CUTTING THE FAT

By Robert Likhang FCIS, ACMA, CGMA, CA(L), Principal Consultant at RL Consulting, a firm of virtual financial directors and company secretaries, and business advisors

INTRODUCTION

The current economic challenges facing the country are fierce and deadly. National reserves will deplete unless the economy generates more funding for the national purse. The decline can be traced back to the 2008 global economic freeze but our fiscal and political decisions as a country have not helped the situation.

Everyone you meet in the major urban areas of Maseru, Maputsoe, and Mafeteng will greet with the common expression “Business is Bad”. We are experiencing a struggling and perhaps dwindling private sector, which means low national revenue will be collected for government to continue its services to the people while the much-needed jobs are also declining.

As a consultant, I deal with issues of revenue enhancement, cost management, risk management on a daily basis.  The concepts seem new especially to the SME sector because over the years it has overemployed and in most cases incompetent staff members who were primarily family members or fellow villagers. SME owners have invested in many business sectors but none could stand on their own and be counted as viable businesses.  The sector is now faced with increased competition and poor economy.

FAT IS UNHEALTHY

Everyone is going around selling fat reducing products because people are made conscious of the fact that obesity is the number one killer, a source of diabetes, cancer, hypertension among other things. Businesses that have developed fat over the years are beginning to show the symptoms of business diabetes and business cancer too. The business fat comes in the forms of overstaffing creating higher fixed human costs, maintaining too much or too old equipment and plant, which leads to high maintenance and upkeep costs, maintaining business units which are not profitable, or on which the companies do not have capacity to sustainably  be competitive in them. Fat is unhealthy and it needs to be addressed to ensure that it holds the appropriate body mass ratio, that is, capacity relevant to competitiveness.

FAT REMOVAL PROCEDURE

People go on fat-shedding procedures.  The procedures require changes in the way one eats and live. They may hurt but when consistently applied they lead to a healthy body. The companies must also follow a hurting procedure, which when courageously and consistently applied, would lead to a healthy lean company that will survive even the worst that is most likely to come. In my opinion the procedure should be as follows:

1. A new Vision – The reality is that your current vision may not be working. You need to redraw the plans and set out a new strategic plan. The process involves looking at the opportunities available, as well as the threats and looking at your own strengths and weaknesses and assessing what your capacity can allow you to achieve. You may realise in this exercise that some of your business units are orphans because you are not able to parent them well as you have insufficient capacity. Such business units may be eligible to be thrown in the dust bin. Units that make small profits and require much of your attention and capacity are a distraction as they eat on resources and time for those units that are highly profitable. Develop a plan for cutting the fat and be sure to conduct legal and accounting expert advice on how to go about it.

2. A new financial control – If anything, control of every sente is critical at this time. The first place to start is ensuring that you can enlist the services of an expert accountant to review your internal controls and ensure that that they are sound and fit. SME owners lose a lot of money in fraud, theft, poor decisions due to unsound internal controls. I need to make it clear that employing relatives is nowhere near establishing a control because it is often the same close relatives (or friends or neighbours) that either make wrong decisions that cause financial losses or commit fraud and theft.  The second intervention is to introduce a budgeting system. A system where annually business plans are translated into financial terms, thus the budget, monthly budgetary performance is looked at so as to establish the effectiveness of our business plans in financial terms.  The most effective budgeting system at this point in time is Zero Based Budgeting (ZBB). This approach gained popularity in the US in 1970s but lost momentum. However, it is currently experiencing resurgence with multinationals such as Kraft Heinz, Mondelez, Unilever, and Coca-Cola. This is an exercise in which a company reevaluates all expenses from bottom up and cuts wastage. The philosophy behind ZBB forces management to be less complacent. The ZBB when combined with strategic cost management (SCM) will identify which functions have to be done by the company and which should be outsourced. In these times SMEs must outsource their finance function to experts who can add value, or restructure their finance function from being a compliance unit to being a performance (value adding/creating) unit. World Class ZBB efforts successfully build cultures of cost management and financial resilience throughout the organisation. ZBB is not as simple as it sounds, so you need to engage experts to implement it. You also need to ensure that your outsourced finance/ financial management advisory firm is able to handle this effectively.

3. A new Performance Management system – I am talking about a business performance management system rather than a human resources performance system. There are certain factors in your business that must go right or your business will fail. These are referred to as Critical Success Factors (CSFs). The CSFs will have been determined in your strategic planning process.  The Factors must be measurable and have Key Performance Indicators. A scorecard should be prepared on these factors so that performance is managed from month to month and corrective actions taken when needed. A simple scorecard will manage areas of Financial Management, Customer Management, Processes Efficiency, and Employees Performance.  You will set goals and targets in each area and report actual performance against targets and develop and implement appropriate initiatives based on performance feedback. This is important as it helps you to concentrate your efforts on the right things and eradicate waste from the beginning. Ask your Accountant/Business Advisor or your financial outsourcing firm to help you.

4. A new Governance – Boards are not just for big organisations. Even SMEs need effective boards made up of Executives and Independent Directors who bring in their knowledge but carry the same burden of potential financial and legal obligations as you. You need an expert to set up proper governance systems and structures for you. An expert will help you set up policies in all areas which could include risk policies, financial policies among others. I have seen businesses that have thrived after implementing governance systems and structure. Good governance helps the business owner to manage risks, operate effectively and grow the business.  I will write about application of good corporate governance in the SME sector in future.

CONCLUSION

Business success is not obtained by luck or entrepreneurial hype. While both can come in handy, businesses that last are those that embody a good practice of business and use reputable (yet innovative) models. The storms are coming and very fierce. Will you stand?