After posting more than 250 book reviews, I decided to try something new: an author interview on YouTube. I am grateful to Alastair Thomson for graciously sharing his wisdom on managing small and medium-sized businesses. Alastair has an accounting background, but this conversation is not about debits and credits. It’s about improving your business from the perspective of an experienced CEO and CFO. We cover cash flow, profit, customer experience, metrics, business ethics, marketing, quality, continuous improvement, front-line employees, growth, margins, inventory, and receivables.
[Andrew] Hello. My name is Andrew Everett and I’m so pleased and honored to be joined by Alastair Thomson, author of Cash Flow Surge: 101 no-cost and low-cost fast-action strategies to boost your cash flow. I posted a review of the book on thekeypoint.org which you can read, but I’m really excited to be able to speak directly with Alastair today. Hello Alastair.
[Alastair] Hello Andrew. Very nice to be here and thank you for the opportunity to have a conversation.
[Andrew] With 5300 miles of social distancing. You’re in Yorkshire, England and I’m in Santa Monica, California. And by the way, in your honor I have my cup of Yorkshire Gold here.
[Alastair] Well, snap.
[Andrew] So maybe we could just start. Tell us a little bit about how this book came to be with your 30 years of financial experience that led up to that.
[Alastair] Sure. I’ve worked in the business world for some time. I am an accountant by background, although I’ve done a range of other things in the business world at executive level, including some time as CEO and chair of different organizations. I think I’ve always been more interested in how accounting and finance can help businesses be more successful rather than kind of reveling in the detail of advanced tax policy or something like that. I’m not saying that’s not important. And clearly there are some people that really take to that, but it’s not really where I come from. Because I think, done in the right way, accounting and finance can actually be really helpful to help businesses grow. And that’s the element that very few people think of when they think about “how can an accountant help my business?” People often think, “oh well I can pay less tax or I can cut my costs.” And, yes, that’s true as well. But, I often think about it as, if something cost you, say, $10,000, the minimum you can ever spend on that is zero. You can only ever save the $10,000 you’re spending. Whereas if you can make $1,000 in sales into $100,000, or $1-million, or $10-million in sales, your upside is almost infinite. Whereas when you’re just looking at it from the point of view of cutting costs, all you can ever save is that 10 grand because that’s all you spend on it now. So I take a kind of different view of what accounting and finance can do for business.
I think really what I was trying to do in the book was to translate some of that and some of the stories and experiences. Because I think, again, part of the issue people have, well people who don’t work in finance have this issue, but actually some people who work in finance also have this issue, is that, “yeah okay, I kind of get the idea but I don’t know how to do it. I don’t have a template to follow. I don’t have a structure that makes sense. And so even if I want to do it I’m kind of stuck a little bit.” So I thought, well if I do a series of little stories and little experiences I’ve had in the past and collate them together, it’s not a theoretical thing, it’s not an academic textbook, but it’s something that if you’re a business person, you can kind of sit down with it and in five or ten minutes you can go through each individual idea and build that toward, over time, into something which hopefully makes a big difference to your business.
[Andrew] Right. It definitely reads like this book was written for either small business owners or CEOs of medium-sized businesses. It is definitely not a wonky book for accountants.
[Alastair] I’ll take that as the compliment I’m sure it was intended to be.
[Andrew] [Smiles] So I guess the point is, as you were getting at, accounting can be about taxes and balance sheets and so forth—or investors—the things that you traditionally think of accountants being focused on. But there’s also the managerial side of accounting. How can you use accounting to help you make better decisions and inform your decisions about running the business? And so the part that kind of interested me is, you’re coming at it from an accountant’s point of view as to how to be a better manager.
[Alastair] Yeah, I think that’s probably fair. I like to think of it like a lens that you can put on to something, or a filter. So, you can look at, let’s say, a factory as a kind of operational bit of activity. Some materials are coming in, and machines are working, and something’s coming out the other end. And you could see that as an engineering process where something is being manufactured. Or as I often do, I would look at that as a kind of financial end-to-end process. It’s not to say that the engineering of it’s not important, because that’s how you make the product. But I might look at that, and I might go, well actually, we could make this a more efficient, more effective operation. We could perhaps look at ways of reducing our unit cost, which is not about the engineering of it, but it might be about the organization of it. And the truth is, in a lot of these things the financial bit is the bit you come to last. And it’s only really the last kind of five or ten percent of it. Because if it doesn’t work operationally then there’s no point in trying to have some wonderfully designed and executed financial strategy, because it’s pointless. I think the idea that a lot of people think, “oh well, the accountant sits in a in a room somewhere and works out some spreadsheets and is going to tell us what we need to do.” I would say if you work for an organization like that, run a mile. Because sooner or later that’s going to go badly wrong. You’ve got to work with your workforce. You’ve got to get them as motivated as possible. You’ve got to get the quality of what you make as high as possible. You’ve got to make sure your customers are satisfied. Make sure they’re delighted, even, with the service that you provide. And then, if you can do all that, then you can sit down with your financial slide rule and say, “ah well, this is how we put it all together. This is how we make it work. And this is how the business is better as a result of doing whatever it is we’re going to do.”
[Andrew] There’s a there’s a quote I love, on page one actually, “As the old saying goes, often there’s too much month left at the end of the money.” It really encapsulates what cash flow is. I mean cash flow and profitability kind of overlap. A lot of the strategies that you talked about in the book would increase your profitability as well. A company can survive periods of unprofitability, but it’s very hard to last very long through periods of insolvency.
