Author: Tim Luscombe

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Managing risk

 

Some time ago I hosted an event for the Oxfordshire International Business Club where we were talking about doing business – or trying to do business – in China and Asia.

It is a massive subject, with a tremendous opportunity matched by high levels of risk. Not something to consider for anyone whose resources are already stretched!

One topic that almost always comes up is how do we manage the money – how do I get paid for the goods I have sold, or how do I pay for the goods that are being shipped.

There are quite a few ways of managing those risks, using the banking system so that you are not releasing payment for the goods until you have inspected them, or if you are selling only doing so against a letter of credit – a promise to pay – where you will get the money if you meet the conditions in the LC.

Often overlooked in the planning stage is the currency risk.

Currencies move against each other all the time, and a RMB today is not worth in GBP what it was yesterday – or even last second. It could be worth more, or less.

The usual way of managing that risk is to use a derivative (before you panic about banking crises they are not all bad) to fix the exchange rate. You know that in 3 months you will have to pay 10,000 of a particular currency, so you can go to your bank and buy the 10,000 now so that you’ve secured the funds at today’s exchange rate. It is a little more complicated – you don’t actually buy the 10,000, you buy a derivative – the right to buy the 10,000 at today’s rate in 3 months time. You will pay for the derivative but you have reduced your currency exposure.

A different way of managing exchange risk is to reduce it.

I was responsible for a business that had part of its revenues in EUR. We operated in GBP so that we had an exchange risk on the Euro sales. Before my time, we’d agreed some supply arrangements with another business in the Eurozone, and eliminated the exchange risk to us by agreeing a price in GBP. Changing that agreement so that we bought in EUR rather than GDP reduced our overall risk – and we were able to reduce the price per unit from the supplier as we were taking on his currency risk.

If you are trading in more than one currency, don’t just hedge everything. Look for opportunities to balance your supply side and sales side currency exposure.

I call that Natural Hedging

 

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Try and Try again – or maybe not?

 

When I was a child, my parents often exhorted me to “Try & Try again” if I failed at something.

In business, all too often I meet companies who, when something is suggested, respond with “Oh that doesn’t work – we tried it some time ago and it failed”

If you dig into that & get them to recall the details, it’s amazing what you can find.

A direct mail campaign didn’t work for us
Well, in fact you only sent one piece of mail, to a small selection of your past customers

We tried using a different system
This is one of my favourites. In general people are resistant to change and prefer to do things the familiar way. If they aren’t convinced of the need to change, your team will prefer to see the new system fail.

It was too complicated
Well, it might be, but it is more likely that the proposal wasn’t broken down into its component parts. You can eat an elephant, one mouthful at a time, but if you start with the whole elephant on the plate it can be a bit intimidating.

Most of the time, business don’t try often enough or hard enough. They are not convinced of the strategy, and go into it halfheartedly, then withdraw at the first obstacle. That’s a recipe for failure.

If you are going to try something new, research it, plan the steps, and then execute it wholeheartedly, with real commitment from the leaders of the business.

You could still fail because your strategy was incorrect, but most of the time

Initiatives fail for poor execution, not faulty strategy.

 

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Perception and reality

Most businesses think they provide good service to their customers and they are probably right, if they are still customers.

Some time ago, I was managing a large distribution business. Every year we commissioned a “Customer Satisfaction Survey” from a third party. It was a report that we debated at some length, to see if there were opportunities to improve our services.

The problem with that report (and I am sure many similar exercises) was that the answers didn’t change very much from year to year. We were asking the people who were using our services, and the very fact that they kept coming back to buy again told us we were providing adequate service – and the report reinforced that view.

What we really needed to do was to ask the people who didn’t buy from us, or even better the customers who no longer bought from us but instead had found an alternative supplier. What made them change?

You and your customers may think you provide good services. What do the people who tried you and went elsewhere think?

