Planning for growth is something every business owner will say they do, but not all business owners will do this effectively and with a focus that will generate profitable growth.
Many businesses plan for growth, but not profitable growth. Some businesses focus on growing sales without a focus on margins while others build infrastructures to support sales and growth that never materialize.
Michael Porter said, “If your goal is anything but profitability – if it’s to be big, or to grow fast, or to become a technology leader – you’ll hit problems.”
A business must focus on profitable, scalable and sustainable activities if it is to grow. Profit and the generation of cash to re-invest in your business must be made a priority, as it is an essential part of the financial strategy and structure of a successful business. Profit and a clear business plan will create a focus and the alignment of the organization, as well as attract investors and other sources of funds to fuel growth – all of which impacts the underlying business value of the business.
CFO Centre has identified 7 Keys to Profitable Growth:
Well, with 2018 in our rear-view mirror and as we move forward along the 2019 highway, it is a great time to reflect on the past year’s journey. For us at The CFO Centre Canada, the last 12 months have been rich in opportunities to help SMEs thrive as well as our overall growth. Our road was paved with outstanding relationships, both new and growing, from clients to collaborators.
We are pleased to have welcomed several talented individuals to our team. It is our great pleasure to spotlight the following CFOs who joined our ranks:
Developing a strong relationship with your bank provides tremendous benefits including offering necessary funding, preferential rates, and better terms. Your bank can provide expert financial advice and help you to find solutions to financial challenges. It can also help you to grow your business and reach your financial objectives.
Since your bank works with a wide variety of businesses, it can also be an excellent source of prospective vendors, partners, and customers for your business.
As banks deal with SMEs in every industry, they are also an excellent source of information and advice about marketing, expansion, fraud prevention, and e-commerce. Some banks take the initiative and offer their customers business ideas and opportunities. So if you don’t have a strong relationship with your bank, you’re missing out in many ways that could help your business to prosper.
Very few business owners appreciate the value of having a strong relationship with their bank.
Why you should develop a strong relationship with your bank
Having a borrowing history and a solid relationship with your bank will make it easier for you to get credit.
“You need to have a good relationship with your bank,” says Black. “If you treat the bank as a commodity and don’t tell them anything, then when you need them most, they may not be there.”
“Tell the bank the good and the bad news in equal measure, as and when it occurs,” recommends Black. “If you have a new contract or a good story, tell the bank about it. Many don’t do this.”
There’s more to it than regular phone calls, however. You also need to demonstrate that you have a coherent strategy and follow it, says Black. That will help to establish your credibility too.
“Continually changing the strategy or appearing to move from one to another does not give the bank confidence,” says Black. “The worst situation to be in is one where the bank does not even understand your strategy.”
Make sure the forecasts you provide are realistic and credible, recommends Black. “The bank will build up a history of how accurate the forecasts are that a business provides. No forecast can ever be totally accurate, but the banks see no end of forecasts showing a massive increase in profits and cash just to underpin the latest request.”
Let your banker know about regulatory changes that could have an impact on your company’s growth opportunities.
Banks need to know:
Who your customers are
Who your vendors are
What is going on in your industry
For that to happen, you need to establish regular communication with your bank manager.
Share your company’s long-term strategy with the bank. Your bank may be able to provide additional resources to help you achieve your goals.
Schedule regular meetings with your bank throughout the year so that he or she gets an accurate picture of your business. It will also make it more likely the bank will respond faster when needs or opportunities occur.
The stronger your relationship is with your bank, the better they will be able to understand your business when you come to them for advice and solutions to help it grow. Banks know things don’t always go as planned. They want to be comfortable that they understand your ability to deal with these situations and make good decisions to improve, building a track record with them based on trust, sharing information and debate. It’s astonishing how many business owners don’t invest in building a track record and strong relationship with their bank.
At a recent event focusing on how to build a world-class finance function, CFO Centre Group CEO, Sara Daw, found only four out of 50 business owners who attended considered their bank was a strategic partner to their business. This is far too low. At The CFO Centre, we make building a strong value-adding relationship with your bank a priority.
If you don’t have a good relationship with your bank manager, you’re missing out on more than a possible future credit facility. You’re missing a valuable free resource for advice and information.