[Alastair] Yeah, that’s so true and it and it is one of those things that very quickly sounds like it is a bit of accounting nerdy stuff, so I won’t perhaps dive into it in too much detail, but those Generally Accepted Accounting Principles, or GAAP, which is the way people put their accounts together, for a variety of reasons, some goods some less good, they don’t necessarily reflect the actual cost you have of running the business: the money that’s coming in and the money that you’re paying out. And again, why I particularly focused on cash flow, this was exactly what you said earlier on, it’s designed to be something that people who are running a business, who are perhaps not accountants themselves, and they may only have maybe a fairly junior accounting person inside the business, or they might even have an entirely outsourced operation to somebody else, is to try and give them some tools to manage the cash. Because it’s the cash that’s going to get you a long time before the profitability does. If you look at even really successful businesses, like Amazon, for example… Amazon ran losses like nobody’s business for a very long time. I know we look at Jeff Bezos and say oh he’s the richest guy in the world, and by the way, wouldn’t it be lovely if he paid some tax now and again, but for a long time that organization gobbled up cash. The only reason Amazon survived while a lot of their peers didn’t, was, through good luck or good judgment, they raised a lot of money before the dot-com crash in the early 2000s. So they had plenty of it to see them through until the point where actually they became profitable and were generating cash themselves. And that’s an example of why cash and profits are not the same thing. Amazon had loads of cash and no profits back then. And now probably it’s good.
[Andrew] But most businesses don’t have that luxury—especially smaller businesses. They don’t have a VC behind them or public markets behind them. Was there a specific target demographic that you were going after? Say, businesses under 10 million or between 10 and 50 million or something specific?
[Alastair] I don’t think I would put a limit like that on it. I mean it’s not for large multinationals with, 43 million accountants in a head office in London or New York or somewhere like. That’s not to say they wouldn’t get something from the principles of it, but that’s a slightly different game. What I’m much more interested in is actually how business people, probably running their own business, although it might be quite a big business. It could easily be a £50-million business. But you know someone who is running their own business can actually make a difference to what they do and how they do it. And a lot of what I talk about are things that are maybe a bit counter-intuitive. And they’re maybe not the sort of things you’d expect to hear from an accountant.
[Andrew] Speaking of counter-intuitive, there was an example of that: high margins don’t necessarily mean high profits. Maybe you could speak to that one.
[Alastair] Yeah. I think it is one of those things because I think when you’re used to dealing with numbers, and you kind of think through what people are really trying to achieve, you maybe get a slightly different take on it. So a lot of people focus on the margin. I’ll talk to a lot of business owners and they say things like, oh we’re making a 50% margin, whatever the number may be. And okay, that’s lovely, a 50% margin, all things being equal, is better than say a 10% margin. So that’s great. But what they nearly always mean with that is, I buy something for £10 or $10 and I sell it for £20 or $20, so in their minds they’re making a 50% margin and that’s usually what they mean when they talk about that. The problem is that what they tend not to think about so much are all the other costs of running the business. You just go, “oh well, if I’m doubling my money on everything I buy of course I’m going to have a successful business.” And whilst that can be true, it isn’t necessarily true. So the example I mentioned in in the book is actually WeWork, which, for all its other problems, has actually relatively attractive margins expressed a percentage. The problem is that all the fixed costs they have of the business, of paying their own rent or the buildings they own and the taxes and the staff and everything else, account for a lot more than the margin that they make on the goods they actually sell. Whereas somebody like a traditional supermarket, and I use a British supermarket Tesco in the book but the same is true of Walmart or any supermarket around the world, actually trade on very small margins usually. But they’re making billions and billions and billions because although they’re making small margins, their costs are much lower than the amount of margin they generate, so a lot more cash drops through to the bottom line. And that’s why having a 50% margin is great, but what you really need to say is, “what’s left over after paying all the other costs of the business?” And it’s not as clear cut as saying a 50% margin is better than the 10% margin.
[Andrew] So you have to factor not just the contribution margin, but also the fixed costs. There was another example that’s related to this too. How do you get those margins? In one of the chapters you talked about sacrificing quality in order to increase your margins.
[Alastair] Yeah, and again it’s one of those sort of slightly counter-intuitive things because usually what happens, and accountants are very good at this, because you know it’s what we’re taught to do as part of our professional training, is to is to look at the costs of things. And it’s one of those things where I was sort of brought up in a time when things like Total Quality Management and things like that were very much de rigueur. There’s a book which I know you like, and I like as well, called Quality is Free by Philip Crosby. I discovered that, oh I don’t know, probably 30 years ago, something like that. But often the way to increase your margin is actually to make a better product and to serve your customer. Because a lot of cost goes into putting things right that go wrong, and to satisfying customers who are currently dissatisfied. And in a lot of businesses, if you could just stop doing those two things you would actually find that your cash flow would improve you’d find your business is easier to run because you’re not chasing around all the time because customers are calling you up, going crazy on the phone. And actually you’d have the time to manage the business properly because you don’t have to break off whatever it is you were doing to fix a problem you created yourself a week earlier, two weeks earlier, a month earlier, when you kind of looked at something, “Oh it’ll be okay, the customer won’t notice.” But of course a month later they have noticed and now they want you to give them a discount or give them some money off, or do a special favor for them in the next order, or whatever the case may be. So a lot of these things are, if we can make sure that you are managing the quality, the old get it right the first time mentality, you’re trying to make sure you don’t have rework, you don’t have customer returns, you don’t have customer complaints. If you can do all those things, actually you’ll find your margins will go up and your cost won’t change in the slightest. And that’s the great thing about some of the things in the book because the whole idea was things that you can do that aren’t going to cost you anything or aren’t going to cost you very much, but will quite quickly pay back in terms of increased cash flow, and, you’re quite right, also increase bottom line nearly always.
