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Tracking your Business’ Performance with Ratios

If you run a business, here are some of the most important ratios you should be looking to monitor. They range from profitability, to liquidity, to efficiency and will, if monitored on a regular, periodic basis, give you good insight in to your business’ financial performance, enabling you to improve.

Current Ratio
Current Assets / Current Liabilities (expressed as a ratio e.g. 1.5:1)
This ratio gives you an indication of the ability to pay off liabilities within the current fiscal year with the assets you have available to you within the current fiscal year, which may include cash in the bank, inventory and other items that can be sold within the period to generate cash, to pay liabilities, within the period. The ratio can be communicated as; for every £1 liability, the company has £1.50 worth of capital that can be produced within the fiscal year to pay off liabilities. A ratio of 1:1 is required at minimum.

Quick Asset Ratio or Acid Test Ratio
(Current Assets – Stock) / Current Liabilities (expressed as a ratio e.g. 1.4:1)
This ratio gives you an indication of the business’ ability to pay off immediate liabilities with cash that is immediately available to the business i.e. Cash in the bank; this is why the calculation excludes stock because it assumes that there will be a time delay with selling stock. The ratio can be communicated as; for every £1 liability payable immediately, the company has £1.40 worth of capital available. A ratio of 1:1 is required at minimum.

Return on Capital Employed
(PBIT / (Total Assets – Current Liabilities) x 100
One of the most important profitability ratios; this measure will give you an indication of how worthwhile a project is based on it’s income relative to its investment. PBIT (Profit before Interest and Tax) is used so that we can directly compare ROCE’s with different projects, businesses etc, before they employ any tax and interest strategies. Non-current liabilities are not included in the calculation, as these may be interest payments for long-term loans or similar, where the loan may be used to generate income, that go beyond the project term.

Gross Profit Margin
(Gross Profit / Sales) x 100
This is a measure of how efficiently the business uses its resources labour and materials in the production process to generate its first layer of profit (cost of goods sold). The higher this figure the better. The figure gives a good indication of the profitability of operations before any costs of overheads are applied and is widely used in the investment community to determine potential opportunity e.g. a low margin may suggest the company is using its labour and materials inefficiently and therefore could be improved, resulting in increased profitability.

Operating Profit Margin
(Operating Profit / Sales) x 100
This is a measure of the business’ profitability after fixed costs overheads are applied to the calculation and gives an indication of the profit margin before interest and tax. Operating profit is also known as PBIT (Profit before interest and tax) and is another figure that is typically used to compare projects with to understand how efficiently businesses use resources, inclusive of their overheads.

Net Profit Margin
(Net Profit / Sales) x 100
This measure gives an indication to the margin the company achieves after variable costs, fixed costs, interest and tax. It is also another profitability measure that can be used to compare with other projects and businesses, but should be taken with a pinch of salt, as different companies can sometimes employ very different interest and tax strategies, convoluting the points of comparison; that’s why the PBIT/Operating Profit is the favoured ratio used when comparing projects and businesses.

Gearing or Leverage
(Long Term Liabilities / Capital Employed) x 100
The gearing ratio gives us an indication of the debt-to-equity structure of the business i.e. the proportion of finance that is provided by debt relative to the finance provided by equity (or shareholders). The business is considered to be more speculative if the gearing ratio is high, as it suggests that a larger amount of the business’ capital structure is based on debt and therefore subject to external forces that are not under its control. The higher the gearing, the more speculative or risky the company is to be perceived. This ratio also gives indication of the long-term financial stability of the business.

Debtor Days Collection Period
(Average Debtor Days / Credit Sales) x 365 (expressed as x number of days)
The Debtor days ratio gives us an indication of how long, on average, it takes for us to collect monies from our customers who have purchased on credit. The amount of debtor days usually under the control of the business and the lower the ratio this is, the better, as it facilitates good cashflow management.

Creditor Days Payment Period
(Average Creditors / Purchases) x 365 (expressed as x number of days)
This ratio gives us an indication of the average number of days the business is required to pay off liabilities owed to creditors, which could be suppliers, professional services etc. The higher this figure the better, as the longer we have to pay back liabilities, the better it is for us, as we are able to cash in money from our debtors to pay our creditors. This figure is usually under the control of creditors, but can sometimes, depending on the relationship, be negotiated.

