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Sunday, 18 February 2018

Budget Time Coming Round? Try Dynamic Budgeting Instead!

Over the recent past I have been banging on about the value or otherwise of annual appraisals of team members as well as the danger of running the business metaphorically using the annual accounts.

It occurs to me that the value of the annual budgeting exercise also needs to be examined. First of all, what is the purpose of the annual budget other than the fact the auditors demand it so that they can report to HMRC (or the IRS) and the bank also likes (!) to see them?

If asked most business leaders would say that the budget gives them an opportunity to monitor performance against an acceptable and carefully crafted standard.

Oh yes?  The number of ways of devising the annual budget is as the sands of the sea and in many cases, just about as useful.

I have known situations where the budget was written by the finance department without any reference to activity; the numbers alone seemed to be far more important. 

In other cases the sales department has the honour and carefully assesses each major customer in an effort to guess what their turnover is likely to be in the year, and so on.

Having gone through that process with a former employer, part of a large conglomerate, we were told that the projected profit was inadequate and needed to be increased.  The helpful head office accountant suggested that we increase the estimate of turnover and reduce costs like, for example, marketing.

A very bright idea but we did as suggested and, lo and behold, the budget was accepted.  Sadly however performance was in accordance with our original estimates and far away from the amended version for which we were, to say the least, castigated.

“It’s your budget” they said: “Why are you not meeting it?”

My old friend and Vistage speaker, the sadly missed Brian Warnes had other ideas about the value of the annual budget.  Brian had an interesting career leaving university to start life as a physicist. He then was commissioned in the Household Cavalry and did strange things as an intelligence officer.

On leaving the army he then retrained, for heaven’s sake, as an accountant. Perhaps because of his scientific and military training he rebelled against the tyranny of the annual budget which he described as generally being a “limp forecast of mediocre performance” and devised an entirely new concept which he called Dynamic Budgeting which was, to all intents and purposes, break even analysis.

Break even is calculated from the “five line P&L” which is:

Sales (volume and price)
less variable costs (labour and materials)
= gross profit (margin expressed as a percentage of sales)
less fixed costs
= net profit (margin expressed as a percentage of sales). 

To calculate break even sales, fixed costs must equal gross margin.  Therefore divide fixed costs by the gross margin percentage.

The clever trick is to keep the break even sales below 75% of actual sales ad this calculation can be done weekly for example. It gives the leader a view of the trends so that if the break even percentage of sales is increasing, then action needs to be taken to increase the gross margin which is, after all, the true revenue of the business.

If this is on the leader’s IT system plotting both actual and break even sales on a rolling annual basis then it is feasible to keep a regular check on profit performance and make quick changes should they be necessary.

Annual appraisal v. regular one-to- ones?  Conventional budget v. dynamic budget?  I know which I prefer.

Read Brian’s book, The Genghis Khan Guide to Business (http://www.amazon.co.uk/Genghis-Guide-Business-Charles-Warnes/dp/0950943207/ref=sr_1_2?ie=UTF8&qid=1360330400&sr=8-2) and change your life (or your Finance Director)

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Sunday, 11 February 2018

Want Some 2,500 Year Old Leadership Advice? Read The Art of War!

I was reminded recently of the classic book, The Art of War, by the Chinese military strategist of the time,Sun Tzu (5th century BCE) and I looked up a copy that had lain dormant and unread on my bookshelf for many years.

I do not in any way equate running a business with warfare which is an abhorrent way for countries to resolve (or not) any difference of opinion usually to the detriment of the people involved especially the innocents.

However some of the strictures that Sun Tzu espouses have relevance today in the matter of leadership.  He has strong views on this subject which he discusses under the generic heading of The Commander.

In the prologue to the book he writes thus:

“The Commander stands for the virtues of wisdom, sincerity, benevolence, courage and strictness”.

and it is worthwhile examining these virtues in the light of accepted norms of leadership behaviour and attitude at the present day.

Wisdom is one of those intangible virtues difficult to define and even more difficult to recognise. The old concept of wisdom equating to age is nonsense.  We have all met many stupid old people (some not so old too) and very wise young ones that give a lie to the maxim.

Wisdom can be defined as “having experience, knowledge and good judgement and the ability to express it to others”.

One of our great US speakers in Vistage is Herb Meyer, formerly Special Counsel at the CIA. Herb says that there is a flow chart starting with data and progressing through information, knowledge, intelligence and wisdom, the latter being the culmination of the system.