[Andrew] That’s a good segue into another question I had. There was a blog that you wrote. Your blog is called Uncommon Sense from the World of Finance. And you had a post called Improved Customer Service through Simplicity where you said, specifically what do we do now that irritates the customers? And stop doing that.
[Alastair] That’s an example of the same thing. I mean, you must have this, I have this a lot, I think probably everybody does, where you’re dealing with an organization who have decided for you how you will interact with them and they can’t accommodate any different way of doing it whether or not that’s actually what their customers want in the first place. Virtually anything you sign up for online is guilty of this. And you know, even sort of quite large organizations who talk a lot about being customer centric and so on, it’s not really a terribly easy way to kind of navigate the way through the systems. I’ve actually got something at the moment which is which is really interesting. A client of mine is thinking about buying some new software to run their businesses… specialist software package, there’s about three or four reasonable sized firms in the sector who provide that sort of software. I’ve been looking for options to improve the software which will reduce my clients operating costs. So that’s what I’m trying to do. The interesting thing with all these businesses, without exception, is I cannot get to talk to anybody about their service unless I sign up for a free demo of the software. Now I find that quite staggering. Because I mean I’m an accountant. I’m not the technical specialist who would be using that software anyway. I can kind of imagine what it probably does, but in the nicest possible way, I don’t really care what it does, because I’ll get the technical specialist to take a view on that. What I’m trying to find out is: How much does it cost? When can I have it? What sort of quality are you going to guarantee? What ROI are you going to sign up to? Do we have to manage this through an integrator or do we deal it direct with you? You know these are all the questions I want to know the answer to, none of which are going to be solved by a product demonstration.
[Andrew] Right. So don’t waste your customer’s time and don’t create obstacles to having them do business with you.
[Alastair] Exactly. So you know I’ve emailed these businesses. Nothing. Absolutely nothing. From the contact pages, I’ve left my phone number, I had a web chat thing with one of them, which is one of those dreadful automated web chat things which I hate with a passion.
[Andrew] You’re talking with a robot.
[Alastair] Exactly. But at the end of it I said, look here’s my number, here’s my email address. If a human ever gets around to reading this, please contact me because I would like to look at buying your software. I can’t for the life of me get anyone to respond. So that’s the sort of example where it’s probably some software selling best practice class all these people have been on. Although if that’s best practice, quite frankly, I think that term probably is under some severe question.
But you know people have been told this is how you sell software. It isn’t actually. It’s how you irritate the living daylights out of potential customers. Because you know you’d have to drag me over hot coals now to deal with any one of these organizations because all they’ve done up to this point is irritate me. And all I wanted was a simple answer to a question…how much is a license? That was really all I wanted. I don’t want the one-hour webinar. I don’t want the product demo. I’d like somebody to respond to my emails. I would like someone to take action based on the automated web chat. But, no. We’re not going to do any of those because we’re not even going to talk to you until you’ve done a product demo.
[Andrew] So during all of this time they’re not making the sale. One of one things related to best practices is data. And you have things to say about data. There’s a great quote: “The problem with metrics is that smart people try to game them and dumb people try to achieve them.”
[Alastair] Yeah. You might think that’s a little controversial and perhaps it is, but I find that there really are those two camps. Where you know you’ll have somebody who’s going, come what may, I need to make you know 47 calls a day or something. So they make 47 rubbish calls a day because that’s what they’ve been told to do. So completely disconnected from…what are we expecting out of this? Because actually what we’re expecting out of this is not 47 calls, it’s the four people who say, “yes, I’m interested, tell me more.” So it’s four people you’re after. It’s not the 47. But, in lots and lots of organizations, you’ll get the sales leads through from the marketing team, or maybe you’re developing yourselves, you do whatever, but people just pursue that I’ve got to make those 47 things. And that’s just not very smart. Because if you talk to 47 different people who are very unlikely to buy what you want, you’re not going to make any sales, never mind the four that you’re hoping to get. But then on the other side of it, I find you know what people often do is they look at something like that and go well you know I’ve got to do 47 of these what’s the what’s the easiest way for me to tick a box do my 47 and then I’m done. So you’re trying to find ways around the system and probably one of the one of the best examples I can give you, which always amuses me, and I had a kind of sneaking admiration for him even though I did have to fire him, but it was still really good.
I used to run a large customer contact operation, like a sort of multimedia call center operation, and we had a guy there whose stats were excellent. Call centers are very heavily statistics driven as lots of information built into the systems, easy to get. And there was a guy there who we thought was absolutely the best guy that we had. A very nice guy. A very pleasant guy to talk to. But one of our key metrics, as it is in many call centers, is call length. And this guy was always within his call length. Always. He never went beyond it. And we used to sort of use him as example to other people. You know, look your call was six or seven minutes long, but actually look he can do them in less than three minutes. What’s your problem? But purely by chance we had a kind of random selection process where we’d listen to calls, you know just to assess for quality and to help the senior management team kind of understand what was going on in the business and what real customers were raising. And what we discovered, the reason this guy was always within his target was every time the call got to about two minutes 55 seconds he put the phone down.
