How far can my sales drop?

I thought my entrepreneurial friends might find it helpful to review the look-up table above, which tells you - the maximum reduction in sales before you lose money:

First identify your company on the table by your Gross Margin and your Net Margin (after fixed costs) e.g. say you make 80% Gross Margin and 15% Net Margin, on an annualized basis, your sales could drop 18.75% and you would still breakeven. Proof, Sales are say $50m, reduced to $40.525m, GM now $32.5m, FC were $32.5m, still breaking even. It basically shows you that in high fixed costs businesses you can't afford to lose too many sales or of course you need to cut that breakeven-point down to size!

I find it's always useful to understand just how sensitive your business is to fluctuations in sales. This is especially true of software businesses where high operational gearing means that once you've set up your infrastructure you can really scale quickly and turn in some great margins.

XPO New England - Compelling Stories & the Dip

I had the pleasure of addressing some smart people at the first New England XPO on Compelling Stories and building remarkable businesses. Here is a version of my speech:

Growing a private company is about being the best in the world at something. It's about defining and dominating your unique market, your micro-market, your sliver of the world.

It's about Positioning & Performance. Today's business climate has one upside, there is more time to focus on choosing who you want to be. To be the best in the world. You see the best, the number one gets an unfair share of the spoils, eg vanilla ice cream, Google, number one selling CD, the fastest man in the world. Often second is not close in terms of reward. Being competitive I love running the 800m on the track. It is a hobby but one I like to do with passion. My goal this year is to produce the fastest time in the world for a 50 year old at that event. I've started well with my first race pushing me to #1 in the US. I've carefully chosen a specific event, trained for it every day at 6am and on race day I compete well knowing I'm ready.

Companies need to do the same. Are they going to be remarkable or invisible? Here is the good news - management get to choose. You get to tell your compelling story. Cirque du Soleil, Pixar, Apple, all got to choose what they could be the best at. All defined their unique market.

You see management follow the pyramid principal but they have it upside down. The pointy bit is at the bottom, that's execution and performance. Often this is done in a simplistic, naive manner and the top of their pyramid is long and flat, that's their over-complicated strategy. As we know the pyramid is pointy at the top, that's the myopic, focused strategy of who you are and what you do. The bottom is long and flat representing the multi-tasks and multi facets of execution.

In building your compelling story think about the following questions:

Why you are remarkable?
How you will make money?
Why is your team effective?
Where do you fit in the landscape?

It pays to be a contrarian thinker; Paul Fireman, the founder of Reebok is investing in a high end designer jean's business. VF Corp is rolling out more stores not less. As Borders struggles, Barnes & Noble is acquiring fast moving e-book retailers.

But strategy is what you leave out. It's easier writing a long report than a short one page executive summary. Entrepreneurs get restless. They can't get through the Dip, push past the boredom and the pain, hanging in past logic. It's about taking things out and pushing on with being really remarkable at one thing. E Bay are retreating from competing across the board with Amazon, Tiffanys are closing pearl jewellery stores to stick with their knitting. ING announced in April a $10bn divestment plan to simply their business. Simply and focus. Think Google home page v Yahoo.

You see Positioning, nailing that compelling story drives everything.

Think marketing - social media, blogs, facebook, twitter are all geared up to bring you qualified leads. But you have to be crystal clear who you are.
Think sales scripts - sales processes like Sandler or Jeff Thull books give great frameworks and words to use but they need a starting point, they need a compelling story to spread. You need to be clear on the business result you will achieve for your clients.
Think Product Road Maps - Apple have created amazing products and an amazing eco-system for apps for the i-phone but they've done it with a strong compelling identity.
Even recruitment, the acquisition of world class talents needs an evangelistic message to attract the best.
It's about choosing a space where competition is light or bringing to the market a fresh story that will disrupt the old guard. eg a potential competitor to Google called WolframAlpha

In summary, find your story, describe the business result you will achieve for your prospects and go build a remarkable business.