There are a couple more, however these are some of the most important and widely used. I will write another post on other ratios including:

  • Return on Equity Employed
  • Stock Holding Period
  • Interest Cover
  • Earnings Per Share
  • Dividend Yield

Enjoy.

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DOWNLOAD: How to Better Manage Your Business Finances and Make Better Decisions

The better management and review of your sales and costs data can be a powerful way for you to gain unique insight in to your business, to help you in making better financial and strategic decisions on maximising profit.

This unique information can give you knowledge on if whether your current and historical decisions are moving your business towards your ultimate business objectives, such as increasing profit by x%, or reducing costs. This real-time information on your financial position will help you in making better future decisions that will support you in meeting your business objectives.

Controlling risk is key and that is exactly what this simple log I have created helps you to do. It does this by recording every sale, with associated details and every cost/expense with associated details. It then uses the simple formula as below to calculate your gross profit. 

  • Profit = Revenue – Costs

Your Gross Profit is outlined in the Sales tab and incorporates sales, costs and forecasted costs.

It’s an editable Excel spreadsheet and you are able to add or delete columns as you wish, but if you think the log needs more, then drop me a message. I’m continuously reviewing my posts and would be very pleased if you did this.

I can tell you with confidence that this system has helped me to better manage my business, by equipping me with the information in an accessible format that is functional, instead of my old folder full of receipts and invoices, that I had to search through and manage manually, which was a serious headache; you probably know the feeling. By treating this log as a live document, keeping it regularly up-to-date, some of the reasons it has come in handy are as follows:

  1. Real-time Information on how much my profit is relative to my sales and costs
  2. When it comes to completing my Tax Return, I don’t have to dig out all of my receipts at the end of the year and struggle to read them through the degradation of quality of my receipts.
  3. I also know that for every transaction listed in the calculator, I will either have or not have a corresponding receipt.
  4. It allows me to search through my transactions i.e. I don’t have to manually search through my receipt file for a transaction – I can search by any field of a record.
  5. It acts as a reference point for future expenses; If I want to go back to remember how much I spent on a drill in 2009 for example, I can do this very easily by using the CTRL+F search functionality.
  6. It records all details related to all transactions, with notes. If I have something I want to remember later on, I can simply write it in the notes section. I will also have information on how the customer paid, what date they paid and more.
  7. I can see who my main customers are. By using the sort functionality in the spreadsheets, I can sort by customer and with a simple calculation, work out their average spend with me.
  8. It helps me to model scenarios – I sometimes put it sales figures that I would like to achieve and see how this affects my profit; I do the same for costs too.

The log helps me in making strategic decisions ranging from reducing my spend on expenses or giving me important information on who my main customers are, to allow me to concentrate on them; we all know the 80/20 rule, right? It gives me knowledge on performance and what services of mine are most popular; this information allows me to develop ancillary services that relate to the popular services. 

It’s best to use this log as a live document you keep up-to-date on a regular basis. It may takes couple of uses to get used to inputting data, but once you’re in the flow of things, you won’t be able to live without it.

You can download it from here.

Take some time in getting to know the spreadsheet before using it. There are some example entries in the spreadsheet, which you can delete. 

Have fun in managing a better business.

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Gathering Stakeholder Perspectives for Analysis

CATWOE

Ever wished there was a tool or framework that would help you to gather details on project stakeholders thoughts and perspectives on where a project or system should go in terms or direction or where it should be focused? Well, here’s some good news; there is one; it’s called the CATWOE framework. ‘CATWOE’ is a good methodology/framework to help get a good understanding on what peoples priorities, values, opinions, beliefs are on a system change, addition or closure. The framework frames their perspective, who, from their perspective, the customer is, owner is and who should be involved. This information comes in handy when reviewing and analysing what kind of need a system should fulfill – you will have detailed information on stakeholders thinking behind the project and its objectives.

The CATWOE methodology was developed by Peter Checkland and was a part of his Soft Systems research; a research study that seems to have been going on for a long time, trying to deal with and manage issues and problems that may lack proper, formal problem definition.

Findings from the analysis is typically used to synthesise with findings from other stakeholders or gather the needs of the key stakeholder that are responsible for setting the objectives of the system.