The crucial aspect however is the ability to transmit that wisdom cogently and with clarity to all those involved and should be one of the primary functions of leadership.

Remember that wonderful gag of George Burns?  He said that the secret of success in show business is sincerity and once you can fake that you’ve got it made.

Cynical yes, but with a grain of truth.  One of the great abilities of any leader is to be able to put a point over so that he/she is believed and that demands an outward display of sincerity.  Please note: it only works when eventually the truth is out and the sincerity proven.

Benevolence was at one time a non-starter for many leaders of businesses.  They ruled with an iron discipline and no variation from the rules was permitted.  That form of authoritarianism is way off the beam these days and those businesses where a benevolent attitude is instilled are the more likely to be successful and crucially, keep their good people.

Courage is, of course, the ability to take risks and that needs to be modified to “considered risks”.  If a leader finds it difficult to take risks then the outcome is likely to be a stagnant business.  The courage needed can be considerable at times and a sensible attitude towards backing-up evidence is needed.  I recall a Chief Operating Officer in a business who was so risk averse that he would make no decision until he had what he considered to be sufficient back-up evidence.  Needless to say he never made a decision.

Strictness of course harks back to the past when the leader would always be expected to be strict.  Perhaps the nearest we come to that these days is a culture of self discipline engendered and encouraged throughout the organisation.

All in all The Art of War has many really valuable lessons for us in business provided of course we can manage to implement them without killing anybody.

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Sunday, 4 February 2018

Feeling Angry or Annoyed? Pack Up Your Troubles and Smile, Smile Smile!

Regular readers may recall that a couple of weeks ago I posted an exhortation to be positive and smile.  I  mentioned a notice that is posted at the wonderful store of Housing Units (www.housingunits.co.uk) here in Manchester that says:

“If someone doesn’t give you a smile, give them one of yours”.

A couple of hours later my dear friend, Harold Woodward in Yorkshire sent me the lyrics of the old song: “When you’re smiling, the whole world smiles with you”.

That evening I was listening to BBC Radio 2 and, lo and behold, they played a song by Harry Konick Jnr called “You’re Never Fully Dressed Without a Smile”.

It was a day of synchronicity.

There was quite some response to the blog and it occurred to me that there must be more instances of smiles being the subject of other song lyrics.  I was right.

Popular music lyricists have always had their collective finger on the pulse of the public and especially during difficult times, they have managed to brighten lives with cheerful and positive lyrics to cheerful and positive music.

Among many, the World War 1 song, “Pack Up Your Troubles (in your old kit bag and smile, smile smile) was almost diametrically opposed to the actuality of that appalling conflict but nevertheless the song was one of the most popular of its time presumably on the basis of This Too Will Pass.

Another rather gloomy epic was “Smile though your heart is breaking”, a further instance of recommending a smile to chase away sadness.

My favourite country group of the 1970s, the Dutch trio  Pussycat, sang about remembering love that has gone away in their record of Smile and there are many others.

A dictionary definition of the word Smile is:

“Forming the features into a pleased, kind, or amused expression, typically with the corners of the mouth turned up and the front teeth exposed”.

For such a definition it is surprising to realise that the word Smile can bear a multiplicity of modifying adjectives such as cheerful, beaming, expressive, charming, warm, soulful, and at the other end of the scale, sad and grim.

Overall however, the main thrust is that of exhibiting a positive outlook and one that encourages others to follow suit because smiles can be catching.

During this awful January I have been catching up with one or two audiobooks, in particular The Pickwick Papers by Charles Dickens, that has been a favourite of mine since childhood.

Throughout the book whenever Mr Pickwick lapses into annoyance, anger and rage at some supposed slight, following a comment by his faithful servant, Sam Weller, he allows a smile to suffuse his face and the anger dissipates.

My Vistage CEO peer group is extremely adept at scotching too much seriousness with a comment that brings on a smile and often defuses a complex situation.

The fact is that the very act of smiling can change the atmosphere in a difficult discussion or conversation and lightens the whole scene.  In essence it indicates positivity and can soften anger.

Mr Pickwick had the right approach.  He was sensible enough to realise that anger is a useless emotion said to be like taking poison and expecting the other person to die.  The fact is that a smile can and does dissipate negative emotions.

Boxing the chimp in our minds can be achieved in many ways and a distinct change to  positivity is one of them.

Trying to smile whenever one feels anger or irritation can change one’s feelings quite dramatically.  Give it a try and encourage your people to try.  You may be surprised at the result.

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