Your bank can provide a regular evaluation of your business and financial strategy, as well as ideas and solutions to overcome many challenges you might face.
Banks also offer a wide array of services including:
Cash management tools
Credit card processing
Online and mobile banking services
Since banks deal with SMEs in every industry, they are also an excellent source of information and advice about marketing, expansion, fraud prevention, and e-commerce.
They can walk you through your balance sheet and explain how they perceive your finances and business. They can also learn more about where and when you’re likely to need the money to grow the business.
Giving information and asking for advice helps to build trust between you and your bank manager. Gradually, you learn to trust their advice and they begin to trust in your ability to repay your loans.
Banks hate surprises so if your business is encountering problems, it’s important to let your bank manager know as soon as possible. If you know that you’re likely to miss payments or be late in paying vendors, let your bank manager know in advance so they can assess the situation and provide you with options.
This will also demonstrate to your bank manager that you can manage the business and also be trusted to inform the bank before the problem gets worse. Your bank manager might even be able to extend your line of credit or temporarily waive your fees.
You can increase your chances of getting a loan or credit extension by demonstrating your ability to repay, whether it is a short-term overdraft or alonger-term loan. The bank will expect to see the proof so you’ll need to provide the following documents:
Your track record
Your previous results
A business plan (which needs to cover how the company started, your products/services; the management of the business and its plans for the future; market research undertaken to support assumptions and forecasts; and your financial requirements)
Your last audited accounts
Current and up-to-date management accounts
Accounts Receivable and Accounts Payable lists
A budget for the current/next trading year
A cash flow forecast
How a part-time CFO will strengthen your banking relationship
Many business owners are uncomfortable speaking with their bank manager. Owners and CEOs often do not know how to communicate their business strategy and needs to the bank and do not know what information the bank needs to support their funding requests. This is where an experienced CFO can be an essential part of your team; someone who understands how banks make their decisions and can, therefore, position your application for a greater chance of success.
Your part-time CFO will:
Develop a relationship with key personnel at your bank.
Share information about your business with the bank and keep the bank fully updated. The more trust that can be built the more the bank will be willing to help.
Provide the bank with a credible business plan which takes into account previous track record including debt and cash flow history.
Provide you with independent advice on bank products and their suitability.
Negotiate the best deal on bank facilities.
Provide access to senior contacts in the bank where required.
Introduce new banking options if needed and negotiate terms.
Your part-time CFO will work hard to forge a strong relationship with your bank so that when you need access to any of the bank’s services your request is treated as a priority.
What’s more, your part-time CFO has many years of banking experience so can advise you on the best banking deals.
Your part-time CFO knows where to go for supplementary funding to complement your bank finance (if necessary) and how to benchmark funding deals for your peace of mind.
CFOs can skillfully communicate your needs in a way that appeals to bank managers. That helps to add further credibility to your credit application.
Your bank can play a significant role in your company’s future growth, both in terms of providing necessary funding and strategic advice.
That will only happen if you take the necessary time and energy to foster a relationship with your bank manager. The benefits of doing so, however, make it one of the best investments you’ll make.
1 ‘How to get the most out of your banking relationship’, Black, Peter, Forum of Private Business, www.fpb.org
If you’ve ever looked through a storage box holding clothes you wore as a child, you may have wondered, “How did I ever fit into something that small?”
Your company may be in the same situation. The equipment, personnel, and premises that fitted well when the company was starting out, may be constraining its growth as it matures.
One of the most pressing areas for change may not be your production system, office space or loading dock. If you find that cash shortages are constraining your business, if you don’t know if you can afford to expand your product offering, or you have no real idea which of your products are the most profitable, you may have outgrown your finance function.
Child-sized clothing might have fitted you well when you were small, and it could be that the financial system you had when your company was young, did what you needed it to do. Most companies start out with the founder keeping track of everything, maybe with the help of a bookkeeper or accountant, later growing into a department with a controller at the head.
But there is a world of difference between the “controller” mindset and the benefits available through someone who is able to help you take your company to a higher level – a Chief Financial Officer, or CFO.
Having access to those skills is important. As noted in the CFO Centre’s e-book, How a CFO Centre top level part-time CFO can transform your business, a CFO brings enormous practical financial and strategic skills and knowledge to your company.
