Category Archives: Finance

How Are Your Relations with Your Bank? Seven Points

Situation: A CEO’s company is short of cash to make a scheduled payment against a line of credit. They have been notified that if the payment isn’t made, the bank will transfer cash from the company’s checking account to satisfy the payment. This would compromise their ability to meet payroll and pay vendors. How are your relations with your bank?

Advice from the CEOs:

  • What the company needs is time, so that they can pay down the line of credit from cash flow. It is best to compartmentalize any discomfort with this situation. Remember that any bank action generally takes time.
  • Advice from the company’s lawyer is that if they stop making deposits, the bank will notice and react negatively. Given that the current interest rate on the line is low, a negative reaction from the bank could lead to an increase in the rate.
  • The company has a bargaining chip. The bank does not want to show the company’s line as delinquent. If they admit that a delinquency exists, it puts them in a bad place.
  • Develop a contingency plan to guard against the company’s biggest risk – inability to make payroll. Assure that this can be covered.
  • Use checks paid by customers to move a portion of company assets to another bank.
  • Secure a new line of credit with another bank to cover credit needs, including salary coverage if the current bank acts adversely.
  • Assure that any conversations with the bank are documented in letters to the company’s contact at the bank.

How Do You Improve a Business Model? Four Observations

Situation: A CEO is in conversation about combining with another company. One option is for the other company to absorb his company. What are the pros and cons of this option? Are there other options that will better serve both owners and employees? How do you improve a business model?

Advice from the CEOs:

  • The company has a great model today. The option under consideration looks like a double compromise – it alters both the company’s strengths and its fundamental business model.
    • The company’s strength is lean and mean – moving from a hourly/fee-based model with high utilization to a salary-based model, as the option on the table proposes, will change this. It also changes the dynamics of who will work for the company.
    • The magic of the current model is that it attracts top talent by offering them the best of two worlds: high individual billing rates with ready access to billable hours. Over the long term this has also made it very profitable.
  • Explore an alternative – how does the company transform its existing business model while retaining its strengths – lean, mean, low overhead – while transforming the model so that it builds “products,” perception, and recognition for the company?
  • A longer-term alternative is to look for a financial acquisition of the company. It has good net margins, good cash flow, and even spins out cash. This is valuable to a financial buyer.
  • What is the role of the CEO right now? Another CEO was asked “Do you have a job or a company? What happens if you leave? If the company dies, you have a job. But it may not be necessary to change much to become a company.”

How Do You Prepare for a Potential Acquisition? Three Areas of Focus

Situation: A CEO has been approached about a potential acquisition of his company. The offer was a surprise, and the team within the company is split on whether they are interested in a sale. They are currently very happy with what they do. How do you prepare for a potential acquisition?

Advice from the CEOs:

  • How does a company best position itself in advance of discussions?
    • Rebrand the company to boost the value proposition. Make what the company does best the focus of its value proposition. Position the company as the “experts” in this area.
    • Look at a series of possible scenarios that could develop and determine who on the team can best contribute each scenario. This will help to evaluate the implications of each scenario and to rank them in terms of favorability on the company’s terms. It will also help to quickly exclude certain scenarios if they come up during discussions with acquirers.
  • What research should the company conduct on the acquirer?
    • Do a deep dive into the potential acquirer. Research is simplified if the acquirer is public. Go online and look at their SEC and public filings. Look at their revenue trend as well as their profitability or losses.
    • What is the acquirer’s history of acquisitions? Interview people from companies that they have purchased.
    • Don’t pitch anything to the acquirer until you understand what they want to buy – this is critical so that the company positions itself well.
  • What is the best approach to take once the conversation starts?
    • Quick first step – send the company’s financials to the acquirer with a 3-year projection. Ask them, based on this, for a price range that they would consider for the company. If the range is outside of expectations, the conversation is over.
    • Determine whether this looks like a strategic vs. a financial buy. A strategic buy yields a higher price.
    • Cut a deal structure with a bonus tied to success post acquisition. This means a reasonable upfront payment with big payments for future success. This creates golden handcuffs to motivate the company’s staff to stay post-acquisition.
    • There should be multiple options on table – addressing both financial considerations and the future of team.
    • Always be ready to say no!

How Do You Create and Communicate Urgency? Seven Solutions

Situation: A CEO perceives that the company has a conflict between performance and planned timelines. Of concern is performance against key metrics like pipeline performance and closing new business. A sense of urgency isn’t present. How do you create and communicate urgency?