The framework is a good one and equips you with the tools to gain a good understanding on why a stakeholder of a potential system might want it a certain way and why another may want it another way. CATWOE will also give you good understanding of where the general consensus lies for the system; where the conflicts are; where overlapping occurs and more. The ‘CATWOE’ acronym is as follows:

  • Customer
  • Actor(s)
  • Transformation
  • World View
  • Owner
  • Environment

NOTE: The reason it is presented as ‘CATWOE’ is so it is pronounceable. The proper format of the framework is as below. This doesn’t necessarily mean you have to do it in this way; you can do it however you want! This methodology is a guideline because it is simply, logical. 

  1. World View
    • Here is where you ask the stakeholder why the new system is needed or why it should be changed; you could ask questions like; ‘in your opinion, why…”; “what made you come to that conclusion…”.
    • It is important to remain tactful, a good listener and a good listener at this point; as the more information you have, the better off you are.
    • An answer might be something as simple as, ‘market research has shown there’s a growing demand for plimsole type footwear at cheap prices’
  2. Transformation
    • Transformation is concerned with what process is to be transformed – changed or created.
    • This would typically be in response to the world view and thus comes consecutively
    • Could be something as simple as, ‘sell plimsole type footwear at cheap prices’
  3. Customer
    • Who is the customer that is affected by the process or system change?
    • In the context of our scenario, it would be a consumer wanting to buy plimsole type footwear at cheap prices
    • There may be scope to go in to further detail that might incorporate any analysis the stakeholder has done related to the market
  4. Actor(s)
    • ‘Actor’ is concerned with who will be involved in the process and who will perform the transformation
    • This cold be someone along the lines of in-house footwear designers, sales staff, marketing staff and store managers
  5. Owner
    • Who has authority to close this bad mama jama system?
    • Typically the commissioning authority; project board or board of directors
    • If the owner of the system is the retail department; the retail director may have authority to further change, stop or close down the system
  6. Environment
    • What’s the environment like in which the business system operates? 
    • A good framework to use for this is ‘PESTLE‘, which looks at the macro-economic forces at play, that may potentially have an impact on your system
    • It may even be worth considering some of the internal business processes related to system implementation; items related to the scope of actual implementation, constraints of doing so, any assumptions that are made and what risks there may be. A good framework for this is the ‘BOSCARD‘ framework – the ‘B’ stands for background for a little context; the ‘O’ stands for objective; the objective in this context would be to implement the new system and ‘D’ is deliverables.

So this exercise is what one would typically conduct with project related stakeholders, in order to gather information on where they think the system should go in terms of direction and focus. There is no reason why this framework cannot be used informally. I use it a lot in my day-to-day life when trying to understand reasoning behind decisions.

The CATWOE analysis can then be translated in to a business activity model (BAM), which is a conceptual model of the system as envisaged or imagined by the stakeholder, that was interviewed. You will notice that, for the most part, the CATWOE analysis is simply common sense. You probably already ask the questions and consider the environment etc. All this framework does is add a little structure to that process. Have fun.

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Balanced Scorecard In Detail

So, in this post, we will be expanding on one of my previous posts on the Balanced Scorecard.

bsc

You will remember that there are four scorecards.
What you might not remember is that there are four headings under each scorecards, which help you to correctly frame what you are trying to achieve; they are:

  • Objectives

  • Measures

  • Targets

  • Initiatives

Now these headings are useful because they help you to correctly structure items within the scorecard, instead of leaving it as some abstract, arbitrary vision, with no real way to track its performance. So for example, if you were reviewing a scorecard and adding an objective, you would need the following information:

An Objective:
This is the objective that wants to be achieved by the company, division or person that would be in line with overall company objectives or life plan.

A Measure:
The measurements that would be used to measure the progress of achievement to the new objective.

A Target:
The targets you want to achieve e.g. +3% within three years. These targets can be either quantitative or qualitative, but must be measurable.

An Initiatives:
The actions to be initiated to achieve the objectives and related targets.

