Avoiding Vortex's - Unprofitable Work

In every business there is a balance between the need to keep cashflow rolling and really difficult and unprofitable work.

In professional services Firm's such risks are higher given the high human capital cost with limited ability to leverage man hours.

At LCC we have a strict approach of looking at potential engagements and attempting to avoid what I have labelled 'vortex's'. These are situations that might have cashflow attached but are very difficult pieces of work to complete.

They occur in every industry. Whilst it is always a balancing act, I recommend that you critically review larger opportunities that are presented where the profit is marginal. If such an opportunity / contract proved to be heavily unprofitable the associated 'stress' that it can place on the corporate system can be incredibly negative.

In my experience it is far better to avoid these situations and pursue other, more profitable, work.

Keeping a Clear Head

On the weekend I took to the water sailboarding for the first time in years.

Not only was it enjoyable it was a really useful experience from a professional perspective. Plonking along on a sailboard in a stiff breeze the only thing I could concentrate on was the waves, wind and my balance. An hour on the board focussing on these things delivered a refreshed mental feeling, being able (or forced in my instance on the water) to switch off mentally completely from business issues.

I thoroughly advise that you figure out that special sport or past time that allows you to immerse yourself in the 'present' and switch off from day to day issues. I only wish I had revisited this sport a few years ago.

Be Careful Using Consultants

There is always an issue for a young company as to whether they should hire or use collaborative initiatives / consultants. This can be a difficult issue to handle.

My own experience is that non payroll based employees rarely prove to be as effective as one imagines. The energy and dedication of consultant can wane if there are not quick wins, or alternatively the risks in work that the consultant wants to pursue can be outside of the box of what the Firm actually wants to pursue.

At LCC we have attempted collaborative engagements from time to time, but despite best efforts, dedication of resources and much time / money invested the recoupment from such initiatives is marginal at best.

In many ways this is similar to a 'channel' initiative. Not all channels work. With consulting services the risk are understandably higher given the intangible nature of services delivered. As such I would recommend that you wait until you can hire full timers - and approach any collaborative effort with caution.

Do Investors Have Money ?

Given the current economic turmoil I advise you to closely ask any potential investor in a project what their available capital is.

There are many venture capital and private equity managers that are still in business, and interested in reviewing things, but when push comes to shove they do not have the capital.

Recently LCC had a series of meetings with a well known PE manager in Australia.  After some weeks, however, we learned that the investor had enough money to pay their fees, but little else.  Additionally the planned new fund that that manager had for 2009 was put on ice.

So early in any discussion make sure you are aware of the investments that the party you are holding discussions with have made, and additionally what their free cash for each investment is.

Using Skeleton Documents

When preparing an information memorandum a simple but useful tip is to prepare a rigorous index to the document ahead of any full scale drafting.

Nothing is more annoying than rewriting documents over and over again.  Working through an index approach you can ensure that the framework of the document is put in good order and all stakeholders that are involved in the process can buy in.  THis will avoid lengthy redrafts (hopefully).

Using an index based framework approach will also give you direction in the preparation of the documentation.  You can work on a modular basis.

Indexes and substance to Information Memoranda are fairly standardised these days.  Any public company prospectus will give you good direction on the sections that a investor will seek to review.

You can also visit the resources section of our website :  www.lcc.asia for many useful tools in preparing an information memoranda.

Managing Inventory Down in a Recession

Today I had a long conversation with a very experienced businessman who was under pressure from a supplier.  This individual has had a very successful track record of managing (and making money from) the hospitality industry.

The issue was a pretty simple one as to why pressure was mounting :

• Inventory levels had been managed down slowly, but not swiftly enough to mirror the deteriorating economic climate.  The decision was a simple one - to stop ordering from a key supplier for a few weeks and to run inventory down.
• A new competitor had opened in the vicinity of the main establishment in the immediate past.  This had had the effect of distorting the typical inventory days for a number of product skews.  The opening of this competitor was no shock, and should have been planned for.
• With a tightening economy the number of days inventory was held in various products (skews) had increased.  A conscious effort was made to rebalance the inventory landscape by liquidating this slow moving stock as cost + 5% to allow capital to be freed and higher turnover inventory to be brought in.

The result was that the initially horrendous picture was not bad at all.  It could have been avoided with a little forward planning.

So in a volatile economy manage inventory levels tightly.  It is better to forego a little bit of margin and order more frequently than just let inventory build up - as the financing cost on the holding of slow inventory will equate to the discount given to clear out.

Build Some 'Giving' into your business model

This is a really short one.

Work out how you can build some philanthropy into your business model.  It is not that hard and here are a couple of suggestions :

1. Work out if your business can donate a product / service to a charity auction to support a cause.  Does not cost that much and has a real benefit.
2. See if there is any way you can support / sponsor a charity - even the simplest amounts / efforts can have a substantial effect.
3. Allow employees to spend a day a quarter in a charity.  As a volunteer.

It is not that difficult to assist, and it gives your business a more balanced perspective than simply trying to generate profit.