The best way to cut overhead costs in big companies

This article describes the way that the principles of Activity Based Costing were used to cut overhead costs by approximately 20% in one large group that I worked for.

Activity Based Costing is the term given to a particular way of analyzing costs in order to manage them more effectively. It arises from the premise that costs are driven by activities. In other words you don’t just decide to employ a new person or buy materials or engage a consultant for the sake of it. You do those things in order to perform activities in the business. The more complex the manufacturing process, the more things have to be done to make the product (activities), and therefore the more people and materials have to be purchased to make it.

So thinking in this way is different to the normal way of looking at costs. Normally you have a profit and loss statement that says you spent so much on employing people, so much on occupying a building, so much on raw materials, etc. Looking at things that way is not completely useless, but it only goes so far. In a sense it answers that “what?” question. What have we spent money on?

Activity Based Costing (“ABC”) goes deeper to try to answer the “why?” question. Why do we spend money? What are the things we are doing that mean we have to employ this number of people, or buy this much raw material?

Now, in my experience, ABC is usually applied to manufacturing processes and direct costs. It allows insights to be gained into the costs of products. For instance, you may find that a costly activity in the process of making a particular product is the initial set up of the equipment. Therefore, you can make that activity more efficient be lengthening production runs. ABC therefore tends to go hand in hand with process analysis, because you can’t do ABC without analyzing the process. ABC is simply putting a cost on each activity in the process. Then disciplines such as Six Sigma, Total Quality Management, etc, come in to help to identify how the process can be improved. ABC leads to product profitability analysis and customer profitability analysis. In fact, it opens up many new ways of looking at the profitability of the business.

The one thing that is normally set on one side in Activity Based Costing is overhead cost. Overhead cost is primarily fixed or long term step costs, such as business management, Finance, HR, premises, legal, insurance, and so on. Old school management accounting would have said that if I want to work out the profits of each product, then I would have to allocate some of these overheads to each product on some basis. However, when I studied ABC I was told that allocating overheads to units of product (or anything, for that matter) was pointless, since products do not drive overhead costs. So it would be misleading to say that I make £2 profit per unit of a product, because it suggests that if I double my sales of that product I can make additional profit at £2 per unit. And that’s simply never going to be true. Doubling output may not lead to doubling overheads (one would hope not normally!). Or it may lead to more than doubling overheads if the additional volume takes the business past a major step (e.g. warehouse capacity). The point was that overheads should be left out of the analysis because it distorts things by including them.

That insight was music to my ears when I first heard it! At the time my monthly management reports were divided up with a page for each product. The direct costs were easy (in my case) to put against each product. But at the bottom of each page was an overhead allocation. Guess which bit of each product profit statement drew the most attention and argument each month? Yes, the overhead allocation! How much management time and energy was being wasted over something that was, to be honest, fairly arbitrary?! Overheads should be managed differently, and product managers should not have to justify the profitability (or otherwise) or their products with overheads arbitrarily allocated to them. I came straight back from my ABC course and took the overhead allocation out of the product profitability statements! Then we really started to focus on the real issues for the products – sales, margins, operational process efficiency.

But having set aside the overheads when looking at product or customer profitability, one cannot just ignore them. Having said they should be managed separately, how should they be managed? Certainly when I studied ABC, it did not seem to provide the answer. Perhaps I missed something!

Later on in my career I worked in a large utilities group, supporting their HR function in Finance and analysis matters. Across the group we spent hundreds of millions of pounds on overheads. And when the time came to tighten the proverbial belt, we had to find a way of getting to grips with the costs of overheads in different functions across different parts of the group. For example, the costs of HR did not just consist of a central HR department. There were about 12 different central HR directorates (ranging from Talent Management and Learning and Development through to Health and Safety and Occupational Health). Then there was the group HR Service Centre. And then each business unit had its own HR functions.

At my suggestion, to tackle the challenge we used the principles of Activity Based Costing to analyse the cost base and guide the decisions over where to make cuts.

First we asked each department manager to complete an Excel template. In this they listed each activity undertaken in their department, and against each activity they put a cost and headcount. The total cost and headcount for the department had to add up to the annual budget for the department. We also asked them to complete the latest forecast.

Since that information was still a little too granular we also asked the functional heads to categorise each activity in different ways. First, the activity driver – legal/compliance requirements; services required by other parts of the business; strategic initiatives; and “other”.

