Leadership, Should I Decide with My Head or My Gut?

February 22, 2011

Many years ago, when I was younger and less experienced in business management, I was chatting with the MD of the company I worked for.

We were discussing risk management, as I’m a PMP certified Project/Program Manager and have been for over a decade.

We talked about Risk Management frameworks, and for him it all boiled down to his “gut” in terms of whether the risk seemed acceptable or not.

Now don’t get me wrong, he didn’t just make all decisions based on his “gut” – but it certainly did drive him in terms of requiring more/less validation before making the final decision.

At the time I thought, there must be a better way than just “gut” for determining this sort of thing.

Now, years later, I tend to agree with him. Your gut-reaction to a decision definitely gives you a sense of comfort or foreboding about a decision and its consequences.

So, this leads to the topic of Leadership and the soft-skills associated with being a good leader. Read on for further details.

What is Intuition ?

In simple terms, intuition is when we know something or know what to do without necessarily knowing why.

What to do just comes to us in a flash of insight. Some intuition is instinctive. For instance, if someone starts running after you with an axe, you will most likely have the instinctive (and intuitive) response of either defending yourself or running away. Moreover, your reaction would be entirely rational.

Other intuition is the result of years of training and knowledge building. Police officers, firefighters, military commanders, emergency medical care providers, airline pilots and many others spend years in learning and honing their skills in order to react in an instant with the optimal solution.

Intuition …. So What ?

Our society expects specialists like those I’ve covered above to make high quality intuitive decisions quickly and accurately and then execute them effectively.

A surgeon with many years’ experience in the operating room has much better intuition than a newly-graduated doctor. The same goes for a highly experienced fireman.

In his bestseller Blink, Malcolm Gladwell describes how a veteran firefighter was able to “sense” a change in situation and order all of his crew out of a house just before it collapsed. He was unable to identify the steps in his decision; he just “knew” that it was time to get out.

The same goes for experienced leaders and executives in all walks of life. With many years of life experience, they can just tell if someone “has it” or doesn’t, and no amount of rational deliberation with convince them otherwise.

However, not all intuitive decisions are equal; and in fact some are wrong – or very wrong.

Experience, and in particular depth of experience, is a reliable indicator for a “good” outcome. Conversely, some situations are so novel, that intuition is next to useless and can even be counterproductive. In that case, deliberate decision making is needed in order to think through the factors impinging on the decision and to ensure that a variety of courses of action are considered.

The key here for a business leader is to consciously know whether they have direct or empirical evidence of an intuitive recommendation being “good”. If the answer is YES – follow your intuition; if the answer is NO – you will to take a more deliberate (and deliberative) and therefore rational approach.

Intuition versus Deliberation

As a guide, the following situations lend themselves to intuitive responses because of immediacy:

  • During an emergency, that requires an immediate response in order to save lives;
  • When there are direct threats to physical safety;
  • When a team has gotten lazy or overly reactive in the face of risk, and requires inspirational leadership to fix the situation.

There are situations where both Intuition and Deliberation are suited:

  • When you’ve been made an offer for the sale of your business;
  • When you’re considering “dropping” an existing client;
  • When you need to take action to correct the behaviour of a team/staff member;
  • When you’re considering a merger with another business;
  • When you’re considering taking on another business partner;
  • When you’re considering Product/Service extensions to your business.

Most other situations have enough time built in to them to allow at least some level of deliberation. It is prudent to involve outside experts and to form an advisory team when faced with unusual situations that will require imagination and resolve to turn around.

Finally, intuition does play a role in deliberate decision making because of its ability to generate deeper insights and provide innovative solutions.


Success Leaves Clues, So does Failure

May 15, 2010

I’m regularly asked questions that come down to “how come they can do …… and my business doesn’t seem to be able to ???”.

This leads me to the question … Why do some businesses achieve great success, while other seemingly similar businesses struggle forever?

My own answer to this is to look for the trail of clues that indicate why a business has (or will) succeed, or conversely why a business has (or will) fail.

The reality is that even though there are many businesses out there with great products and excellent services, they never seem to get beyond survival let alone achieving stellar performance.

Below are 5 critical mistakes that will kill your business’ chances of attaining above-average success.

I see these every day in businesses looking to sell, or raise capital, so I can say with great conviction …. If you make any of these 5 critical mistakes, your business will achieve average performance at best, and likely create a trap where you end up working long hours for mere survival, or even eventual failure and bankruptcy.

Feel free to read on and check to see where you and your business are at.   Be honest with yourself when looking at these common, but highly-detrimental, mistakes.

1.  Short-term focus

Most SME business owners are focused on short-term survival rather than long-term success.  Typically, short-term cash requirements become the driver for most things that happen in the business.

If this short-term requirement is constant, the future development needs of the business are totally neglected.  This also leads to feast and famine as the business pipeline is managed for next month rather than next quarter or next year.

This also tends to create transactional business rather than long-term relationship business.  The cost of acquiring transactional business is 4 to 5 times higher than acquiring relationship-based business.

