Why You Need a Business Plan & How to Prepare It

Virtually all businesses, within a corporate structure and the majority of larger private businesses, have well-developed business plans that incorporate clearly defined strategic objectives, detailed plans about how those objectives will be achieved and financial projections, including forecasts for sales, profit & loss account, balance sheet and cash flow. None of this guarantees success but it provides a road map, with a clear destination and a properly defined route for the business to follow. These types of businesses usually put considerable time and effort into the preparation of their business plans because they know it significantly improves the likelihood of building and/or maintaining successful market positions, strong balance sheets and sustainable competitive advantage.

By contrast, many small and medium-sized businesses spend very little time thinking through and preparing business plans and, in some cases, they spend none at all. As a result they tend to drift. The business is managed from day-to-day and goes from one year to the next, sometimes moving forward and sometimes going backwards but, in reality, making little or no progress.

Initially, many start-ups can show considerable progress, as they establish their market position but, more often than not, without a business plan as a blue print, they generally reach an early plateau, from which they find it difficult to progress. To be fair, this suits some business owners but, for many, it creates enormous stress, as they are continually living with a very uncertain future and less personal income than they require. And yet, preparing a worthwhile and effective business plan doesn’t have to be a massive project that distracts the business owner away from the action for too long; and actually, standing back for a short time to work on a business plan, almost always proves highly beneficial for the business and can be very therapeutic for the business owner.

So why don’t business owners stand back more? In my experience, the usual reason is that they think “no one else can do what they do” or no one else can do what they do as well as they do it”. So they micromanage everything and get increasingly bogged down and stressed out. In reality, many of the day-to-day activities can be done quicker and more effectively by their staff, if only the business owner would just let go. I’ve developed this theme in another article but, for the time being, let’s assume that the business owner has let go and is now about to work on a new business plan. How does she or he go about it?

The first thing is to look outside the business and see what’s going on in the market. For most small and medium-sized businesses, this doesn’t require a lot of detailed market research, it’s more about using suppliers, customers, competitors, trade organisations, trade publications and, of course, your own staff, who interface with customers. Using all these sources and any others that may also be helpful, try to establish what’s actually happening. Which market sectors and product groups are growing and which are declining? What’s happening with prices across those market sectors and product groups? What are your competitors doing? What quality standards and service levels are the norm? What technological developments are occurring? What legislative and regulatory factors are likely to affect you? In practice you’ll know much of this anyway; so it’s as much about standing back and putting everything into context and creating a balanced and objective picture, as it is about searching for new market data and intelligence.

The next step is to look at your own business and make an honest and objective assessment of how well it interfaces with the market. Are you capitalising on the sectors and products that are in a growth phase? Are you exposed to market sectors and products that are in decline? Are you under-pricing and giving away margin unnecessarily? Are you over-pricing and uncompetitive? How do you shape up against your key competitors? Where do you have competitive advantages over them? And where do they have competitive advantages over you? Are your quality standards and service levels meeting market expectations? Are you investing in appropriate technologies? Are you complying with all appropriate legislative and regulatory requirements? And are you running ahead of your competitors or lagging behind them?

You can now compare your business with the market by undertaking a simple SWOT analysis (Strengths, Weaknesses, Opportunities and Threats). You’ll very quickly see where your business’s strengths and weaknesses lie and you’ll clarify where the threats and opportunities, presented by the market, are likely to be.

Once your SWOT analysis has been completed, you can start to develop your strategy. Generally, you’ll want to build on areas, where you’re already strong. The more difficult decisions are likely to be around strategies for areas of weakness. How are you going to deal with these? Alongside this you’ll need to consider the threats to the business, from wherever they may come and decide how you are going to meet them. Then lastly, you’ll need to look at the opportunities the market is presenting and decide whether you should exploit any of them.

At this stage, you’ll probably have a lot of potential ideas, which collectively will be unaffordable and which, if you tried to implement them all immediately, would simply overwhelm the business. So you need to start establishing priorities and time frames; and as you do that, you’ll create the framework for your business plan, which would probably be built over a three-year period.

With the framework complete, it’s time to run some numbers, which would normally include projections for sales, profit & loss account, balance sheet and cash flow. The first year of the plan, which is your next full financial year, is likely to become the budget for that year. The second and third years will be increasingly aspirational. So this process needs to be undertaken on an annual basis, which means you’re always working with a business plan on a rolling three year basis.

It is highly likely that the first time you run your numbers, the projections will look completely unrealistic; unachievable, unaffordable etc. So you’ll need to adjust and refine; correcting errors; improving the accuracy of some of your assumptions; scaling some things down; scaling other things up; adjusting time frames etc. until you have a realistic and achievable plan. At this stage you’ll have your road map, with a clear destination and a properly defined route for the business to follow. As I stated at the beginning of this article, it won’t guarantee you success, but it will make success a considerably easier and more likely outcome.

If you haven’t been through this type of process before, you’ll probably need some help. If your business is big enough to employ its own management accountant, he/she should be able to run the numbers; if not, you may need to engage your external accountants. But, in a sense the numbers are the easy part. It’s the development of the strategy that leads up to the point where you can run the numbers that is important to get right. And to do that, you need to debate all the ideas, challenge all the assumptions and make sure that the strategic framework is realistic, robust and achievable. For many small and medium-sized businesses this isn’t always easy because it can be difficult for employees to challenge the boss’s ideas and there is no one else to do so. That’s where you need help from an experienced independent industry expert. Some small and medium-sized businesses have a non-executive director; and this is an area where he/she can play a very important role. If you don’t have a non-exec, there are invariably a number of independent business consultants who could be brought in. However, if this is something you are considering, do ensure that the person you select has had senior management experience within your industry and has a good understanding of your type of business and the market, in which it operates.

Once you have your business plan, it should become a key reference point for you and your management team. It should be the yardstick by which you measure performance and there should be regular monthly reviews to see how the business is performing against the plan. In areas where the business is under performing against plan you’ll need to consider what remedial action is required. Where the business is over performing, you’ll need to consider whether and how this can be further exploited.

Once you’ve started to use your business plan in this way, you’ll wonder how you ever managed before. It will provide focus for many of your management decisions; it will provide direction for your managers and staff; and it will help you to build a much more profitable and sustainable business.

If you’d like to discuss any of the issues raised in this article, in more detail, please feel free to contact me.

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The UK Window Industry: Balance Sheets & Quicksand

Whilst there are some very successful businesses within the UK window industry, unfortunately, too many are seriously challenged due to their weak balance sheets. This may not have mattered so much during the long years of growth and comparative prosperity but, in today’s saturated market, it’s a crippling disease that the industry ignores at it peril.

Let me support this statement with some facts.