Speaking for the HR function, the analysis was pulled together practically by my Management Accountant, categorised by a 3-4 person working group, consisting of a couple of BU and central HR directors and myself, and then validated by the HR Leadership Team (the Group HR Director and her direct reports, including the Group Directors and the BU HR Directors). There were more than 400 rows of information, adding up to around £75m+ if I remember correctly. But, using the activity information in the data received, my Management Accountant and I came up with reports that could show the costs summarized in a few different ways to help the rather painful discussion.

The painful discussion was, having analysed the costs and categorized the activities, going through and further marking proposed savings against each activity. This started with senior HR Directors in each business unit discussing their own straw man proposals with the BU Managing Directors and their management teams. Then more pooling of thoughts and opinions within the HR Leadership Team. Then culminating with a presentation of a proposal by the Group HR Director to the Group Executive Committee.

The target cost saving had been given at the outset – there were to be 2 or 3 different proposals – small, medium and large! In other words they wanted to know what activities would be lost or cut back if they asked for cuts of 15%, 25% and 40%. So we knew what we were aiming at, at least in terms of analysis. The unknown was what the final savings figure would have to be. Each proposal to cut activities had to be accompanied by an assessment of the impact, strategically, operationally and tactically.

So you can see that ABC can be applied to overheads very easily, and gives a valuable and effective way of examining overhead spending especially when drastic cost savings are required.

The discussions that resulted from the analysis were very focused, well-informed and pitched at the right level of detail. The decisions were made confidently, in full knowledge of the impact.

… The sting in the tail of this story is that my own department was one of those where cuts were proposed in our activities, and the process resulted in my own redundancy (amongst many others)!!

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When Finance departments need to build bridges

The Marketing Director of a business I worked for once said in leading a seminar, words to the effect that, “functions like Finance, HR and IT are just overhead costs. They don’t add value. They don’t bring in new business or sell anything, and they don’t produce anything.” I didn’t respond at the time, but I remember being quite offended. I felt put down, as if he was saying that I was no value to the business. I was, at the time, I have to say, fairly naïve – this was my first job outside of public practice. What follows here are some of my reflections on the relationships between the Finance function and the other parts of a business, from working in more than ten different companies over thirteen years since then.


“Business Partner” – a misleading phrase

One thing that has mildly irritated me occasionally over the years is the use of the term “business partner” to describe aspects of functions that support and control the main activities of a business (which are providing goods or services to customers). In my experience, Finance and HR use the term a lot. I even use the phrase myself, because I know what people mean by it!

Normally, being a “business partner” simply means that the function or the individual is trusted to be involved in high level strategic decision making. This is as distinct from the mundane provision of information and operation of transaction or control processes.

I think the thing that irritates me about the term (albeit only mildly) is the misunderstanding it generates. This misunderstanding can be exposed by a few exaggerated statements:

- Some functions are not doing business, so they can only partner the business, or maybe just cost money. They don’t make or sell the product or deliver the service, so they are less important. So there are people you employ in your business that are not part of your business, but if you like them enough you may let them partner you in your business.

- Doing business is all about making the decisions, rather than the mundane processing and controlling. I, the CEO, and my board, are the business, because we make the decisions about the business. Business partners help me make decisions about my business. The other people in the functions are just recording, supporting, controlling and doing. The other people are not really part of the business. They just do jobs.

My view is: We are all the business, not a business partner. We all need each other. Not just the people making the big decisions. Not just the people making and selling and providing.

We all need to recognize the value of each other’s contribution to the success of the business. There is a passage in The Bible that speaks in this way about the church. It likens the church to a body. No one part of the body can call itself the body, but the body would not be a whole body without each part. Each part has its role and place, and importance, in the overall function of the body. The church is the body. So every member of the church has a gift and calling from God that contributes to the overall function and goal of the church. We cannot do without each other.

So it is with business I believe. We are all parts of the business, and without every part functioning properly and together the business will fail. This is my fundamental mindset when I deal with relationships in business. Each function and person must support each other in achieving the goal of the business – e.g. more customers, more sales, more profit, lower costs, a better brand, happy shareholders, stable cashflow, improved communities, etc.

So when managing a Finance team I encourage them to see themselves as helping the business to achieve its goals first, then in all their cross-functional relationships if they can help their colleagues it will ensure we are acting as one.

