February is the month of collective romance, usually dominated by love letters to your valentine and hopefully good, solid results at the financial year-end generating more loving shareholders! This February was just the opposite for John.
Around the 14th, as it would happen, John received a notice in response to his January invoice that all operations on the mine in which he worked were ceasing until further notice. The mine cited Force Majour or an Act of God as the reason in that the stand-off with AMCU, the dominant union, had reached a stale-mate.
With neither party willing to budge further, the mine had decided to cease operations temporarily. Shocked at the news, John immediately thought of his outstanding invoice against which he had paid Vat and was relying on its payment to settle his other expenses for January, such as salaries which he had funded through his overdraft. Fortunately he had not yet paid rent.
There are many events that will affect your business. Preparation is therefore key to survival and eventual growth.
John started his business six years ago as the mines in the Rustenburg area had increasingly created and offered more opportunities to local communities and entrepreneurs within these communities.
The mining business makes for interesting suppliers. You start and if you deliver on the first contract, you generally get access to further contracts in fairly quick succession. The nature of the business of mining is that of big industry. Digging shafts and setting up the plant to safely and efficiently undertake the mining of platinum or any other mineral, utilises big tools, machines, infrastructure and services.
A supplier gets a big turnover fast and while margins remain fairly tight, the nature of the business means that you need people to support your business processes. It’s not unusual to find a mining supplier start-up that services core operations move from a handful of staff to 50 to 60 staff within a 12 month period.
In addition, the mining environment is obsessed with safety and for good reason. Training staff to the safety specifications required before you can pass the compliance regimes of the procurement department takes a big investment in your staff.
John was running a number of contracts with this mining client. Over six years he had grown his facilities management business to a point where his ability to outperform the service level agreements both above and below ground were consistently superseded. He had built a staff compliment of 196 people to deliver his services and this mine made up 72% of his turnover.
John stared at the notice he received from the mine and could feel the panic welling up inside him. Each staff member fed a small community of between ten to 20 additional mouths both in Rustenburg and the Transkei where many mining staff originate.
No pay meant that close on 2 000 people would be affected by John’s business alone. Like many of the entrepreneurs I work with, John felt a massive obligation to care for his staff. The weight of his responsibility weighed heavily upon him.
We met that evening to consider the options. Some very tough decisions would need to be taken. By the end of the week, we had devised a strategy.
We took a bet that the strikes would pass. How long it would take was uncertain. But we knew that when they did end, the last man standing would have fewer competitors, more business and the prospect of greater profit.
As an entrepreneur, you need to have your eyes firmly on both the present and the future. It’s a fundamental part of risk management. All risks emerge from either an activity today or an event in the future.
We agreed that the most important outcome was survival. The mining strikes would not last forever and once lifted, the opportunity to continue providing the services would present itself again and John was really good at what he did.
For John’s business, survival meant managing cash flow and together he and I developed a three-pronged strategy. These are some of the actions we took to secure his future.
GET PAID FOR SERVICES RENDERED
1. Keep good accounts.
- Without a good set of books and more importantly, timeous books that are easily and readily accessible, you will find out too late that current invoices are moving into 30 days or even 60 days.
- Time and risk have a direct relationship. As time goes by and no concerted efforts to collect monies outstanding are made, you might expect a lackadaisical payment effort from your customers too. Get the money in your account fast.
2. Maintain good relationships with your biggest customers.
- John immediately went to his contacts on the mine to secure settlement on his current invoices. He had provided the services and was due payment.
- Fortunately, he had developed good relationships and was well regarded. Irrespective of legal contracts, good relationships matter and can be the difference between getting paid, or delayed, or not paid.
3. Insist on contracts and purchase orders.
- Unless you are offering a COD service, get a contract in place. It’s called a service level agreement and it should specify the terms and conditions upon which a service is rendered and paid for. It should also specify payment terms.
- Often it’s hard for a SME to negotiate favourable contracts with a corporate customer so read the contracts that they offer you with care.