The Plimsoll Report analyses the financial performance of the 1,000 largest businesses in the industry. The table below shows some interesting data from their latest report, published in April 2014.Figure 1

Only 368 of the 1,000 largest companies saw their net worth increase during the previous year and 160 saw theirs remain static. So less than 50% actually increased their net worth. The report also shows that the average net profit for this group of businesses, during the last year was 2.3% of sales, which is a very low average indeed and suggests that there are a significant number of serious loss makers, balancing out a few star performers.

The pie chart below shows Plimsoll’s categorisation of these 1,000 businesses in terms of their strength and sustainability. 227 are classified as being “in danger” and another 90 categorised as “caution”.Figure 2

So, although 578 are either strong or good, a very large proportion of these businesses are relatively weak and, as we see from the above table, are either stagnant or declining.

The report also points to increasing polarisation between some highly successful businesses, building on their success and, at the other extreme, a very significant number of businesses in decline, to the extent that, without some form of intervention, they are at an increasing risk of failure.

Remember, we’re talking about the top 1,000 businesses in the industry, which according to Insight Data has around 14,000 businesses active within it. So, if this is the picture painted of the top 1,000, it’s fair to assume that the collective position of the smaller businesses is even worse.

To test this hypothesis, I undertook a small experiment.

From the GGF website I selected 10 businesses that were GGF members. I disregarded the larger names that would have been part of Plimsoll’s top 1,000 and I also disregarded all smaller businesses, of which I had any prior knowledge. So all ten that I selected were completely unknown to me; but to try and provide some regional balance, I ensured that my selection was distributed around the country. Having made my selection – and it’s important to note that I selected the companies, without any prior knowledge of their financial status – I then obtained their latest accounts from Companies House. For all but one company, the accounts were abbreviated, in line with small company rules.

The table below shows, in an anonymised format, some key balance sheet figures for all ten companies.Figure 3

Of the ten, there are two really good businesses (Company A & Company B) with strong or fairly strong fixed asset bases, good liquidity, represented by high net current assets, and significant shareholders’ funds (net assets). What isn’t shown, in the table, is the fact that Company A substantially increased its net worth over the previous year. So here we see two businesses in comparatively strong positions.

By contrast, Company J is balance sheet insolvent, having net liabilities of circa £20k. It’s difficult to tell from abbreviated accounts how the business is able to continue trading. It has net current liabilities of £30k, indicating a significant liquidity problem; and it has minimal fixed assets of £12k. So it’s either hanging on by the skin of its teeth, lurching form crisis to crisis, or it’s being supported by a kindly creditor or shareholder. Realistically, this business needs to embark on a major transformation strategy, which, in the absence of any significant cash, may be very difficult. But without this, the prognosis is unlikely to be very good.

The remaining seven businesses are all solvent, from a balance sheet perspective; but their nets assets (shareholders’ funds) range from virtually nothing to not a great deal; so none of them is in a strong financial position and two of them, Companies G and I, have net current liabilities, suggesting a very tight liquidity issue. Of the seven, only Company G has significant fixed assets; but that’s offset by its net current liabilities.

Based on this analysis, I’ve classified 20% as stars or stronger performers, 40% as chugging along but quite vulnerable, 30% as more seriously challenged and 10% as insolvent. This is a significantly worse position than that shown by Plimsoll for the top 1,000 companies. But if the systems companies and some of the large trade fabricators were to analyse the balance sheets of the companies, making up their customer networks, I have little doubt that they would find a very similar pattern. And this is the nub of the industry’s problem. We have a comparatively small number of larger capital intensive players, at the core, dependent on supply chains that are built on quicksand.

Roughly, 80% of the industry’s output to the final customer is via these small businesses, 80% of which range between vulnerable or insolvent; and that isn’t a foundation for a successful long term future.

So what can we do about it?

In my view we need to consider this very serious challenge on two distinct levels, namely strategic and cultural.

At the strategic level we need to move away from the current laissez-faire supplier-customer relationships, with each level of the supply chain and each business, within the supply chain, doing its own thing, in its own way, and often not very well. And we need to move towards strategic alliances that enable entire supply chains to act in a co-ordinated way, based on common standards, systems and processes and under the umbrella of a single brand.

A homeowner in Newcastle upon Tyne, buying from a fabricator/installer of Systems Company X should receive the same product, quality and service levels as a homeowner in Truro, buying from the Systems Company X fabricator/installer in Cornwall. The processes and systems deployed should be identical throughout; and the total brand experience should be exactly the same, just as it would be if these two customers were buying from a large national brand such as Everest or Anglian.

I’ve waxed lyrical, in previous articles, about the issue of small businesses in our industry having no brand, on which to base their business/marketing strategies. The systems companies and large trade fabricators have commoditised the product to an unprecedented extent; and to an extent that does not exist in other building product or home improvement markets. Other than the 20%, or so, held by the large national brands, most of the market is price driven, with an unrealistic belief that good selling can deliver premium prices in the absence of a brand. Good sales reps can undoubtedly achieve higher prices than poorer sales reps; but there aren’t enough of them; training is a never ending journey because of the high turnover rate, within sales forces; and, in any case, the higher rates that the good reps do achieve are relative to the levels of their own sales forces not to the levels of a premium brand.

It’s no wonder that we have so many unprofitable or marginally profitable small businesses within the industry. On their own, they’re not big enough to develop strong brand positions. They rely on local reputation, which is very difficult when, at best, their product is only purchased, by the end user, a few times in a lifetime. Some do break through to become significant local or regional brands; but these are a small minority and, even then, their own perceptions of their brand strength can sometimes be considerably greater than an independent brand recognition survey would assess them to be. Many of these small businesses are left, by the systems companies and large fabricators, to fend for themselves, often without the management and business skills that they need to run a successful, profitable business.

There can be several different ways of creating more cohesive networks under a single brand; and the precise structure is not the key issue. However, there are four important requirements.

The first is that there is a core organisation, at the heart of the network, that implements and monitors performance standards over the product range, productivity, operational efficiency, quality, systems, process and service levels. This could be a systems company, a large fabricator or some other third party; but all businesses, within the network, must be contractually bound to adhere to those standards.

The second is that each business, within the network, must have real and meaningful business support available to it. This doesn’t just mean marketing support of one sort or another. It means that they need support that will enable them to manage their businesses better, achieve high levels of operational performance, make good profits and build strong balance sheets. Everything from HR to PR; from production to installation; from financial control to administration; from IT to process and systems; from management to organisation structure. Support in all of these areas needs to be available to help the businesses, within the network, build on their strengths and really get to grips with their weaknesses.

