looking ahead and forecasting potential issues and pitfalls Amundsen engendered in himself and his team a reassuring sense of confidence. By doing the hard work up front, they made the journey somehow ‘easier’ for themselves, in the best sense of the word.

Why Microsoft thumped Apple in the mid 1980s to 1990s

The same applies to companies and helps explain why US company Southwest Airlines trounced its discount rivals and why Microsoft thumped Apple in the mid-1980s to 1990s.

Bill Gates used to keep a photograph of Henry Ford in his office to remind himself of how Ford had been overtaken by General Motors in the early days of the car industry. Gates wanted the constant reminder that, however well Microsoft did, there was almost certainly some younger version of himself toiling in obscurity to one day knock him from his perch.

The 20 mile march

Armed with these behaviours, 10X companies set off on what Collins and Hansen call the ’20 mile march’, a long period of sustained growth, characterized by hitting well-defined performance targets and demonstrating both resolve and control.

Through the discipline of behaving consistently over time and proving resistant to a changing marketplace, an organization discovers self-control. And this, far more than more nebulous ideas such as innovation or creativity, is what determines 10X success.
They compare the process of successful innovation to firing bullets in order to zone in on your target, and only then heaving a cannonball at it to do the job properly. Disasters happen when one uncalibrated cannonball after another is fired, each big, reckless bet made in the hope of recovering from the last one, with little or no time taken to test the waters.
One of the most important lessons in the book is that innovation is not always the surest route to success. In their comparisons of companies in the same industry, notably the biotech firms Amgen and Genentech, Collins and Hansen found that it was the less innovative firm, Amgen, that generated better returns for investors over 20 years. Sometimes, it serves companies to be ‘one fad behind’.
Consistent with this idea is the authors’ assertion that the 10X companies are not the brash risk-takers, but the ones that prepare rigorously for what they cannot predict, the antithesis of many Wall Street banks before the 2008 financial collapse. These companies hoard cash and keep comfortable buffers in every area of their business, just in case. They are hyper-realists, who act according to Collins and Hansen’s ‘SMaC’ methodology, being ‘Specific, Methodical and Consistent’.

Purpose vs Discipline – 10Xing the 10Xers

In 2004, the All Blacks were beaten convincingly by the Springboks.

The incoming All Blacks coach, Graham Henry, found a team that had lost its mojo, its sense of togetherness and most importantly its purpose.

As the number 1 team in the world for so many years, what did they have left to achieve?
Henry inspired the team with a new vision that went beyond the individual players themselves.

The vision was to create a values based, purpose driven team, playing for something bigger than themselves.

His watchword was ‘legacy’: for every single player to leave their jersey in a better place.

His philosophy: “when you’re on top of your game, change your game.”

The culture he created, defined by a collective sense of purpose was like none other in All Blacks history.

The result?

They reached a totally new level of success. With a staggering 87% win rate they went on to win every possible piece of silverware.

Firms of Endearment

In his seminal book, Firms of Endearment, Raj Sisodia, charts the rise of the purpose driven business.

He shows that organizations aligned around their true purpose exponentially outperform their competition.

In fact, he argues that ‘purpose’ is the magic fuel that can break the bonds of conventional growth and take companies to a whole new space, outperforming Collins’ Good to Great companies.

When times are tough and external circumstances are beyond our control, often the best place to look is inwards.

When we remind ourselves of what our true purpose is, in life and in business, we tap into an energy that gives us the fuel to change the world, or at least some small part of it.

At The CFO Center our mission is to help companies define their true purpose – what they really want from their life/business – and build the plan to actually make it happen.

In fact, we help you bring the discipline described by Collins into your business to give you the space to tap into your true purpose and build a legacy you can be proud of.

If you would like to have a conversation about your ambition for your own business contact us at www.thecfocenter.com or [email protected]

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How to Double the Size of Your Business in 2021

How to Double the Size of Your Business in 2021

While much uncertainty still remains after the craziness of 2020, our Chairman Colin Mills talks about his process on how to significantly grow your business.

“The best advice I ever received for ‘doubling’ the size of our business, was to list down the Top 20 things we could do to increase the revenue by 10 times. You can then identify the Top 3 activities to concentrate on for the following year” says Colin.

So let’s say you’re a $4million business. Spend a few hours listing out the 20 things you could do to turn this into a $40million business over the next 12 months. This will force you to think outside the box and away from small incremental changes you can make.