An example of the above is:

Objective:
Achieve 5% growth in sales over the next three years

Measures:
Percentage increase in Turnover

Targets:
Year 1: 1% Growth in  Turnover

Year 2: 2% Growth in  Turnover
Year 3: 2% Growth in  Turnover

Initiatives:
– Conduct market segmentation exercise

– Review and revise Marketing strategy
– Conduct quality questionnaire in to customer satisfaction
– Incorporate appropriate response to questionnaires via training update
– Train all team members on quality customer service

I did start breaking down the relationships between ‘objective’, ‘measures’, ‘targets’ and ‘initiatives’ e.g. how many targets you can have per objective etc, but the simplest way to put is that one objective can have many measures, targets and initiatives that work towards achieving that one objective. Each objective should have it’s own measures, targets and initiatives. You cannot have two or more objectives in one, as each objective requires it’s own measures, targets and initiatives.

What is useful to remember is that despite the Balanced Scorecard being a tool for business, it can also be applied to something in your life, for example, booking that dream holiday to Milton Keynes or Hull in the UK – this could be your objective right? You will then have the measures to measure you’re on track to achieving your holiday, which could be the money in your bank account; targets to meet to make sure you achieve the objective at the right time, which could be something like have £150 in three months and another £200 in the subsequent three months and your initiatives on how you’re going achieve that objective, like cancelling that gym membership 😉 (your welcome).

Hope this was helpful.

Naj Hassan wrote this article. Naj is a full-time Dad; full-part-time Blogger; full-time Analyst; part-part-time Composer and part-full-time Investor and property problem solver.

– Leicester Property Buyers
 Leicester Car Buyers
– Naj Hassan LinkedIn
– Naj Hassan YouTube
– naj.hassan01(at)gmail.com

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The Business Analysis Process: 2. Considering Perspectives

You’ve now completed step 1 and you’ve now got a good understanding of the situation and are ready to progress your business analysis activities. The second activity within the business analysis process is to consider the perspectives of your stakeholders.

Here’s what you need to do:

  1. Find out who your stakeholders are. You can typically do or should have done this this by gathering details on the situation, from the first activity within the process. With this information you can then decide how to manage your stakeholders by conducting stakeholder analysis. A good way to do this is by using the power-interest matrix; the power-interest matrix will give you a framework for management.
  2. Once you have considered who your stakeholders are, it would be important to conduct the CATWOE analysis to understand what the stakeholders thoughts, feelings and values are with relation to the system/process addition/update/closure. The CATWOE analysis gives the analyst good details on the system from the users perspective; it takes in to consideration, why the stakeholder thinks the system should be implemented, what the definition of the system is, who the customer is, who plays a part within the system implementation, the owner and the environmental factors that need to be considered in which the proposed system will sit. You will conduct the CATWOE analysis with your stakeholders that you have identified as value-adding.
  3. Each perspective that you gather from a stakeholder, would be documented in a business activity model that outlines the main activities within the system, from the individual stakeholder’s perspective.
  4. Once you have gathered the above details and produced the business activity models, the next step is to determine one unified business activity model that synthesises all business activity models gathered. Now, naturally it may not be possible to create a synthesised model that incorporates every single requirement of all stakeholders. BA’s must recognise that stakeholder play a part in systems development because they have good context and understanding of user requirements; naturally people will have different opinions, however it is up to the BA to understand which activities within the documented business activity models that add most value, while meeting each stakeholders requirements. Often negotiations will need to take place, as it may not always ben feasible to deliver all requirements as outlined by the stakeholders. The way negotiation facilitation is highly personal and for that reason I won’t discuss this much.
  5. Compile all information gathered and document all of the details including the business activity models for reference, if required.

This will then take you on the next stage of analysing the needs within that one business activity model that you have now created, amalgamating most, if not all of the activities outlined in all stakeholder business activity models.

The Business Analysis Process: 3. Analysing Needs

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The Business Analysis Process: 1. Investigating a Situation

One of the Analyst’s key activities will be to understand the context/situation in which a project sits, in order to gain a better understanding of what implications and impact the project will have. The analyst is responsible for gathering all requirements of the project that are (a) relevant to the project and (b) meet the deliverables of the project, which could typically be defined by any or all of the stakeholders ranging from, shareholders, employees to customers. The requirements document will then form the basis of the project.

In order to create a  requirements catalogue for the project, a couple of activities within the process need to be conducted; the first of which is:

1. Investigating a Situation

This is the stage in which you gather high level information about the problem, issue or gap that needs addressing. This data is important because it will provide a good reference point on which to build upon. The situation will contextualise the problem and the potential solution’s practical application within the business.