The third is that the whole organisation must go to market under a single brand, with co-ordinated advertising, PR and lead generation strategies; albeit tailored to suit local circumstances. This could mean a franchise type arrangement, where the franchisees only use the core brand e.g. McDonalds or Body Shop; or it could be a dual brand with an identifiable independent business selling a branded product range – System X from ABC Windows. Either way, there should be a single, state of the art website, enabling the brand to be properly managed, developed and controlled, rather than many small, often not very good, websites with a wide range of uncoordinated brand messages, giving rise to hopelessly confused brand values.

The fourth is that all this has to be paid for; and each level of the supply chain – systems company, trade fabricator and retailer/installer – must accept their share of the cost. Again, there are many different ways of achieving this; but one thing is for sure, neither the systems companies nor the large trade fabricators can fund it on their own; so it must be a cost to the entire network, but proportional to each layer of the supply chain and to each business within it.

Developing a network with a good, well managed product range, supplied through a group of disciplined businesses, all optimising their operational performance and service levels, will bring significant financial rewards at all levels of the supply chain. And if this happens under a strong brand, the network, as a whole, can determine where it wants to position itself in the market and the price levels appropriate to that position.

This last point is incredibly important. Not every network can be a premium brand, going to market with a premium price. Some will need to be value brands and some will need to be budget brands. The cost structures, within the networks, will need to differ accordingly, as will the brand values that are developed and promoted.

That’s enough about the strategic level. So let’s now consider the cultural challenge.

To achieve the change, from where we are to where we need to be, a significant cultural shift is required.

I’ve talked to many senior people, from within the industry, about the need for the sort of changes that I’ve described. And there seems to be an acknowledgement that the products have been commoditised and that this has given rise to some serious difficulties. There’s also an acknowledgement that, if the industry is going to thrive once again, substantial change is required. But when it comes to the specifics of what that change should be, the barriers often go up and the reasons why things can’t be changed seem to overwhelm the reasons why things can and must be changed. The result, not surprisingly, is inertia and a retreat to comfort levels, which is likely to lead to continued decline.

Somehow, the bigger players must start thinking outside their traditional boxes. So much of our thinking is still influenced by the sales driven philosophies of the 1980s and 90s; but those days are over and the industry needs to move on. The face of retail and direct sales has changed beyond recognition, due to the on-line revolution; and we need to look closely at what happens in other more progressive markets and at the cutting edge of both B2C and B2B developments. There’s so much to learn and we’ve been so slow to learn it. Perhaps we need to bring in more people from more dynamic retail environments; not just to teach us but to lead us and to give us the confidence we seem to lack. One way or another the major players must initiate the changes that the industry needs because it can’t continue to exist on a foundation of quicksand.

But a different culture is not just needed amongst the larger players, it’s needed within many smaller businesses as well. Many of them really must raise their games; and this is something, with which some will struggle to come to terms. But they need to manage their businesses better so they can generate more profit, strengthen their balance sheets and create greater long term sustainability. But without help and support, of the type I’ve described, this is often very difficult for them to achieve; and sometimes impossible. So whilst I’m urging the systems companies and larger fabricators to develop more controlled networks, with far more support for the businesses in their supply chains, the smaller players need to accept that they may need some help and that they will lose some independence, as the price they pay for support from the network, of which they become part. At the moment the supplier/customer relationships, within the various supply chains, are a free for all that are, in practice, damaging many more businesses than they are helping. The network approach is that each business, within the supply chain, is part of and contributing to a larger team. But the strength of the larger team, within the market, is greater than the sum of the strengths of the individual businesses.

If we can start to address these cultural issues, the changes that are needed will start to flow.

On a final note, there are actually some encouraging signs that movements in the right direction are beginning to happen, albeit very slowly.

The US building products giant Masco is now well established in the UK window industry; and, whilst it’s still a bit of a sleeping giant, it’s hard to believe that it won’t want to develop a more dominant position over here. When it does, it will start to put some real pressure on the indigenous industry to change.

Similarly, Internorm, the leading European window brand, seems to be showing some increased interest in the UK market and this may also add to the potential pressure from Masco.

On the home front, Epwin’s recent news that it’s floating on the AIM market and appointing a new Chairman is very interesting. Peter Mottershead was a previous CEO of Anglian and brings some serious retail experience to Epwin. So we could see some interesting developments and perhaps a much greater emphasis on the Swish brand, which although a household brand name, remains only a small part of Epwin’s business. Perhaps it’s another sleeping giant that is starting to stir.

Network Veka is currently by far the most advanced network in the UK window market and has created a very successful organisation focused on first class service levels and operational performance. It’s associate Veka UK, now owns the Halo brand, which was originally designed as, and intended to be, a consumer brand (As the first CEO of Bowater Halo, I wrote the original business plan!). It’s not hard to imagine a “Halo” branded product supplied through Network Veka; that could be very powerful, so who knows.

The Conservatory Outlet is almost the opposite of Network Veka. It’s a fast developing network of independent businesses, all going to market under a single brand, based on a modern, on-line marketing strategy, using a single website. It seems to have some strong legs and, whilst still comparatively small, may be showing the way to some of its larger rivals.

Imagine combining the operational disciplines of a Network Veka type organisation with the brand management and marketing strategy of a Conservatory Outlet type organisation. Eureka! We’re getting there slowly; and someone is going to join the dots up before very long. And when it happens that organisation will be catapulted into a commanding position, within the market, with others being forced to play catch-up.

It will be interesting to see who gets there first. Epwin with Swish? Veka/Network Veka with Halo? The Conservatory Outlet by extending its business model? Or perhaps a current outsider? Polyframe, the Halifax based trade fabricator, has been taking market share very successfully, resulting in controlled and profitable growth. This has involved a number of strategic alliances with other fabricators/retailers; so perhaps its next move could be to extend its business model to incorporate a Conservatory Outlet type brand and marketing strategy. Who knows?

The changes that I’m advocating are starting to happen, albeit in a small way and perhaps without all the dots being joined up yet. But to return to my starting point about weak balance sheets and foundations of quicksand, things need to speed up. At the moment there is still too much resistance to change, a lack of vision, too little mould breaking strategic thinking and not enough energy and resources being applied to shaping the future. If we’re going to create a firm foundation for the future and address this debilitating balance sheet problem, this must change; not tomorrow or sometime/never; but today.

Better Times Ahead

Most economic indicators are now pointing to a recovery.

• The economy is growing
• Manufacturing and services are up
• Unemployment is continuing to fall
• Inflation is below 2%
• Living standards are beginning to recover, albeit slowly

Under these circumstances, business confidence is on the increase. However, over the last few years, small and medium sized businesses have had a tough time.

• Profits have been low
• Balance sheets have weakened
• Cash has been under pressure
• Investment in plant, equipment and infrastructure has been supressed.