On the other hand when I speak with my colleagues in Ops, Customer Services, Marketing, HR, IT, and so on, I make sure they know what I am there for. Basically we are on the same side. I may have to challenge their spending or their performance against sales targets, question why they have not collected cash from customers quickly enough, set hard budgets, cut costs, and do many things they may not like. But if they know fundamentally that I do this, and Finance does this, because we are following our remit to help the business succeed – then it becomes more a question of asking for their help in achieving our objectives, whilst offering our help in achieving theirs.


Different personalities and skills suit different roles

Character differences produce a lot of friction. But it is possible to recognize that and get better at working together. Clearly Myers-Briggs, Insights, Belbin and the multitude of personality assessments demonstrate this clearly. But it is really self evident.

You get many different personalities in a team. And indeed everyone is different. But you also get certain personalities gravitating to certain roles and functions. I believe certain personality traits go with certain skills, although this is a generalisation that does not always work.

For example, an analytical person may gravitate to the Finance and IT areas, where there is a degree of set process, logic and numerical certainty. On the other hand, a sociable person may gravitate to areas that deal with people – HR, sales or marketing.

And each different business will require slightly different shades of characters within the different functions.

Recognising the strengths and weaknesses of certain character styles in different situations really helps to get people working well together. Instead of looking down on the marketing or sales person for the way they can’t understand the figures, or act unpredictably, we "analytics" can both help them with that weakness and seek their help when we need slightly more expansive and unstructured thinking. Working together creatively leads to competitive advantage.


Finance is sometimes seen as interfering

“What do Finance know about selling? So how can they give me these ridiculous targets?”

“What do Finance know about making our product? So how can they ask us to do it more efficiently?”

“Why do Finance ask us to fill in useless information on our transaction screens? They are just wasting our time.”

“Why do Finance always need an authorising signature on every bit of paper? They are the reason we are not as efficient as we could be.”

Finance people will be familiar with these and other similar accusations. How do we respond? How should we respond? Because one of the main things (though certainly not the only thing) a business is trying to do is to make money for its shareholders, Finance will always be in a central position and get its fingers into a lot of pies. And that can sometimes be seen as interfering in things we know nothing about.

The point I want to get across is that with every such complaint comes an opportunity for dialogue. That’s DIALOGUE! Not talking, not arguing our case, but constructive two-way dialogue.

But before I say something more about dialogue between Finance and other areas, I want to clear something up.

We Finance professionals are trained in Finance, normally first of all as accountants, and then analysts and financial managers. We are not (normally) trained in manufacturing, engineering, C++ programming or human resource management! So when we are accused that we don’t know these things, we should not try to make out that we do! We recognize there are things that we know and things that we don’t, things we are good at and things we are not.

But the next point is equally true – 99% of the time we don’t need to know either! For example, I may not know much about C++ or .net frameworks or web design, but when I challenge the IT department for employing contractors to develop an application, I don’t need to know all that. The thing I may need to know is what the application is for and how it will help the business (financially or non-financially). If they can’t tell me that, or their statement of benefits falls apart under scrutiny, then I have a right, as someone responsible for financial success, to ask them to stop. What we need to know is what is relevant to our remit as financial custodians.

But my main point is DIALOGUE. Every interaction with our colleagues, especially when we are challenged, is an opportunity to 1. Listen; 2. Understand; 3. Think; 4.Explain; 5. Change; and 6. Move on in working together (perhaps into a feedback loop so that the whole dialogue process continues).

1. Listen – Just ask them to tell you more, and then shut up and listen carefully. Finance does not have a monopoly on the truth. We don’t know everything. We need to learn. It also may be true that nobody understands perfectly the way the business works. Businesses are complex, they are made up of imperfect human beings, using machines made by human beings and computer programs written by imperfect human beings! Things never work 100% perfectly, and since we are not perfect we may in fact be the cause of the particular imperfection! This is your opportunity to learn about something in the business, and may turn into an opportunity to help.

2. Understand – Ask questions to get an understanding of the issue. Look for cause and effect. Ask who does what and when. Ask questions to help your colleague understand the issue they are raising. They may not fully appreciate what they are highlighting. You can help them simply by asking questions.

3. Think – Don’t just jump in with a suggested solution. Give it some thought. Go away and draw diagrams, process maps or play with spreadsheets if you have to. Ask other colleagues their opinion if you need to.

