I read an interesting article recently by Brian Traecy that suggested that every decision in life is impacted by the people that are or have been in our life. In a way that is easy to accept and agree with in that the decisions we make will be a result of the information that we have and our perception of the world. Both this information and this perception will be due to the people that have been a part of our lives. However, a lot of us like to consider ourselves as independent beings that make our own decisions. I do not see these two trains of thoughts as being mutually exclusive. By that I mean we do have the power to make independent decisions but that decision will be the outcome of the impact that other people have had on our life.

This concept again has parallels between success in business and success in personal lives. The people that we surround ourselves with will impact the decisions that we make therefore it makes sense to surround ourselves with people that will help us make good decisions. Three examples of when we can make that decision is as a parent, in our own lives and in business

1. As a dad with fairly young children I have the ability not only to make those decisions for myself but also for my kids (or a least I like to think I do). Liz, my wife, and I encourage friendships with other children who we deem will have a positive impact on the lives of our own kids. Liz and my definition of “positive impact” will be different to yours but for us we are looking for other children that are confident, treat others with respect and show a bit of “fire in the belly”. They are things that we value and we hope that our three kids will value.
2. The people who I enjoy spending time with fall into two categories. There are those that share values with me and there are those who I admire for what they have done with their life. My best mates are the ones who both inspire and share the same values. These are the people that motivate me. The ones that help me make the decisions that are consistent with my values and the ones that inspire me to make the most of what I have to offer.
3. In business the people we choose as partners or employers or employees or as board members is the decision that will have a huge impact on the financial success of the business. It is important to have the right product of right service supported by great marketing initiatives servicing a sustainable customer base. However, all this may not be enough to develop an enduring profitable business without the right people.

The rest of this article will focus on four attributes to look for when identifying board members, business partners or coaches. The four are:

1. No fixed point of view

People who do have a fixed point of view may miss opportunities that are not consistent with the way that they view the world. They will look for information that supports that particular point of view and reject information that contradicts the point of view. These are not good attributes for a person that you want to help guide and grow your business.

2. Willing to question

The person who questions the basis of your ideas will be more valuable than the person who has blind faith in your skills and abilities. Look for people who will broaden your view of the world. They may help identify opportunities or risks that otherwise would be missed.

3. Willing to both analyse and listen to intuition

This is the area where science meets art. Analytical skills are always valuable. This is the science. A board member, partner or coach who listens to, and communicates their own intuition can be equally as valuable. This is the art. A good friend of mine talks about checking in with the feeling in a certain body part before making major decisions. A more universal tool to assess your own intuition is to ask does it feel “light” or “heavy”. “Light” and “heavy” can be interchanged with “right” and “wrong” respectively. Discussing and exploring that feeling or intuition may help make even better decision than relying on scientific analysis alone.

4. A prosperity prospective rather than a scarcity prospective

This is talking about choosing board members, partners and coaches that will look for ways to make things happen rather than those that reinforce how hard it is and suggest it could never happen. If you hear anyone say something like “that is just the ways things are” avoid them from a business point of view.

The overall message is to surround yourself with people who will help provide you with the information, motivation and the support to achieve your goals.

Spreadsheets have become an important business tool. I first experienced them at university in the mid to late 1980s. I remember thinking, for the first time, that computers could really be useful. Since then some of the things that I have used them have been:

• Business reports

• Create financial forecast

• Run horse race sweeps

• Develop a betting program (unsuccessful) and

• Calculate average km times in races

Spreadsheets are very powerful and can be used for a variety of purposes. However, in business, they are prone to error and an incorrect formula or a spreadsheet designed poorly can result in poor business decisions being made.

I have used my own knowledge and an article written by Shahid Ansari and Richard Blockto to provide some rules to develop effective spreadsheets. The following examples help to demonstrate the benefits of the rules.

Option A

Option B

Both option A and option B produce the same results for the total sales of product 1 by quarter. However, option A will be the more effective spreadsheet in the future for the following reasons.

1. Identification and Segregation of Data: Option A clearly identifies each input. For example 800 is the volume of product 1 in quarter 1 and .01 is the % increase in volume of product 1 in quarter 2.

Each formula only has cell references in option A. Compare that with the formulae in option B that are a series of numbers. In option A it can be determined that the sales of product 1 in quarter 2 is the volume of product 1 by the price of volume 1. Alternatively in option B sales in quarter 2 are 800 by 1.01 by 10. The new user (or the original user a couple of weeks later) will have to guess what these numbers refer to.