[Andrew] [Laughter] This is what’s known as the tail wagging the dog. The metrics are the tail wagging the dog.
[Alastair] It’s absolutely right. It happened once and we thought that’s a little odd, but you know maybe the line was broken or what have you. And then we dug out more of his calls and we discovered this was happening actually really quite a lot. And clearly it was unacceptable. For all sorts of reasons we had to part company.
[Andrew] And it set the benchmark. As you said before, you were coaching other employees, “if he can do it why can’t you do it?” Well, because he wasn’t making authentic calls. He was gaming the system.
[Alastair] Exactly right. He was a bright guy so he worked out that was how he stayed out of trouble. And he got everybody to say he did a wonderful job, and you get pay increases, and everything else in the back of it. So you’ve got to give him marks for the smarts if not for the integrity.
[Andrew] Speaking of integrity… Seriously, this is kind of a recurring theme in your book. You talked about doing trial projects during employee interviews, but you said if you’re going to do this, and you’re going to have people actually do work, you should pay them. You also talked about supplier negotiations. I think you used the phrase, “a good supplier is worth their weight in gold.” So it has to be a win-win. It has to be profitable from their end as well. There was another article that you wrote that I read where you use the phrase “moral compass.” So I just kind of see this as a recurring theme: Increasing your cash flow within the context of business ethics. So maybe you can speak to that.
[Alastair] Yeah. It’s something I feel quite strongly about. Before I answer, to give a slight little bit of context, I actually started off in life not as an accountant, but as a lawyer. So my degree is actually in law and then later on I became an accountant. It’s why things like corporate governance get me quite excitable, because it’s a bit like constitutional law frameworks where you know if you don’t get that bit right then all sorts of things can happen and none of them usually are very good. So, I do carry that bit of baggage around with me. And it does mean that sometimes I get a bit prissy about corporate governance and people go, “calm down, don’t get so excited about it.” I go, “no, no, it’s really important!” But part of the reason behind this is that first of all is an element of do unto others as you would have them do unto you, which is something that my grandmother and my mother sort of drove into me. But I think it’s also just smart business. So if we look at suppliers, for example, a lot of businesses have problem with suppliers. Suppliers let them down. They don’t do what they say they’re going to do. They don’t deliver on time. They cut corners with quality. There’s all that sort of stuff goes on because the suppliers are trying to game the system. You’ve beat them down on price, so now they’ve got to find a way of doing what they used to do 10% cheaper and hopefully you’re not going to notice the difference. That’s the basic scenario there, but the difficulty with that, though, is that what that means is you’re probably going to get a product that isn’t as good as the one that you thought you were getting. Maybe not in very visible obvious ways, but in one way or another, it’s not going to be as good, because you’re not going to be able to justify that if you’re the supplier. And what that then does, it means that when your business sells on the product, which is incorporated whatever it is you’ve bought from that supplier, that is also not going to be quite as good as it was before. And that’s going to then lead to, in all probability, some degree of customer complaints, quality issues, the things we spoke about before. Where actually that’s going to come back and bite you. The trouble now is somebody who supplied you with a fitting or something that costs five bucks that you’ve put into your system that cost a grand, well, now your customer is going to raise a grand’s worth of hell with you over a five buck fitting that you ground down from $5.50 or something because you were doing stuff to improve your margins—you thought. Actually it’s completely backfired on you. You would be much better off taking that $5.50 of initial cost and then working through with it with your customer to give them all the reasons why they shouldn’t be paying you a grand for this they should be paying 1500 quid for it.
[Andrew] If the attitude of senior management is to cut corners, that probably gets sensed by employees and trickles down as that’s the M.O.
[Alastair] I think that’s right. And I know a lot of organizations run on that because you know, we’ve got to hit the numbers this quarter, we’ve got to report to the bank, we’ve got to report to the group CEO. You know, whatever those things may be and they’re all the drivers. So yes, at some level that’s right. I get that and I do understand that. And there is a bit of a challenge to get you through that gap from where you are to where you need to be. But it’s a remarkably quick thing. It’s not often one of those things where it’s going to take you like four years to make the sorts of improvements you need to make. It might take you two or three months. Those two or three months might just dip across a quarter end or something. You might have to ride out a little bit of performance in one quarter to make sure you nail it the next quarter. So we’re not talking about enormous amounts of time. But of course, this isn’t for the chief executive of Coca-Cola or whatever.
This is about someone who’s probably running their own business, or perhaps part of a family business, or more entrepreneurial setting. Actually it’s up to them if they want to go, “well, you know…If we don’t make it March, but we make it in April instead, I’m not too bothered.” And that’s one of the advantages of owner-managed businesses. You can actually take that slightly longer term view that maybe if you were Coca-Cola or Walmart or one of those organizations maybe you wouldn’t have quite so much freedom to do that.
[Andrew] Too much outside pressure in a public company like that.