A report by the International Federation of Accountants quotes James Riley, Group Finance Director and Executive Director, Jardine Matheson Holdings Ltd.:
A good CFO should be at the elbow of the CEO, ready to support and challenge him/her in leading the business. The CFO should, above all, be a good communicator — to the board on the performance of the business and the issues it is facing; to his/her peers in getting across key information and concepts to facilitate discussion and decision making; and to subordinates so that they are both efficient and motivated.
In this post, you’ll learn about the difference between a controller and a CFO, and why it may be time you made the change – and how you can do that without putting an undue cost burden on your company.
The controller mindset: accuracy, compliance, tactics
All companies need someone with a controller mindset, even if they don’t have that specific title on their business card. The controller watches the details, so you don’t have to. The controller focuses on making sure that financial records are accurate, prepares monthly financial reports, ensures payroll is made on time, invoices are issued and collected and ensures compliance with regulations.
Essentially, the controller manages the company’s books and records and is responsible for the transaction processing in a company and reporting on those transactions. With the focus on recording and reporting on past events, the controller’s role is mainly backward-looking.
And just to repeat – you need someone who makes sure all of these issues are covered.
But your company, even if it’s small, also needs someone able to watch the big picture. And as it grows, that need becomes more acute.
By comparison, the role of the CFO is to provide forward-looking financial management. It’s a proactive role since it is concerned with the company’s future financial success.
What are the signs that you may need more than what a controller mindset can provide? Maybe — if you need to understand the risks your company is facing, or you need to know which of several possible ways forward is best to improve performance or help you grow profitability, or it could be that you need to someone to help align the organization by establishing performance metrics and mindset throughout the organization, or perhaps you need to know how to finance your growth.
In short, you don’t just need someone to provide a utility function – you need a combination of coach/advisor regarding the resources you need to make your intended future happen.
The CFO mindset: big-picture, advisor, strategy
The role and responsibilities of a CFO have expanded in the past two decades, according to the International Federation of Accountants. That expansion it says has been driven by complexity as a result of globalized capital and markets, regulatory and business drivers, a growth in information and communications, and changing expectations of the CFO’s role. Whereas the CFO was once seen as a company’s ‘gatekeeper’, he or she is now expected to participate in driving an organization towards its goals.
The CFO still has the responsibilities for overseeing the Controllers role in record keeping to safeguard the company’s assets and reporting on financial performance
By contrast with a controller, the CFO expands that role to focus on improving the operating performance of a company, analyzing the numbers and presenting solutions on how to make those numbers better. This can include higher sales, lower costs or greater margins.
A CFO will focus on strategy, helping to shape the company’s overall strategy and direction, as well as a catalyst, instilling a financial approach and mindset throughout the organization to help other parts of the business perform better.
The controller looks to the short term, the CFO is long-term. The controller helps make sure your company is compliant with issues such as environmental reporting and taxes; the CFO helps you design and implement a strategy. The controller seeks to maintain what you have; the CFO helps you expand.
If your company is in a growth phase – or you want it to be in a growth phase, the controller has your back – and the CFO helps you move forward. It means together you can achieve better results, faster.
Feel free to reach out to us here at the CFO Centre. We’ll sit down and have a talk, even if it’s phone or video call, to get an idea of where you want to take your company, and what your options might be to support the growth you want.
Many of the issues in this post are covered in the CFO Centre’s e-book “Financial Reporting,” which goes into detail about the insights that you can gain from a CFO’s strategic view of your company’s financials.
THE ROLE AND EXPECTATIONS OF A FD: A Global Debate on Preparing Accountants for Finance Leadership, the International Federation of Accountants (IFAC), October 2013, www.ifac.org
‘Four Faces of the FD’, Perspectives, Deloitte, http://www2.deloitte.com
Many businesses get by without one. “It’s in my head,” you might say. Or, it could be a document you put together years ago, maybe because your bank required it to extend financing, and you haven’t looked at it since.
But as the CFO Centre’s e-book “Business planning and strategy implementation” points out, according to a survey by business and finance software provider Exact, companies that have a business plan in place were more than twice as successful at achieving their goals than those that did not (a 69% success rate versus 31%).
What’s wrong with many business plans?
If having a business plan is so important, how can your company get the best possible benefit out of the work that goes into preparing one?