2. Ease of making changes: Option A has highlighted the cells that can have direct input by giving them a yellow background. In addition the cells that should not be changed i.e. the cells that have a formula have been locked. The easiest way to unlock cells for input and to lock the remainder of the spreadsheet is to right click the cells that can have input, choose format and protection and uncheck the lock check box. Then choose the tools protection option from the main menu and click on protect the sheet.

3. Document Assumptions: Although it is not shown in the above example it is good practice to document the assumptions that you have made in developing the spreadsheet. For example some of the Option A assumptions were:

a. Product 1 Volume Qtr 1: Based on the prior year sales volume in the first quarter + 3 % which was the increase in the prior quarters sales volumes compared to last year.

b. Product 1 Volume % increase: Based on market research which indicates the total market will increase by 3 % in the next twelve months. The assumption is a 1% increase in quarter 2 and a further 2 % increase in quarter 4. This sales volume increase will be supported by a marketing campaign during which we also plan to increase our price by 5 %

These options should be documented in the workbook, preferably in a separate worksheet.

These are three simple rules to help develop effective spreadsheets and provide a better basis for business decision making.

1. Identify and segregate the data

2. Make making changes easy

3. Document the assumptions

A recent survey conducted by CPA Australia suggest that

• Skill Shortage and

• Fuel and interest Costs

are the major issues facing small businesses today.

Two other interesting findings in the survey were that

• the majority of small businesses are doing nothing about reducing their greenhouse gas emissions

• Compliance is not as big an issue as it was 5 years ago for small businesses, however an increasing percentage of small businesses want to see simplification in compliance for Occupational Health and Safety requirements

An issue with surveys is they can provide information but if that information does not result in action (either physical or mental) it is not that useful. In the rest of the article, to overcome that issue, I will provide a more in depth analysis of some of the findings and suggest what actions businesses can take to take advantage of the current conditions.

The findings of the survey included that it was not just a skills shortage but also a shortage of skilled staff with the “right attitude” that was an issue for small businesses. Also it appears that the skills shortage is now an important driver in employing casual staff. In comparison, in a survey done five years ago the lower total costs of casuals compared to full time employees was a more important driver in employing casuals.

A way to alleviate this problem is to keep existing staff. But one way that has been regularly suggested as a means of retaining staff, the offering of flexible employment conditions, is not being used. Only a minority of small businesses offer flexible employment conditions and this percentage is roughly the same as it was five years ago.

Small Business Initiative 1: Develop a retention plan for the staff that you want to retain. Follow the plan.

In regards to confidence in 2008 one of the biggest concerns for small businesses was the increasing cost of fuel and interest. Fuel was rated as a higher concern than interest. This implies that the fuel price increases has had a greater impact on the cash flow of a small business than the interest rate increases. This flags an opportunity for businesses as it would not be surprising if some of the businesses that rated fuel as the highest concern to have their cash flow more adversely impacted by interest rate rises than fuel cost rises.

Small Business Initiative 2: Have an analysis done on the business cost structure to understand the impact of rising costs in general and fuel and interest in particular and implement initiatives to maintain or improve the business cash flow.

One of the surprising findings of the survey was that the majority of small businesses have done nothing to reduce their greenhouse gas emissions. Those that have done something to reduce their emissions have focussed on recycling and reducing energy use. This will be an interesting trend to watch as it is possible that being environmentally aware and taking actions to reflect that may result in a competitive advantage. This will happen if customers increase the value that they place on the well being of the environment and place a greater importance on this when making consumer decisions than they currently do.

This increasing importance on the environment is reflected in a pest control business brochure that my wife picked up from a home show. The brochure included the environmental commitments of the business which were:

1. 100% carbon neutral by July 2007

2. Install solar energy hot water system by January 2008

3. Company vehicle fleet to use carbon neutral fuels by January 2010

4. Investment in solar energy grid power system by January 2015

This is a business whose operations could have an adverse impact on the environment and so they have an incentive to be proactive in regards to environmental management. They have decided to take their environmental message to potential customers and made their environmental commitments prominent in their marketing brochure.

Small Business Initiative 3: Develop an environmental plan for the business and uncover ways of how it can make a return on investment

The survey is available from the CPA Australia website.

Business professionals, lawyers, accountants, engineers and others are sometimes viewed as a necessary evil. Each profession has offered a lot of material for jokes and comedians over the years. We have the bottom dwelling lawyers, the charisma by pass, cardigan wearing accountants and the geeky computer dorks to name a few. As well as jokes these professions have something else in common. It is the ability to charge relatively high fees for their services.