Stress Tests for Private Companies

Much publicity has been given to the stress tests handed down by the Supervisory Capital Assessment Program and applied to the Banking Industry. These tests are designed amongst other things to ensure banks have sufficient capital reserves to trade safely. What about the rest of the population? What stress tests would you apply to private companies to ensure they have a healthy, robust, sustainable future?
Here are a few:

#1: Cash Balances are fit for purpose.
Gold Standard: Under all reasonable future rolling 12 month sales forecasts, your cash flow can pay for your cost base over that period.
Comment: You need to think like a start up, take a very cynical view of sales lead times.

#2: Your compelling story defines your unique market.
Gold Standard: Your positioning in the marketplace articulates how you will dominate your unique market and the business result you will achieve for clients.
Comment: You embrace the phrase, companies are either invisible or remarkable.

#3: Drive passion, talk the walk.
Gold Standard: Staff need to be educated about your compelling story, inspire with your vision but remember to lead with action.
Comment: Executives need to spell out their message in a laconic (terse to the point of being rude) with clear expectations from staff.

#4: Recruitment of quality world class staff is a constant process not an event.
Gold Standard: You are constantly interviewing people, looking to upgrade staff and build a stronger team.
Comment: Think virtual bench, constantly in recruitment mode even during times of hiring freezes!

#5: Product & Service Innovation never stops.
Gold Standard: Think simplicity, clear out products that suck up resources and generate low margins, constantly create new relevant features for the winners and consider holes in your unique market worth filling.
Comment: Surprisingly, large corporations have not turned off R&D but in fact many show increased ratios, R&D as % of sales.

#6: Dependency is dangerous.
Gold Standard: Largest customers account for less than 10% of sales.
Comment: Use dependency in the short term to build cash but aggressively seek new enterprise deals to avoid being trapped.

#7: Private Company growth should be double digit.
Gold Standard: Smaller private companies (sub $100m sales) should be shooting for 10 to 15% growth despite the recession. (some are achieving 70%)
Comment: If you believe you have defined your unique market you need to be ambitious on growth

Scenario Planning

Over the last few weeks it's funny how certain phrases start to rise to the top of the noise.Three phrases have jumped out at me, economic recovery, behavioural economics and scenario planning. In one sense it's not suprising, we all want to know the future is better, it has to be!
Economic recovery appeared in Google search results 6,991 times in January, 7831 times in February and in the first week in May - 24,443 times. Another two I predict will gather momentum as well - Behavioural Economics and Scenario Planning. The new book Animal Spirits will propel behavioural economics into the spotlight arguing that our ideas and feelings about the economy embodied in our "sentiment" drives economic growth. But it's the last phrase Scenario Planning that is having a renaissance. I was involved in two major exercises in the 80s with Thomson and in the 90s with Shell building stronger businesses using this technique. For the un-initiated, the technique involves building a detailed picture of several possible future worlds in which your company will play in! It is not a prediction of the future. That would be to miss the point. It is a set of stress tests to determine what gaps , skills, products, resources exist in the current business to make it more robust going forward.
e.g. in the Thomson example the result of the exercise demonstrated how badly prepared we were for an advertising slump and what we needed to do to lessen our dependencies. Several years later, the advertising slump came but we had already sold the division for a premium price by then!
Small and large companies would benefit greatly in this current marketplace from using Scenario Planning to deliver revised policies for their businesses that are comprehensive, rigorous, forward looking and highly collaborative.

Positioning & Performance

There was a great piece by Robert Weisman in the Sunday Globe yesterday highlighting some lessons learned from the last recession. It described how Akamai Technologies realized that e-commerce would grow as traditional companies migrated online as opposed to chasing down new web companies that were disappearing every week. Thermo Fisher Scientific refocused on scientific instruments and sold off activities non-core to that new vision. Staples closed non performing stores but opened new stores in faster growing markets.
Recessions require a myopic focus on cash in the first 100 days but then it should be about positioning and performance. The next few years will reward companies large and small who take the baggage, the padding out of their strategy. You need to figure out what you can be great at and then execute your strategy with passion and skillful delivery. Most companies have an overly complex strategy and a naive simplistic approach to execution. It's the other way round. Simple strategy but a clever, measured, multifaceted execution.