Our work here at the CFO Centre has found that while having a business plan helps, there are some important elements to success (many of these are presented in more detail in the e-book).
One is that the plan must be a living document – it needs to be something that you review frequently, updating it as circumstances change, and using it to provide guidance on what your daily, monthly and yearly priorities should be.
Another aspect of success, believe it or not, involves packaging. You may be aware that a business plan that is used as a finance-obtaining tool will succeed more if it features attractive layout and design. But having a document that’s pleasant to look at – not just text on a page – will work better even if it’s just used internally. That’s because the people who read it, including you, will have a greater sense of confidence that the ideas in it can be made to happen.
How a timeline helps make it all happen
But the one important aspect, that many business plans miss, is the element of time. Without a clear picture of what is to happen by what time, a business plan is just a wish-list.
The best way to help make sure that the business plan stays alive – and more importantly so that what’s in it comes to pass – is through including a timeline.
A timeline (or timetable, if you prefer) sets out the milestones of your business plan – the number of employees, number of locations, sales targets, net revenue expected and other targets – and indicates what date they are expected to be reached.
For example, let’s say you have a winning retail concept that you want to turn into a franchise. Maybe even a national franchise.
To do that, you need to determine what processes need to be implemented in order to manage a store like yours effectively. That, in turn, leads to a set of written procedures – such as the steps to be taken upon opening the store or on closing, how to make each of the products that are sold, and other aspects of success. Maybe then you need to establish a time by which you expect to have that first satellite operation running, maybe as a corporate-owned location, just to see what happens when you’re not on site to trouble-shoot all the time.
It could be that this sounds so complicated and intimidating that you never actually get your franchising idea off the ground.
Here’s how a timeline helps make your business plan happen:
It breaks down big, scary projects into smaller, bite-sized chunks you can actually do
It reassures you by pointing out that you don’t need to do everything right now
It moves you along because you see a deadline for one of those “chunks” coming up, so you can get working on it
Start with the end in mind, then work backward
This involves a 5 step process.
Get a firm image of your goal. Established business wisdom says to consider first where you want to be (say, 20 franchise outlets across the country, ten years from now) and then spell out in detail what that will look like. Going into detail gives you a more clear idea of what needs to be in place for that to happen. Set a date for that to happen.
Determine the big milestones along the way. This might include writing out the elements of success in your current business, creating written procedures, testing those procedures to see if they cover all reasonable contingencies, opening a second outlet to further test those procedures, selling your first franchise to someone you know already, and onwards.
Write out your timeline. It might be on paper, on a computerized document, on a calendar program that will remind you about deadlines, or whatever works for you. Maybe multiple formats will be a good way to keep you on track.
Implement. The rest is up to you and your team. Delegate tasks, outsource, do it yourself – but be sure to stay with your timeline.
Any business owner will eventually be faced with the need to sell their business.
It could happen when a medical change or injury makes it impossible to continue, and you need to sell to secure your family’s future. Or maybe an offer comes along that’s just too good to refuse.
Regardless of the reason, it’s always a good idea to take steps to make your business ready for sale at any time. And as Chapter Seven of the CFO Centre’s book “Scale Up” points out, many of those steps will help make your business life easier, less complicated and with fewer unpleasant surprises, right now and ongoing.
The CFO Centre report “Heading for a big exit”goes into detail on some of the steps you can take now to get the best possible offer for your business when the time comes – and make your life easier now as well. Here are five key points covered in more detail in that report:
A potential purchaser will want clarity around the question of who currently owns the business. If you’re the sole decision-maker in the company, it may be best to have all the shares in your name.
But if you want to reward long-time employees, and support their continued loyalty, you may want to grant or sell some shares to them. If that’s the case, a potential buyer will want to see that there is an effective shareholder’s agreement in place. This reduces uncertainty for the buyer.
If your business owns real estate, you need to understand that a buyer may view this as a problem – particularly if owning the land is not essential to the success of the business. Consider separating the property from the business, so that a potential owner has the option of avoiding a commitment to an asset that they may not want. One way to deal with this is to put the land into a holding company controlled by you, and then set up a lease agreement for the business to use the property.