Do businesses and individuals get value from these high fees? To answer this question I reviewed the 2008 Beaton Consulting Annual Business and Professions survey. This survey looked at the demographics of the business professions and client perceptions of the value that these professions provided. The professions were:

• Legal
• Accounting
• Actuarial
• Patent and trade mark attorney
• Architecture
• Management Consulting
• IT Services
• Consulting Engineering

The demographic part of the survey found that there are more female lawyers than male lawyers and that females also dominated in the accounting profession. At the other end of the spectrum 82% of consulting engineers are male as are 72% of IT service professionals.

The survey asked clients what they looked for in their professionals that they used. The two keys attributes overall were “proactive innovation” and “excellent service, communication and client focus”. However there were significant differences between how theses were valued in the different professions. “Proactive / innovation” was rated much above the average in the IT services professions while “service, communication and client focus” rated much lower in the IT and consulting engineer’s professions. The Legal and actuarial professions rated very high on this client focus attribute.

The clients were then asked how the professionals performed in providing innovation. In the IT world innovation was valued highly. However. The survey found that the IT profession was a relatively poor performer in delivering innovative solutions. The high performers in providing innovation were the Patent and Trade mark Attorneys and the Legal profession.

In regards to client relationship management the professions are focusing on the following.

• Making Efforts to build personal relationships
• Providing a client relationship contact
• Acting on feedback

The areas of relationship management in which clients indicated there had been the least amount of work were:

• Providing metrics on the service provided
• Identifying opportunities and referring business

Fees were typically viewed as high; however, this did not naturally lead to a perceived deficiency in value provided. It was suggested that fees were only one component that determined overall value. The ones perceived with the highest fees were management consultants, accountants and lawyers. Patent and trade mark attorneys were perceived as having the lowest fees and providing the highest value. However, the IT profession who were ranked second lowest in regards to fees were ranked last in regard to value. Also lawyers who were perceived as charging high fees were also judged as providing a high level of value.

What are some of the take aways from this survey?

• There is a huge opportunity for IT professionals

Unmet demand from clients in regards to innovation

• Lawyers may cost but they are satisfying their client needs
• Patent and Trade Mark Attorneys are potentially exceeding client expectations
• Generally these professions do have a high cost but overall they are delivering value

A message from the survey for the business professionals with a strategy of developing client relationships is that to differentiate yourself from competitors you will need to do more than develop a personal relationship. Referring business and providing metrics are two opportunities to help retain those valuable clients.

As with most business decisions it is important to start with the end in mind when engaging a business professional. This should be communicated to the professional and ideally done in writing before work commences. This will help clarify expectations and keep the professional focussed on solving your issue. This perhaps painful process up front will increase the likelihood of you extracting the value that the professional offers.

This is a question that many small business owners have. There are many issues that need to be addressed to find the answer but one of the big ones is how much will the expansion cost (the initial outlay) and how much cash (operating cash flows) will be generated. A tool to help evaluate whether the operating cash flows generate a return to justify the initial outlay is called Net Present Value (NPV).

NPV is a fundamental element of business finance and it is based on the concept of the time value of money. The time value of money suggests that a dollar is worth more the sooner it is received. To see how this works consider that you were offered the option of receiving $100 now or $100 in one year’s time. What would you choose?

The $100 now is always worth more than the $100 in one year’s time. If you wanted to spend the money you could do so now rather than waiting for a year. Alternatively if you did not want to spend it immediately you invest it for a year and earn some interest. If you did invest you would have more than $100 in one year’s time. Either way you are better off receiving the $100 now rather than waiting twelve months.

NPV is a tool that helps evaluate investment options when the numbers are more complex than the $100 example. However, it is still based on the concept that a dollar is worth more the sooner it is received.

For example, you are presented with an investment option whereby if you invest $20,000 now you will receive $2,000 in one year’s time and $22,000 in two years time. For investments of this kind you expect to get a 5% return. Should you go ahead with this investment? A quick answer to this question is, yes, the investment is good as you will receive $24,000 (2,000 + 22,000) and only outlay $20,000. However, that answer does not take into account the time value of money.

NPV is a tool that does take into account the time value of money. It does this by putting those three cash flows (the $20,000 outflow and the $2,000 and $22,000 inflows) in “today’s” dollars. What does that mean “today’s” dollars?