This can typically done through gathering details on the following:

Context:

  • Speaking with stakeholders on the issues, gaps, problems they are facing, that the project will help  to achieve
  • Consider company strategy and strategic objectives
  • Consider the Project Initiation documentation (if there is one) to gather further details on who the stakeholders are, who will be using the system, risks, costs controls, business case 
  • Consider the terms of reference (if there is one) which will provide details on Objectives, Scope, Constraints, Authority and Resources (OSCAR)
  • Stakeholder analysis

Input:

  • Understand documentation that is related to the project
  • Review process maps
  • Review non-documented processes with actors
  • Speak with relevant stakeholders

Output:

At this point it is worth considering what problems, issues, gaps etc the output is facing. You might want to refer to the following to gain a better understanding of this.

  • Quality control documentation
  • Issues Log
  • Complaints received
  • Performance management reports; KPI’s etc
  • Speaking with relevant stakeholders

Techniques:

Some of the techniques you might use to gather the above information are:

  • Interviews
  • Workshops
  • Activity Sampling
  • Document Analysis
  • Updating/creating draft Business Needs Log

This above gathered information can be documented under the following headings:

  • Summary of information gathered
  • Data gathered
  • Draft business needs
  • Draft world view 
  • Mind maps
  • Use case (as-is)
  • Rich picture diagrams
  • Create a draft business needs log, documenting the high level business requirements based on the stakeholders you have spoken with; this may need revising based on subsequent activities
  • Fishbone diagrams
  • Knowledge on structure, management, policy and change processes
  • Any other details that may come in handy for later stages to help support with questions, interviews, workshops analysis etc
  • The input vs output analysis would be equip you to create a draft gap analysis

With the above information you would be able to document the very high level requirements you will be able to review for the compilation of your business needs log and consider when doing further analysis; you may alternatively encapsulate gathered thoughts, comments etc in to a general “world” view. You will also have good information on the organisational structure, divisions, policies, strategy and more to have a better understanding of the process of change and management within the company when doing further analysis, which is always useful, for context.

And there you have it; you’re now ready to move on to your second activity; considering the perspectives of your stakeholders. The next stage is concerned with analysing stakeholders and their perspectives on the situation/project, to get a better understanding of their values and beliefs for the project. 

The end result of the complete business analysis process will be a clear, non-ambiguous, relevant, reasonable and testable requirements document. The document will take the company’s internal structure, management and policies in to consideration, meeting all relevant requirements and deliverables of the project and your stakeholders, hopefully getting them to buy you a drink at the end of it. Or in my case a can of Dr Pepper; I love that stuff.

The Business Analysis Process: 2. Considering Perspectives

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The Weighted Cost of What?!

The Weighted Average Cost of Capital! Also known as, WACC.

A discussion I had with a friend inspired me to write this post; we spoke about calculating the absolute minimum return a project would need to generate, in order for the project to be deemed feasible.

What is WACC?

WACC is a figure that a company would have to pay to providers of capital in exchange for borrowed capital; sources could be banks, investors, businesses etc.
You would typically use WACC when there is more than one source of capital; where there is only one source, you would not necessarily need to calculate an average, weighted, rate of return, as there would only be one figure/interest rate and that would serve as your WACC.
This WACC is a the return that you must generate as a bare minimum, to at least keep creditors happy and break even.
The assumption however is to generate a return that exceeds the WACC to create a profit for yourself too of course.

Why Would You Use WACC?

You would use WACC to calculate the absolute minimum return you must generate from your project; anything above this base figure is potential profit in your pocket.
The Weighted Average Cost of Capital calculation is also used to decide if whether it is feasible to progress with a project based on the cost of the project against the return on the project.
If for example, the profit, in percentage terms, does not exceed your cost of capital, then the project should be rejected – you wouldn’t be able to even generate an amount that will pay off the creditors! Therefore, do not progress with the project!

Example projects:

  1. You want to borrow money from a number of sources to buy a building and convert them in to single-let flats.
  2. You’re a business that wants to purchase another two retail units and in order to do so, will have to borrow money from the bank and two other investors
  3. You want to stock your furniture shop up and have borrowed capital from one bank and a family member.