Marketing & Sales people will tell you that you can much more easily reactivate a past customer than find a new one; you can do much more to improve your services by asking a dissatisfied customer what you did wrong – and in the process perhaps that dissatisfied customer will give you another chance.

What have you got to lose by asking?

 

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Do you delegate well?

When I was first promoted to managing a team, I had been the “technical” expert, a real hands-on, sleeves rolled up type.

We had so much going on that I had to learn to delegate and let go of things. The team were not as good at some of the things I could do, but at least they could do them, so I could do other things.

Over time, as they gained experience, their skills increased and some of them were actually better than I was.

That’s when I learned to delegate responsibilities, not just tasks.

If all you ever do is delegate a task, no matter how complex, you will only free up so much of your own time. Much more importantly, the people you are leading won’t feel empowered – you’ve made it clear that it is just the task you are handing over, not the responsibility.

There’s a downside to this. If you delegate a responsibility, you also have to delegate the authority.

I was once in the invidious position of holding a senior role, with responsibility for the P&L of a business unit, but I was not empowered to change the focus or control the spend of the single biggest item in the P&L. That’s an extreme, but it really was the classic “poisoned chalice.” I had the responsibility, but not the authority.

I have found that delegating responsibility – by which I mean focusing on the outcome, not the means employed to achieve the outcome – allows me to harness the abilities and talents of those around me.

A phrase I have often used when delegating something new is to ask

“What do you need to make this happen?”

That, coupled with a review process, allows me to delegate responsibilities and the necessary authority, but I haven’t abdicated. The ultimate responsibility stays with me.

 

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You don’t have to do it all alone

 

Collaborations and partnerships are a great way to move your business forward.

I’ve been to several events recently where the emphasis was on collaboration and sharing resources to achieve greater results, but I have been to others where the focus was on business development, or marketing, or international trade and in each case there’s a partnership element to success.

I have been helping a client make space to grow their business. They are so busy with the day to day firefighting that they don’t have the time (or the energy, or the resources) to look at the things that will help them advance.

One way to look at this is to review the organisation structure – even if it is just you – through an organisation chart.

Put names in all the boxes and then underneath each make a note of where you are today:
How much time are you spending on this area?
Is this your core skill?
Can you delegate it?
Can you outsource it?
Can you automate it?

Now answer the same questions again – this time as if you were looking at the business as if 3 years have passed.

That’s given you the starting point, and your destination. Now all you need are the steps to get there.

 

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Don’t be an Ostrich

Don’t be an ostrich

One of my clients had some really powerful, and very useful management information in the form of a report from their custom built computer system. The report gave great detail on the thousands of daily & weekly transactions, allowing the client to see profit & loss by individual item, or analysed by groups or by territories.

They had an issue with another report from the system. This second report listed all the supplies that they had paid for, but had not yet arrived – Goods in Transit – and this report was getting bigger and the value of GIT was getting larger & larger. The value of GIT in the monthly accounts did not tie back to this report.

When we investigated, it turned out that both reports were wrong, and indeed were being used in a way for which they were never intended. The business had overstated its profits by almost £1m over a period of some 3 years.

The accounting team had found a small problem 3 years ago when the stock records didn’t match up to the profit & loss report that management relied upon so heavily. They looked at the GIT report, realised that some of the information on the report was wrong, and adjusted the value of GIT to make everything balance. In short, they fudged the numbers. It was a pretty small adjustment for the size of business.

3 years later, when I was involved, that little adjustment had been added to and had grown, so that it was now just under £1m.

The accounting team played Ostrich – head in the sand, hoping the problem would go away instead of dealing with it when it was tiny.

The trouble is when you play Ostrich your rear is somewhat exposed, and your problem will come back to bite you.

Deal with the problems when they are still little problems

 

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Cooperate and win

On a bus journey, a delivery van had blocked the road and the bus driver pulled up behind the van and made use of the horn. When he didn’t get a satisfactory result, he left the cab to remonstrate with the delivery driver – and was promptly followed by 3 or 4 bus passengers eager for either the distraction or a piece of the action!