If you’re spend more than 10% of your time, as a business owner, putting out fires then you’re sealing the long-term fate of the business …. and it won’t be a good fate.

The only way to stop this sort of problem in the long term is to work on prevention in the short term, at least you will know that at some point “it will get better”.  This means taking time out to analyse what’s going wrong and planning what needs to be done to achieve the long-term goals (as well as eliminate the things going wrong).

You need to become proactive instead of reactive if you want to achieve real success.  You need to define what that success looks like and then develop a plan to get it.  Then go out and make it happen.

As Yoda says “Try, there is no try.  Do or Not Do”.

2.  Haphazard advertising

Advertising decisions in SMEs are commonly made based on how busy everyone in the business is.  The corollary being “let’s do whatever is easiest”.  The signs are:

  • There is no defined marketing plan;
  • Advertising is initiated when sales slow down and stopped when sales pick up;
  • Advertising is usually tactical/opportunistic rather than strategic.

This endlessly reactive cycle just tends to keep the business operating around the same level of sales (survival).  In turn, this level becomes the limit to the future success of the business.

Smaller, struggling businesses tend to react by using price as their main competitive strategy.  This sets up a knee-jerk approach to price setting and sales/marketing activity, creating a response from competitors that ends up damaging everyone’s profits and cashflow.

Marketing is about communicating to the market the distinctive reasons why your company’s products should be the logical choice compared to competitive offerings.

Successful companies determine their strategic advantages over the competition and then proactively communicate the value of those advantages to the market.  More often than not, this style of marketing allows them to sell at higher prices than their competitors because they’re focusing on what customers really value.

3.  Ineffective delegation

You can’t grow your business without delegating work to someone else.   THERE IS NO OTHER WAY.

However, most business owners would prefer to do the work themselves rather than learn how to choose the right people, set them up with the right systems, then motivate and nurture them.

Partly this is a trust issue, but mostly this is a control issue.  You just need to learn to hand the steering wheel to the Universe over to somebody else for a while and focus on the areas of your own business where you can significantly increase the capability/competitiveness of your business.

The trust/control issue is commonly caused by the business owner having expectations of employees that are not communicated clearly – therefore they don’t get the results they expect.  The outcome will always be frustration followed by the assertion “you just can’t get good staff these days”.

The best managers know clear interactions between people and good relationships are essential to productivity, so they develop effective communication processes.

These include job descriptions, operations manuals, work instructions and appraisal systems to ensure that expectations about an employee’s role in the business are effectively communicated and understood and that the employee’s performance results are fed back and effectively worked through to the satisfaction of each party.

Delegation can then occur without frustration and antagonism, and everybody is clear about what/why/how/when leading to a highly-productive and positive work environment.

4.  Ineffective control

Many business owners/managers are so focused on getting the work done that they never stop to check how efficiently it is being done or whether performance levels are improving/deteriorating.

Running a business without performance indicators is like walking across a highway with a blind-fold on (you just wouldn’t do it would you ???).

Some business owners/managers don’t even know what their financial position is from month to month.  That’s like guessing how much fuel you have left, then being surprised when the car stops.

Many businesses stay at the level of growth where the business owner can physically see/check how hard people are working.

This method of maintaining control is self-limiting, because it puts a self-imposed cap on business growth.  However, it is often also ineffective because activity and productivity are not the same thing.

Staff have a tendency to try to look busy, even when they aren’t working hard.  Many managers are then lulled into a false sense of security by visual checking.

Without real performance measures that identify actual levels of productivity, operational costs and relativity to targets, a business has no real controls.  Making this critical mistake almost guarantees that it will be impossible to achieve above-average success.

5. Doing it all yourself without looking for help

Significant achievement always involves help from others.

In small business it has long been accepted that you need external professionals for preparing accounts and dealing with legal matters.

However, it is also becoming commonplace to bring in specialist skills to work on improving specific business functions (eg: Strategy, Marketing, Sales, HR).

Running a successful business requires effort, and the effective leverage of everybody’s time.  It is unusual to achieve without a significant amount of mentoring/guidance from people with the right experience and expertise.

It is accepted practice in all sports and almost every elite athlete uses a coach to provide external guidance and tips to improve performance.

The best business owners also accept this principal and look for advice whenever they can.  It seems that only the poor performers try to go it alone and think they have all the answers themselves.

Conclusion

If you make any of these mistakes in business, your performance – and the businesses performance – will suffer and you will most likely tend to spend your time struggling to survive, or at least working longer hours than you want to get where you want to go.

Success leaves clues.  Successful businesses operate in a different way from most average businesses …. that is why they’re successful.

Wouldn’t it be a good idea to find out how they do it and how you can eliminate the mistakes that keep you trapped in a business that is a continuous struggle and a constant source of frustration ?.

Feel free to talk with us if you want to break out of this “Cycle of Despair”.


Receivables Management for managing Business Cashflow.

March 27, 2010

I’ve talked with many businesses over the years about the benefits of Receivables Management as a tool to leverage cashflows.  Receivables Management is also known as “Debtor Finance” and more commonly as “Factoring”, which is a particular form of Receivables Management.