Remember that we said that $100 is worth more today than in one year’s time. NPV quantifies that by outlining what $100 in one year’s time is worth today. You require a 5% return on your investment so that means that the $100 is one year’s time is worth $95.24 ($100/1.05) in today’s dollars. In other words if you invested $95.24 today at your required return of 5% you would have $100 in one years time.

This NPV tool can be used to evaluate the $20,000 investment option produces the following result.

The rule is if the NPV is zero or positive it is a good investment. Note that we need to divide the year two cash flows by “1.05 * 1.05” because the $22,000 is received in two years time so to convert it to today’s dollars we need to allow for the required return over two years.

NPV and its relative the Internal Rate of Return (IRR) are important tools when evaluating investment options including deciding when to expand. However they are just part of the tool kit and need to be complemented by such things as:

ü Business Environment Analysis

ü Industry Environment Analysis

ü Sensitivity of Assumptions Analysis

ü Marketing Plan

ü Business Action Plan

ü Skills Gap analysis

Whether you do the NPV analysis yourself or you employ a financial expert to do it for you it is important to understand what the results mean so that you can make the most effective decisions.

In January I had the opportunity to present to a group of business people. The purpose of the presentation was to outline what Inspiration Coaching does. However, when doing presentations like these, a major component is talking about what coaching is and what benefits it’s provides. I also used the opportunity to launch a new program. The new program is called “Inspired Living”. There will be more about this program later.

In the presentation I talked about my fascination with sports stars and how that was one of the factors that drove me to coaching. I admire people who are successful in their chosen sport and I want to discover what role their mind plays in aiding that success. For example, why were Ian Baker Finch and David Duval capable of competing for majors one year and not be able to make the cut the next while Tiger Woods can dominate golf for a decade? What drove Sebastian Coe to win the gold medal for the 1500m at the Moscow Olympics after losing in the event that he was favoured to win, the 800m (I know I am showing my age with this one)?

I believe that there is something to learn from these people that exceed in their chosen field and the challenge is to use that to help me and my variety of clients achieve our own personal objectives and goals.

That is one factor that has driven me to coaching but it doesn’t help explain what is coaching all about. My definition of coaching is:

“a partnership between coach and client, focused on the client, to help the client move towards the achievement of their life objectives.”

The benefits of coaching include:

ü Identifying your objectives

ü Identification of actions to reach your objectives

ü Having someone to keep you focused on achievement of those objectives

ü Having someone to support you to overcome day to day life issues that get in the way of achieving your objectives

ü A greater self awareness and an appreciation of what you can achieve

ü Appreciating the journey just as much as enjoying achieving the objectives, and the big one

ü Helping you “live a life of no regrets”

The Inspired Living program has these benefits. In addition it provides a structured approach to coaching. It is a 12 session program. The frequency of each session will depend on the needs of the client but will vary from 2 to 3 a week to once every 6 weeks with the average being one session every two weeks.

The process that is used in the Inspired Living program is a little like the process I go through when entering a shopping mall. I need to go to the mall map to discover where I am. If the map doesn’t have one of those “You are here” stickers I am in real trouble. I then look at all the different options to work out where I want to go. Finally I work out a plan to get to from where I am to where I want to be. Usually I need to consult another map on the way to make sure I am heading in the right direction.

The other great benefit of the program is that you will discover tools and techniques that you can share with people that are important to you.

Maria Robinson says in the opening quote that it is never too late to make a new ending. Coaching can support you to make a new ending.

Now for the Special offer! Anyone who starts the Inspired Living program in February and who mentions The Coach newsletter will receive a $100 discount off the cost of the program.

My years of working in large mining organisations allowed me to see great risk management techniques and tools that can be applied to any size business.

Mining is a capital intensive industry and a lot of money is spent to reduce the risk of making wrong decisions on investments and to reduce the risk of investments not delivering what was promised to shareholders. The same principle applies to any sized business. Every business wants to make the right investment decision and increase the likelihood of the business of delivering what is expected. When evaluating a new business good risk management tools and techniques can assist the decision making process and increase the likelihood of business success.

Before outlining some of the tools and techniques I will outline a principle that my Engineer friends tell me is crucial. The principle is that the ability to influence a project or business or contract negotiation is at it’s greatest during the feasibility stage. That is it is during the time when you are analysing an opportunity that you have the greatest power in influencing the outcome. Once a contract has commenced or a new business has started it gets costly to make significant changes. This suggests that the most efficient time to do risk management is during the feasibility stage.

For the purposes of risk management, risk is defined as an event that could prevent you from achieving your objective.

