All businesses have a flow of product or documents. All businesses also have a “pinch point” or bottleneck that slows the overall results.
In 1997, I read Eliyahu Goldratt’s book, The Goal. This is a wonderful business book that is written as a love story and can be gobbled up in a weekend. But in spite of the overarching simplicity of the book, it harbors important business principles.
In the book, the author takes a Boy Scout troop on a hike to base camp for the weekend. Of course, the line of boys attenuates and the author is stressed about keeping 25 boys together. The fit and ambitious boys are well ahead of the rest and the fat boy trails the pack. The fat boy is an allegory for the bottleneck. The author is an allegory for a business owner.
The slow pace of the fat boy means that everyone must stop and wait for the tail end to catch up. In terms of productivity, this is a killer to have people standing around doing nothing. The solution, to skip pages of the story, is to have the fat boy lead. Everyone moves, even at a slower pace. Now the author can focus on the bottleneck alone, lightening the fat boy’s load and choosing easier paths to the base camp.
You can relate this to a manufacturing environment really easily. But it has its relevance to administrative paper pushing. I have been in so many businesses where the invoicing is weeks behind. The impact of slow invoicing is slow cash flow. Businesses fail being owed millions but overdrawn at the bank.
The manufacturing solution is to take and release orders to the floor at the pace of the slowest step. Instead of 25 fires, there is only one place to pay attention. In 1997, I experienced this in a job shop where this paradigm revealed that the shear operator who cut giant sheets to the production size was an over producer, littering the shop floor with pallets of goods that would not be worked by the brake or punch press for weeks. Once slowed down, the clutter cleared up and the shear operator was re-deployed elsewhere.
Bottlenecks happened in the administration department, too. The solution there is to move the fat boy to the head of the queue and drive the pace of administrative rhythms at the pace of invoicing. By focusing the brains of the company on the bottleneck, it goes away – reappearing in another place, to be sure. But business owners find it easier to fight one battle for improvements than 25.
Read the book. Fascinating and it applies to your business.
I have been pleasantly surprised of late to speak with business owners who understand the impact of fixed versus variable costs.
A fixed cost is one that must be paid each and every month regardless of how well the business is doing. This applies to all debt, mortgages, salaried employees, equipment loans, leases and rent.
Variable costs as you may judge from the name vary with the volume of business. So, goods for resale, supplies, hourly paid employees, mileage and fuel will grow rapidly with an expansion of the business.
In good economic times, it makes sense to lock down your expenses each month so that you know exactly how many dollars must come in to cover the “nut”. In slowdowns, fixed costs will put you out of business.
In the late 1990s I was part of the senior management team of a “job shop” contract manufacturer for the high tech industry. When we lost three customers during the dotcom bust, the team voted to workshare, cut prices and try and survive. I advocated, keeping up prices but was overruled. The company survived but in a weakened state. During the next downturn when a further three customers moved to the US, the owner changed his tactics by cutting fixed costs, giving up a building, cutting staff and holding his prices. The result was that the company was awash in money – enough to pay cash for new plasma cutters that filled his building. When business returned, he was equipped to handle the extra work, could operate all three shifts and had the cash to withstand the strain of growing receivables.
The lesson to be learned that can be applied in the current business slowdown is:
- Don’t add any further fixed costs burden to the company.
- Cut all variable costs where you can.
- Don’t cut prices and follow the crowd heading over the cliff.
- Strive to be the last man standing with cash and credit intact.
- Cash is king.
Your plumbing business is not a bank. But when you are giving terms to customers that exceed what you get from your suppliers, you become one. And every time that someone does not pay you, you are a bank. But unlike a bank, your company does not have the resources to continue paying employees and suppliers when payments slow down.
On every client list there are a handful who do not pay until you call them, who tell you the cheque is in the mail, or who simply cannot pay. Having receivables arrive at the right time is the best way to ensure you can pay staff, contractors and suppliers on time—which is key to keeping your business running smoothly.
Manage your cash flow
Entrepreneurs understand that a $10,000 sale results in a nice profit. But most forget that the suppliers will be knocking at the door looking for payment long before the $10,000 comes to your bank account. Knowing the payment cycle of your customer and your supplier is important. Knowing what your cash flow will be on a day to day and week to week basis is more important than any profit and loss statements produced three weeks after month end.
Invoice on time
I do not have enough fingers and toes to count the number of times that companies in financial trouble were weeks behind in sending their invoices. This stack of paper is cash almost on hand.
Invoicing on time might mean as soon as a project is finished, or, in some cases, it might mean requesting a deposit from a client at the beginning of work to get cash flow going early on.
Make it easy to pay
Accepting multiple methods of payment is one way to accelerate receivables. Do you accept electronic payments? Or, farm animals in exchange, only? Cheques only? Credit cards? Bank drafts only?
Better cash monitoring, collections and invoicing are all part of the same administrative function that must be done on a regular and frequent basis. Getting behind is death by debt.
I have several clients and a number of friends and colleagues who equate busy time with productivity. But, being “busy” does not always equate to being effective. Ineffective people abound. From outside they are hard at work with paper, phone calls, emails, meetings and more meetings. Their desks are piled high. They look frazzled. They achieve nothing. Bad entrepreneurs and ineffective managers complain loudly about the time they spend, how tired they are and waste the time of people around them who could be making them money.
In contrast, great managers and good entrepreneurs are stingy with time spent on unproductive, non-earning activities. They keep meetings, emails and phone calls short. They focus their attention on concerns that will make them money.
How do good managers operate? Good managers seem instinctively to be able to find the time to work on the money making projects. Here is short list of how to do it.
1. Make a physical list and prioritize the items. If the items on the “A” must–do list do not earn money, re-consider your priorities. Making a list also prevents you wasting time lying awake at night desperately trying not to forget to do something. When I took my first time management course in the 1980’s, we wrote down everything on a to-do list. I still do. If the same “urgent” item is still there after a week, it will not likely ever get completed. Dump it or go to item 2.
2. Delegate. Some jobs are simply better done by employees. If you are paying someone $20 per hour why are you doing that job for them?
3. Block your time. Short focused bursts of two hours will produce more than a 12 hour day frittered away. Eliminate the noise by shutting off phones, radio, email and any other distraction from getting your work done. Close your door. If it’s not fire, flood or blood, ignore it.
4. Deadlines work. Give yourself a time limit to complete a project. You have heard the adage that “if you want something done in an organization, then give that task to a busy person”. This is true because that person manages time well and completes to deadlines.
5. Manage your energy. On most days my energy levels peak in the morning so I try to make my meetings happen in the afternoon or move paper shuffling to my least productive part of the day.
6. Do the most dreaded task first. When that crap job is out of the way, the rest of the day will seem simple.
7. Don’t attempt too much. More than any other characteristic, this is a most condemning character flaw. Too many great opportunities for fun, friends and business crowded into an already busy week. How can you do it all? The answer is you cannot and it is a worthwhile exercise to apply some rules to ALL of your projects. The one I have used for years is to ask 3 questions. Am I in control of this project? If not, why am I doing it? How much will I get paid? And, when will I get paid? It is simply remarkable how the answers will change your mind.
If you want to be a better manager or business owner, work smarter and not harder.
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- The price of money: Part 2 Jul 10
- The price of money Jun 26
- Yard sale pricing May 29
- Squaring the circle May 15
- Calling on your help! Apr 17
- How to price: Step Five Mar 20
- How to price: Step Four Mar 6
- How to price: Step Three Feb 20
- How to price: Step Two Feb 6
- How to price: workbook approach Jan 23
- One of the giants Jan 16