So, it’s inevitable that many businesses remain very cautious. Nevertheless, as markets continue to recover, businesses do need to gear up; and being over cautious is likely to lead to lost opportunities and being left behind by your competitors.

So Think About Your Business

• Is your business model working effectively and still relevant to current and future market conditions; or does it need to adapt?
• Is your marketing strategy working; or have you been left behind by the fast moving on-line revolution?
• Are your products/services state of the art; or are they getting tired?
• Are your processes and systems as efficient as they need to be; or are they becoming cumbersome?
• Is your productivity as good as it should be; or are your direct costs too high?
• Are your quality standards under effective control; or are you getting too many complaints?
• Is your organisation structure fit for purpose; or has it become dysfunctional?
• Are you supporting your employees effectively; or are too many underperforming?
• Are your customers happy; or are they drifting to your competitors?

In all honesty, very few businesses can tick all of these boxes. Sadly, some can tick very few, whilst the majority fall somewhere between these two extremes and, therefore, have the opportunity to raise their game.

How Can You Raise Your Game?

As an owner, director or senior manager of a small or medium sized business, the first thing you need to do, is to be honest with yourself about the state of your business; good or bad. Then remember that you don’t necessarily have all the skills and experience needed to address the weaknesses your business might have, or exploit the opportunities that the market might present. Recognising that you aren’t superman or superwoman is a strength in itself.

Next, think about how you can spend more time working “on the business” and less time working “in the business”. That probably means more delegation of responsibilities; and remember that a failure to delegate is often more about your own inclination to micromanage, rather than the lack of competency of the people, to whom you should be delegating.

At this point, you can start to take a more considered view about the strengths and weaknesses that your business has, and you can be more objective about the opportunities and threats that exist. So you can now start to plan. Look at where you want to take the business and assess the resources you’ll need. Compare these with the resources you have. Then consider how, and over what time frame, you can acquire the resources you need but don’t have, as well as offload the resources you have but don’t need. This is all about developing a properly focussed strategy; and, once you have this, you can start to work on a more detailed business plan.

Now back to the point about your own skills and experience. For many owners, directors and senior managers of small and medium sized businesses, strategic planning and change management isn’t familiar territory; and if that is true for you, you have three options.

The first is do nothing, carry on as before and chance that everything will turn out alright in the end. It’s high risk but it might just work.

The second is to go it alone and to try and find your way through. If you do that, you may get there eventually, but the chances are you’ll take some wrong turns, get lost, have to retrace your tracks and end up taking much longer to reach your destination, whilst incurring substantially higher costs on the way.

The third is to hire a guide; a business advisor, familiar with the territory, who can steer you to your destination via the shortest and least costly route. Business advisors cost money; but the right business advisor will cost you a fraction of what it would otherwise cost, by the time you’ve taken several wrong turns en-route.

The changing economic climate means that small and medium sized businesses, which have battened down the hatches for the last few years, can increasingly start to take a more proactive position. But most markets are likely to remain highly competitive; so focused strategies, well developed business plans and ever increasing levels of operational excellence are essential to long term sustainability.

The Challenges for the Window Industry in 2014

It looks as though the UK economy may have grown by as much as 2% in 2013, which is a lot faster than the pundits were forecasting not very long ago. That’s great news but, perhaps even better, the IMF has just upgraded its 2014 growth forecast for the UK to 2.4%. In general the outlook for businesses is now much more encouraging than has been the case for several years. But what does this all mean for the window and conservatory sector?

We need to remember that our problems started long before the banking crisis of 2008 and the subsequent recession. The window market, including all its sectors, peaked in around 2004 and the prime driver for its decline, since then, has been saturation in the domestic replacement window sector, which was, and still is, the largest sector by far. The market today is substantially smaller than it was ten years ago; and, even though respected market analysts, like Robert Palmer of Palmer Market Research, are forecasting growth over the next two or three years, for the foreseeable future, the total window market is unlikely to be anywhere near as big as it was in 2004.

Let’s now think about what happens in shrinking markets. Consolidation tends to occur between some of the major players, as they take capacity out of the market. We’ve seen that happen; for example, Epwin Group’s merger with Latium Group; and Veka’s acquisition of Bowater Windows (WHS Halo), the business I started in 1982. The number of companies withdrawing from the market or diversifying into other sectors also tends to increase; and we’ve seen that as well. Sadly there tend to be more company failures; and that has happened too. But perhaps most significant of all, shrinking markets tend to change the structure of supply chains, as businesses become more focused on their core strengths; and I’d like to look at this more closely.

Over the years, the systems companies, as a group, have never created any real brand strength for their products, except within the trade itself. This is quite unusual; and, if you think about other building material and home improvement markets, they are littered with well-known brands. Ideal Standard, Showerlux, Mira, Stelrad, Myson, Poggenpohl and Alno are but a few. Of course a few major players have developed well-known brands; for example Everest, Anglian and Safestyle; but these are the exception. The vast majority of the market is dependent on products originating from the systems companies. As a result, most small and medium sized players are selling commodity products and having to rely, almost entirely, on their own reputations rather than on the brand strength of the products they supply. To the homeowner one plastic window is much the same as another; and this has left most of the systems companies as capital intensive producers of a commodity, from which they make little or no money. Ironically, this has also helped both timber and aluminium products to stage a revival; and some businesses are doing very well, as a result.

At fabricator level we’ve seen some major changes. The number of fabricators has been falling for quite a long time, giving rise to a trend of fewer larger fabricators. Some of these large fabricators have developed very successful strategies, focussed on building market share, as smaller retail fabricators withdraw from fabrication to focus on sales and installation; think of Polyframe. But interestingly, despite market shrinkage, a higher casualty rate and fewer fabricators, the number of businesses involved in the industry hasn’t changed very much. So what we seem to be seeing is polarisation between a relatively small number of major players and many very small businesses, often started up by ex-employees of larger businesses that have either downsized, diversified, withdrawn or failed. This in turn has led to the development of the “one stop” specialist trade counter businesses such as Window Fitters Mate and The Window Store. These businesses are merchanting operations, from which small window installers can buy their frames, glass, trims, fixings, mastics and everything else needed to install windows, doors, conservatories and roofline. So we’re seeing another layer in the supply chain, which now progresses from systems company to fabricator, then to trade counter and finally to installation contractor. Interestingly enough, the market is developing in a similar way to the central heating market, after the central heating boom of the 1970s and 1980s. Something I predicted in an article I wrote for Glass & Glazing magazine back in 2002.

