At first view probably not, but to illustrate the value that can be gained from small but continuous improvements in business performance we have chosen three key areas to consider; revenue generation, gross margin, and cash collection. There are also lessons to be learned from looking outside these conventional areas of the business into the world of IT testing and data quality.
So is 1% improvement worth having?
A 1% improvement on annual revenue of £100,000 would be impossible to spot as it could easily be swamped by normal fluctuations in customer activity. However, what if you were able to improve your revenue position by 1% every month; now you would be looking at a 12.5% compound increase for the whole year – worth having?
From a different perspective, it is likely to improve confidence in pursuit of an improvement if you set a SMART objective of 1% increase per month rather than an annual 12.5% increase.
Following on from a LinkedIn thread referring to Dave Brailsford’s successful approach to Team Sky, we explore a number of key areas where the approach can be used in business to gain real benefits from small, incremental/cumulative changes.
We have also looked outside the usual areas of a business where people seek to make improvements as we think there are good lessons to be learnt elsewhere; we look at the world of IT testing and the cost of bad data where the focus is the other side of the coin; reducing waste.
Everything starts here; without revenue there is no margin, profit or cash, in fact; there is no business. Whether your business is turning over £100,000, £1.0m or £100m per annum the same basic principles apply; it is easy to visualise and bring about small incremental increases in revenue which quickly add up to something significant.
- Be more selective, at an earlier stage in your selling cycle, when deciding which opportunities you will pursue. Avoid time wasters, tyre kickers and those who are just interested in a low price.
- By spending more time on fewer better quality opportunities you will increase the chances of closing more business.
- From the same amount of marketing and selling effort you will gain more revenue and yes that could easily be a 12% increase in a year.
Gross Margin; improvement and protection
Margin can suffer in two main ways. Firstly, if you feel obliged to reduce your quotation without also reducing the amount of effort you will put into delivering the result. Secondly, reducing your price, even if you reduce the amount of effort, will result in a reduction in margin.
- Having been more selective in the opportunities you choose to pursue you will have removed at least some that would have dented your margin.
- From the earliest stage, when engaging with a potential customer, demonstrate the value that you deliver and avoid being sucked in to talking about price; value is what matters.
- By demonstrating the value you deliver you make it harder for the customer to justify to themselves pushing down on your quoted price.
- Quote the real price for the amount of work that needs to be done; don’t delude yourself that you can “make it up later”. Along with death and taxes one of the givens is projects always take longer and cost more so you won’t be able to make it up later.
- Once you have the deal you can avoid margin erosion by delivering exactly what you quoted for and the customer contracted for. Don’t be tempted to undertake “added value” work as it will dent the margin and the customer probably won’t know or appreciate what you have done.
If, for example, you have revenue of £100,000 on which you make a margin of £20,000 then to gain an increase of £1,000 on the margin you will require an increase in revenue of £5,000. Alternatively, you could keep the revenue at £100,000 and employ some of the above tips which could easily add that extra £1,000 or probably more to your margin. You get the same or a better result without additional effort.
Whether you are funding your business from your own resources or a line of external finance then every day a customer has your money in their bank account it is costing you interest and it is also reducing the funds you have available to invest in your business. Here are a few tips to help you get your money faster:
- At an early stage in the engagement with a potential customer discuss contractual terms, including payment terms, don’t leave it until the end as you will have far less negotiating power. Don’t allow the desire to win a piece of work get you bullied.
- Don’t be shy, ask for what you need. Always ask for some money up-front and if you are delivering projects ask for staged payments making sure those stages align with the outgoings you will have on the project.
- Make your payment terms short; seven or 14 days. The customer will try to negotiate up and even if you let them you are more likely to get 21 or 30 days than you would have been had you started at 30 days.
- Discuss your terms with the decision maker and get them to agree; don’t assume that because they have signed a contract with your terms that they will have taken the internal steps required to get you paid when you expect. If the customer wants to use their terms you do not have to accept everything as presented; it is called an agreement not a dictat.
- As soon as the agreement is signed call the customer’s finance department, introduce yourself and let them know they will be getting invoices from you. Ask them what you can do to make their lives easier; should invoices be posted or sent electronically, do they have specific days for processing invoices, do they work part-time, etc.
- When you raise an invoice, send copies to both the sponsor/budget holder and the finance department. After a few days call to make sure they have it and ask when it will be processed. Call back again just before processing date to confirm it has indeed been authorised and will be included in the payment run. Don’t be shy, it is after all your money!
Even small reductions in your debtor days will improve your finances easily delivering a 1% improvement per month. But more importantly, you will have greater financial certainty and your money will be available sooner for you to invest or spend.
Lessons from other worlds
It has long been recognised by those in software engineering, that the cost to repair an issue escalates the longer it remains undetected in the lifecycle. Typically a 1:10:100 type ratio is applied to correction costs, and that excludes the additional cost of impact if the issue “escapes” into the wild (production).
If you search the web for “1:10:100 rule” you will notice that this basic ramification is being applied to the cost of bad data also.
The world of software engineering is much more precise than the world of sales and marketing or business management but the same principles of early detection can be beneficially applied to all areas of the business. If your first meeting with a new potential customer tells you; “we are unlikely to win this one at a good price” then qualify it out there and then. Or you could do what many businesses do; invest a lot of time and effort bidding for the work only to find you don’t win or worse still you do but at a very poor price.
Be brave; qualify early, qualify hard!