4. Explain – Ensure that your colleagues are aware of why you need information, or need things to be done in a certain way. What are the business consequences of them failing to follow procedures? Will we lose money? Will we pollute valuable information sources? Will we be less efficient? Get everyone on the same page. They may start to see how they can do things differently to achieve the desired result. There’s more likelihood of a win-win outcome if you understand each other’s perspective.

5. Change – If you need to. Being ready to modify things to ensure you can both achieve better results shows that you really believe you are both on the same side. It shows you appreciate their difficulties as well as your own requirements.

6. Move on in working together – if you have gone through this active dialogue then you will hopefully have solved a problem at the same time as making a friend and powerful ally. They will be both more ready to help you if you need something in the future, and willing to talk openly and less confrontationally about problems in the future. Keep the door open. Offer to review what you’ve agreed.


Final thoughts

Finance sometimes does not portray itself well. If you rely on Finance for anything it is to provide information on how the business is doing, and to make sure that transactions are managed and controlled efficiently and effectively. You rely on them to be able to analyse and tell you whether something will lose or make money. But sometimes we don’t do our job properly and lose respect and trust.

In those cases, in my experience, you have to be open, especially at a management team level. Explain what you are trying to achieve for the business, and how it will help. Share with your colleagues the problems you are having. Ask for help. There may be someone in another team that is good at process analysis, or good at Visual Basic macros, or good at training, or experienced in restructuring or integration. You would help them if they needed your help, wouldn’t you? And finally, keep sharing – share your successes and your problems. When you understand someone’s problems, share their successes and get involved in helping, you become more sympathetic. So get people on your side, because in reality they are already.

Finally, sometimes people in other functions don’t realize their actions have financial consequences. E.g. lack of detail in transactions leads to errors which leads to loss or time wasted. E.g. delays in dealing with Finance queries can lead to losses if it becomes too late to go back to customers to clear up errors.

Don’t just beat people up for doing the wrong thing and call them stupid behind their back. Go back to the dialogue outlined above, and educate them. I have found that if people realize the consequences of their actions, they are more likely to take care over doing things right. Point out where things are going wrong, and then start to listen to their side… then you’ve started a dialogue.


Conclusion

A business without Finance at the heart will be risking loss through errors, inefficiency or even fraud, and will risk making the wrong decisions through not understanding financial information. But Finance is not the business, and neither is it merely a business partner. We need to recognize the roles, remits, strengths, weaknesses and personalities at play across the whole business. We should value the diversity and work together to succeed in business through trust and open dialogue.

What should Finance do better to make relationships work? In short, better dialogue. You have two ears and one mouth – use them in that proportion! Be always more ready to listen than to speak. And communicate always with the assumption (whether or not there is evidence for it) that you are all on the same side, working for the success of the business.

Using Twitter for your business - Simply Business Knowledge

Using Twitter for your business - Simply Business Knowledge

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Work-life balance

I’ve reflected quite a bit on so-called “work-life balance” throughout my working life. Anyone who gets into key positions, especially in management or in expert roles, will face the “work-life” struggle. Work has the potential to stray outside the normal 9am to 5:30pm hours, sometimes by a long way and over a long period of time.

I’m certainly no stranger to the tension – I’ve been in roles earlier on in my career where I worked more than 60 hours a week, some days starting at 5:30am and working through until 2-3am the next morning on occasions. After my first redundancy, however, I became fairly cynical. Hard work, even the sacrifice of my own time outside the hours contracted, did not seem to produce any loyalty from The Company or increase job security. With four young children and a wife looking after them at home, I was also under pressure to give more quality time to them. So I started to rebel, in a non-dogmatic kind of way. I consciously tried to limit my working hours. But there are problems with that approach, and I have struggled, along with 50% of the working population if statistics are to be believed, with getting the right balance between putting priority on urgent work to be done and focusing on family and personal priorities.

Here are a few of my thoughts on the subject:

1. The term “work-life balance” itself is probably flawed and arises from the tension between two misconceived presuppositions. Do we live to work or work to live? Or neither?

The term “work-life balance” suggests that I have work on one side of the scales and life on the other, and the ideal would be to have them in a happy equilibrium. In other words it makes a distinction between work and life. My contention is that it is wrong to make such a sharp distinction. For me work is part of my life, but it is not the whole of my life.

The overwhelming pressure that we have found since the 1970s/80s to work harder and harder can be summed up in the phrase “I live to work”. Work is one of this generation’s great idols. Our work is what gives us meaning and purpose. It is what we do that defines our contribution to the progress of the human race. Therefore I should work as hard as I can, making sacrifices to achieve as much as possible.