Shrinking markets impact on individual businesses in many different ways; but ultimately, it’s all about market share. Stronger businesses take market share from weaker businesses; so if you’re losing market share in a falling market, you’re hurtling towards the precipice of oblivion, unless you can do something to reverse the trend. Even if you’re gaining market share, your sales can still be falling unless you are gaining market share at a greater rate than the rate, at which the market is shrinking. So what determines whether you gain or lose market share? The answer is whether you can create and maintain sufficient competitive advantage. If you can, you’re winning; if you can’t, you’re not.

Hopefully, the UK window market has now hit the bottom of the cycle and is starting to show some signs of revival. However, we are likely to have a problem of overcapacity for some time, until supply and demand have reached a more sustainable equilibrium. So life is likely to remain tough for many businesses in the industry for a while yet. Achieving and maintaining real competitive advantage is, therefore, all important. So let’s look at what this means.

When we talk about competitive advantage, many people tend to think about things like price, quality, customer service etc. And of course these are all important factors. I like to group all of these together under the heading “Operational Excellence”. Basically it’s all about being better, more efficient and more cost effective than your competitors; and in highly competitive markets, this is essential. However, if we’re honest with one another there are far too many businesses in the window industry, whose level of operational excellence isn’t good. And these businesses need to work hard on addressing this serious weakness, if they are to secure their futures in the tough market conditions that are likely to prevail for the foreseeable future.

However, there are other equally important factors in the creation of competitive advantage and I’d like to mention three of these.

The first is financial strength. Obviously larger corporate businesses have much more financial muscle than SMEs; and this will always be the case. But that’s not really the issue. If a smaller business has a strong balance sheet, relative to its size, it is in a much stronger position than similar sized competitors with weaker balance sheets. It is much easier for it to fund the changes it must make in order to achieve the levels of operational excellence that are required to give it the competitive advantage it needs. But there are far too many businesses in the industry with weak balance sheets. It is, therefore, very important for those businesses to rebuild their balance sheets. To some extent the issues of balance sheets and operational excellence are chicken and egg. You need some financial strength to achieve the level of operational excellence you require; but you need to achieve a reasonable level of operational excellence to build your balance sheet. So some careful and well thought through strategies are needed.

The second is sales and marketing strategy. Whilst there are undoubtedly examples of some really good and highly effective sales and marketing practices within our market, the industry, as a whole, remains in a time warp. We’ve grown up on a diet of untargeted, randomly implemented, in your face, lead generation, accompanied by crude, high pressure selling that focussed on pounding “punters” into submission. It worked, in the past, thanks to almost 35 years of uninterrupted market growth aided and abetted by a lack of both consumer awareness and statutory regulation. But the world has moved on. Our market has been contracting for nearly ten years, our customers are far savvier and statutory regulations are much tighter. Added to all this, the internet has revolutionised retailing and direct sales in a way that we couldn’t have imagined only a few year ago. Today, successful retailers and direct sellers, across a wide spectrum of market sectors, are those that have adapted to and exploited these new conditions.

Marketing today is about getting the right product to the right customer, at the right time, via the right channel, at the right price. It’s about brand building, establishing brand values, brand positioning, delivering the brand promise, accurate targeting and empowering the customer to make his/her own decision in your favour. As an industry we’re light years behind many other retail and direct sales markets. But actually, this presents a huge opportunity for those businesses that are willing and able to embrace change and turn themselves into modern marketing businesses. Despite all the gizmos and widgets we build into our products and get very excited about, in consumer terms, we’re supplying “me-too” commodity products, which are very hard to differentiate. Gaining competitive advantage, at consumer level, through product differentiation is, therefore, nigh on impossible. But gaining competitive advantage by taking a 21st Century approach to marketing is where the future lies for the more switched on businesses in our industry.

The third and final factor is the more general business strategy. Where does your business sit within the current supply chain and is that position sustainable, as the supply chain changes?

We’re seeing fabrication consolidating towards fewer larger fabricators; and many of those larger fabricators are doing very well as a result of this momentum. They’ve probably achieved fairly high levels of operational excellence and may have built up reasonable balance sheets. They’ve also seen power, in the market place, shifting towards them and away from the systems companies. But what happens when the flow of small fabricators, pulling out of fabrication dries up, as it will? Without a brand, these businesses will be faced with the same problem as the systems companies; selling a “me-too” commodity product. So will they make the same mistake that the systems companies made or will they start to develop networks that are based on consumer brands?

We’re seeing the growth of very small installation businesses and the one stop trade counters that supply them. Without any consumer brands, this part of the market is inevitably price driven, particularly as many of these small installation businesses have limited selling skills. Depending on whether some of the larger fabricators do or don’t embrace the brand challenge, this may or may not continue to be the case. Thinking outside of our market, you can buy a top of the range Worcester Bosch boiler via a small plumber/heating contractor and pay a premium for the product, whilst paying a much cheaper installation fee than you’d pay British Gas. So there may be an opportunity here for premium prices for a fabricator brand but installation will still be cheaper for the homeowner than it would be through a larger retail business.

At the other extreme, we still have a few major brands selling at premium prices; Everest and Anglian spring immediately to mind. But the interesting one is Safestyle because they have come in as a comparatively late entrant and have grown to become a major player, ranking alongside Everest and Anglian. They’ve also been very clever with their brand positioning, which differentiates them from their two main rivals. This all indicates that there is still a market for higher priced branded products. But set it alongside the growth of the trade counters and small installation businesses, and it suggests that we’re starting to see a significant degree of polarisation between the large brands and the small installers. In this situation, the middle ground is inevitably being squeezed; and this is precisely what happened in the central heating market after the central heating boom of the 1970s and 1980s.

So if your business is in this middle ground, as many are, what are you going to do? You can either carry on and be pushed gradually into extinction or you can start to develop a strategy that reduces your exposure. That could include many different things. You could look at developing a trade counter business. You could become a specialist in a particular niche – conservatory roofs, composite doors, bi-fold doors, vertical sliders, etc. You could diversify into other materials – timber, aluminium, composites etc. You could diversify into other home improvement products – kitchens, bathrooms, bedrooms, studies, garage doors, driveways etc. You could combine any of these and many more options besides. You could also develop entirely new business models that are web based. You’ll need to tread carefully and you won’t get everything right first time but the successful players, in the future, will be the ones that address the challenges that a changing market presents.

Summing all this up, it seems to me that we operate in an industry that has, to a large extent, been bypassed by developments in many other markets and that we’re now a long way behind the general level of play. The peaking of the market around 2004, its subsequent decline and the effects of the recession, since 2008, have played havoc with us; albeit some star players have emerged during that period. However, the long term effects of those difficult years and the impact of what is now a mature market means that the industry itself must also mature. Businesses, in general, need to raise their game, combining operational excellence and financial strength with 21st Century marketing and business strategies that are sustainable in a market that is changing beyond all recognition.