Advice from the CEOs:

  • Management knowledge of company financial status and performance against key metrics – particularly key drivers like pipeline performance – is critical to their being able to assist the company.
  • A company decision to focus on project profitability may have the unintended consequence of exacerbating the lack of urgency. If revenue growth lags, the only option for managers who are tasked to hit a profitability target is to cut expenses. This delays projects and can negatively impact morale.
  • Accountability comes from meetings. Not 1-on-1 meetings but team meetings. Peer pressure is an important component of accountability. Nobody wants to be the individual who is consistently behind on projects or initiatives.
  • The challenge may be more external than internal. When business closes more slowly then everything else slows down: hiring, new development, investment and profits. All of these are driven by new business acquisition.
  • Another CEO has same issue with her contracts. All contracts include a timeline. If work or deliverables slip, the customer wants to slow down delivery and billings. Her solution is to include stop work and delivery delay fees in the contracts.
  • What actions would others take to address this?
    • Institute progress payments. For example, instead of charging 50% up front and 50% on contract completion, shift to, for example, 50/30/20 with the 30% due on completion of project framework. This way, only 20% can be delayed due of customer timing issues.
    • Built financing into total pricing. The customer is free to delay projects, or aspects of projects, but there is a charge calculated into delayed delivery which covers the cost of money and additional management.

How Do You Manage a Difficult Employee? Seven Suggestions

Situation: A CEO and her staff are struggling with a difficult employee. This individual fails to send invoices on a timely basis, doesn’t provide required reports to management, and doesn’t return vendor calls. The CEO has spoken to the employee, who acknowledges the issues but then rapidly defaults to old habits. How do you manage a difficult employee?

Advice from the CEOs:

  • Ask for specific weekly/biweekly AP/AR reports, and be very clear as to everything that this should cover as well as the required deadlines. Make it clear that these deadlines are mandatory and that there will be disciplinary consequences for failure either to meet the deadlines or to create the report as specified. Address issues with timely mailing of invoices and timely return of vendor calls the same way. Make all three standard operating procedure.
  • This is not an at-will employee so assure that there is very good and complete documentation over a period of time to demonstrate that the employee is not meeting required job responsibilities.
  • Tell the employee that he has 90 days to demonstrate that he can consistently meet required responsibilities, and that there will be a retain or termination decision at the end of this period.
  • Update policies that are not being following so that they are clear.
  • Check with a human resources expert for advice on what needs to be done. Regulations are shifting, so this will assure that the company is following regulatory requirements.
  • If the final decision is to retain this employee, adjust responsibilities to mitigate potential future damage.
  • Given the current challenges, why is this employee’s behavior being tolerated? What message is this sending to other employees?

How Do You Build International Sales? Five Observations

Situation: A CEO wants to create new markets outside the US. They have investigated options and locations and are starting to plan. One question is how long it will take to start seeing results, so that they budget accordingly. How do you build international sales?

Advice from the CEOs:

  • Decision timelines internationally are longer than they are in the US. For example, in Europe timelines are easily twice as long. This means that new entrants must budget for a sustained effort.
    • It took another company three years to develop traction in Europe. They have an office in Germany, but most new sales are coming from Eastern Europe. After three years their European operation is now break-even.
  • International markets, especially in Europe, can be very conservative. Job security and maintaining cash flow are the focus.
    • Labor laws encourage companies to do things themselves rather than outsource. The result is that a new entrant will face competition from internal departments of potential prospects.
  • In European the emphasis is not growth, but on conservative steady operation. Growth tends to come from acquisition.
    • Sales pitches should be tweaked for international audiences. For example, highlight reduced need for additional personnel to manage the systems, fewer breakdowns and glitches, and the ability to count on seasoned outside expertise to quickly address complications.
  • Relationship selling is very important internationally. Sales and tech support are best provided, and in some cases required to be provided in the local language.
  • In Europe, Italy can be an important lever to sales with the right partner. Italian companies can be excellent at marketing and can jump-start European sales. This will be a very personal relationship.

How Do You Create an Incentive-based Compensation Plan? Seven Ideas

Situation: A CEO wants to build additional incentives into the company’s compensation plan. The objective is to add group incentives to the pay mix – to focus more attention on group performance rather than just company goals. How do you create an incentive-based compensation plan?

