Are small changes really better than being radical?
Small changes? Is that really an adequate response to the world today? Don’t we need radical action instead?
There is a time and a place for radical change, and many small companies are facing it right now. If your whole business model has been trashed by lockdown, you clearly need to think big in order to survive.
But many businesses do not want to take such risks. They need to improve their bottom line and recover from a recent dip (or maybe plunge) in performance. But the problem with big changes is that they often require a big investment in money and time, and any potential failure has a big impact. All very well when you can afford the gamble, but a scary proposition if you’re not used to managing projects for major change.
The alternative is the theory of marginal gains, or the power of one. Making small changes on a regular basis has a cumulative impact on your financial position without the massive overheads in time and money. And it spreads the risk across multiple small bets instead of one large gamble.
Hasn’t the theory of marginal gains been discredited?
David Brailsford was famously obsessive about marginal gains and improving every little aspect of British cycling performance. He instilled a laser focus on inspecting every small detail to find 1% improvements. From painting the team van floor white to highlight any dirt that might affect the cycle tyres to travelling with the team’s own pillows to promote a better night’s sleep in hotels.
Bradley Wiggin’s wife even lifted his suitcases into the car for him to avoid any risk of injury before the Tour de France. When it reaches this level of obsession, many people back away. And the image of the British cycling team has been tarnished by using loopholes in regulations to justify performance-enhancing drugs. Effective in raising performance? Yes. Legal under the rules? Just about, maybe, though the whole truth is still unclear. Admirable, even with the benefit of the doubt? Definitely less so.
The problem came when the desire for victory overtook the ethos of “winning clean”. But the original strategy reaped huge rewards, even while it was still totally ethical. Those 1% changes accumulated and translated into phenomenal results. A team that was laughed at internationally rose steadily to an incredible tally of medals at both the 2012 and 2016 Olympics and a stream of Tour de France successes.
So how can this help you?
The power of one uses the theory of marginal gains in your business. Develop a habit of looking every month for small changes to improve your financial position, and they will build incrementally to radically higher performance. Get the habits ingrained now in times of hardship, and you are more likely to continue in times of growth and prevent avoidable stagnation.
There are 7 key drivers in your financial figures to focus your planning. Improving the first four will make you more profitable and all seven of them will increase your working capital and net cashflow position.
Each month, take time to think what small changes you could make in each category, and implement those that seem to offer the highest reward for the least effort. Then next month, look again – perhaps one of the existing ideas might now be ready to take forward, or perhaps you will have been inspired to see a new possibility. The key is little and often, not just a one-off splurge with no follow-through.
1. Increase prices by 1%
Customer-centric businesses often hesitate to raise prices, and there is never a time that feels right for it. And it is true that raising prices by 10% will be a shock to customers. Avoid this by raising your prices in small increments of 1% on a regular basis.
My window cleaner did not raise his prices for 5 years, then one day he doubled them. I bet a lot of his customers looked around for alternatives at that point. If he had put them up a little each year, nobody would have been surprised, and he would have got more income along the way.
Pay attention to the ratio of cost to price and look to maintain your profitability ratios by raising your prices just a little on a regular basis.
2. Increase sales volume by 1%
Set your sales people a target double the size of last week’s and you will just demoralise them. Set them a target which is 1% higher each week and they will stretch to achieve it.
It is worth noting however, that a price drop of 1% will more than wipe out any 1% gain in volume. So do not let them raise volumes by the simple method of offering discounts. New sales need to maintain the profit margin, or they can actually make your cashflow position worse.
3. Reduce indirect costs (or cost of goods sold) by 1%
Businesses in the services sector fall into two broad categories for indirect costs:
- Those supplying products – eg software suppliers, book authors etc
- Those supplying bespoke work or consultancy – eg hairdressers, lawyers etc
- Many companies offer a mixture of both
For bespoke work, the relationship between indirect costs and revenue is fairly linear. As sales go up, the work goes up in direct proportion. This makes it predictable to some extent, but limits your options for profitability growth. Time is often the biggest cost. To improve margins by 1%, streamline procedures and look for ways to automate all repetitive tasks in order to save a few hours or minutes here and there.
