As a body grows and develops it also slows down. The years of life and living bear down on it and lying in bed for an extra 5 minutes rather than springing into action the moment the alarm sounds becomes tempting. An extra slice of cheese or a spoonful of ice-cream after dinner and a hard day also feels like a well-deserved reward. Cholesterol builds and if not checked, it’s the death knell that you often regret most when it’s too late.
It’s a terrible analogy to contemplate when building and growing a business, especially if you plan to exit it one day for a capital profit as your just reward for all the risk and sacrifice it took to build.
HOW DOES CHOLESTEROL BUILD IN YOUR BUSINESS?
1. In the beginning
In the beginning, you are in control of everything. You especially keep your attention on all things that bring money in and take money out. Sales matter enormously as do expenses. All your suppliers that you work with you get to know personally. Who are they, what value do they offer, what is the deal that you have with them and most importantly, spending as little as possible for as much as possible is as vital as getting sales into the business.
2. Then you grow
As sales come in and you get traction in the marketplace, complexity and activity both increase. Your attention moves onto the bigger cost items. Rent, people, vehicles, computing, software and the like. If you are in manufacturing, machinery and equipment as well as stock and inventory in other businesses. This matters because if you don’t buy right, you can’t sell right…right? The smaller ancillary expenses and consumption items fall out of your purview simply because you don’t have enough time. they are also hard to find in the avalanche of admin that governs and everyday growing business. In your mind, they are small costs and often difficult to understand. Do you truly understand your medical aid or cell phone contract? Such services are deliberately bundled and complexified to keep your attention on the idea that it’s just, say R52 per month. When you are spending R300k per month, you must focus on the big-ticket items. People tell you it’s the pareto principle, the 80% of your costs lie with 20% of your suppliers – focus on that.
3. Complexity builds stress that narrows your focus further
Nobody ever built a business by focusing on the pennies people will tell you. Unless you are Sam Walton, founder of Walmart or, Phil Knight, founder of Nike or, Jeff Bezos, founder of Amazon. And the list goes on because many pennies make a pound and so it grows from there. But the problem remains this. With more growth comes more complexity and opportunity and that, if managed well becomes more growth leading to further complexity. This cycle stresses you out because it’s a lot more to deal with in far less time than you ever had. You try bringing in people to help and even software too. Often that serves only to increases stress and complexity. Oh, and with your growth, where you now sit 50 times bigger than you might have been a few years back, those small expenses have grown too, not only in size, where the R52.38 is now R552.38 but there are more of these small, noisy little expenses. Your time scarcity sees you double down on the Pareto principle further feeding a false sense of belief that the leak is just that, a small leak if it exists at all. After all, it’s just one tiny spoon of chocolate ice-cream or a small slice of cheese, you say in the back of your mind!
4. Cholesterol, unchecked, generates the heart attack
With further growth, the cholesterol builds and as it does, it slows your body. The many, many small expenses, many for services you no longer need nor use add up to a chunky R50,000 monthly. Sure, your business now generates 100 times what it was several years back, but that bleed is a shock to you. You are furious and angry both at yourself and your team who are now largely looking after all the costs outside of the pareto margins. An investigation begins and you further discover that your team involved in procurement are missing obvious negotiation advantages that could have saved over R500 000 over the last 18 months. The cholesterol has built and set in and a makeover is needed before it kills your business, and you in the process.
This happens to most fast-growing businesses. Especially if its leaders have a big vision and are driven to grow and manifest the vision. The pareto principle is used as a constant reference to focus on what matters. Don’t sweat the small stuff is what most would say and often, those who say it, well, it’s not their money that is bleeding out the business.
HOW CAN THIS BE PREVENTED?
1. Develop a procurement strategy
Allocate all your procured items into one of three buckets – strategic and core, strategic and non-core, non-strategic and non-core. Once done, set quality, delivery and risk measures on them all.
2. Turn it into a system
Determine the times and activity schedule along with checklists to procure the inputs across the three buckets. This includes how often you buy, at what standard of quality, from who, on what contractual terms and how often will you review it.
3. Train and capacitate
Train your staff in procurement on the system because now you have a system to train people on. Remember, staff have mostly not been through a process of starting something with nothing and so their skills in negotiation and understanding of its importance in cashflow will be limited, you need to pick the right staff in procurement and mentor their performance.
4. Structure and motivate
Create incentives by setting budgets and link the procurement buckets. If you have well-defined standards and performance expectations in procurement, any outperformance might well be incentivised but beware, the wrong behaviour within the wrong bucket can harm the business. for example, squeezing your insurance costs by dropping the standard of cover can cost you your business.
5. Hire and fire
Hire the right staff in the first instance and fire those that break with system. Procurement is prone to corruption and a well-designed system to bring your procurement strategy to life should be severely enforced.
We work with established business to build business systems across the entire scope of business activities. Systems deliver certainty, without which cholesterol can build. If it doesn’t kill you, it will slow you down and in the fast paced, competitive economy we live and play it, that could see your business being one of the 94.6% that are started but never succeed in a sale.