The risk management process for evaluating a new business opportunity is:

1. Identify Risks

2. Analyse Risks

3. Evaluate Risks

4. Treat Risks

The type of risks will depend on the business being evaluated but once identified a good tool to assist with the analysis of the risk is the likelihood and consequence matrix. The matrix is

Each risk event is analysed as to its likelihood of occurring (from certain to rare) and the consequence of it occurring (from catastrophic to insignificant). The event is then categorised in the appropriate section of the matrix.

The definition of the consequence categories will depend on the business opportunity and whether a dollar impact can be measured. For example it may not be possible or appropriate to have a dollar impact of a safety or environmental risk event occurring.

One way of defining the likelihood categories is to analyse how often the event is likely to occur. For example if an event occurs daily it would be classified as certain and if an event has never happened but is possible it would be classified as rare.

The risks have now been analyzed and, to an extent, evaluated by using the likelihood and consequence tool. To complete the evaluation of the risk events a decision needs to be made on whether the risk is acceptable or not. You may decide that all risks that fall within the yellow and green sections of the matrix are acceptable but those in the red section are not.

Finally for those risk events that are not acceptable a decision needs to be made on how to treat the risk. The three main treatments are to:

1. Reduce the likelihood

2. Reduce the consequence

3. Transfer the risk via insurance

If none of these treatments are possible or are too costly to implement you may decide not to proceed with the business opportunity.

Managing and mitigating risks will increase the likelihood of business success.

Articles in earlier editions of the coach outlined how to develop a one page business action plan. This month the focus is on the development of your career action plan. However, the process can also be easily adapted to other areas of your life.  

The first and most important step is to make a decision. The decision is whether or not you need a career action plan. Many may not require any action in their career at this stage of their life. For some there are more important areas in their life to which they want to devote their time. The challenge is to make a conscious decision and either accept the current job or put into place actions to achieve your goal job.  

Like a business, the foundation of a strong action plan for a career is a vision, mission and identification of values. This article will not go into detail about the development of this foundation (see the inspiration coaching blog for articles that contain more detailed information) but in summary the following is suggested

ü       Vision: Choose a time in the future and document in detail what you will be doing from a career point of view. I suggest somewhere 3 to 5 years in the future. What you should identify includes:

o        where you are located,

o        what you are doing,

o        how you travel to your work place,

o        how many hours a day you spend there,

o        what sort of colleagues you have,

o        what clothes you wear,  

ü       Mission: Identify what you want to achieve in your working life. As a tool to help you complete this, think of what ideally you would like to tell people when they ask you “What do you do?”

ü       Values: Identify what is important to you in your working life. Make them behavioural statements and not just one word statements. For example if you value “excellence” (I suggest choosing the 5 or 6 most important values for you, please contact me if you would like a tool to assist with this) document a statement that will show how you will behave to show how you value excellence. For example it could be “I will value excellence by continuing to develop my knowledge in _______________ (your area of expertise).

The next steps involve identifying actions to help achieve your mission. The first of these steps is to document the key areas that need to be nurtured to achieve your career mission. For example these could be relationships, customers, my knowledge, my growth. As an example I will look at “customers” and the steps to follow to identify actions. The steps are strategy, targets and actions.

ü       Strategy: In simple terms a strategy is a method to win. Be it war, sport, business or your own personal career having a strategy increases the likelihood of success. In regards to customers, “exceed customer expectations” is a statement not a strategy. However, “I will exceed my customer expectations by knowing their needs before they do” is a potentially very powerful strategy.

ü       Targets: The targets that support this strategy could be:

o        80% Retention / renewal rate

o        New product or service provided every six months

ü       Actions: Actions that would help achieve this target are:

o        Attend two industry conferences annually

o        Call each customer once per month

o        Subscribe to two industry magazines and research industry trends

Repeat this process for your other key areas and you will complete your career action plan.

Office politics generally has a negative connotation in the Australian culture. People who play office politics can be seen as pushy, arrogant and self centred and perhaps sometimes this is the case. However it could also be the case that these people are value centred and are living a life in alignment with their personal values while at the same time helping their organisation achieve their goals.