[Alastair] That’s right. It’s always rather amazed me that people say things, oh well you know I’d love to I’d love to offer better customer service but it takes too long to pay it back. I’m thinking, well what are you doing that it’s taking you six years to see a benefit from improving your customer service? Because my experience is you’ll get that in a couple of months. It’s a kind of excuse to say, oh well you we’re not even prepared to consider a different way of working when actually you’re almost talking yourself out of being successful. Because it’s pretty quick or it might not be two months, maybe three months, or four months, but it’s not six years. And that’s the opportunity I think a lot of people are missing.
[Andrew] You were talking about improvements. Chapter 30 of your book talks about the biggest single contribution you made and it talks about continuous improvement. Can you talk about that?
[Alastair] Sure. I used to run a manufacturing business in the printing industry. We were printers and we produced predominantly packaging, the sort of boxes that you might get like breakfast cereal in, or something like that, was the sort of thing we did, and actually, you’d be interested to know that Yorkshire Tea was in fact one of the people that we used to print the boxes for, Andrew. That’s it!
[Andrew] [Spontaneously produces a box of Yorkshire Gold] There we go…Alastair’s product.
[Alastair] Well it was several years ago. And let me tell you they’re lovely, but they’re hellishly difficult to print, but that’s a different issue altogether.
[Andrew] We’ll have to do a separate conversation about printing challenges.
[Alastair] Exactly. But part of the challenge there is to think about, we’ve got to make a manufacturing process work. Printing works by… you’ve got ink, you’ve got paper, you’ve got a printing plate. We were lithographic printers. That’s how the process works. So you’ve got to respect the mechanics of the process but at the same time you’ve also got to think about well, how could we make this better than it is just now? How could we make this more efficient? More effective? One of the key metrics was… When your presses are running you’re making products that you can sell. When your presses aren’t running, by definition, you can’t make anything anybody’s going to buy because nobody pays for dead time. Of course as every job comes along we need to take the press down for a bit because we have to put on new plates, we might have to fill different ink in the reservoirs, and things like that. We’ve got some fiddling around to do to make sure the job’s printing right to the correct standard and so on. But that is a cost to us because we still pay all the salaries, we still pay for all the depreciation on the machines, we pay for the heat, the lights, the rent, all that sort of thing. So our costs are running all the time, but our revenues are not, because the machine’s not working. It’s stopped while we get ready for another job. So one of the things we looked at was: what are the bits that happen in that process that we can minimize as much as we possibly can? And it goes from really little things to really big things. So an example of a really little thing was that the printer used to have to walk into our pre-press department to get the printing plates for his next job. What we did instead was we got the pre-press department to take the plates out and stack them next to the machine in the order the job was going to be run so the printer had to go two steps instead of… it probably took five or ten minutes a job to walk there to you know say hello to the pre-press guy, to make sure it was the right plate, to walk back again, to fit them, etc., etc. So we get 10 minutes down to probably 30 seconds. And if you do enough of that often enough It’s amazing how many more jobs you can fit in the course of a day. And we didn’t change anything about the printing process because the way the machine works is that you press some buttons on the front and it and it does things automatically. We didn’t change anything about how we printed. We changed all the stuff around it, which meant we spent more of the day printing.
[Andrew] It sounds like the continuous improvement point is that it’s not one gigantic, one-off initiative. It’s an ongoing process of lots of little things.
[Alastair] It is. I think the one key thing I would add, though, is the little things have got to be driven alongside the people working the machine or, you know, obviously in a different environment people in the office or, you know, whatever line of business you might be in. Because it’s first of all, if you’re sitting in an office away from the shop floor you would never know that was going on anyway. Also you’re in the worst possible position to start issuing instructions to people on the shop floor to say “we need to take half an hour off the make-ready time, so I want you to do x, y, and z” because you don’t have to make the thing work practically. And the guys on the press are not committed to your solution. Because, well, they probably think you’re an idiot, quite frankly.
[Andrew] What does this accountant know about printing?
[Alastair] Exactly. But if you work with them…and you know one of the things that I did was I helped them understand that we wanted the press to be running as much of the day as possible because that was generating the revenue that paid their wages that allowed us to make a profit to reinvest back in the business. When you work with people and they understand that. And they have to believe you’re sincere. That’s the only other thing. Because if you if you do all that and then you fire half your printers then no one’s ever going to help you again.
[Andrew] Staying in touch with the front-line staff is another theme of the book. There were a couple of things that I remember. One was your daily five-minute meeting at the beginning of the day and then another one was later in the day you would you would walk around and talk to everybody.
[Alastair] Definitely. One of my fundamental principles is there are two people who can tell you everything that’s wrong in your business. One is your front-line staff and the other is your customers. If you want to know why your business isn’t working, if you ask both of those you’ll have everything that you need. I’d love to say that the answer is an accountant comes along with a magic wand and sorts it out for you. I’d love to say that, but it’s not true. But both those groups can tell you what’s going on in the business and they can tell you what’s not working. Particularly, one of the things I used to do a lot was when I used to kind of walk around and talk to the guys around the factory and so on, it was trying to understand what has got in the way of them being able to do the very best they could have done today? What didn’t happen that should have happened? What happened that was okay, it just happened ten minutes too late or half an hour too late? Or they were waiting while somebody did this other thing before they could come and help them with that or all those sorts of things are things that that got in the way.