We idolize entrepreneurs, sports stars and people who are at the top of their fields – people who have reached those positions by enormous effort, tenacity and sacrifice. To them the idea of balance is ridiculous. Success in their field is everything, and we admire them for achieving it and overlook the battered remains of families, marriages and friendships left behind in their wake.

On the other hand the classic “work-life balance” stance is the opposite – “I work to live”! Why should I let work consume every part of my life to the extent that I have no time and energy left to enjoy it? The purpose of life is to enjoy life. Therefore, work is a means to earn money to buy holidays and other leisure activities, including spending time with the family if I am the less selfish sort (and less and less of us are that sort, judging from the birth rate, marriage rate and divorce rate… but that’s another subject!). Just witness the explosion in the availability of leisure activities and the importance we place on music, movies, sport, entertainment, relaxation, experiences.

But we ought to realize that both those positions are presuppositions from different forms of secular humanistic worldviews. “I live to work” assumes that my purpose is to help the human race to make progress. So I should strive to have the job that helps me to do that best, using my natural gifts and abilities. “I work to live” assumes that my purpose is to enjoy the world around me because there is nothing else – “eat, drink and be merry, for tomorrow we die” – the classic hedonist catchphrase.

The phrase “work-life balance” is really a reaction against the “I live to work” mentality, assuming that work is taking up so much time and energy that I don’t have enough left to live life.

So my conclusion was that the reason the term “work-life balance” does not work for me is because it clashes with my Christian worldview. The Christian worldview would say that I neither work to live or live to work. God created human beings to glorify Him, telling them to “be fruitful and multiply and fill the earth and subdue it and have dominion over [creation].” We are called to be workers therefore, yes, but also parents, teachers, worshippers, members of the community – all in order to bring glory to Him.

The entrance of sin into the world has distorted our view of those objectives, blinded us completely in some cases, so that even my last paragraph will cause laughter for some, anger for others and complete mystery for others.

There is a lot more that could be said about Jesus Christ and his solution to the problem of sin – the Christian gospel. However, my point here is simply that our view of work and balance is based on our fundamental presuppositions about existence/life, knowledge and morality.

For me, from a Christian standpoint, everything in my life has to be done to God’s glory. That means work has an important part in my life, because God has made human beings workers. Family is important in my life, because God has given me an important role in raising a family. Community is important in my life because God said “love your neighbour as yourself”. Leisure is also an important part of life, because one of the ways we glorify God is by enjoying His creation (in a responsible way).

2. Work-life balance is sometimes portrayed as the domain of the family man or working mother.


One of my previous employers made real efforts to encourage work-life balance. And of course we have seen the UK government and EU try to legislate for it as well – parental leave to augment maternity leave, but applying both to fathers and mothers; the Working Time Directive; etc. But I well remember the mild bitterness of one female employee, a darn-good Financial Reporting Manager at the time, recently married with no kids yet. She said that really all the encouragement for work-life balance was so that people could spend more time with their families. But for someone like her, with no pressing need to get back home in the evening for kids bathtime or bedtime story, and her husband equally stretched and working long hours, she could never get a good enough excuse to limit her hours.

What she felt was that those with families were treated with sympathy if they wanted to limit their hours. But those with no kids were still expected to pick up the slack and do the long hours on their behalf! It didn’t seem fair. And to be honest, I can see that kind of discrimination being a reality.

(The Working Time Directive, I guess, was supposed to address that issue by limiting working hours for everybody, but in practice had no discernable impact on anything as far as I can see. What a waste of time! And people actually opt out from it too! Whenever you sign a new employment contract you are given a Working Time Directive opt out clause to sign. This means you waive your right to limit your working hours to 48 hours per week on average over 17 weeks. Employers are not allowed to discriminate against employees that do not opt out, and they are not allowed to compel employees to opt out. So why do employees sign this waiver of rights?! I have never signed the opt out… and at times continued to work more than 48 hours a week over a 17 week period! There have been no consequences on anybody one way or the other!)

Following on from my last point, this is a concern. From my point of view, every aspect of life has a place, and the childless person or single person must still be allowed to engage their outside-of-work interests without guilt, just as much as the parent must be allowed to fulfill their responsibilities as a parent. There should be no discrimination in favour of parents.

3. Where does the pressure to work long hours come from?

This is actually quite a big question. And there may be a different perceived cause in different situations. And there may be a cultural root cause (or causes) beneath those.