I suggest you then spend another hour or so considering the Top 3 activities. These will be the activities that are most likely to get you towards your goal of $40m.

You then have the top 3 activities to focus on over the next 12 months that may well enable you to double your turnover.

For each of those top 3 activities, develop clear action plans on how you are going to achieve results.

Next, get input from your management team (including your CFO of course) in developing these action plans.

Don’t forget to consider the risk and downsides to each of your priorities. Then develop strategies to mitigate the risks you identify.

Above all, ensure your plans are realistic and find capacity that can support your ideas. Your CFO should be able to support you in developing finance and funding to ensure your growth plan is realistic.

The overall economic climate won’t allow all business to double their size this year. However, this radical approach for business growth will hopefully enable some to change their thinking from doom & gloom towards optimism and growth. As Henry Ford famously said “If you think you can, or think you can’t, either way you’ll be right!”

The CFO Center is the global No.1 provider of part-time CFOs. We are dedicated to making a real difference for our clients and their businesses.
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Profit Improvement - Driving Profitable Growth

Profit Improvement – Driving Profitable Growth

“Without an understanding of profitability, every business, no matter how successful is a house of cards” – Mike Michalowicz, Entrepreneur and Author.

There are four ways you can improve your profits: sell more, get customers to buy more frequently, increase margins and reduce costs. If you can do all four at once, your profits will increase dramatically. Even changing one of these four factors will boost your profits.

In this article, we will cover the main reasons for low profits and how a part-time CFO will help you to boost your profits.

Introduction

Profits are vital for your company’s growth for the following reasons:

  • They provide a return on your investment capital.  
  • They provide opportunities to reward staff.
  • They make it easier to attract investors and customers.
  • They make it easier to borrow money and negotiate a lower interest rate on the money it secures.
  • They can be reinvested in the business to expand into new markets, products and locations.
  • They provide a buffer against economic downturns and changes in market conditions.
  • They make it possible to hire more people.
  • They allow you to develop and test new products or services.

While many business owners experience a decline in their net profit margin (the percentage of total revenue that’s profit) at one time or another, they are usually able to continue to trade, albeit with the aid of a short-term loan and some heavy duty cost-cutting.

Sadly, unless you identify and address what’s causing your profits to shrink, the problems are likely to get worse. For it often follows that poor profitability leads to reduced cash flow. When profits are low and cash flow is weak, businesses can slip into a downward spiral.

Your profits tell you how well or how poorly your business is performing. For example:

  • Gross profit (the total amount your business makes minus the cost of goods sold (COGS) indicates how efficiently your business uses resources to produce your products or services.
  • Operating profit (gross profit minus operating expenses, depreciation,and amortization) indicates how efficiently you produce and sell your product or service.
  • Net profit (the amount of money left after paying all the business’ expenses including interest, taxation, etc.) indicates how well your business is generating healthy results.

These figures alone won’t give you the whole picture. You’ll need to compare them with previous annual and monthly profit results. That’s where ratios come in: they can be used as a benchmark against which you can measure your business’ performance.

Profitability ratios help you evaluate your company’s ability to generate profits.

They include gross profit margin; operating profit margin; and net profit margin.

  • Gross profit marginyour gross profit divided by your sales is a useful indicator of your company’s financial health. It shows how efficiently your business is using its materials and labour in the production process and gives an indication of the pricing, cost structure and production efficiency of your business.  The higher the gross profit margin, the better. That is because the higher the percentage, the more your business retains of each dollar of sales, which means more money for other operating expenses and net profit.
  • Operating profit margin – calculated by dividing your operating income by your net sales during a period reveals how much revenues are left over after all your company’s variable or operating costs have been paid. It also shows what proportion of revenues is available to cover non-operating costs like tax, interest, and distribution to your company’s owner.  It is useful because it shows you whether your operating costs are too high.
  • Net profit margin – calculated by dividing your after- tax net income (net profits) by your sales (revenue) shows the amount of each sales dollar left over after all expenses have been paid. The higher your net profit margin, the better because that shows your company is more efficient at converting sales into actual profit. A low net profit margin might mean that your business is not generating enough sales, your gross profit margin is too low or that your operating expenses are too high.