Within a lot of businesses, whether people recognize it or not, a lot of effort goes into kind of undoing or redoing things other people have already done or not done or should have done, but never get round to or whatever in the business. And again, it’s a case of, if you stop doing those things, if you just take them out, if you just connect the dots a bit better. Because a lot of organizations run in hierarchies. So I’m this department and I’m that department and what we’re trying to do in each department is to go, well, how can I be the best: The most efficient finance person I can be. Or the most efficient HR person I can be. Or the most efficient printing person I can be. Actually, often you can do that as long as you’re not too bothered about screwing everybody else up. I could run a much more efficient finance department if I was never concerned about paying any suppliers. It wouldn’t work for very long. But I could be really efficient.
[Andrew] So this sounds like, basically, there may be things that the front-line worker doesn’t really have the power or doesn’t feel like they it’s their place to suggest changes, but if you are in touch by meeting with them directly on a daily basis and you’re aware of these issues, you can take these obstacles out of their way to make them more effective.
[Alastair] Exactly right. Although again I think the important thing here is… That might be where you start, but it can’t be where you finish. Because what you have to be able to do is, you have to be able to empower the people in the front line to actually have those conversations themselves. And for people, whomever they’re talking to, to understand that actually what I’m hearing is something important. You know, if somebody from the printing press comes to me to says, “Look, this thing that you did meant we had half an hour of down time in the machine today. What can we do tomorrow to make sure that doesn’t happen again?” Whomever it is they talk to, even if it’s somebody quite senior in the organization, they need to go, just a minute that’s quite important. I should be concerned about this. I might be the sales director or something like that, but I should be listening to what this guy from the printing press is telling me because that’s going to be affecting the business.
And it only really works when actually I’m not involved. Because when you’re the chief exec of a firm, or whatever, or even the CFO to be honest—because people tend to listen to CFOs—if I say, look, this is the way it’s going to be, people go, “oh yeah, okay boss, that’s fine I’ll go and do that.” But that’s not success. You know it might look a bit like it, but it isn’t. Success is when the guys in the front line are doing it and everybody else is seeing it as important as I would. And in fact, the guys in the front line would because most people on the front line want to do a good job. They want to do high quality work. They want to be appreciated for what they do. They want to be recognized as people who make a difference in their business. That’s what people want in the front line.
[Andrew] It speaks to intrinsic motivation. Nobody wants to be a drone. Everybody wants to feel like they’re doing something meaningful. Quality work.
[Alastair] Exactly. I mean do 5% of people or 2% of people not do that? Yeah, of course. But you know 95% or 98% do. They’re the guys you want to work with because, if you support them, they will make your business a better business and it will generate more profit, it will generate more cash. But it’s a different way of running than most organizations would do who are more used to that kind of hierarchical structure thing where the bits are not as well connected as they probably should be.
[Andrew] One area where a lot of companies spend a lot of money is on marketing, branding, advertising. Sometimes there’s not an immediate payback on these things. So I was curious to see what you had to say about the short-term and the long-term nature of marketing expenses.
[Alastair] Yeah. I’m very much a supporter of marketing, which I think is often misunderstood and misinterpreted. Because to answer your question, I have to kind of take it back a little bit to the value of an organization. The value of an organization nowadays is based largely on what an accountant would call intangible assets. So things like intellectual property, or the branding, or the customer satisfaction, or the customer repeat purchase propensity, or any of those metrics that you want to think about. They’re the ones that really matter in the business. They determine your future cash flow, which at least in theory is how your business will be valued. They’re not things that you can buy in a package from a shop or you can manufacture on a lathe, or something like. It’s not a scientific mechanical process. It’s a very ethereal process. So you have to be working on those things. And for me, a bit like we were talking about quality earlier on in this conversation, marketing is the same thing. If you get that right, and if you think about working in the longer term, then actually you can generate significant improvements in your results. A good example at a client not very long ago: I did some analyses with their customer base. I discovered that a large part of their marketing expenditure was spent on attracting customers who were by definition going to be unprofitable customers for them. The marketing team, to be fair, were just going, “well we’ve been told to get more sales so we’re off to get more sales.”
[Andrew] But the sales people are usually incentivized on revenue and they don’t necessarily understand the margins.
[Alastair] Well, exactly. And also in a lot of organizations people don’t understand the margins at granular enough level. So you know they might get the gross but they might not necessarily work it out all the way through. So basically customers who are always trying to beat you down on price and who never pay you on time aren’t anything like as profitable as you think they are, even if they’ve got a fairly attractive gross margin. I find in most organizations I go into, the customer they think is their most profitable customer almost never is. Because what they’ve got is, oh we supply this to Coca-Cola and that’s brilliant and that’s lovely and oh look we’re making a 50 percent margin. Coca-Cola are really giving you the runaround to deliver that because they recognize that you get some kudos associated with being a supplier so they’re going to get every penny out of you they possibly can. And you will probably willingly give it to them as well.
[Andrew] If they become 50% of your revenue that makes you very vulnerable.
[Alastair] Exactly. And of course with a lot of large organizations that’s exactly what they want. Because that’s how they make sure that you keep behaving yourself and you keep doing what they want you to do. Sometimes you’ve got to be a bit…well first of all a bit bold, but second of all a bit dispassionate about this. Because if you’re looking at a situation where, yes, you might have a wonderful brand or what have you and if you want to say as part of your own marketing that you deal with Coca-Cola and that’s one of those names you put in your PowerPoint slides, just accept a big chunk of that is really marketing cost. It has nothing to do with you making any money out of dealing with them.