Calculating WACC

Right, here’s how you calculate WACC. Let’s say for example you need £200,000 for a building that you want to buy to convert in to single-let flats. The £200,000 includes the purchase price and cost of works. You know four people that will fund your project, either through a joint venture, simple interest based borrowing, bridging loan etc. Let’s say you have four sources for capital and they are as follows:

Source 1:
Source: Bank

Capital secured: £70,000
Interest rate/required rate of return: 8% per year

Source 2:
Source: Bridging Company

Capital secured: £75,000
Interest rate/required rate of return: 14% per year

Source 3:
Source: Hands-off Investor #1

Capital secured: £25,000
Interest rate/required rate of return: 7.5% per year

Source 4:
Source: Hands-off Investor #2

Capital secured: £30,000
Interest rate/required rate of return: 8.5% per year

Note: It is worth noting at this point that all sources have different required rates of returns/interest rates in exchange for the money they’re giving you for your project. The next question is, how do you calculate, in percentage terms, how much you need to generate from your project to pay them all back. I talk in percentage terms because often profits and rates (interest, WACC, tax etc) are presented in percentages (yield, return on investment, return on capital employed etc); this makes them directly comparable. Now the calculation you do is as follows:

nh100 WACC calculation 1

The above calculation is based on the following:

nh100 WACC calculation Illustration

Legend

WACC = Weighted Average Cost of Capital
Source Amount = The amount that has come from one particular source
Total Amount = The total figure gathered from all sources; £200,000 for this example
RoR = Interest OR Required Rate of Return

Calculationnh100 wacc calculation answer

For the above project, 10.26% is the Weighted Average Cost of Capital and the minimum return you would need to generate from your project. Anything above this figure is money in your pocket. In the event, you know, based off other due diligence you have done, that you will get for example, a 23% return on investment for this project, you would deduct 10.26% from this 23%, leaving a tidy 12.74% potential profit for you.

You could incorporate tax in to this calculation by simply adding the tax rate that you expect to pay at the end, but I have intentionally left this out, as I know at this point, creative tax strategies are typically employed to offset or deal with tax more efficiently.

Last note; you may see people differentiate between the cost of equity (your money) and debt (somebody elses money). I haven’t got too complex with this calculation, however you would superficially be able to treat equity (your own money) as a form of debt. This is due to the fact that when you invest your own money, there is what’s called an opportunity cost by investing equity in the project because you could invest that money elsewhere to generate a return and as a result, a rate of return would be required – you could go a step further if a company is using it’s own money and calculate the value of shares + any loans taken by the company and use that as a cost of capital – talk to me for more detail. And lastly, as there is more risk with debt; often this is factored in to the rates of returns.

Last, last note; calculating the WACC can prove to be very useful and is the early stage of an investment/project appraisal, because all this calculation tells you is how much would be required to pay your creditors. The next step would be to calculate if whether the project would be cash-flow positive and this is where discounted cash-flow calculations come in, but we’ll talk about these later though.

Falling asleep now. Hope I haven’t made any spelling mistakes. Good nigt.

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Steve Spoke Some Sense

“Your time is limited, so don’t waste it living someone else’s life.” — Steve Jobs

That life your living is for someone else. Not you.

“Have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary” — Steve Jobs

This takes courage.

“You can’t connect the dots looking forward; you can only connect them looking backwards.”  — Steve Jobs

We are products of our past.

“Remembering that i’ll be dead soon is the most important tool i’ve ever encountered to help me make the big choices in life… Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose.” — Steve Jobs

Only if we did think like this, we would achieve things in life we don’t even dream of.

“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs int eh square holes.” — Steve Jobs

There’s value in being different. They achieve non-conventional things – things that make the world go, wow.

Having children really changes your view on these things. We’re born, we life for a brief instant, and we die. It’s happening for a long time. — Steve Jobs

Time is short.

“I want to believe in an afterlife, that when you die, it doesn’t just all disappear. The wisdom you’ve accumulated somehow it lives on.” — Steve Jobs

Otherwise what’s the point?

“I want to put a ding in the universe.” — Steve Jobs

Let’s do it. From today.

Naj Hassan wrote this article. Naj is a full-time Dad; full-part-time Blogger; full-time Analyst; part-part-time Composer and part-full-time Investor and property problem solver.

