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Rolling Back The Years…

Rolling Back The Years…

The comedian Barry Cryer tells a story about a Finance Director walking down the street. The FD is approached by a homeless man. “Excuse me, mate” says the man “can you spare me a few quid, I haven’t eaten for two weeks”? “ I see” says the FD “And how does that compare with the same period last year”?

Of course, no FD would be that heartless but the story also hides a deeper truth – most of us think in fixed periods of time, mainly years and months. This puts us in a situation where we measure financial performance by the distinctly non-financial yardstick of how long it takes the Earth to revolve around the Sun. This is understandable as we measure our lives in the same way – but is it the best way to plan a business?

There has been some movement away from the annual forecasting and planning cycle; I work with several businesses that use rolling forecasts , for example. According to a study by CIMA about 20% of businesses use them – but what do the other 80% do? Fixed annual forecasts, presumably.
The idea of a fixed annual forecast includes the following assumptions:

• A year is the ideal planning period
• We can get a good fix on revenues, costs and profits over that period
• We can reasonably predict how external economic, political and social factors will turn out.

Let’s think about this a little more. Why is a year the ideal planning period? What if we consider, for example, a five quarter forward planning period instead? Firstly this gets us away from what I call “the January factor”. By this I mean that a forecast is prepared and January, (or Q1), shows a marked change from the end of the previous year. Revenues shoot up; costs are magically under control.

In reality less changes in most businesses between December and January than at any other time of the year; staff, directors, customers and suppliers are all off for Christmas!

Yet this happens. Perhaps businesses, like people, make New Year Resolutions – and perhaps they break them too. The fact is, a business is a continuous process; the last quarter of one year flows in to the first quarter of the next. Businesses don’t stop and start with a jolt and unless we make changes they will stay the same, yet the planning process often suggests otherwise.

If we choose a different planning period we automatically start to look at the business in a different way. The selected forecasting period needn’t be longer than a year – we might wish a six or nine month period if we feel that this reflects the nature of the business. A restaurant might have a very different planning cycle from the manufacturer of Oil Rigs, for example. But the selection of an appropriate planning period is key.

This brings us on to the next part of the change in the planning process: if we break away from the notion of the annual planning cycle we can then take it to the next stage, rolling forecasts.

Businesses spend time and resources preparing annual forecasts that run January to December. That means that at the start of the year they look forward to the next twelve months of activity, but as the year progresses the horizon shrinks. Rolling forecasts enable the business to keep looking up and thinking about the future rather than focussed inward on a set of assumptions that are all too quickly outdated.

What underpins this idea is that in uncertain times (and I would argue that businesses always face uncertain times) the forecasting and planning process needs to be nimble enough both to predict and react to changes in the business environment. A rolling non-annual based forecasting process enables us to do just that. The non-annual part acknowledges that a business is a continuous process and the rolling part keeps it focussed on change and development.

This is not to suggest that the business should be purely reactive or incapable of setting long-term strategic objectives but that such a mechanism is the best way of reaching those objectives.

Why ‘discipline’ wins over ‘innovation’ as the key characteristic of highly successful business owners…

You might well know how to grow (i.e. do more of the things that are working for you, and do them better) but as a seasoned entrepreneur, you tend to instinctively want to hold back a bit…
Why?

It’s chiefly a case of paranoia…

Business owners tend to be more paranoid than they let on. They don’t like to be regarded as paranoid so they often hide it.

What are the causes of success? Is it luck or talent? Is it genius or hard work? Is it creativity or plain diligence?

Jim Collins, the veteran author of Good to Great, and Morten Hansen believe that it comes down to control and discipline in the face of inevitable change. Luck, both good and bad, will befall us, circumstance will be as fickle as the weather. But if we put our heads down, we can thrive.

Their book starts with a definition of what the authors call ’10X’ companies, those that outperform their industry averages by at least 10 times. These companies display three fundamental and distinctive behaviours: ‘fanatic discipline’ and ‘monomaniacal’ focus on achieving their goals; ’empirical creativity’, an obsession with facts rather than opinion and a readiness to ignore conventional wisdom once armed with these facts; and ‘productive paranoia’, constant worry which fuels relentless preparation and precautions against even the most improbable bad events.

They draw on examples from business and beyond to illustrate 10Xers at work, such as Amundsen and Scott’s race to the South Pole. While Scott took a relaxed, somewhat cavalier approach to his expedition, Amundsen prepared for every eventuality, even having back-up plans for his back-up plans. He was a relentless ‘tester’ – he ate raw dolphin meat to see if it could provide a decent energy supply. He loaded up with far more supplies than Scott to serve a much smaller team. And, tellingly, for Collins and Hansen, Scott took just one thermometer, which disastrously broke, whereas Amundsen brought four.

Amundsen reached the pole more than a month before Scott and made it back alive. ‘Amundsen and Scott achieved dramatically different outcomes,’ Collins and Hansen write, ‘because they displayed very different behaviours.’

