Whether they realize it, all businesses use some form of ERP (Enterprise Resource Planning) system, it just may be that one or more components are manual or disjointed. An effective ERP system provides greater team efficiency, continuity of information, enhanced visibility into the business and data security. More formal systems come in all shapes and sizes, both generic and highly specialized with increasingly cloud-based as well as server-based options. In evaluating a new ERP system, there are several key considerations to take into account:
Do I Truly Need to Make a Change?
• Why is the current system inadequate? Does the system not suffice, or is data not being inputted or used timely or accurately? Is the system the problem, or are communication breakdowns between departments causing issues? Is the system maxed out, or are there opportunities for advanced training?
• Is the ROI there? New ERP systems have an ongoing cost associated with them, but also can involve sizeable 3rd party implementation costs, and time investment of the internal team. Based on these costs, is there enough ROI to make a change now or can you find ways to bridge what you have until human and financial resources are available to execute properly.
What We Have vs. What We Need
• Who are the users? Who should or could be using a system? Systems like this impact multiple people and departments. ERPs rely upon the interaction of human capital and technology. Understanding who needs to use the system, how often, why, and for what are essential to scoping out needs.
• Form an internal implementation team with people from all the key departments in your company. What are their “must haves” in a new system vs. the “nice to haves”. This initial assessment needs to be thorough – a missed important function/output can be very expensive to add down the road.
• What is the desired output of the system? And this can vary across the business. What reports are needed? Can the system provide metrics and dashboards? What about the ease of entry and access to data? How digestible of a form is it in? Too often, we see companies with more data than they know what to do with, or almost none at all. This is an opportunity to decide what output is right for you and your team.
How to Choose
• What is your budget? With the proliferation of cloud-based systems, the cost of ERPs has come down dramatically. For example, many smaller companies are using platforms like Xero with an open API that allows multiple other programs to link together to form an affordable ERP. There are solid options for smaller budgets. More robust ERP’s can involve an investment of well over $100,000. How much can you truly afford to spend? Narrow the list of options based on that.
• Industry Specific vs. Off Shelf – Some industries have very good industry specific software platforms. That can be a big advantage, but also limiting.
• Do thorough demos – Any quality system has demos available to dive deeper into system capabilities and understand implications and how features can be used for your specific business. This is often one of the key go/no go decision points.
We have seen ERPs with well-organized evaluation and implementation processes provide a return on investment for companies many times over. Unfortunately, we have also seen systems that were not well thought out, leading to frustration, lost productivity and in more than one case, situations where six figure investments were scrapped in favor of starting over. Thoughtful planning can be the difference.
One of the primary challenges we see in working with growing small and midsize businesses is managing cash. The simple reality is growth can burn cash, so a healthy P&L can accompany poor cash flow. Businesses don’t fail when they lose money, they fail when they literally cannot pay their bills – and even when utilizing outside capital such as equity partners and banks, without properly managing cash, long term viability in a growth mode can be very difficult.
There are however a number of steps that growing companies can take to better manage cash flow.
1) Have a planning mindset – No different than managing a personal budget, a business has to dictate where its cash is going. Be intentional and don’t make a decision unless you know you have the cash to spend.
2) Cash Flow Forecast – Forecasting cash is essential and one best practice is a 13 week forecast. By laying out expected inflows and outflows, this allows visibility to make sure that a cash flow decision tomorrow won’t result in an unexpected cash crunch down the road.
3) Conservative estimate on collections – A good billing month does not necessarily mean collections are great as well. And a decline in collections can cause chaos in a business. There is no crystal ball, but a conservative approach to collections when forecasting can help mitigate a crunch. Don’t just look at your standard customer terms, but under what terms do you actually collect for a customer/line of business? Use historical averages, and maybe pull back from there even a little to be safe.
4) Plan for infrequent expenses – The recurring expenses that pop up every month are fairly easy to predict, such as payroll, rent, etc. Not so are quarterly or annual expenses or onetime purchases that arise. A good best practice is to reserve cash monthly so that when a big payment comes up, the cash is “saved” to manage it without disrupting everyday business.
5) Have cash reserves – Plan for a rainy day. Disruptions in business are real – maybe a key customer delays payments or there is a disruption in your supply chain and cash is locked up in inventory. How many days can your business continue to operate with available cash on hand? If the business has little to no cash reserves, part of that cash flow forecast should include saving a little each month to build one.
Proactive management of cash can be the difference in allowing a growing business to survive and thrive. With it, there is flexibility, strength and a sleep at night factor for a business owner. The absence can easily stall growth, or worse.
The KPI is a common buzzword in business, but what is it, and more importantly, how do you use it to manage your business? Used properly, Key Performance Indicators, or KPIs, allow a business owner and management team to evaluate the overall health of a business, identify areas for corrective action, and make decisions on important opportunities.
One of the most common challenges we hear from business owners is their lack of information to make decisions. The brilliant business mind Peter Drucker summed things up by saying, “what gets measured gets managed.” Very sage words, but easier said than done. Too often, business owners are stuck between having too little information, perhaps just a P&L, or so much data that it is impossible to comb through and determine what truly matters in their business. The answer to this problem is a well-designed set of KPIs.
So where do you start? In every business, there are primary drivers that determine the difference between success and failure. An organized summary of these drivers is often referred to as a dashboard. And that dashboard is an overall gauge of the health of the business. It is not very different than the dash in your car. A good KPI system serves like a maintenance light, indicating that there is something, if not multiple things, in your business that need a tune up. And if ignored for too long, the wheels can start to fall off.