– Leicester Property Buyers
– Naj Hassan LinkedIn
– Naj Hassan YouTube
– naj.hassan01(at)gmail.com

 

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Why ‘Why’ Will Win and Why ‘What’ Won’t

All of the great and inspiring leaders and organisations in the world think, act and communicate in the exact same way and it’s completely opposite to everyone else – Steve Jobs, Martin Luther King, the Wright Brothers, Barack Obama all have this in common.

What is it? They communicate from the inside out.

What does that mean? Communication from the inside out entails in communicating with emotion, passion and love first and then everything else second – you communicate WHY you’ve done what you’ve done, why you’ve made a difference, why you’ve challenged the status quo – then drop that all important question – Wanna buy one?

As humans, we are hard wired to respond better to emotion, passion and feeling more than technical or soft details of a product – you could call it “instinct”, I guess. Here’s an example.

We’ve made the best machine possible by thinking differently, challenging the status quo and designing something we want to use. Wanna buy one?
vs
We have leather seats, air conditioning, four wheel drive and great suspension, all at an affordable price. Wanna buy one?

Obviously the tone in which it is communicated will make a difference but you get the point.

Simon (the speaker) talks further about how our brains are structured to respond to this type of communication – he talks about the two parts to our brain in particular, (1) the neo-cortex corresponding with the ‘what’ level responsible for our analytical and rational thought and our (2) Limbic system (or Paleomammalian brain) corresponding with the ‘how’ and ‘why’ levels, responsible for all of our feelings like trust and loyalty. Ultimately, the limbic system is also responsible and forms the basis of all behaviour and decision making. The limbic system does not have capacity for language however – our neo-cortex deals with that.

As our Limbic system has no capacity for language, if your limbic system is not comfortable with something, you will get that gut feeling that something is not right – you have no idea why or a good reason to communicate, it just doesnt feel right – that is where that comes from. Our neo-cortex comes to a conclusion or decision based on the information it receives – it analyses it and responds accordingly with sound reasoning – the limbic system doesn’t because it responds to feelings and by inspiring such feelings we can communicate directly with the part of the brain that makes the decision.

After watching the video and some reflection on Steve Jobs, Apple, Barack’s ‘Yes We Can’ campaign and Dr King’s ‘I have a dream’ speech, it does make sense – I definitely agree. Perhaps this is why UK Politicians get limited public support – they’re too busy trying to make friends with the media or plotting on how to tackle the opposition rather than communicating why they are doing what they are doing – maybe this is what they need. Check out the video below.

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The Balanced Scorecard is Really Useful. Here’s Why

The Balanced Scorecard. What is it? It’s a performance management framework alright – what’s that you ask? 

Probably one of the most useful frameworks around to support in the management of performance and strategy. The framework has been commended by both business people and academics alike.

Now, I’m not going to bore you with too many details but the Balanced Scorecard is essentially a tool that gives a company a template on how to manage both financial and non-financial strategic performance in line with goals and objectives that are set by the company or owner. Objectives, measures, targets and initiatives are set to implement, monitor and respond to, to ensure that the company is working towards it’s overall and longer-term objectives.

Now before we begin, it is probably worth defining, success.

  • Increased profits year on year?
  • A happy customer base?
  • A competent team?
  • Is it being efficient in all aspects of the company?
  • Or all of the above + more?

The Balanced Scorecard response to this question is that, all of the above definitions define success collectively. The Balanced Scorecard takes a “holistic” approach to strategic performance management, ie. managing different ‘dimensions’ of the business collectively, successfully.

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The Balanced Scorecard has four distinct sections to it and they are as follows:

  1. Financial – Focuses on financial objectives and ‘shareholder’ opinions of the organisation.
  2. Internal Business Processes – Focuses on the processes and systems in place to help the business excel.
  3. Learning and Growth – Focuses on the resources and infrastructure the company must establish and maintain to ensure growth, learning and development, resulting in innovation, effective team etc.
  4. Customer – Focuses on the approaches, processes and systems to ensure the customer is always satisfied.

The Balanced Scorecard poses a number of questions to Managers that contextualise the scorecards into a more accessible, friendly format, in order to allow Managers to better respond. The questions ask Managers to consider what metrics are important based on each scorecard. The questions are as follows with some example metrics:

  • Financial: “How should we appear to our Shareholders?”
    Example metrics include, ROI (%), Liquidity, Profitability Margins etc.
  • Internal Business Processes: “What business processes must we excel at?”
    Example metrics include processing times, individual steps needed for a process, wastage, errors etc.
  • Learning and Growth: “How will we sustain our ability to change and improve?”
    Example metrics include, Research and Development spend, innovative solutions, speed to market, corrective action response times and success rates etc.
  • Customers: “How should we appear to our customers?”
    Example metrics include delivery times, quality control, customer experience statistics etc.