The main reasons for low profits

Falling revenue

Your sales or revenue slump could be due to internal and external factors such as:

  • Inadequate marketing programs. To be effective, your marketing needs to convey  the right message to the right target audience and convince them to take a desired action like call your company to purchase a product or book your service.
  • Poor pricing strategies.  
  • Increased competition.
  • An inability to keep up with market changes.

Excessive expenses

Budget overruns or unexpected costs will chip away at your net profit.

High variable costs

The higher your variable costs, the lower your net profit margin will be. High production costs or purchase costs can result in insufficient funds to cover expenses. When variable costs rise to the point that there are not enough funds left to support all expenses for the period, a net loss will occur.

Follow us in part II of the profit improvement article to learn how a Part-time CFO can help you drive profitable growth!  Coming up soon.

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Colin Mills – Founder & Chairman

How to Seduce Your Bank Manager

Given that the bankers are often ranked in the top 10 of the world’s most hated professions, the prospect of seducing your bank manager is probably not high on your bucket list.

It’s fair to say that you’ve probably never thought about doing it. But if you want your company to grow then it’s something you not only need to think about but act on.

Unfortunately, seduction, in this case, will rely almost entirely on the allure of your company’s numbers rather than your ability to deliver snappy one-liners, a bunch of hothouse flowers or the promise of a candle-lit dinner. That’s because the average bank manager is a risk-averse creature who will demand far more from you than the average romantic date!

And it will be down to you to do the running—because if you need to fund your working capital or if you’re looking to fund investment in the business and to grab an opportunity, you’re likely to need external funding.

In other words, you need your bank manager far more than he or she needs you. That’s because access to finance will be a key determinant in your company’s growth and if you’re like the vast majority of SMBs, you’ll approach traditional banks for funding (in the form of an overdraft or loan) before looking at other funding options. So you’ve got to be at your persuasive, most charming best.

And it will take preparation—masses of it. Think weeks, even months of preparation.

That new finance might be for working capital/cash flow or capital expenditure such as investing in new machinery or property or improving existing buildings. Or you might need it to enter new markets, develop new products/service or even to refinance the business.

Whatever your reasons for seeking external finance, if you’re going to approach a bank, you need to know the best ways to win over your bank manager. You also need to know what approach is going to trigger an immediate slap-down (an outright ‘No’) or the offer of a substantially smaller amount than you’ve requested. To download our full report on how to get the best out of the relationship with your bank manager click here

Why do bank managers rebuff applications?

Banks won’t always provide you with the reasons they’ve turned down your loan or overdraft application. But here are some of the reasons they’ve offered companies in the past few years:

  • The company is experiencing declining sales/profitability
  • The company is over-leveraged
  • The bank has changed its lending policy. A new feature of the new ‘normal’ financial environment means there’s been a reduction in the availability of longer-term debt (for loans with terms stretching over five years), according to the CBI.
  • The company has insufficient security
  • The company has no experience in the new product/service or market
  • The bank considers the company’s business sector or trading environment too risky
  • The bank is not prepared to lend the full amount
  • The company has a weak balance sheet.

How to boost your chances of a ‘Yes’ response

So how do you get your risk-averse bank manager to happily rubber-stamp your loan or overdraft application?

Be prepared

Your bank manager is likely to demand you provide fully audited accounts, financial cash-flow projections, security information and guarantees and full business plan details. You might also be asked to provide evidence from order books.

Companies who’ve gone through the application process in the post-recession years have noticed that it’s become a lot more stringent. They found there was a higher level of due diligence, sales and market reporting, security and guarantees and that the process took longer than was expected. This was particularly the case when they approached banks with which they’d had no previous dealings.

Improve your credit rating

As well as having all the required paperwork in place, managing and making efforts to improve your company’s credit rating will help your chances of getting a ‘Yes’ response from your bank manager.

That means making payments on time, maintaining regular contact with creditors and banks and ensuring you offer maximum financial transparency.

Enhance your internal resources

Hire an experienced Chief Financial Officer who has experience with accessing various forms of bank debt finance and can put together, for now, the business plans and financial projections the bank will want to see. Here’s the thing: you can now hire a part-time highly experienced Chief Financial Officer for less than you’d pay a full-time junior staff member. You can find out more here

 

Conclusion

Seducing your bank manager is going to take time and lots of effort but if you’re successful, it will provide your company with the financial fuel it needs to grow and reach its full potential.

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