You can learn a little bit more about the basics of Debtor Financing at http://en.wikipedia.org/wiki/Debtor_finance which may answer some basic questions that I don’t address here.

Please feel free to contact me if you want more information on this topic, or want help accessing Debtor Financing as an option for your business.

As I mentioned, a term used to mean Debtor Financing or Receivables Management is Factoring.  This still has a dirty name for many people who remember the ridiculous interest rates businesses were being charged to access this type of facility back in the 1980’s and 1990’s.

Rest assured that in todays financial markets Debtor Financing is much more cost effective for businesses.  Typically the cost to a business is 200-250 basis points (2.0%-2.5%) above the benchmark lending rates.

So, why would you use Debtor Financing ?.  Well, the most obvious answers are:

  • You’ve issued an invoice to a customer and now have to wait 30/45/60/90 days until you get those funds.
  • If your customers are late paying, or go delinquent, you will wait even longer.
  • If you could get 70% of the money due in 30 days today, and only pay 6.5% for the privilege what sort of a return to the business can you make ?.  If it is less than 6.5% then you shouldn’t be in business … it should be more like 20% to 50%.

PLEASE NOTE: The banks don’t just give this away for nothing.  They will do an assessment of the Invoices you are proposing to use and will decide which ones they will accept (or not accept).

In the Australian marketplace there used to be a number of financial institutions offering Debtor Financing, with ANZ and NAB being the top 2 with very attractive offerings.

Unfortunately as at the end of 2009, ANZ withdrew from this market for new business customers.  However, NAB are still in this market and have over a 50% market share.

This means that:

  • They’re committed to Debtor Financing as a tool for their business customers;
  • The NAB Business Bankers understand how this tool can be made to work for their customers; and
  • When they approve of an Invoice you want to use for Debtor Financing that means they’re willing to work with you in risk-managing those Accounts Receivable.

Here is a link to the NAB Debtor Financing facility in case you would like to know more http://www.nab.com.au/wps/wcm/connect/nab/nab/home/business_solutions/3/1/2

I’ve provided a small précis below.

NAB Debtor Financing:

Suited to businesses that need a capital injection to fund business growth, or cash flow requirements, but want to fund this purely on the strength of their business sales.

What are the Benefits:

  • Funds access: borrow money based on the strength of your business sales
  • Flexibility: helping you manage seasonal and day-to-day fluctuations in cash flow
  • Convenience: ability to gain access to funds when you need it against issued invoices.
  • Limit: as your business grows and your debtors grow so does your facility
  • Accessibility:   transfer funds from your NAB Debtor Finance account into your working account via NAB Online Business and NAB Online Corporate, or by written instruction

What are the Features:

  • Credit limit based on business sales, not mortgage based fixed asset lending like all the other options available to businesses
  • Withdrawals can be made from your NAB Debtor Finance account up to your daily available limit (which automatically increases/decreases depending on the level of your sales and debtor collections).
  • No account keeping fee
  • No line service fee

What is a Convertible Note ?.

March 27, 2010

When I talk with businesses the topic of funding is usually the first-cab-off-the-rank.

One of the most effective ways to raise the funds in the post-GFC world is through Convertible Notes.  When I talk about this, the first reaction from most people is “what is a Convertible Note ?”.

So, to stop that little record being played over and over, I now point people to this Blog entry.

Feel free to contact me if this is a topic of interest to you for your business, or you just want to know more about the topic.

A convertible note (or, if it has a maturity of greater than 10 years, a convertible debenture) is a type of bond that the holder (Investor/Bank) can convert into:

  • Shares in the Company they’ve put the money into, at an agreed value (per share); or
  • Cash, of equal value to the money they’ve put into the Company.

Either way, the Investor will receive interest payments on the way through at an agreed-upon annual interest rate and at agreed-upon frequencies.

In terms of exercising a choice (Shares, or give me my Cash back), this is the Investor’s choice and the Company must accept that choice whether it is convenient and whether they like it or not.

The types of frequencies I most often see are:

  • Quarterly in arrears;
  • Half-yearly in arrears;
  • 50:50 (50% up-front, and 50% at the agreed end-date);

Each type of frequency has a different risk profile for both the Investor and the Company, and therefore the rate of Interest is expected to be quite different because of the risk spectrum.

A convertible note is a hybrid security with both debt and equity features.

The Investor receives the potential upside of conversion into equity, at an agreed price today for some point in the future, while protecting their downside with cash-flow from the “convertible note” payments.

From the Company’s perspective, the key benefit of raising money by selling convertible notes is (hopefully) a faster approval timeframe than a bank can achieve plus a deferral of dilution of all the other shareholders (though it will be inevitable if the Company does very well).

In the present Australian market, private convertible note arrangements vary from a duration of 6 months to 5 years and vary from an interest rate of 10% to over 20%.  The massive difference in interest rates relates to the frequency of interest payments and the risk-levels that the Investor perceives the Company as being for them to get their entire capital back.