[Andrew] It’s just bragging rights.
[Alastair] Yeah, exactly. You’re having the bragging rights. And as long as you’re clear that’s what you’re doing, then keep doing it. That’s okay. But a lot of people run the business on the basis of: this is how we do things. And actually you might well be better off not dealing with Coca-Cola because what you’ll find is you can then run the rest of your business so much better, that it’s a vastly more profitable organization, with a lot less time and effort and hassle and aggravation. Because what you’ve done is you’ve attracted the right sort of customers for your business whatever they may be. So that’s the sort of dimension where I think working with colleagues in marketing and thinking about how we’re going to sell this, and who we’re selling it to, and is that really going to generate as a cash flow, because if you’re dealing with, again, I don’t know about in the U.S., but in the U.K., if you’re dealing with a major supermarket over here, you’ve got really long credit terms. If you’re supplying to Tesco or Sainsbury’s or Asda, which is the kind of Walmart over here, you might have 90 day credit terms or 120 day credit terms. Well, if you’re only making two or three percent margin and then you’re having to wait 90 or 120 days for your money, you’re probably not making any money really, whether you think you are or not.
[Andrew] The cost of capital.
[Alastair] Exactly. It’s kind of thinking those things through. For me, the whole purpose of marketing and branding and all those other types of expenses that we that we spoke about, is it should be about bringing in more of the sort of people that you really want to be dealing with. It’s not just about making a sale for the sake of making a sale. It’s not about bragging rights…although if you want to do that, that’s fine. Just be clear that’s what you’re doing. But the bulk of your activity should be generated at: where do we make the most profit from? Or, where can we engineer a greater profit from? Maybe the way we do it now it is not, but it could become that. And then, how do we try and focus on making sure that’s what attracts us. And I know there’s a lot of talk about social media and digital marketing, all that sort of thing. I think sometimes people get a little bit wrapped up in the technique and they forget actually the principle behind it. So whether you’re doing it on Facebook or Twitter or LinkedIn or whether you’re doing it in inserts in the local newspaper or whatever, if you don’t know what customers you want more of, it’s very hard to get your marketing right. Because you’re probably not approaching them in the right way, you’re not approaching the right publications, you’re probably not using the right language to talk to them. Like I was saying earlier on, the guys selling the software they wanted to talk to the specialist fee earners in those fields. They weren’t set up to talk to an accountant or a finance director, even though I would have thought that they might well be quite commonly the sort of person who would call a software company to say we know you’re selling this, how much is it? It’s a fairly basic question. But from their marketing point of view they’d never even conceived of the possibility that that might happen and therefore missed out an opportunity.
[Andrew] I know I said in the beginning that this book was very understandable for somebody without an accounting background and it doesn’t dive into the technicalities of income statements and balance sheets, but I did want to ask a question. Because we had spoken about the fact that the book is more about the perspective of managerial accounting, how to run your business based on the financial perspective, financial information informing your decisions… So, within an income statement you break down your sources of revenues and then all of your expenses. Do you do you find that having an increased amount of granularity in the expenses helps to discover more actionable information as opposed to just rolling everything up into catch-all categories?
[Alastair] It’s an interesting question. I think it can do, but sometimes it obscures more than it illuminates. I think I would take it back a stage further and say that before you get to that that sort of level, you actually need to think about what is the information you’re going to want out of the back end of this process? And where are your priorities? Irrespective of whether or not I would think this was a good idea. With many organizations, particularly if they’re VC funded, it’s all about growing the top line. That’s their priority. So the set of information that you would probably need, if that was your primary focus, would be a very different from a bulk chemical manufacturer, who was dealing with a (by and large) steady demand of a (by and large) well understood product that they’ve made for many years. So I think the information requirements are quite different and this is where, to get your cash flow right, you actually have to start right back at the beginning with: What’s your strategy? What are your objectives? And then all the things that you’re doing should be around: how do you support achieving that objective? If it’s sales growth, if it’s squeezing the last 0.07% efficiency out of your chemical manufacturing process, whatever. Those things set the template for what you need to do. Then that sets the information needs from a management accounting perspective. Because, again, when I’m working with clients, what I’m very often doing is, I’m trying to present their financial information differently. Because that makes it easier for them to understand what their key issues are.
I say this a lot to clients, so if any of them see this, they’ll hear this quite a lot. But one of my mantras is, if I’m doing my job really well then it should be obvious what decisions you need to take in the business. I should be presenting you with information in such a way that you don’t spend hours and hours and hours going, I wonder what he means by that? Oh well it could be this, it could mean that, maybe it’s this other thing. I’m doing my job well if I’m presenting you information, you go, “Right, I know exactly what that is, I know exactly what that problem is, and I know what we need to go off and do and fix it.” That, for me, is what you’re trying to achieve. Whether that’s your year-on-year top line growth or your 0.07% out of your manufacturing process, all that information should be arranged in such a way to focus in on those key metrics because they’re the things that are going to make a difference to your business.
[Andrew] This may be too big of a question to answer but I’ll ask it anyway. I mean it may take forever. So, the cash flow problems would be different I would imagine, depending on the phase of whether it’s a startup company, or a growth company, or a mature company. Would you like to speak to that question?