- If the terms are unfavourable, investigate the reputation of the big customer.
- Do they pay or don’t they. The trust-based belief that if you deliver a good service you will be paid carries a good dose of risk.
- Going further and thinking that you have a friend or relative within the organisation that is your client is also fallacious. Big businesses work through boards and committees and by sticking their necks out for you, your friend or relative could have their heads lopped off. Just get a contract!
GENERATE NEW CASH FLOW
1. Dilute customer concentration in the good times.
- When you have a large client that has collapsed and this impacts you, the practice of foresight says never let any one client make up more than 20% of your total revenue.
- While I recognise this is not always possible in the beginning of a relationship when you have secured a big client, it’s no excuse later on in the relationship.
- Chasing and landing a big client carries massive risk. If it means that servicing this client will consume all your attention and leave no time to build your business, think carefully if you want that client or are ready to take them on.
- If however, you have sufficient momentum (systems and people) in your business to take care of delivery and grow your revenues away from that client, then it’s a match made in heaven.
2. Diversify your customer profiles to spread your risk.
- As in an investment portfolio, don’t generate all revenues from clients that look exactly the same. If this completely homogenous client grouping goes bang, so too do you. John is already active in marketing his services to other customers in government, private business in the retail environment and property developers and management companies.
- Beyond that, John concentrated his marketing efforts beyond Rustenburg reaching into Mpumalanga and Gauteng.
- His credentials on the mines and relationships were important.
- References flow freely for him and the standards required by the mines are often more onerous than those required by private industry, meaning that his service standards represent a competitive advantage.
1. Stop the cash flow bleed as a fast as possible.
- The next day we met with his staff. They were familiar with the growing tensions in the environment and had seen friends and family in other parts of the industry lose their jobs.
- There was a surprising level of acceptance that a three-day week was the only option that John could offer.
- Why not a complete retrenchment? Firstly John could not afford it but importantly, he had invested training and skills development in many of his staff. He knew that he would need them when the strikes ended and work resumed on the mines.
2. Negotiate with creditors, don’t hide from them.
- Over the weeks that followed, John met with each creditor.
- The level of empathy was remarkable and John’s proactive action was respected.
- Don’t hide from people you owe money to. It makes them angry and breaks down trust.
- Business is about relationships. They too want you to remain in business because they also need to hold onto the relationships that serve them well.
Stop Surviving And Start Thriving In Business
It will inform your operations, which will inform your human and asset capital and lastly, the financial investments you make.
To thrive – and not just survive – in business you need three basic building blocks: 1) attract more customers and clients; 2) who spend more; and 3) buy more often. But how do we make this happen in the tight, recessionary environment we find ourselves in South Africa?
Despite the tough economic conditions, businesses can still thrive. In fact, many small businesses have been found to thrive in difficult economic conditions and are known as counter-cyclical businesses.
So how do you turn the tide from surviving, to thriving? You need to start thinking creatively, making informed decisions and being agile in the business environment. Always start with your marketing strategy. It will inform your operations, which will inform your human and asset capital and lastly, the financial investments you make.
Ansoff Growth Matrix
Business leaders continuously explore various growth strategies to retain and grow market share. One of most respected and often used is the Ansoff Growth Matrix. It was first published in the Harvard Business Review in 1957, written by strategist Igor Ansoff to help management focus on the options for business growth. Ansoff suggested that an effective strategy considers four growth areas, varying in risk. This strategic planning tool guides us to understand our current situation, contemplate strategic options and consider the associated risks.
- Market Penetration: Market penetration has the least risk of the four options. Here you are selling more of the same things to the same market. You know your product and market well. The question is, how can you defend your market share and sell more to your existing customer? You may consider special promotions or introduce a loyalty scheme.
- Product/ Service Development: Product and service development is slightly riskier as you introduce a new component into your existing market. The advantage is that you sell to a customer/ client that you know, and they trust you. Ask yourself how to grow your product and service portfolio? You may consider adding new services and products or modifying your existing offering.