There is no “right” number of KPIs. Two is too few and twenty is probably too many. On average, somewhere between six and twelve is probably a good target, but what is more important than the number of indicators is the quality of the indicators. I would ask two key questions about any KPI: can you trust the underlying data, and do the measurements allow you to confidently take action that will result in a change in your business? If the answer to both of those is yes, you almost certainly have a good KPI.
Key Rules of Thumb
• The business environment is constantly evolving; so, too, should the KPI dashboard. When reviewing, not only ask what the dashboard is telling you, but ask if it is telling you something no longer relevant, or are you possibly missing something relevant altogether? When first building a dashboard, establish a framework and then regularly refine it over time. KPIs may fall off and others may be added. Goals can, and should, change as well.
• Every business is unique; so, too, should be the dashboard or menu of KPIs and the goals for each measurement. You can certainly rely upon industry data and company history. However, a company that is twice the size of another will almost certainly have different realistic targets. And if you have a new product line compared to two years ago, are historical numbers a good barometer for the future?
• Have regular meetings to review the KPIs. For some metrics, that may mean weekly, but in most cases, at a minimum, a monthly review is necessary. Review and determine what the metrics are telling you about the business.
• Ensure a balanced view. Monitor KPIs that look backward (i.e. Units Sold) as well as forward looking (i.e. Opportunities in Pipeline). Look not only at the Income Statement, but the Balance Sheet as well (i.e. Days Cash on Hand). What about productivity? For a manufacturing company, it can be very valuable to track how many labor hours it takes to manufacture a widget.
• The KPIs need to be able to be calculated without too much effort. If your team must spend 5 hours collecting the data to calculate one metric, you should ask yourself if that is the right metric.
• Keep things in context. In a business that has any cyclicality for example, the measurements may change materially on a monthly basis and so, too, should the goal. Think of the gas gauge in your ca. Being on empty with 40 miles to drive is a lot different from being on empty pulling into a gas station. For a seasonal manufacturing company, inventory levels might build up during slow sales seasons, but if the labor hours required to manufacture that inventory goes up, labor many not be working efficiently, chewing up profit and cash at a time when you need to conserve most.
• TAKE ACTION! If all indicators are positive, but the pipeline is bare, that recent success could be short-lived. Having this information allows you to place additional focus on sales. If margins are shrinking due to market conditions, it may be time to cut spending and conserve cash.
When done correctly, KPIs can provide a CEO with the confidence to make key decisions and the visibility to avoid pitfalls that await in the future.
As we near the fourth quarter for calendar year businesses, most small and mid-size companies are starting to form plans for the new year. Many companies go so far as to have an actual budget, however too often those same budgets lose either their usefulness or worse still, provide a false sense of either panic or security.
Especially in the case of growing businesses, change is at the very core of many companies. This means that last year’s assumptions may not work anymore. Perhaps keeping gross margins flat and adding 5% to last year’s payroll costs is not a good representation of the upcoming year. A solid budget must be a living document, not just something that sits in a drawer. To do that, it must be measurable against actual performance, retaining the ability to meaningfully evaluate positives and negatives over time. And in a good budget process, companies should constantly be asking an important question – why?
1) Revenue – Building Blocks
At its core, what really drives revenue in your business? And based on that, what does that mean for the new year? What will happen to the price per unit of sales? Volume sold? The number of customers – both existing and new? So many financial items trickle down from revenue, a thoughtful, deliberate evaluation here is essential.
2) Infrastructure – What is Needed to Support the Revenue?
In order to drive the thoughtful revenue numbers above, what is needed from your people, equipment and other resources? Do you have the capacity to reach the numbers needed? This could mean more salespeople to generate new customers, more operations people to execute on the product, or another piece of machinery (and people to run it) to increase throughput.
3) One-Time Expenses and Purchases
It could be new software, a recruiting fee for a big hire, a new piece of equipment or legal costs, but large, infrequent expenses and purchases, and more importantly their effects, are often overlooked in budgets. Where possible, the timing of these large outflows should be planned for to a large degree to ensure the business and its resources can absorb it. Is simply taking the expected total and dividing its cost over 12 months an effective way to plan? Possibly, but it can also result in negative consequences – it is likely best to plan for some lumpiness in the timing.
4) The Unseen Costs
As we have talked about the trickle down effects in the budget, it is easy to forget unseen costs in the business. For any business with debt, new purchases, working capital needs and/or changing interest rates can all have an effect on the cost of capital for a business. What about carrying costs? If sitting on more inventory, what is the impact of that? Maybe supplier or customer terms are changing – these can all have a sneaky impact on numbers moving forward.
5) Get the Team Involved
A sound budget process needs input from the key team members involved in executing it. Even in small businesses, getting three or four people involved can ensure a thorough process with multiple viewpoints and evaluation from different perspectives. A solid budget needs input from the CEO, sales, operations, and finance.
6) Can You Justify it?
To properly utilize a sound budget, your team should be measured by it, you should be making decisions with and against it, and banks and other external stakeholders should be able to scrutinize it, with readily available answers. A budget that is too aggressive will only lead to frustration, from both leadership and the team on the ground executing. A budget that is too conservative could lower expectations and create lost opportunity.
An effective budget should be well thought out, all-encompassing and reasonable. And when it is so, the ability to truly measure against is an essential key to good management decision making.