[Alastair] Yeah. I suppose the main challenge is if you’re running an established company whether it’s doing well or whether it isn’t, it already has some cash flow. So you’ve actually got something you can work with. It may not be in an ideal setting. There may be all sorts of things you want to do with the business. But you’ve got some customers, cash is coming through, there’s some financial velocity going on in there. You’ve got some options. The harder bit with a startup, and I suppose it’s, I forget which one of Newton’s laws, anyway it’s a lot easier to keep something going when it’s already moving than it is to get something moving when it hasn’t started yet. And that for me really is the cash flow challenge for more businesses more at the start-up end of the spectrum. Because they’ve got a different issue. Because their primary concern is around cash burn. How quickly do we go through the cash we’ve got or can reasonably expect to have? We might not have it now but maybe we’re going to be able to draw down a bank loan in six months’ time. So we can factor that in. But, are we going to live long enough to get to the point where the revenues coming in bring in enough cash to cover our cost so we can keep operating? And that primarily is the key metric in those smaller start-up, more entrepreneurial businesses. And it’s also a lot harder to predict. Because if you’ve run a business (whether you’ve run it or not) with a business that has been going for 30 years and it’s got cash flow, and it’s got customers, it’s got things like that. It is inherently much more predictable. Because if people bought 47 tons of soap powder last month they’ll probably buy about 47 tons of soap powder this month. So again, it’s an easier job. I’m not saying it’s easy to run that business, but trying to see into the future becomes a lot easier. If you’re starting a new app today to rival Tik Tok or something, well, who knows? Are you going to get any customers? Are they going to pay you? Are they going to convert from a free tier to a premium paid tier? Are they going to be downloading enough from Apple iTunes to be able to move up the rankings, so that more people download it? There are so many more variables in there, but fundamentally it’s about, let’s say, we’ve got nine months of cash and then we run out. So as we’re going along, what does our trajectory need to be and are we delivering in line with that trajectory so that we can reasonably expect to get there on time? So that’s where the differences tend to come. So creating cash flow is problem number one in your startup end of the operation and actually maintaining and optimizing cash flow is the problem with more established businesses. And then everything else tends to follow within those two different sets of parameters. But you’re absolutely right, Andrew. They are quite different dynamics and you would need to be looking at different sorts of things.
[Andrew] In a growth strategy I guess I was thinking that you could think you’re very successful because you have an enormous growth rate, but it could create some cash flow problems for you to keep up with that.
[Alastair] Well and that is also true. That’s why one of the key things for me is what I call the business model. Other people use different terms for it, but you actually have to map out where are the cash flows taking place in this business because in a lot of organizations, not all of them, but a lot of organizations, you very often are paying out before you get cash in. So even in a simple service business, probably you’re paying a salary today for someone’s work that you will bill at the end of the month and maybe 30 days later someone’s going to pay you. So you’re out of pocket for six weeks on that person’s salary before you’re going to get paid for the work they do today. But of course in a manufacturing environment or something that’s not just about people service by itself, you know very often people have to buy, let’s say, a truckload of material, or a ship load, or an airplane load, or a some much larger unit that they can then work off over a period of time. So that cash flow is actually significantly negative and only becomes positive after really quite a long time of being out of pocket. This goes back to one of the questions you asked earlier on about margins. So in that that sort of organization, people will go, oh our margins are very good. We don’t understand why we don’t have any cash. Well, I know why you don’t have any cash. Because you were to buy 40 tons of material three months ago and you’ve still got 20 tons of it in your warehouse that’s why you don’t have any cash. All your cash is in your warehouse. And that’s a good example. We were talking a moment ago about financial information. That’s a good example of the sort of thing that you have to try and reflect within the financial information package every month to show people that’s where you’ve tied up your cash. Very often I work with clients… for example, one of the key metrics in nearly every business is things like… We call them debtor days. Receivable days, I think you call them in the States. You know people have got 73 days receivables or 42 days or some other number. And I was thinking, well that’s very interesting, but how much cash does that mean? If you sell on 30-day terms and you’ve got 77 days of receivables, that tells me that you’ve probably got 47 days’ worth of cash there that should be in your pocket, not in somebody else’s. And, actually, that might be worth a million dollars. So you’ve left a million dollars in somebody else’s pocket. That’s not going to do your cash flow any good whatsoever. So “do you want to keep dealing with that customer?” is kind of question number one.
Or maybe you need to improve your internal credit control processes. Or maybe it’s because you’ve got quality issues and there are customers arguing about refunds so they are not paying you until you’ve sorted out whatever the quality issue was. But whatever it is, if you’ve got 30-day terms and 77 days receivables, something is far wrong in that business. And the quicker you get to grips with it the quicker you get that million quid back into your account, not into your customer’s accounts. And it should really be in your business account because terms are 30 days.
[Andrew] Wow. I think we’ve really covered a lot in an hour, Alastair. Thank you so much.
[Alastair] Hey, my pleasure.
[Alastair] Well just thank you for the interesting conversation, Andrew. It’s been a fun process putting a book together. If you’d asked me 10 years ago I never thought I would probably have written a book but I’m really glad I did and I’m really appreciative of the fact that you’ve been kind enough to read through it. You’ve made some lovely comments and you’ve also given me the opportunity to chat with you today, which I really appreciate. So thank you very much.
[Andrew] Thank you as well.