Do people work long hours because they want to? Sometimes the “I live to work” mentality comes through strongly. I have met people who so love their jobs that they spend every available hour on it. I don’t belittle them for it. It’s great to love your work. But often they are the big bosses, and they presume everyone else is the same!

Do people work long hours because they are forced to by their employers? This is really a rather simplistic way of putting it. If it means, do people get threatened with being fired if they don’t work as many hours as they are asked to, even if it is more than stated in their employment contract, then this is probably fairly rare. Similarly if it means do people sign employment contracts with specified long hours in them, because they wouldn’t be employed otherwise, then again probably fairly rare.

Perhaps emotional blackmail is more common than actual coercion. “C’mon, we’ll never fulfill this contract order on time if we don’t all put in some extra hours… yes, I know I said that last time and the time before…” And what this overlooks, of course, is that the employer has the power to employ more people to do the work and take the pressure off you. Why don’t they? Because they probably quoted the contract (in the example) assuming they could squeeze some extra hours out, or simply underestimated the work. And so, having won the contract, or priced the product, etc, they would start to lose money if they employed too many more people.

Similarly, perhaps fears over job security “force” people to work longer hours. They want to be seen to be the keenest, the people with the highest output. Then when the accountant’s red pen comes out (in my experience this is a gross caricature, so I’m not sure why I’m using it, being an accountant myself!) we will be lower down the redundancy list.

It would be too easy, I believe, to immediately point the finger of blame at the balance of power shifting towards corporations and away from employees, especially following the decline of trade unions and so on. Where do the pressures on us originate? When the big bosses set the department budgets, asking for year on year cost reductions while asking for greater output, they do it to try and achieve bottom-line growth. And why is bottom-line growth important? For public companies growth in profits allows growth in dividends, and growth and stability help to increase the share price, at least compared to competitors.

Why is share price important? Because companies want people to invest in them. If people don’t invest in them, then they have to borrow and pay interest. Investors prefer stable, growing, profitable, cash-generative companies. The riskier the business (i.e. more volatile or less tried-and-tested) the more return investors want for putting money in.

So it’s the investors who create the pressure. But who are the investors in your employer? For many it’s the government (NHS, civil service, education, etc), and therefore the ultimate stakeholder is the tax-payer – YOU! For the majority of other employees, working in public companies, it’s pension schemes, endowment funds, ISAs, etc. And who demands higher returns from pension schemes, etc? YOU!

So it turns out that when we demand better returns from our savings, pensions and investments, and when we demand greater efficiency from our public services – we are building more pressure on ourselves (as a group) to work harder!! Our own greed is driving our plight!

But again, that’s far too simplistic in one respect. The pressure from stakeholders to deliver returns or to be more efficient has always existed. What held back the long-hours culture in the past was a more balanced view of work. The working time available from the workforce was seen as a limiting factor. If someone was contracted for 40 hours a week, then they would only be asked to work 40 hours a week, and would be compensated for overtime. Nowadays it is common to see no reference to working hours specified in employment contracts (especially for management or clerical jobs), simply a clause to the effect that “I will work as many hours as it takes to get the job done”. So in the past we respected people’s time as their own, and therefore agreed to pay a reasonable salary for a slice of it. Nowadays we set the salary and say we’ll have as much time as we want in return!

In the past, the weekend was not for working. Shops closed, banks closed, not just for Sunday, but for part of Saturday as well. Nowadays 24/7/365 is almost the aim. There is now no one time of the week when communities and families can spend time together. We mocked keeping Sunday special, because of it’s Christian basis, but now feel the exhaustion and stress coming from a world of work without adequate rest.

We have given up on some of our moral principles, and have reaped the harvest of wealth, but not without human cost. My conviction is that workplace stress and long hours culture is not the result of a political or social policy (many people seem to blame capitalism and “The Thatcher legacy”). I believe it is the result of a moral and spiritual decline. It’s the result of changing views about what life is all about and the way it should be lived.

4. Conclusion

Work-life balance issues are simply more consequences of a shift in worldviews. There are no easy answers. My practical advice is to think carefully about how work fits into your life overall, and don’t assume that it has the same place for everyone. If you are a manager, respect each employee individually, recognizing quality rather than quantity of work; and see their value as holistic human beings (with families, communities and life-enriching hobbies), not just workers.