The same applies to companies and helps explain why Southwest Airlines thumped its discount rivals and why Microsoft thumped Apple in the mid-1980s to 1990s. Bill Gates used to keep a photograph of Henry Ford in his office to remind himself of how Ford had been overtaken by General Motors in the early days of the car industry. Gates wanted the constant reminder that, however well Microsoft did, there was almost certainly some younger version of himself toiling in obscurity to one day knock him from his perch.

Armed with these behaviours, 10X companies set off on what Collins and Hansen call the ’20 mile march’, a long period of sustained growth, characterised by hitting well-defined performance targets and demonstrating both resolve and control. Through the discipline of behaving consistently over time and proving resistant to a changing marketplace, an organisation discovers self-control. And this, far more than more nebulous ideas such as innovation or creativity, is what determines 10X success.

They compare the process of successful innovation to firing bullets in order to zone in on your target, then heaving a cannonball at it to do the job properly. Disasters happen when one uncalibrated cannonball after another is fired, each big, reckless bet made in the hope of recovering from the last one.

One of the most important lessons in the book is that innovation is not always the surest route to success. In their comparisons of companies in the same industry, notably the biotech firms Amgen and Genentech, Collins and Hansen found that it was the less innovative firm, Amgen, that generated better returns for investors over 20 years. Sometimes, it serves companies to be ‘one fad behind’.

Consistent with this idea is the authors’ assertion that the 10X companies are not the brash risk-takers, but the ones that prepare rigorously for what they cannot predict, the antithesis of many Wall Street banks before the financial collapse. These companies hoard cash and keep comfortable buffers in every area of their business, just in case. They are hyper-realists, who act according to Collins and Hansen’s ‘SMaC’ methodology, being ‘Specific, Methodical and Consistent’.

‘Luck is not a strategy,’ the authors conclude. What determines any organisation’s success is how it prepares for both good and bad luck. They call this getting a ‘positive return’ on luck and, if Good to Great’s four million-plus sales are anything to go by, this idea will be embedded in corporate-speak before you know it.

The FD Centre divides a finance department into 12 areas (we call the ‘12 Boxes’). One of these boxes is ‘Risk Management’. Amundsen’s success reaching the South Pole was largely down to the exceptional way in which he managed his downside/risk to stack the cards heavily in favour of him succeeding.

If you would like to book a 30 min call with one of the top FDs in the country to discuss ‘Risk’ and how you can create a powerful risk management strategy in your business to help you grow much faster and make bolder decisions because you know you have your back covered follow the link below:

http://fdcentre-dev.8fifty4.com/financebreakthroughsession/

7 Habits of Highly Effective Finance Directors

Colin Mills – Founder & CEO, The FD Centre Limited (www.thefdcentre.co.uk)

So, to be a highly effective FD in your business, you have to be up to date on all the latest accounting standards, be really up to speed on the latest developments in tax legislation and spend long hours in your office reviewing reconciliations and signing off VAT returns. That’s right isn’t it?

NO.

Our experience over ten years suggests that highly effective FDs need a rather different set of skills to be effective and “make a difference” in the businesses they work for. With over 100 FDs providing FD services to a number of SME’s each on a part time basis, we understand what it takes to be a great FD!

Here are the top 7 Habits for effective FDs:-

1. Competence
2. “Bean Growers” not “Bean Counters”
3. Build a team outside the business as well as in it
4. Manage up as well as down
5. Communication is everything
6. Passionate
7. Sharpening the Saw

Competence
There’s no getting away from it that an Accounting qualification and experience gained being a real life FD counts for a lot. FDs will be judged initially on how well they keep the score, solve financial problems in the business and direct management attention to the things that matter financially. Although it starts here, this is not where it stops! Other key habits are:-
Bean Growing, not Bean Counting
Highly effective FDs should come with Business, Commercial and Strategic skills that are super strong. Super financial skills are merely a pre-requisite.

Team Orientation
Teamwork is key for the modern day FD. As well as the ability to build their own team, highly effective FDs must be able to work effectively with the management team of the business and develop relationships outside the business to provide a strong network of support professionals.

People Skills
“Soft skills” are the hard skills these days. Managing down, across and most importantly up to MDs and business owners is key. Being a great FD and doing the FD “stuff” is not sufficient in adding real value to the business. People need to be brought with you.
Communication
The way you communicate and get your point across is critical to making a difference. Influence and persuasion skills are massively important to be highly effective.

Passionate
Yes “passionate”. High energy levels and having some fun is an important factor in effectiveness. What FDs do is a serious business, but it doesn’t have to be dour, and nobody likes a bore!

Sharpening the Saw

Keeping fresh and finding time to keep up to date is vital in this fast moving world. This relates to all the effectiveness habits not just technical skills!

FDs who want to make a difference to their businesses should work on these habits to become highly effective. Those that can master all these skills will find themselves in very high demand!

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