Making Sound Business Decisions
In all businesses, small or large, actions are often taken in the moment – reacting to a symptom rather than making a fully informed decision based on the cause.
Symptom management is a very frequent occurrence, with the management decisions based at a superficial level to arrest what is the perceived cause which in the bulk of cases is not the true underlying driver.
An example of this was with an electrical contractor who we once met – we will call them ElectroInc.
ElectroInc had been operating for several years with a number of electrical teams on the road servicing all manner of electrical contract needs. Typical clients ranged from the domestic household wanting a new electrical fitting, all the way through to a developer requiring full wiring of a large multi-site commercial development. The characteristics of these assignments varied significantly, making direct comparison a bit hazy without proper analysis.
Our conversations started with this firm after they had incurred a large bad debt, which had placed severe pressure on their operational cashflow and bottom line profitability.
ElectroInc’s reactions to this loss had included;
- immediately ceased taking on any large commercial development work, as it was one of these which had delivered the bad debt loss
- commenced an advertising program to get more domestic work
- let go 2 of their trained technicians
- made arrangements with their Bank to provide an increase in working capital lines
From our initial discussions, it was evident that a lot of assumptions had been made quickly by the owner about their situation – and to be fair, the owner was holding themselves solely responsible for the large loss.
So whilst in no way wanting to be disrespectful to the owner, with some digging we found the following;
- ElectroInc was only marginally profitable, with no effective measurement system of their margins.
- The bad debt was due to one client going under. The reason the loss was so high, was that there had been a lot of pressure to get a stage completed quickly, resulting in an unusually large number of invoices outstanding at the one time.
- ElectroInc had no formal client limits in place, nor was anyone following up some overdue invoices due to it being a “big client”. A bad debt would have likely occurred regardless of what ElectroInc had done, but the size of loss was certainly within their control. The absence of formal credit assessment and a robust collection platform had allowed it to be a large loss.
- Of the other 6 large commercial jobs completed in the past 12 months, all of them had been profitable, with 2 of them being very profitable.
- The domestic jobs involved a higher level of travel downtime between jobs, but generally carried a good margin per job – overall however, the firm needed a lot of small jobs to make a decent business level return.
- The staff who were let go were selected on a “last on / first off” basis with no consideration given to their performance or suitability to do the domestic work. These two technicians were in fact both very competent and due to experience, were more suited to the domestic work as they were still finding their way with the larger commercial jobs.
- Based on profitability levels and volume of cash in their cycle, this bad debt loss was going to take approx 2 years to fully work through the system as it equated to approximately half of the company’s annual profit (before owners remuneration). The simple increase to the Overdraft was a quick fix to the clients’ cashflow issues, but it could be argued that this was not the best way to fund the situation.
Based on what we were able to highlight to the business, it was determined that the actions made on the “symptoms” were not in the best interests of the business, as they did nothing to address the underlying causes. In fact, based on the quickly conceived strategy to switch to domestic work, the symptom decisions were potentially costly.
So…..when faced with issues in your business, STOP!
Stop and consider whether you are considering mere symptoms or the cause. Resist the urge to make a decision based on the symptoms alone, dig down to understand what is causing the issue and then, only then – decide what action to take.
Decisions made at a symptom level often make a bad situation worse, so gather the facts and then move forward rather than back!