The Workthing+ blog

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Cash is King

First the basics - some would say the obvious – the fundamental requirement in keeping a business alive is cash. Not customers, and not profit – you can have both of those things and still have a business failure. Cash is like the lifeblood of a business. That’s why the maxim, “Cash in King” is so true.

Anyone in business should have heard this. But it may still seem confusing to you how you can be profitable and run out of cash and fail. If that’s the case then you can think more clearly about this by remembering one word – timing. Very simple example – I buy a car for £5,000 and sell it for £10,000. There is no question that I have a good customer and I have made a profit. But if I have to pay for the car tomorrow, and I am not going to get money from the customer until next week, then my business will fail if I don’t have £5,000 cash to pay for the car tomorrow.

The basics of cash flow management, really, are that to maintain the level of cash required to survive (zero or, perhaps, less if you have an overdraft facility) you must have more cash coming in than going out.

Sometimes the business is so consistently loss-making that it requires constant propping up by lenders and investors. Cash going out is more than sales receipts coming in, so more and more capital is required to ensure that the cash does not run out.

I worked with one such small business. The thing that amazed me at the time was that even after the last lot of capital had been used up, even though each month’s accounts showed a loss, even with no overdraft facility, the business managed to continue two months longer than anyone thought possible... and long enough to allow a rescue.

How did we do that? I think there were three key things that we did (apart from the obvious cost control actions that were necessary):

First, we produced cashflow forecasts in detail every week. The forecasts went forward 6 months - weekly for the first 3 months, then monthly after that. The base forecast detail was based on the same assumptions as the profit and loss forecast and went to quite a low level of detail. It showed very clearly when the shortage of cash would occur, how long it would last and how big the shortfall would be.

To get a feel for the level of detail, on the income side we forecasted three categories – i) receipts from debtors (i.e. cash for invoices already raised, based on payment terms and specific knowledge of each customer); ii) receipts from customers on projects not yet started, but the work has been ordered (i.e. so we know roughly when we should be invoicing for the work, how much and how long it will take to collect the cash); iii) receipts from deals in the sales pipeline and therefore may or may not come to fruition (i.e. there have to be probability judgments around which proposals will be successful, what the agreed prices will be, what invoicing timing will be agreed, and when the projects will start).

On the expenses side we forecasted different types of expenditure depending on its materiality and timing. Salaries, bonuses and commissions were monthly and fairly predictable. Rent was payable quarterly. PAYE and VAT also had a predictable pattern. Loan interest payments were fixed. Then staff expenses and other invoice payments were the variable elements. We knew from the profit and loss forecast and budget, compared to the actual P&L for the previous year, what a reasonable assumption of monthly expenditure would be. But we also knew that some of that had VAT added to it, some with foreign GST, some with no tax, and we knew we could flex the timing and size of the payment runs to a certain extent.

Second, we relentlessly monitored the bank account and the debtor list. The CFO would get copies of the bank transaction prints every day and check against what we forecasted. If customers did not pay when they were expected to, we would chase the project managers and customer account directors as soon as the invoices became overdue. As a result of that we got to the point where we had only a handful of invoices overdue for collection from customers.

Also, since our forecast of receipts went down to customer and invoice level, we were able to tick off what we had received compared to what we were expecting.

Thirdly, we knew what payments we could flex and therefore what our limitations were on payment runs. The extent to which we had cash to pay suppliers was determined by whether the inflows came in as expected. We knew we could flex PAYE payments by a few weeks, but there was a limit. And we knew that to keep the business going we had to keep paying the payroll, keep paying the loan interest, keep paying the suppliers. But we also knew that unless we started to make a profit we had to be careful with the timing of those supplier payments, and so we had a fairly tense few months when we only just stayed on the right side of some of our key suppliers.

Conclusions: Accelerate the inflow and slow down the outflow and you can make the cash go a lot further. Also, with careful, detailed monitoring and forecasting you can see a lot more accurately exactly when you need the rescuer to come in, when the investors need to increase their contribution, or (heaven forbid) you need to call the administrators. That's putting it negatively, but it applies positively as well - having surplus cash is not just a safety cushion. Surplus cash allows you to invest in the future without having to ask for extra investment from shareholders or ask for more borrowing. It also allows you to pay bigger dividends to the shareholders. Knowing how big the surplus will be and when it will occur will help to plan investments or dividends or the like.

So whether your business is loss-making or making a healthy profit, detailed, regular cashflow forecasts are essential.