The van driver moved his vehicle and the bus journey continued.

How much time and energy did the bus driver, the van driver and the 4 passengers expend in shouting at each other?

Have you got a van driver in your business – someone who gets in the way and delays everyone else?

Wouldn’t life be easier if they didn’t do that?

Do they know they are doing it? Why are they doing it? Have you explained the consequences, and tried to help them, or are you taking a detour and avoiding the problem?

Cooperation is always better than conflict

 

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Make it easy for your customers to pay you

 

One thing that I often see in businesses of all shapes and sizes is a focus on the profit and loss account, or income statement, with not enough attention paid to the balance sheet. There may be hidden money in your balance sheet that you can use!

Do you pride yourself on paying all your suppliers on time, but find your customers don’t pay you on time? You are not alone!

** Make it easy for your customer to pay you
————————————————————
One business I advised had succeeded in winning business in the Ukraine, and this was turning into a significant opportunity. The sales team were getting very excited!

The finance team were getting worried – payments were erratic, and very slow.

The Ukrainian government had imposed currency controls – you could not pay in “hryvnia” outside the Ukraine, and to pay in US Dollars you needed to get finance ministry approval for each payment.

That wasn’t easy for our customers, and was hampering our business growth. We established a subsidiary company in the Ukraine, so our local customers could pay us in the local currency. Business boomed and the customers were paying much more frequently.

Now, that’s an extreme example, but how easy do you make it for your customers to do business with you, and how easy do you make it for them to pay you? I’m just asking!

 

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Measure the right things

There’s an old cliche in management speak “What’s measured is managed” but like most cliche’s there a grain (or more) of truth within.

I’ve seen businesses at every extreme, from those that measure and try to control absolutely the finest details, to those that barely measure anything.

One client ran a substantial manufacturing business with a weekly management report consisting of two lines on a graph, sales and cost of sales. If the lines started to converge, he needed to take action, if the gap was widening and the lines trending up the business was doing well.

Another business that I worked in had a monthly management report pack of over 50 pages. Nobody (other than the finance team who slaved to put it all together) read all the pages.

In the first case, the methodology was simplistic, but focused on the overall success of the business, and it worked. In the second case, the various departmental managers wanted their own key metrics so they could brag about how well they were doing. No one was focused on driving the overall business success, just their own little piece of the pie.

A current client tells me he is very proud of the fact that his revenue per head and his gross margins are best in class. That has not helped with his most recent year, where a few big projects were delayed and the business lost a lot of money.

He’s not measuring all the right things – are you?

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Cross Training to keep your business fit!

For me, cross training in a gym is a distant memory but I am sure some of my readers may still indulge. In a business sense, cross training is a great way to improve the business.

In a well-designed induction program a new team member may experience several different departments over a number of days or weeks. That allows them to start on the job with a wider understanding of how their work impacts upon the rest of the business.   It’s a really good way to bring someone into the team and make sure they have a decent understanding of how the business as a whole gets things done.

It’s not often that you see the same principles being applied to established team members, but it can be a great way of making sure that departments work together, rather than forming silos where information is retained within the department and competition with other departments rather than cooperation is the order of the day.

Tesco used to require the senior team (from directors down) to spend some time on the shop floor every year. I wonder if that no longer happens, and some of their problems can be related to the disconnection between the leaders of the business and its customers.

When you acquire a business you should have a plan to integrate the two businesses and a very powerful way to blend the cultures is to have an exchange of staff.

I’ve used cross training with the credit and collections teams, working with the sales team.  The credit team can be very dismissive of the sales team – I’m sure you have heard phrases like “Those lazy sales folk, they can’t even get the credit application form completed” but get the credit team into the meetings and they’ll realise (a) how much else is going on to secure the customer and (b) how clumsy the credit application form is.  In one case I remember the credit application form was reduced from 8 pages to 2.

Cross training really can keep (your business) fit