Cash v Profit

The UK economy is coming out of recession; that now seems to be the general view of economists, politicians and business. In fact growth in the July to September quarter was 0.8%, which equates to an annual rate of around 3.2% and is the fastest growth rate of all the G7 countries, over the last quarter. Even better is the fact that all sectors of the economy – services, construction and manufacturing – are growing.

This is all great news and let’s be thankful that, at long last, there’s some light at the end of the tunnel. However for small and medium sized businesses, it presents some new challenges and I’d like to highlight some of the more significant ones.

The last recession was longer and deeper than any other recession since the Second World War. But it has shown some very different and perhaps unexpected characteristics.

Consider employment and unemployment. The following tables show changes in employment statistics between August 2011 and August 2013. I’ve extracted all of the data from official figures prepared by the Office for National Statistics.

People in Employment

People in Employment

The number of people, aged 16 – 64, who in theory could have been working has risen by 101,000 (0.3%). But the numbers in employment will always be much lower than the total number in the 16 – 64 age group, which includes students, people who have retired early, people of independent means, people who are sick, disabled etc. However, the really significant factor is that the number of people, in employment, has increased by nearly 600,000, which means that many jobs have been created or existing vacancies filled; and there are proportionately fewer people, under the age of 65, who are economically inactive.

Economically Active & Unemployed

Economically Active & Unemployed

My second table shows that the number of people, between the ages of 16 and 64, who are economically active, has increased by 700,000 over the two year period; and yet, the number of people, who are unemployed, has fallen by 90,000. These first two sets of figures seem to disprove the suggestion that the unemployment figures have fallen, due to people being reclassified as economically inactive and in receipt of other benefits. The new jobs do seem to be real and the fall in unemployment does appear to have happened.

Full Time v Part Time Employment

Full Time v Part Time Employment

My third table shows that the number of people, working part time, has gone up by 269,000; so some of the new jobs have been part time. However, the number, working full time, has increased by 519,000. The notion that most of the new jobs are part time is, therefore, a myth. Most of the new jobs are, in fact, full time.

All of this has been happening at a time when public sector jobs have been cut by 437,000. So the private sector has actively created over a million new jobs, most of which are full time. And this has happened, during a recession, which is unprecedented. It also means that the wealth creating part of the economy has increased its capacity, which is now likely to be underutilised. But that, in turn, means the private sector should be able to support significant growth, as the upturn gathers momentum.

However, there is considerable evidence that salaries and wages have fallen and that living standards have been supressed. Furthermore, despite the loss of nearly 450,000 public sector jobs, over the last two years, public sector jobs now command a 6% premium over private sector equivalents, according to the “Policy Exchange” think tank. This all points to many private sector employees having had no pay rises for some considerable time and to people leaving public sector jobs and taking lower paid jobs in the private sector.

Understandably, the political focus is now moving from economic growth and unemployment to the cost of living. In reality, it is quite normal for real wages to continue falling during the early stages of a recovery. But it’s also normal to see pressure building up for wage increases; and realistically, there is likely to be a period of catch-up over the next two or three years. The challenge for business is to ensure that the higher wages that ensue, are paid for through productivity improvements and don’t just inflate costs. However, that should be possible due to the extra private sector jobs and capacity that have been created.

Another factor to consider is that the rate of business insolvencies has been considerably less, during this recession, than during previous recessions. And much of this is due to the banks, which have tended to leave struggling businesses to continue struggling, rather than calling in loans and appointing administrators. But the downside is that there are now a huge number of zombie companies that can barely generate enough cash to service the interest on their debts and keep their creditors at bay. The UK’s largest insolvency practitioner, Begbies Traynor has calculated that there could be as many as 432,000 businesses in this category.

If we now start to join up all the dots, a picture is emerging of a whole raft of businesses, particularly small and medium sized ones, which have weak balance sheets, high wage costs, upward pressure on wages, suppressed profits and cash flow difficulties. Add to this, a lack of investment in infrastructure, IT, R&D, plant & machinery and training and it’s clear that many of these businesses will struggle to invest and grow as the economic recovery gains momentum. Indeed, there is a developing school of thought that, because they will act as a brake on the recovery, it may be preferable to steer many of them towards administration, thereby releasing their employees to work for stronger businesses that can fully exploit the recovery.

I don’t want to get into the political arguments of whether this is right or wrong but I do want to emphasise, to owners of small and medium sized businesses, the importance of developing robust business strategies that take account of these very real challenges. I’ve written a series of articles about many aspects of planning and managing small businesses but, on this occasion, I want to focus on the difference between cash and profit because having a clear understanding of those differences is an essential part of developing a realistic and achievable growth strategy that is able to capitalise on the current recovery.

Depending on your type of business, it is perfectly possible to run a significantly loss making business, whilst generating a substantial cash surplus; at least for a time. It is also perfectly possible to run a profitable business and have a serious cash shortfall. So let’s look at this in more detail.

First of all consider a Business to Consumer (B2C)/retail business. It receives payment for its goods/services at the point of sale. In some cases it may have even taken a deposit prior to the point of sale. So it’s generating its cash very quickly. However, it may be paying its suppliers and employees a month in arrears. The following table is a very simple profit and loss account and cash flow statement for a £1m turnover business doing precisely as I’ve described.

B2C Business £1m Sales

B2C Business £1m Sales

This business has sold goods or services to the value of £1m and has collected all of the cash from those sales during the year; but it has made a loss of £50k because its total costs have exceeded its sales revenue. However because it is paying its suppliers on net monthly terms and its wages a month in arrears, it has only paid for 11/12ths of its costs; so its cash outflow has been less than its total costs. As a result it has generated £37,500 of cash, albeit, it still owes its creditors £87,500.

If the sales and expenditure figures, in the P&L, remain the same in the second year, the cash gain, in the first year, will have been a one off because the business will pay out 11/12ths of its costs for year two plus the final 1/12th for the first year. As result, it will have a net cash outflow equal to its loss i.e. £50k.

But now see what happens if, instead of remaining static in the second year, the business increases its sales by 20%, whilst maintaining its overheads at the previous level.

B2C Business £1.2m Sales

B2C Business £1.2m Sales

It still makes a loss, this time £10k. But it benefits from collecting all £200,000 from the additional sales but only makes payments for 11/12th of the additional cost of sales. As a result it generates £3,333 of cash. So over the two year period, it has made cumulative losses of £60,000, whilst generating £40,833 of cash

If, on the other hand, the business reduces its sales, in the second year, by 10%, whilst still maintaining its overheads at the previous level, a very different picture emerges; and this is shown in the next table: –

B2C Business £900k Sales

B2C Business £900k Sales

Not only do the losses increase due to the lower sales volume, but the cash drain is even greater. Cash in is reduced by £100,000 due to sales also being £100,000 lower, resulting in a loss of £70,000. However, payments related to the cost of sales, drop proportionately less because they include 1/12th of the cost of sales from the previous year, which were 10% higher. So the cash outflow is £76,667 i.e. £6,667 more than the actual loss. Over the two year period, this means that the cumulative losses would have been £120,000 and the net cash out £39,167.

