By BRAD ROSSER
I’m all about growth. I like to relentlessly move forward in some shape or form, but only when it is done profitably. More cash, not less. This is where finance comes in. If you are going to succeed, you have to be something of a schizophrenic. I want you to be visionary, dream where you’ll be one day, and plan for it. But when it comes to getting there, your method and day-to-day decision-making needs to be that of a visionary with your feet on the ground.
So finance counts because the discipline it brings counts. As you enter, grow and leave the SME stage for bigger and better things, I need you to have two skills:
A methodical, no nonsense way to make every investment decision. I craved the unruffled, clear way that Sir Richard Branson approached each decision without distractions and perceived interdependencies when I worked directly for him as his Head of Corporate Development.
An ability to quickly and easily assess the financial health of a business at all times. This means less time wading through reports and instead concentrating on problem areas before they spiral out of control.
So, how can you achieve the necessary clarity and simplicity in your decision-making? Well, ask some simple questions every time: ‘If I spend this, what will I get back?’ And ‘How quickly will I get it?’ It’s the payback principle.
Sometimes impressively trained people sneer at you and look at you in a way that lets you know you obviously don’t understand that all the decisions are interrelated and that there’s a hugely complex matrix you could not hope to understand. Rubbish. Look at each issue on its own merits. This was the secret to Richard’s absolute clarity and his ability to constantly progress projects, step by step, and to lead from the front.
Payback is often misunderstood, but its implementation is critical. The principles to follow are:
1. Do everything on a cash basis. No emotion, no accounting.
2. Only consider incremental revenue and costs, i.e., those directly related to your decision.
3. List all fixed costs directly related.
4. Calculate the profit margin, i.e. incremental revenue less incremental costs.
5. Find out how many items you need to sell to recoup all your costs, i.e. breakeven.
6. Compare your breakeven with other points of reference.
7. Make a judgement call – is this reasonable?
8. Don’t look back – move on.
Once you take away the hype and emotion, you’ll be able to find clarity in your decision-making. This method forces you to look at all the elements and see if you can change them to work for you.
Now you are in control, and an added benefit is it works for all decisions. All choices are about increasing revenue or reducing costs. At Virgin, and for my own ventures, I have used payback for deciding whether to hire a sales person, invest in an accounting system, and spend on a branding decision.
Using this method in a disciplined way positions you to make the best decisions, but ultimately you’re going to have to use your judgment and trust your instincts. You will have to take a risk, but this is now a calculated decision and not a pure gamble.