- Market Development: With market development you target new customers and clients with your existing products and services. You sell more of the same things to a different market. You can consider new sales channels, online or direct sales. Do a proper market dissection to target different groups of people, considering different age groups, gender and demographics.
- Diversification: Diversification is very risky. Here you consider introducing a new, unproven product or service into an entirely new market that you may not fully understand. You may need new expertise, acquiring another business or venturing into another sector. The main benefit of diversification is that during difficult times only one component or element of the business may suffer.
Related: My Business Is Growing… What Now?
The fifth element: Passion
In addition, I would add one more element critical to business growth: Passion. It is the single component most critical to business success and, combined with any one or combination of the four areas of the Ansoff Growth Matric, it can equip small business owners with all they need to thrive in their business environment. Passion determines your business success, so make sure you have it in heaps to reap the rewards of your hard work.
6 Common Decision-Making Blunders That Could Kill Your Business
Among the logical errors nearly everybody makes is thinking only everybody else makes logical errors.
Humans are often very irrational. If you’ve ever explored behavioural economics or psychology, you may have found a host of examples demonstrating situations when we make objectively bad decisions.
Below are six of the largest decision-making blunders we all make. Avoiding them will dramatically improve your decision-making, your quality of life and success.
1. Sunk-cost fallacy
Of all the ones on this list, the sunk-cost fallacy is the most common. Many of the decisions we make are final or difficult to change. For example, let’s say you invest R1 000 in Facebook, and the price of the stock goes down to R600 the following day. The fact that you put in R1 000 initially is irrelevant to the situation at hand; you now have R600 worth of Facebook shares.
What this means is that once the decision is made and our cost is incurred, there’s no point thinking back. You already put in the time, money or other form of investment. Considering that in any future decision is illogical, despite how tempting it is. Instead, present yourself with the new options at hand — without considering the sunk cost.
2. Narrow framing
Would you take this bet? You pay me R1 000 if a flipped coin lands on heads and I pay you R1 200 if it lands on tails. Most people would say no. We tend to be risk-averse, unwilling to risk something like R1 000, despite the reward being a bit greater.
Now, what if I offered you that bet, but I promised we would flip 100 coins? Each time, the loser pays up. Would you take it then?
Almost certainly, right? The chances that you lose money, overall, are extremely slim. This idea can be applied throughout life. When we’re in situations that will repeat themselves over time, we should take a step back and play a game of averages.
3. Confirmation bias
Another common one in the worlds of psychological and behavioural economy is confirmation bias. It hurts our ability to keep an open mind and shift our opinion. When we have a held belief, we typically look for information that confirms our opinion while ignoring data points that tell the opposite story.
For example, if I’m really excited about a new software product that I just integrated into my business, with ten of my employees as users, I might have made up my mind about the quality of the service before we put it to use. I would then be more likely to listen to the three employees who enjoy it, not the seven who don’t.
There’s almost always information that will validate our opinions, no matter how wrong they might be. That means we need to always look for conflicting evidence and, from there, make judgements based on more well-rounded information.
4. Emotionally driven decisions
When we’re angry or upset, we’re much worse decision-makers. When you have to make an important decision and happen to be in a bad mood, you should hold off. Instead, wait until you cool down and can think more clearly. It will remove the outside influences and let you think more rationally.
5. Ego depletion
This one makes intuitive sense, but it’s one of the most common ways to make bad decisions. The idea of ego depletion is that when we’re drained, physically or mentally, we’re less likely to think critically. Think about the times you’ve been exhausted after a long day of work. In those moments, you don’t want to have to think hard about anything. Instead, you want your brain to work automatically.
What that means is that when you’re tired and faced with challenging choices, you’ll rely more on your instinct or automatic processes as opposed to analysis and thought. That can be extremely problematic in situations that require effort.
6. Halo effect
The halo effect says that once we like somebody, we’re more likely to look for his or her positive characteristics and avoid the negative ones. This is similar to confirmation bias, but it’s oriented around people.