In order for Managers to choose metrics that add real value, they must first understand what the company wants to achieve over the long term. With this knowledge, companies can then answer the above questions and choose measures, targets and initiatives to direct day-to-day activities that ultimately meet longer-term objectives.

For details and examples on the subheadings to each scorecard, with examples, please read this fabulous post, here.

The overall results of the implementation of the Balanced Scorecard can be improved processes, greater customer satisfaction, educated and motivated employees, better overall internal systems, increased and sustained profits and overall value added to all dimensions of the business. Why would you not want to use this tool to help determine what to monitor? It helps the company align its day-to-day operations with longer-term objectives and ambitions as all short-term objectives, targets and initiatives are based on long-term objectives.

You might be thinking, but why do I need this now? I’ve been doing just fine without a framework; indeed this is true but the point of the Balanced Scorecard is to provide a template on which to build upon. You may already be using the Balanced Scorecard unknowingly. The Balanced Scorecard simply provides a template, a structure, a guideline on how to structure performance management and strategy.
 
Related read: Balanced Scorecard In Detail.
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A Book You Should Definitely Read: Innocent: Our Story & Some Things We’ve Learned

So my Boss Dave read this book and really recommended it for a budding entrepreneurs – I ready it anyway – I laugh in the face of perceptions.

I just thought I’d write review on it. Here it is team.

Summary:
So the book itself is about the story of Innocent. It talks about the idea, the journey, the current situation and the future, all of which are extremely interesting as I do actually like to see how companies develop and grow. The book gives tips and tricks the founders have learned throughout their journey of setting up and managing the business.

The company was started by three Cambridge students – Now I hate it when people mention this because by mentioning this, I am inherently suggesting that only OxBridge graduates can go on to build successful companies, but that is bullshit, these guys were coincidently Cambridge graduates – all they did was simply execute an idea effectively, but I digest. Richard Reed, Adam Balon and Jon Wright were the co-founders and they all had great jobs in the city as Management Consultants if I remember correctly before they setup the business. The guys had an ambition to start a business of some sort and wanted to take the jump. The team came up with the idea of healthy smoothies as they found a gap in the market (which I guess there was between 1998-1999). The book goes on to highlight the name ideas they had, the challenges they faced of not being able to source vegetables, retailers not accepting their product and more, all of which very interesting.

Verdict:
What I really liked about this book were the hints and tips they gave throughout to budding entrepreneurs. They talked about how the company has values, has a bookshelf that employees can loan books from and how the company will buy a book for an employee as long as they then donate it to the company bookshelf – great idea I thought and so much more.

What I really enjoyed about the book was the insight in to the process of how they chose their name, ‘Innocent’, below is a picture showing just how they came to this name – other names that were in the running before Innocent were, ‘Naked’, ‘Exposed’ and ‘Seedy’.

Some of the interesting advice in the book is as follows:

“Our advice: get a small team together of people who share the same values but bring a different and complementary set of skills.”

“If your product’s good, then there’s no greater advert than having someone try it.”

“Businesses that don’t listen end up failing. So all we would say is that in order to gather information from the people who make your business tick (your customers), you need to stay in touch and put out as many feelers and sensors you can. Wiretap your target market. Everything you do should suggest an attitude of availability and a willingness to learn.”

All in all, the book has some great advice for entrepreneurs and has an excellent tone to it – the books is extremely readable and I managed to get through it within a week with evening only reading – that is a major thing for me, as I take bloody ages to read a book.

What I would say is that the book didn’t come with a free sample of a smoothy – that would have been good. The book also didn’t come with the option to change the font on the paper like those Kindle things do nowadays. It was good quality e-ink and didn’t reflect the sun in the sunlight. I bought the book for £11.89. Worth it? yes – I don’t plan on giving this book to anyone as I have made a whole load of notes on it and bookmarked a whole load of pages for future reference.

Hope you enjoyed the review and hope I have enticed you in to buying it. Was I critical enough you may be asking? I was actually, the book is a really good read.