Beware the Budget Loch Ness Monster

Sydney Outsourced CFO Thomas Taylor - Sunday, May 28, 2017

In last week's blog entry I talked about how what might appear to be a lumpy business is more often just lumpy accounts and how dangerous that can be.  

It's a profit one month, a loss the next, but you have been there before right? Managers tell you "$400K is coming in next month" but you have probably heard that before as well.

If you graph profit, month by month, for this sort of business, it looks like the Loch Ness Monster, half in and half out of the water. With the much higher head of the monster representing the forecast. This might be optimism bias, and that can be dangerous, but you don't want to plan for failure right? Although without changing behaviour it's probably more likely that the good outcome won't happen, we usually know that in our hearts. 

So, what are some of the things you can do?

First, get real about the pipeline. If this has been going on for a while, call bullshit where you see it. In your discussions raise what the possible consequences should be if the targets are missed again. Perhaps dropping some unprofitable project types and associated resources. This is not about blame, and it's not at all easy or pleasant, it's about being authentic. Wanting the best outcome for everyone concerned. A lumpy business cannot with certainty provide a satisfying environment for all of the stakeholders.  

A great Chairman I worked with years ago did this with a failing tech company. He got everyone to agree on what the consequences should be in 3 and 6 months time if the turnaround targets were not met. They missed them but at least everyone understood they had done the best they could.  

Next look at pricing and billing options. Are you getting hammered on fixed price jobs? Stop doing them till you have sorted out the appropriate processes properly. Is scope creep killing your margins? Look to see how other businesses like yours manage it. 

Find out where it is. Slice and dice profit by income stream, client type, product, team, office etc.

Compare your margins and costs with other businesses like yours. Also, compare remuneration structures and amounts.

Finally, try to cut back on some of the risks. Try to just bet some paddocks rather than the whole farm. If that means scaling back for a while that might be a good thing. Particularly if you can go through your client list and cull the less profitable ones, and let's face it they are usually also the difficult ones.

A surf coach once told me that if you have trouble paddling out, come in a bit, move up the beach, and then catch the rip out. Then he said, "life is like that sometimes". Classic. He also said, "the first thing you should do is spend some time on the beach watching carefully before you get in the water".  Because for years we have known there are definitely monsters out there. There is graphical proof.

Cheers

 

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