This is a classic problem for many B2C/retail businesses. They embark on a growth strategy funded out of cash flow rather than profit. Providing they don’t let their overheads expand at a faster rate than their sales, they can keep growing and maintain a positive cash flow, often for several years, whilst continuing to generate losses. However, at some point, the crunch inevitably comes. Growth grinds to a halt; sales decline for a period; the cash disappears and bang! the business goes bust. The home improvement market is an example of a sector that has a large graveyard of companies that collapsed in this way; and some of those failures were quite spectacular.

Now let’s consider the reverse problem.

Take our £1m turnover business but, this time, let’s assume it’s trading Business to Business (B2B); that it’s profitable but gives its customers ninety day terms, whilst paying its suppliers in thirty days. The next table shows simple profit & loss and cash flow statements.

B2B Business £1m Sales

B2B Business £1m Sales

Here’s a nice little business making a modest profit of £25,000 but, because it has only collected 9/12th of the cash from its sales and has had to pay out for 11/12th of its costs, it has had a net cash outflow of £143,750, which it has had to fund.

If its P&L was to remain unchanged during its second year, then it would collect £1m of cash from its sales (3/12th coming from the first year’s sales); and it would pay out twelve months’ costs (1/12th from the first year’s costs). It would, therefore, generate £25,000 of cash.

As with our retail business, the second year’s cash flow would match the profit or loss generated, providing sales and costs remained the same. But let’s see what happens to this business if it grows by 20%, whilst holding its overheads at the same level as in year one.

B2B Business £1.2m Sales

B2B Business £1.2m Sales

A sales increase of 20% would result in a profit of £65k (+160%). Cash flow would benefit from collecting three months’ cash from the previous year, as well as nine months from the second year. But cash from three months of the incremental sales, in the second year, would not have been collected by the year end, so the cash generated would only be £41,667.

The cumulative profit for the two years would be £90,000 but the cumulative cash position would show a net cash outflow of £102,083. It would, therefore, take several years of this type of expansion to recoup the initial cash outflow from the first year. And this assumes that overheads could be maintained at year one levels, which may be unrealistic.

Now let’s see what would happen if we go for a 50% increase in sales. In this case we’ll also assume that overheads would increase proportionately.

B2B Business £1.5m Sales

B2B Business £1.5m Sales

The net profit of £37,500 would be higher than in year one but would be suppressed by the additional overheads. But there would have been a net cash outflow of £6,250 because the cash from three months’ worth of incremental sales would not have been collected. So, in this scenario, there would have been two years of cash outflow, totaling £150,000 despite profits of £62,500, during the same period.

For businesses of this type, growth can be quite tricky. It needs to be planned and it needs to be controlled because, even though the business may be profitable, it may not have the working capital it needs to fund the growth it would ideally like to achieve. In a worst case scenario, it could fail due to over trading.

There are, of course, ways of funding the working capital needed to support growth; invoice discounting being one option. But however it is done, it involves a cost, which impacts on both profit and the amount of cash required. So there is a balance to be struck that keeps the costs manageable, the bottom line sufficiently profitable and the level of growth supportable.

For most small and medium sized businesses, the recovery shouldn’t be a signal for a mad dash for growth because rapid growth has its risks. For B2C/retail businesses, the risks tend to revolve around throwing money at growth because the cash is available in the bank. But costs then tend to get out of control, which hits profitability and ultimately leads to a crisis. For B2B businesses the risks tend to be around over trading, the inability to fund growth and the risk of running out of cash, which also ends up in a crisis.

Stronger businesses will obviously want to capitalise on the recovery and should of course do so; but it’s important that their growth strategies are properly planned, resourced and controlled. It’s also vital that funding is in place to support the growth plan and that the incremental sales make a real contribution to the bottom line. Whether you run a B2C or B2B business, both cash and profit need to be properly managed; and focusing on cash at the expense of profit or profit at the expense of cash is a road that invariably leads to a crisis. Get all this right and the business should grow and prosper; get it wrong and the business could be in trouble.

But what about the many zombie companies that now exist? Well, I’m afraid that some harsh truths may need to be faced. The first is that most of them are where they are due to bad management not bad luck. The second is that some of them are probably past the point of no return and just don’t have a viable future. For those that do have a chance of recovery, they really must address the underlying strategic, operational and management deficiencies that are responsible for their current predicament. Only when they’ve done this and can demonstrate a turnaround are they likely to get the support that they need, from suppliers, customers, banks and finance houses, to put in place even a modest growth strategy. But with the right approach and the right help, I’m sure that many of these zombie companies could be brought back to life.

Crackers at Christmas

The summer holidays are over, the schools are back and, increasingly, our focus is now on Christmas. We Brits love our Christmas; don’t we just? But, as much as we might love it, Christmas creates huge distortions in the annual trading cycle. For some businesses, for instance many high street retailers, the run up to Christmas and the January sales account for a large slice of their annual sales; so, if they don’t do well over the December/January period, their budgets are knocked for six. For other businesses, probably the majority, sales in the run up to Christmas fall away dramatically, order books run down very quickly and, during the aftermath of Christmas, output is depressed until order books recover. Furthermore, a full month’s overheads are incurred during December, whilst trading is restricted to about three weeks. So you can see why many businesses find their cash flow very stretched at that time of year and why January to March is the danger period, when many weak businesses fail.

So, if your business is one of those that are hit badly at Christmas and the early part of the New Year, what can you do about it?

Well what you can’t do is fight it. It’s part of our British culture and there’s not much you can do to change that. The real issue is how you manage your business through this period with the least amount of damage.

The first action that you need to consider is right now. During the autumn you need to build your order book as much as you can. Increase your advertising, while your market is active, and maximise your flow of enquiries/leads. At this time of year, you’re targeting customers, who are a long way through the buying cycle and are ready to buy; so create some urgency by running a time related offer that requires your product or service to be delivered before Christmas. The orders you take need to be well priced, giving you good margins that will sustain your business and deliver some decent profits. So don’t be tempted to cut prices. The offer you run needs to be product related – an upgraded spec: a free extra etc. And what you’re looking to do is make it something, whose perceived value is greater than its true cost to the business.

However, at some point prior to Christmas, you’ll cross a threshold. Market activity will start to drop off very quickly and your order book will reach the point where you can no longer offer a pre-Christmas delivery. There’s no clear rule as to which of these will come first; but whichever does come first should trigger a complete change of tactics.