Related: 10 Stupid Mistakes Smart People Make
For example, let’s say I just hired someone named John, who was great during his interviews. Through his first few weeks, John does a few things well at work, but he also does many things poorly. The halo effect — brought on by his wonderful interview persona — could cause me to ignore his poor attributes and emphasise his good traits.
This can be detrimental to our ability to make judgements about others. We have to realise our biases toward certain people and eliminate them.
These are a handful of the many decision-making errors we’re all prone to. Although it’s challenging to scrutinise your preconceived notions, doing so is worthwhile. It gets easier over time and will, ultimately, make you a more effective decision-maker — personally and as a business owner.
This article was originally posted here on Entrepreneur.com.
8 Reasons Why Failure And Focus Are Essential To Business Success
There are two Fs that define the long-term and sustainable success of your business – Failure and Focus.
There is an event that runs globally across countries such as the United States, Spain, France, Brazil and Israel. It is a conference that is aimed at the entrepreneur, the investor, the developer and the designer. It also caters exclusively for failure – FailCon asks the entrepreneur, specifically within the technology space, to embrace failure. However, this focus on failure isn’t about leaping blindly into the ball pit of collapsed dreams and wallowing in its sorrow as you shout ‘Bazinga!’. It’s about being comfortable with the idea that failure can happen and using it to drive your business focus and long-term success. These eight steps define exactly how…
1. Not big, iterative
Giving someone advice to fail big isn’t practical. It isn’t the kind of attitude that investors will be drawn to either. Instead, embracing failure is about being open to the fact that it may very well happen to you and some of your ideas. It isn’t necessarily going to be a gigantic failure on a scale of company-wide collapse. It could just be that you had an idea, and it wasn’t a very good idea so it failed.
2. Focus on your agenda
If you’re not focused on your end game and business agenda, don’t expect your staff to be. This level of focus is critical as it gives people direction. They then understand exactly where the business is going, what it hopes to achieve, and the role that they play in taking it there.
If you don’t have this level of focus, your staff don’t have anything to latch onto.
This is where your ability to fail is of value. You need to test your assumptions and ideas and then use their failures to learn more about how they could potentially succeed in the future. You have to learn from your mistakes. Don’t drown in self-doubt, take the mistakes and move them towards enhancing your business.
4. Success isn’t easy
Look, if being a hugely successful entrepreneur was easy, everybody would do it. You need to keep the focus and intensity you brought on your first day all the way through to today. Create short term goals and objectives that give you endless purpose and a sense of achievement and use their success to drive you onwards towards your final destination.
5. Build in plenty of goalposts
Justify every decision and long-term goal through relentless measurement to ensure they are the right decisions. The last thing you want is to hit your goal in 10 years and discover that it wasn’t the right one, your business hasn’t gone anywhere and you’ve worked incredibly hard for nothing. The effectiveness of your time, decision making and execution is critical.
6. Define failure
What does failure mean to you? Understand how you define it and then use this as a barometer to define your idea of success. As long as you have clear objectives for both, you can assess your business, its effectiveness and your results. As mentioned in above, always set goals and objectives so you give your company and people a sense of purpose.
7. Your ideas aren’t always that good
Some of your ideas are not going to fly. They’re going to collapse with an embarrassed sigh. The lesson is that you should be constantly questioning yourself so when you are in a situation where your ideas don’t work, you can objectively examine why they failed and use these learnings to change and adapt.
There needs to be a healthy tension between learning through theory and practice. The latter is learning to win and to handle defeat in real time with real results.
Related: Your Business Failure is Your Fault
8. Get over it
It’s quite easy to wallow in your failure misery and lose years to personalised anguish. It’s harder to just get over it and move on. The thing is, it’s moving on that counts. Those who get up, dust themselves off and start again are those who end up thriving. The ability to compartmentalise and learn is invaluable as you take your business from your first idea through to a sustainable, epic enterprise.
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