Over the years your company has likely developed trademarks, patents, brands, and industrial processes that are important to the success of the business. You may not think of them as something that has value, however, anyone considering buying the company will want to be sure about the ownership of this intellectual property and its value. So, it may be good to have your company’s IP valued professionally – you may be able to increase the purchase price based on that valuation.
Many potential buyers will base their purchase decision on the expected ongoing cashflow of the business. So, they’ll want to know about how much of that cashflow comes through dependable contracts. But they’ll also need to know if those contracts will transfer to the new owner – and if a high proportion of the company’s income is due to the customer’s personal loyalty to the owner. Accordingly, it’s good to carry out an analysis of the company’s major customer contracts to see if the future business is sound. Because cashflow is so important in putting a value on a business, consider some of the points raised in our blog post “How your business can fly away from cash problems.”
Many owner-operated businesses are operated in a fairly ad-hoc way. If an idea sounds good, the owner relies on their intuition and experience to decide on the next steps.
Potential buyers need to know that there is a plan in place – including a budget each year that they can see closely matches what was actually spent. They need to know that there are not a lot of unnecessary expenses, such as a local softball team sponsorship that is due largely to the owner’s personal interest, rather than its marketing value.
This is one of the areas where an experienced financial professional from the CFO Centre can help. This person can work with you well ahead of time to build a business that is financially successful and therefore attractive to a potential buyer. You’ll also get help with finding out what potential problem areas might cause a potential buyer to lower their offer or just walk away, so you gain the most benefit from the hard work of building your company.
Maybe you see ride-hailing services like Uber and Lyft as arrogant bullies. Or, to you, they’re a breath of fresh air in a world held victim by over-regulated dinosaurs.
But whatever your view, you can’t deny that ride-hailing upended an entire industry. Some taxi companies have tried to compete with the upstarts through rideshare-like mobile apps allowing customers to choose vehicle options, pre-book rides, and pay by smartphone.
Why have ride-sharing services succeeded against well-entrenched opposition? They’re a new idea – but more importantly, they offer real benefits over the traditional taxicab. In short, they’re disruptive.
As we’ll see later, just being disruptive isn’t enough on its own, but it’s an essential part of success.
Disrupt your way to a better customer experience
To see how being “disruptive” works, consider one of the world’s oldest skills – what some parts of the world call “joinery” and others “cabinetry.” It’s about making furniture, cabinets for kitchens and bathrooms, and other fine woodwork. It’s a slow, meticulous process in which skilled people use tools that have changed little in centuries.
That is until someone crashed into this tradition-bound environment with a radical new approach to the business. As entrepreneur Alex Craster recounts in The CFO Centre’s book “Scale Up”, he’d already helped disrupt one industry – travel agencies, with the then-new idea of people booking their own travel online.
Craster talks of how he’d been pulled into managing his father’s failing joinery business. But he came to see opportunities for the firm to provide better services and meet new needs. He started using suppliers in Eastern Europe who were able to do highly skilled work at a fraction of the cost of UK suppliers. He also switched the focus of the firm, from making products into providing solutions to customer problems.
The result has been spectacular growth and even an invitation to supply services to Buckingham Palace.
Why is disruption like this such an important part of business success today? It has to do with two concepts – something that’s new, and something that’s better.
Grab the attention of people you want to attract
Let’s start with “new.”
One well-made kitchen cabinet is pretty much like any other well-made kitchen cabinet. In some ways, cabinetry is a commodity – it’s hard for a customer to tell one company’s offering from another’s. So it becomes a race to the bottom regarding prices.
To catch the attention of potential customers, Alex Craster’s company had to offer something that was new to the market – providing a service in which company representatives sat down with potential customers to get an idea of their problems. That might involve a hotel that wanted to attract a higher level of clientele. This approach made the company newsworthy, so it gained more word-of-mouth publicity.
The company’s approach made it more attractive to the traditional media. But it also had the potential to attract what is becoming a more important kind of attention, from social media including bloggers and Instagrammers.
This meant that just having a new approach put the company’s name in front of potential customers.
Holding the attention of prospective customers
Once you have the attention of the people you want to attract, how do you hold them? By offering something they will value – something that’s not just new, but demonstrably better than what they have now.
Alex Craster’s approach, which included a consultation and understanding customers’ business objectives, was a big step towards helping a hotel meet its goals. Those may have included being able to charge a higher room rate and improving the hotel’s all-important RevPAR (Revenue Per Available Room) metric.
