Why it is that so many SME Bosses still hold fire on implementing necessary major strategic and structural change, when they know pretty well what it is, in general terms at least, that needs to be done ?

Why do so many SME bosses still do this ? - when it has been well-documented for many decades that it’d be far FAR safer for them and for their businesses to be getting on, and focusing on the ASAP planning and then safe implementation of such necessary strategic and structural change, and via whatever thoughtful means are deemed to be most appropriate, in order to be able to protect the future of their businesses   

The Company - A well-established manufacturer of very high quality, up market designer domestic lighting products, which has been family owned for over twenty years, and turning over approx £5/6m per annum over the last few years, and employing approx 90 people

The Situation - All output was sold into Department Stores networks around the UK, but the business consistently achieved an extremely modest pre-tax net profit, each year of maybe approx £50k after all salaries, expenses and perks had been taken in to account. The company operated in working capital terms primarily on substantial overdraft facilities which had been cut some year or more previously by approx 33% and the business was now hitting the revised overdraft ceiling some three or four times per year

Personal and Business Objectives - The business owner and founder was in his early fifties and wished to retire well before his 60th birthday. He sought ideally to somehow create serious exit value in his business to provide for himself and his family in retirement

The perceived problem - The owner could not envisage what he saw as a realistic and practical way of significantly changing the pattern of business results year on year, and the cut in the overdraft facility was putting more pressure on already strained cash flow and profit forecasts. An OMSG Senior business mentor was called in to advise on how to possibly plan, and most critically to facilitate the successful implementation of, a break in the long term trading patterns, in order to attempt to move the business over to a position after say three years or so in which the owner would have built said serious Trade Sale value in to his business and to be able to meet his retirement objectives

The real problems - There was a wholly inadequate level of net profitability, ie effectively Nil, no fixed assets of any significance, and the existing business model was inherently seriously cash negative, with department store customers taking 90 days and often more to pay their bills. Cash flow also suffered as a result of too many Sale or Return and Sale on Consignment arrangements. It was felt also that the department store business model, in to which the firm was selling, and upon which it was 100% dependent, was in long term terminal decline. His business was effectively worthless

The process - During several analysis and planning sessions between the OMSG Senior business mentor and the owner, sometimes involving other members of the Mgt Team, possible and then preferred strategic changes were discussed, and then most importantly validated and agreed, most of which the owner had considered previously but about which he had not felt confident enough to proceed and most particularly to implement. Further sessions together generated a realistic plan of action which was encapsulated in a two-page document plus, associated financial modelling exercises - and determining exactly who should do what and when in order to ensure that the changes that were proposed were going to be implemented fully and successfully during the three year project period

The strategic change - Realistic targets were set, of an increase production, but only marginally by say an extra 10%, and then initially, re-allocating at least 25% of that revised total production away from Department Store network sales to Direct Sales, via both Factory Showroom and Website selling, albeit incurring significant b2c promotional outlays, this designed to dramatically increase the average %Gross Margin across the whole, ie from say a company average of 10/15% to 60% plus in the New Division, and to introduce simultaneously some markedly cash positive elements in to the overall corporate cash flow profile

These measures were designed with the aim of attaining an increase in net profitability from effectively £Nil to say £1.5m per annum within two to three years. Furthermore, the said re-allocated turnover, whether that be via Factory Showroom or via Website sales would be handled only on a Payment with Order basis which would provide the dramatically improved cash flow profile being sought
It was agreed that the OMSG Senior business mentor would stay involved throughout the three year period whilst the proposed action plans were to be implemented, in order to ensure that said plans were actually implemented by the Owner and his Management Team on time, to budget and in the manner sought.

The results – Within the end of Year Three, net profits were indeed running at the required £1.5m per annum, and the business was no longer needing to run any overdraft facility at all, and in fact generated surplus cash at all times, which was now always needing to find a good home, a new and rather nice problem to have  !  - The business owner could furthermore see a a sensible, practical profitable mid term exit strategy, which when based on an Exit P/E of as low as 5 would generate £7.5m for his retirement plans

The key to success –

• The courage, and the confidence, achieved via facilitation and validation with the OMSG Senior business mentor, that the proposed Strategy Change Business Plan and its Action Plan could and would actually work
• The absolutely key implementation support from the OMSG Senior business mentor throughout the totality of all the implementation processes over the three year period, so as to ensure that everything in the Action Plan actually got implemented by the Management Team, and on time, within budget and exactly in the manner sought.

More next month on another topical issue for SME businesses.

January 2010

©OMSG Business Mentoring Ltd - 2010