by Paul J. Castle, Castle Heslop
In the last year I have witnessed more business failures and hardship than I have seen in my previous 21 years as a practising chartered management accountant.
I have seen very successful family businesses that have traded for generations collapse and I have seen business owners take “runners” and leave no forwarding address. Behind business failure there are often family breakdowns, divorce and sometimes destitution.
This doesn’t need to happen!
Statistically, 57% of businesses fail in the first year and 80% fail in the first five years and only 4% are left after 10 years. Can running a business be that difficult? Well the answer has to be “yes”. A business is meant to give MORE LIFE but often it becomes the “killing field of the spirit” and business owners become consumed by their business giving up their LIFE to their business.
I think the main reason is that we go to school to be taught to become butchers, bakers and candlestick makers in other words employees. Nobody teaches us how to become a business owner and so we end up hating what we do because:
– we work for clients/customers that don’t appreciate us
– we have staff who are not fit for purpose
– we do most of the “technical work” ourselves
– and the “numbers” are something that we are not interested in because that is what the accountant does, right?
From my experience business owners that run great businesses:
– systematically get rid of clients who cause them grief
– make their businesses “system dependent” not “people dependent”
– continually focus on improving their technology, their team and their systems employ someone to do what they do understand their “numbers”
Yes the best business owners don’t leave their numbers to chance! For example if a business makes a profit of £50,000 is that a good or a bad result?
The answer is IT DEPENDS on your frame of reference.
Frame of Reference 1 – the past
If the business had earned £700,000 for the past three years then £50,000 would be bad. On the other hand if the business only earned profits of £300 in the past then £50,000 would be good
Frame of Reference 2 – your plans
If you planned to make £700,000 you would regard £50,000 as bad. But if you had only planned to make £300 then £50,000 is good
Frame of Reference 3 – your industry
If everyone else was making profits of £700,000 then £50,000 would be bad. Whereas if everyone was only earning profits of £300 then £50,000 would be good.
This means that at the very least you need:
1. Trend reports graphically showing how the performance of your business has varied over the last three to five years
2. Variance reports – showing how your performance compares with your forecasts and budgets
3. Benchmarking reports – showing how your performance compares with the rest of the industry
Benchmarking is critical because it provides the best comparisons and identifies their strengths and weaknesses and an important early warning system.
So what is the answer? Use Key Success Drivers or Key Performance Indicators and show them all on a single page – which as it name suggests distils all the key numbers into a single sheet.
The One Page Plan starts at the bottom of the page and works upwards starting with the business’s mission/vision/goals
These goals in turn determine the key areas in which the business will have to excel and become the Underlying Success Drivers
Next comes the Key Factors that directly drive the business’s sales costs and cashflow and are so important that they are each given a section of the page.
And finally there are the Key Results that have been generated by all the underlying drivers.
The recession has made the “numbers” more important to a business owner than ever before.