Wikipedia (I know that is not 100% reliable but for this purpose it does the job) defines “Office Politics” as “the productive and counterproductive competitive human factors present between co-workers, in any office environment”. I saw productive and counter productive politics during my career working in offices (my brother in law unkindly suggested that I should not write about this subject because all I have for competitive human factors in my current job is the family dog and he is not even human). Also, I have seen recently in the TV show “Damages” and the movie “The Bourne Ultimatum” some great examples of office politics. In the movie a CIA agent, Pam Landy, is moved into a position so that she can take the fall if things fail. However, Pam in turn uses politics by utilising people loyal to her and her own political skills to achieve an outcome that was consistent with those of the organisation and in alignment with her own values. (I don’t think that gives away too much for people who haven’t seen the movie).

Steven Covey in his book “The 7 Habits of Highly Effective People” (I didn’t read this book for 15 years because I didn’t like the title but I found it a thought provoking read) discusses a former colleague who utilised politics in the office. He worked for a organisation that was headed by a president with a dictatorial style of leadership. He made all the decisions and used his executive team as “gofers” (go for this, go for that). Most of the executive team would grumble to each other about their president. The former colleague decided to compensate for the president’s weakness (his style) and work with his strengths (vision and creativity). He shielded his own people from the president’s style and while still being treated as a gofer he used his own skills to identify the president’s underlying concerns. When he did present information to the president he did more than what was directly asked. He addressed the underlying concern and provided his own recommendations. The result of this action was that the president still used the other members of the executive team as gofers but now sourced the opinion of Covey’s former colleague.

The colleague used politics in an ethical way in alignment with his own values and advanced his career and served the needs of the organisation.

So the key points about office politics are:

• It is a fact of life (whenever people gather politics will come into play)
• It is a social lubricant (It is a way of making things happen)
• It is about influence (Influencing others to help achieve goals)
• Anyone can be an office politician
• Using politics with integrity can help you advance your career with a clear conscience.

What businesses want to know is how the cash flow and profit will be impacted by changes. Changes that include the implementation of the actions to realise the “important stuff”. A tool that shows the impact of changes in cash and profitability is the financial model of the business.

A financial model is your business in numbers. The model will include the profit and loss statement, the cash flow statement and the statement of financial position (balance sheet) of your business. The difference between the statements in the model and those that are prepared by the accountants and book keepers is that they are a model of the future rather than a statement of the past. The model also includes the information behind the numbers. It identifies what are the “drivers” of the numbers in the statements. The model can start off simply and grow in complexity and sophistication as the business gets used to using it.

To start your financial model use this five step process. Microsoft Excel or a similar spreadsheet product is the ideal tool to use to build your first model.

Step 1: Identify your revenue drivers

Initially this could be your volume of sales and the average sales price. Multiplying these two statistics together will provide the total revenue number that feeds into the profit and loss statement. The model can evolve to further break down these statistics. For example rather than just having a total volume of sales each product or service that is sold can be separately modeled. It can be further developed by identifying the different type of customers (e.g. those that are offered discounts, those in different geographic regions (if they pay different prices)). Matrices of statistics could be developed that feed into the revenue line of the profit and loss statement.

Step 2: Identify your cost of sales and cost of production drivers

These are the direct costs of producing and selling your product or service. In the early stages of the model life the drivers could be production volume and average cost of production. In a service business the costs of production would largely be the salary costs of the people providing the service. If you are the owner of the business remember to include an allowance for your own costs. A suggestion for the amount to use is what you could earn working for someone else. For a business that produces a product or products the model could evolve in sophistication by identifying raw materials and the amount of the raw material that is consumed in each production process.

Step 3: Identify the drivers of the administration and support costs

Use the 80 20 rule in all steps of producing the financial model. In this step the rule dictates to spend time on identifying the drivers that result in 80% of the total costs. In fact if these costs make up less than 20% of the total costs of the business I suggest that initially these costs should not be modelled but fed directly into the profit and loss statement of the financial model.

Step 4: Model the businesses financing and investment strategy

Use your vision and other planning tools to identify the future capital expenditure requirements of the business and feed this information into the cash flow statement of the model. This will help identify the financing requirements of the business.

Step 5: Verify the model

Check the accuracy of the model by recreating last year’s results. Use last year’s data on the business drivers to test that you can recreate your actual financial statements in the model. Once this is done you can start to estimate the impact of the improvement initiatives on the business’s future cash flow and profitability.

But what do these four steps and the financial model of the business have to do with the headline of this article? Predicting the future profitability based on the best available current information is only one benefit of the model. Going through the process of developing the model will help identify the different margins or profits that each class of customer provides. One of the decisions that you may make as a result of this analysis is to stop servicing a class of customers that provide a low margin and spend your time increasing your market share of the customer class that provides a high margin. Thus by losing customers you can make more money.