So too, you need to be sure that your business idea offers real benefit to the people you want to serve.
Start by understanding their situation – some of the most pressing problems they are facing. That matters, because unless you can present them with a solution to one of their most pressing problems, or a step towards a solution, they’re not going to pay attention.
Then, instead of choosing a service or product to offer, you choose a problem to work on – such as increasing a hotel’s RevPAR.
Your approach must then revolve around solving that problem, with your product or service being part of that solution. If you’re offering something that is distinctly better than the solutions your prospective customers have on hand, you’ll have a much greater chance of success.
Planning is essential
All of this – finding something new and better – doesn’t just happen. You need to think it through. It takes time to match the assets you have – your skills, the skills of the people you work with, experience, and other factors – to the needs of potential customers.
Many growing companies find that the best way to make sure they have the financial resources they need is through a skilled finance professional – a Chief Financial Officer – who can help them understand their financial picture, and if necessary, get access to other financing that can help to seize on the opportunities to grow in a “disruptive” way.
For many companies, their best option is to have an experienced CFO available to them, on a long-term basis, but without the need to pay the compensation that a full-time professional would expect. By utilizing a part-time CFO, they have the skill set they need available to them, but in a much more cost-effective manner.
To make sure you’re being disruptive within your market, planning is key. Failing to plan is like planning to fail. To learn more about how you can take your business to the next level, please download our e-book, “Business planning & strategy implementation,” which will walk you through the steps involved in business planning.
Venture Capitalists, angel investors, bankers and private-equity managers may not agree on much, but there is one idea they share. They’d rather put their money behind a stellar management team even if it has a just-okay idea than put it into a brilliant idea implemented by a ho-hum management team.
If your company is seeking to break out of startup mode and into a period of aggressive growth, how do you go about building that stellar management team? You may need people with skill-sets, experience, and connections that are a few levels above those of the people who have helped you get this far.
It’s sort of like when you graduated from university and its pajamas-friendly environment and had to buy your first real ‘work’ outfit to start your “grown-up” wardrobe. What should be the first piece to add to your ‘collection’ of your management team that will take your company to the next level?
A CFO is the key to unlocking your future
You might think it’s best to start by recruiting top-level talent in Operations, Sales or R&D. And those functions are vital. But the foundation to it all is finance. Remember that “money makes the world go ’round.”
Looked at another way, a lack of money can stop your world from turning. What signs could exist to indicate that money issues might hold you back?
Your bank keeps calling to say that you’re close to violating your covenants on existing credit
Your head of Accounting shows up at your door a few too many times asking where the cash to cover payroll is
You don’t have a clear idea of what financial resources you have available in the near or long term, to fund working capital or investments
The account manager you’ve worked with for years gets transferred – and you find you have nobody at your bank to advocate for you
If you have the money issue solved, you’re free to implement your growth ideas – research new products, expand into new markets, offer new products to existing customers – confident that you have the financing to allow those ideas to happen. But how do you meet your financial needs in a way that works for your still-growing company?
3 ways to get the CFO you need
There are several ways to sweeten a cup of coffee – sugar, honey or a vast array of artificial and “natural” sweeteners. In the same way, there’s more than one way to get the financial expertise you need.
Promote from within: You can take someone who knows your financial picture – your head of Accounting, say – and move this person into the CFO role. You need to be sure that the person has the right skills and connections, because what makes a good CFO is different from what makes a good Controller. And, you need to back-fill the role that this person was promoted from.
Hire a CFO from outside: The second way involves hiring a full-time CFO from outside your organization. This person will come with the skills and connections you need, but at a cost – literally. The amount you must pay to attract top talent can throttle your company’s cash flow, exactly the problem you want to solve. And, top CFO talent may well be wasted on a midsize company. After the setting-up process is complete, your new CFO may get bored and start taking calls and meetings with search consultants.
Hire a part-time CFO: This solution (which is one that The CFO Centre provides) can give you the best of both worlds. You get an experienced CFO, often with a track record in your industry, and you don’t need to pay anything like the salary and benefits package expected by a full-time employee. Many experienced CFOs like having a part-time position – it gives them the flexibility and work-life balance they want, while still being able to get the satisfaction of helping great businesses succeed.