Your advertising must change to target a different type of customer. You’re now looking for customers, for whom buying your product or service isn’t influenced by the timing of Christmas. You’re after bargain hunters looking for good deals. They’re not tempted by free upgrades; for them, it’s all about price. You want orders that are placed before Christmas but with delivery in the New Year. The incentive is a significant discount that makes your product or service exceptional value for money. Whilst the market may be generally inactive, serious bargain hunters, with a genuine interest in your product or service, will still respond, if the deal is good enough. For you, low priced business is better than no business; and your aim is to keep your business’s output up, in the aftermath of Christmas. So not only is this cut price offer for a limited period in the run up to Christmas, it must also stipulate that the product or service must be delivered within a limited time frame after Christmas; perhaps by the end of January or maybe February. The actual cut off will depend on the length of your delivery period. Your objective will be to attract enough low priced volume to keep your output up, in the immediate aftermath of Christmas but not to impede the delivery of higher priced orders that start to build up in the New Year. It’s a tricky balancing act designed to fill a gap; and you probably won’t get it 100% right. But even so, it’s far better to have this type of strategy in place than to let your business be a helpless victim of market distortions caused by the British being crackers at Christmas.

Adapt or Die

The only certainty about any market is that it is in a state of permanent change. Some markets change very quickly, others much more slowly; but change is both continual and remorseless.

For businesses, of all types and sizes, adapting to market change is fundamental to on-going sustainability; and exploiting that change is critical for future growth and success. However, even some of the largest players misread the signs and get it wrong.

Think about Nokia; not very long ago the giant in mobile phones. Now Nokia is struggling against the likes of Apple and the smartphone; it just didn’t adapt soon enough.

Think about Comet, the now defunct retailer of white goods and brown goods; it didn’t adapt its traditional retail business model to embrace the on-line revolution. By contrast, Dixons Retail plc has reinvented itself several times. It started out as a camera and photographic retailer, based on in-store concessions. It progressively moved into brown goods, launched PC World as a retailer of computer hardware, moved into white goods, through the acquisition of Currys, and developed a huge on-line presence in parallel to its retail stores. It’s now Europe’s largest specialist electrical retailing and services company; and it has created massive competitive advantage, with which the likes of Comet just couldn’t compete.

So here are three interesting and different examples of how businesses have adapted to market change. Comet didn’t adapt and collapsed. Dixons Retail has continually adapted and, from small beginnings, is now a leading European retailer. Nokia didn’t adapt soon enough and has been left behind, with an enormous challenge ahead of it. But, of course that was the story of Apple. Apple lost its way a few years ago and came back with avengeance. But it came back through technical innovation that was at the cutting edge. So it actually drove market change rather than adapted to it; and that’s very difficult indeed.

Sadly, the world of industry and commerce has a huge graveyard of businesses that failed to adapt to changing markets; and, whilst there have been some spectacular corporate failures over the years, the overwhelming majority are small and medium sized businesses. So why do so many SMEs fail to adapt?

I’ve spent many years working with and supporting SMEs through periods of change and transformation and, in my experience, there are probably three critical factors.

The first is that many SMEs are actually very isolated from the markets they serve. They are minor players with small market shares and the only part of the market that is visible to them is that fraction, with which they regularly engage. They often don’t have sufficient budgets to fund professional market research and they tend to be poorly supported, in this respect, by larger customers and suppliers, who are frequently much better informed. So they are just out of the loop, unless they make a concerted effort not to be; and that leads me to the second reason.

The second reason is that many owner managers and directors of SMEs are too focused on the day to day issues of running their businesses and have a strong tendency to micro manage. Because they don’t empower their key employees, they don’t have the time to look over the horizon to see what’s going on in the wider market. It’s a vicious circle that leads to an introverted culture, within the business, and a strong tendency to remain within personal comfort zones.

The third reason revolves around skills and experience. Very often, owners and directors of SMEs may have backgrounds in sales, production, logistics, accountancy, operations, etc. However, they may not have broader based commercial or strategic skills and may, therefore, simply not recognise the importance of market intelligence or the need to adapt to changes that are taking place in their markets. In practice, once those changes have become obvious, they may respond but often at a very late stage, by which time they have lost a considerable amount of competitive advantage and are well and truly on the back foot, fighting for survival.

Having identified the problem faced by many SMEs, what can they do about it?

The answer is not simple because most of them can’t fund expensive market research; and moving ahead with a change programme that has not been properly evaluated could be even more risky than doing nothing. This isn’t a problem that has a clear cut solution in the way that a new piece of machinery could solve a productivity issue, at a known cost.

The main change that owners and directors of SMEs need to try and make is to put aside some time every week or every month to look over the parapet and see what’s going on in the wider market. Managing a business isn’t just about working in the business, addressing the various daily chores and tasks. It’s also about working on the business; monitoring progress and developing the strategy. Part of this should also include looking at the wider market and trying to pick up the trends and developments, within it. Talking to customers, suppliers, competitors, trade associations and providers of professional services can all help build up knowledge and information. The trade press and market surveys from organisations like Mintel and Keynote are good sources of information. Reading the business sections of the daily papers will provide an awareness of general business sentiment and trends. Attending trade conferences and exhibitions is also an important source of market intelligence.

All of this needs to stimulate discussion and debate within your own management team. But it all takes up time and to find that time, you’ll probably have to do less micro management, give more responsibility to your key people and stand back more. Ironically, you may well find that your business runs much more efficiently as a result. Over the years, I’ve found, time and again, that owner managers and directors, who micro manage and don’t stand back, become the main obstacle to growth and sustainability. In extreme cases, I’ve seen businesses collapse as a result.

By being better informed, you can start to see where the market opportunities are emerging, where the threats are developing and where the trends are heading. So you can then look at your own business and start to think about the general direction it is going in and whether this is exposing it to greater threats or positioning it to exploit emerging opportunities. In order to minimise the threats and maximise the opportunities, you may need to rethink your strategy and business plan; or in some cases actually develop a strategy and business plan.

For many owner managers and directors of SMEs, this may be taking you outside your comfort zone but it’s too important to ignore. So if you’re in this position, you really should bring in outside support. This could be in the form of a non-executive director or it could be via a business consultant or mentor. The way you do it is of less importance than the fact that you have available sound advice and support provided by a rounded business professional with a successful and relevant track record.

The objection to this is usually the cost; and yes there is a cost. But with the right person that cost will be repaid many times over, as your business’s success and sustainability grow. Successful SMEs are increasingly widening their horizons through some form of external support and once they’ve taken that leap, few revert back to the previous isolation that undermined their ability to adapt to the circumstances of an ever changing market.