When selling products, the relationship between indirect costs and revenue is more complex. A paper book will need a printing run and added costs for storage, postage and packing etc, plus the initial costs of the time for writing it. And there is a jump in costs once you need a second print run. But a digital book has much the same costs whether you sell 10 copies or 10,000. SaaS software has scalable hosting costs, but those are dwarfed by the fixed cost of developing the software, so higher profitability depends on selling as many licences as possible, and keeping the development costs aligned to the market needs.
For goods businesses, can you reduce the money tied up in inventory by 1%? Not necessarily easy right now when there is more focus on sourcing locally and keeping stocks in. Last year the mantra was on slimming your supply chains and just-in-time strategies. The risks of that became apparent as borders shut and imports less viable. So can you reduce the range of choice you offer and streamline your inventory to the most popular or profitable items? Can you distinguish the “gateway” items, that act as loss leaders to entice bigger sales, from the “nice to have” extras, that could be dropped with limited impact?
4. Reduce overheads by 1%
This is the first place many people look when they want to improve profitability, but a continued scrutiny can often find a further 1% to trim, without significantly affecting service levels or employee morale.
For instance, instil a mentality of treating company money as if it were your own, and expense claims often drop. It’s not that anyone was breaking the rules, it’s just that they now think more carefully before spending. It can lead to behaviour changes as simple as sales staff choosing to fill a bottle with water from home instead of buying one on the road between clients.
This is the place where you can make or break employee relations. If you are seen to impose cost cuts, particularly if they feel unfairly targeted at lower levels in the organisation, employee morale will suffer. But if you can get your staff to contribute ideas, they will feel more invested and will help you reach your goals, 1% at a time.
5. Reduce debtor days by 1 day
It may seem impossible to get paid at all right now, and there is no doubt that it is immensely difficult for many companies. But reducing the time span from issuing an invoice to customers to getting the money into your bank account affects your cashflow significantly and each day makes a difference to your working capital. If some customers are not paying at all, it is even more important to focus on those that are.
If the target was to cut the average number of days to payment by just 1, would your team find new ways to achieve it? Suddenly it feels more manageable and that sparks creative ideas. Of course, the goal will be iterative, but success breeds success and the impact is cumulative.
6. Reduce work in progress or inventory days by 1 day
For service businesses, pay attention to the time lag between completing work and raising an invoice for it. Can you shorten that gap by 1%? The sooner you invoice, the sooner your invoice will get processed. Plus your client has less time to forget the value you just provided, and appreciative clients will push you up the priority list for payment if they are making choices.
For goods businesses, which items in your inventory are not selling well? Do you have a lot of returns or damaged stock sitting around gathering dust? If so, that stock is taking up useful space and tying up money. Do you need a clear-out sale just to get some cash in that you can spend on faster-turning stock? If your inventory sells just 1 day quicker on average, it will boost your cashflow and provide extra working capital for the next sale.
7. Increase creditor days by 1 day
Unless you are monitoring your cashflow regularly, it is possible to be too efficient and just pay all your bills without thinking about affordability. Don’t get me wrong, I am not suggesting that you hold off payment unreasonably and risk pushing your suppliers out of business. But if you usually pay invoices before the due date, consider the impact on your cashflow of delaying payment by 1 day. It will free up working capital that you can invest in increasing your sales.
How can I help?
If you would like an independent review of your business and help to embed power of one thinking for cumulative small changes, get in touch for a free, no-obligation chat. I offer training programmes to improve in-house skills, or consultancy to be the outside perspective and facilitator for your strategy meetings.
Or take a look at the Cashflow Healthcheck for a demonstration of the power of one with your own financial numbers.