Our experience at The CFO Centre is that any company can benefit from someone in the CFO role, whether it is part-time or full-time. How that role is provided depends on the circumstances.
Feel free to contact us to see what we can contribute towards your thoughts regarding your company’s future.
If you have ambitions to grow your small company into a large one, you need to make sure it has room to grow.
To see how that works, consider that humble box of baking soda in your refrigerator. Baking soda was originally developed for, well, baking. It solved a baker’s problem – the difficulty of getting baked goods to rise. But then, people discovered other problems the product solved – diaper rash, kitchen fires, grease stains … and refrigerator odors.
Manufacturers such as Arm & Hammer found demand for their product that was quite unrelated to their company’s original idea.
But what Arm & Hammer found out indirectly about solving wider and bigger problems, you need to do intentionally. How do you do that? Here’s a three-step process.
1. What problem(s) are you solving now?
You may have started your business to provide a specific product (such as baking soda) or service. But your customers may look at the situation quite differently. They’re looking to buy a solution to a problem they’re facing, like diaper rash or a carpet stain. Sometimes, it’s more than one problem – a box of baking soda helps bake cookies and helps clean the kitchen counter.
So, you need to get a clear idea of what problems you’re solving for your customers now. To do this, consult with your customers directly, get input from your sales team, and see what people are saying about you on social media.
Then ask yourself: are the problems we’re solving now the problems that will help us continue to grow? Should we be solving different, maybe bigger, problems?
2. Find the right bigger problems to solve
The world is full of bigger problems – climate change, overpopulation, civil unrest, and many more. But how do you find the right bigger problems? Some ideas that may guide your quest:
Do people with money feel this problem? If you’re running a business, you need to earn revenue – so the problems you solve must involve people who have the money to pay you. And, the problems must be pressing – those ideal customers must actually feel the pain and urgency enough to want to pay you to solve those problems for them
Does this problem give meaning and urgency to your life? As well as pressing on your customers, the problems you’re solving must motivate you. They have to help you get going in the morning and stay at it all day. Only then will you be able to motivate others on your team, even those who don’t interact directly with customers, to help solve those problems too.
Does this problem have staying power? You need a problem that will continue – and better yet, continue to grow. Only then will you have the basis for a business that has sustainability.
Now, let’s consider how you can bake that sustainability into your business.
3. Develop a solution that’s disruptive
If your answer to the problem of refrigerator odors is another box of baking soda, you may need to re-think your approach. You’ll be struggling against a well-entrenched competitor.
Instead, the solution you offer must be disruptive – in other words, it must be unusual and offer new solutions to existing problems. One reason is that if it’s a big enough problem, it won’t be solvable by current thinking, or someone would have solved it already. And, you need to seize attention, and offer an advantage compelling enough so that potential customers will say, “I want some of that.”
Our work at the CFO Centre is something like that. We saw a problem – entrepreneurs whose dreams crash to earth because they don’t have the financial lift they need under their wings. And we saw that many companies can’t afford a full-time experienced CFO (that cash problem again), and what’s more, they don’t need one.
What many (we like to think all) growing companies can use is ongoing access to a CFO’s ability to clear away the financial stumbling blocks, but without a full-time CFO’s cost. So was born our “fractional” CFO – a permanent, but part-time, financial advisor.
That’s our disruptive solution.
One thing we’ve found out is the importance of having the cash you need to build a way to solve the “big problem” you’ve decided to focus on. Without cash, it’s like you’re trying to walk when you need to fly. To learn more about the importance of cash flow, the reasons for it (such as slow-paying customers, high fixed costs), and some steps you can take to resolve them, download our free e-book, simply titled “Cashflow.”
“We have an allergic attitude to failure,” he says. “We try to avoid it, cover it up and airbrush it out of our lives.
“For centuries, errors of all kinds have been considered embarrassing, morally egregious, almost dirty.
“This conception still lingers today. It is why … doctors reframe mistakes, why politicians resist running rigorous tests on their policies, and why blame and scapegoating are so endemic.”
This notion of failure needs to change, he writes. “We have to conceptualize it not as dirty and embarrassing, but as bracing and educative.”
That’s because success in business (as well as in sport and in our personal lives) can only happen when mistakes are confronted and learned from and there’s a climate in which it’s safe to fail.
It’s what the airline industry has done so successfully, he says. Instead of concealing failure, the aviation industry has a system where failure is inherently valuable and data-rich, says Syed.
In fact, his ‘Black box thinking’ refers to the black box data recorders that all aircraft must carry to provide information in case of accidents. One box records instructions that are sent to all onboard electronic systems and the other records the voices in the cockpit.
“Mistakes are not stigmatized, but regarded as learning opportunities,” he says. After a crash, an independent team investigates.
“The interested parties are given every reason to cooperate since the evidence compiled by the [independent] accident investigation branch is inadmissible in court proceedings. This increases the likelihood of full disclosure.”
What’s more, after an investigation into an accident is completed, the report is made available for everyone.
“Every pilot in the world has free access to the data,” writes Syed. “This enables everyone to learn from the mistake, rather than just a single crew, or a single airline, or a single nation.”
Syed gives the example of United Airlines Flight 173 which took off from JFK International airport in New York on December 28, 1978, bound for Portland Oregon.
Just before the airplane went to land, the flight crew became convinced the landing gear hadn’t locked into place. They then spent so long trying to fix the problem that they ran out of fuel and had to crash-land into a residential area, killing eight people onboard.
An investigation discovered that the flight engineer hadn’t been assertive enough in telling the Captain the fuel was running low. The Captain meantime was obsessed with trying to fix the landing gear problem and avoid giving passengers a bumpy landing.
As it turned out there had not been a problem with the landing gear in the first place.
Afterwards, new protocols were put in place and training methods were revised. As a result, nothing quite as bad has happened again.
So much so that flying on airplanes is now safer than any other form of travel because the industry investigates and learns from its mistakes.
“Openness and learning rather than blaming is the instinctive response – and system safety has been the greatest beneficiary,” Syed told Director magazine.
Dyson Vacuum Cleaners
Sir James, the designer, inventor, and entrepreneur, is another committed to learning from failure.
He made 5,127 prototypes of his bagless vacuum cleaner before he got it right. This practice has obviously paid off because Sir James is now worth more than £3 billion.
“Creative breakthroughs always begin with multiple failures,” says Sir James. “…True invention lies in the understanding and overcoming of these failures, which we must learn to embrace.”
Without them, innovations won’t happen, he says. “Failures feed the imagination. You cannot have the one without the other.”
Great inventors always develop their insights not from an appraisal of how good everything is, but from what is going wrong, Sayed wrote in the Daily Mail.
Using Failure To Grow Your Business
Obviously, failure is only useful if it’s acted upon. “You can build motivation by breaking down the idea that we can all be perfect on the one hand, and by building up the idea that we can get better with good feedback and practice on the other,” says Syed.
Some of the world’s most innovative organizations like Pixar, the Mercedes F1 Team, and Google “interrogate errors as part of their strategy for future success.”
Take Google’s decision to test which shade of blue in its advertising links in Gmail and Google search worked best, for example.
Rather than ask its designers to choose the shade of blue for those links, Google decided to run tests known as ‘1% experiments in which 1% of users were shown one blue and another in which 1% of users were shown another blue. Then Google went further and ran 40 other experiments showing all the shades of blue.
It paid off: Google found the perfect shade of blue (the one that users were more likely to click on) and made an extra $200 million a year in revenue.
Why Don’t Companies Embrace Failure?
One of the biggest problems in business is the collective attitude we have to failure, says Syed.
“We love to think of ourselves as smart people, so we find mistakes, failure and suboptimal outcomes challenging to our egos,” Syed said in an interview with Director magazine. “But the reality is, when we’re involved in complex areas of human endeavor—and business is very complex—our ideas and actions not being perfect is an inevitability.
“If we’re threatened by our mistakes, and become prickly when people mention them, we don’t learn from them. We need to eradicate the idea that smart people don’t make mistakes.”
To really be successful, businesses need to encourage a company-wide failure-embracing culture which in turn will create a “process of dynamic change and adaptation”.
“Success happens through a willingness to engage with, and change as a result of, our failings. Get that right and everything else falls into place,” he says.
If you would like to download the CFO Centre’s report on Risk you can do so here
You can also arrange a complimentary 1:1 Finance Breakthrough Session with one of Canada’s top CFO here