Advice from the CEOs:

  • The best policy is to be upfront, open, and transparent as the plan is presented.
  • Communication is the key to success, including the following bullet points:
    • Pay starts at a base which is 75th percentile – a generous base in our industry.
    • Group bonuses, which reflect the results of the group’s efforts, allow you allow to reach the 90th percentile or higher.
    • On top of this, profit sharing enables the addition of 10-20% of your base.
    • Altogether, management thinks that this is a generous package. The difference from the old system is that employees will be rewarded for making decisions which will benefit the group as well as the company – and you will be generously rewarded for this.
  • Once plans are communicated to employees 1-on-1, reinforce the message with a group presentation and open discussion at monthly company meetings.
  • Consider: significant changes in compensation may be best taken in small rather than large increments. Start with small incremental adjustments. If these are effective proceed to larger increments on a planned and open schedule. This is particularly true if the historic culture has been that we all win or lose together.
  • A downside of rewarding by team is that some will get rewarded for producing minimal results. Consider some percentage of discretionary payments to recognize and reward effort instead of pure parity within the team.
  • Consider longer-term results within the payment scheme – not just quarterly results.
  • People need to know that they are accountable. Let them know that a 75% base is reasonable but that the significant rewards will be for producing results above this level.

How Do You Implement a Process Change? Six Suggestions

Situation: The CEO of a service company is concerned about lost income from uncaptured billing. He has identified the cause – failure to capture extra hours that haven’t been billed – but is struggling to get employees to monitor this more effectively. How do you implement a process change?

Advice from the CEOs:

  • The group presented two options for growth: bring in experienced outside people to develop additional systems to run the company, or a hybrid model using internal resources, augmented with outside expertise.
  • Bring in Experienced Outside Resources: Hire an experienced outsider with a track record in your industry to design and implement the needed systems.
    • Pros for this solution: the outsider will bring a fresh vision and new energy, plus the experience and know-how to make the desired changes.
    • Cons: impact on current business culture. This may generate resentment among employees who can no longer make decisions on the spot and may remove a path to management for existing staff. Possible negative impact on customers who receive larger bills due to change orders.
  • Hybrid Model: Outside person creates model and trains employees to implement it, then monitors the system and progress long-term. The key is to change expectations and behavior within the team.
    • Pros for this solution: more opportunity for current employee participation; involves employees in the design of the system, providing better buy-in to the solution.
    • Cons: as with any change, this won’t provide the full expected return. Just the fact that things are being changed impacts the efficiency of implementation. Unanticipated blocks and resistance may hinder progress – don’t be surprised by this, it is predictable.
  • Implement SOPs that facilitate rapid response to change orders – starting now and with whichever option is chosen.
  • Generate a pick list of all possible change orders with pre-calculated costs to guide employee choices and keep customers informed.
  • Whatever solution is chosen, be sure to communicate frequently and consistently with employees to facilitate the change.

How Do You Monetize Your Business Model? Five Suggestions

Situation: The CEO of a start-up software company focuses on connecting potential parties to business opportunities. Early signs are that this offering has legs and potential parties have responded positively. The critical question for the CEO is how best to turn interest into revenue. How to you monetize your business model?

Advice from the CEOs:

  • The first step is to segment the audience and determine both the potential for each segment to both benefit from and fund the service that they receive.
    • Individual contributors may not have a lot of financial resources but may be interested in participating as employees or providers of expertise or services. They also may know others and can spread the word.
    • Collaborating organizations may be able to offer both funding and services to help build and sustain momentum.
    • Companies have funds to support the effort provided they see value to their bottom lines as a result.
  • Suggest a fee or contribution for services from companies who will benefit. Provide guidelines or a sliding scale of fees depending upon duration of services provided to the company. Make it clear that moneys earned will be reinvested to increase the range and depth of services offered.
  • Suggest a sliding fee scale for individual contributors based on the financial benefit that they receive.
  • For companies and collaborating organizations offer levels of membership or recognition for support based on benefit received.
  • For all segments – start with small, timed fees and increase these as the model proves its benefit to them.

How do You Minimize Inventory Damage by an Outsourced Manufacturer? Five Points

Situation: A company uses outsourced manufacturing but is concerned about inventory damage by the manufacturer. Tests have been established to assure both visual compliance and functional performance, overseen by a company employee. Still the company is receiving too many unacceptable parts. How do you minimize inventory damage by an outsourced manufacturer?

Advice from the CEOs:

  • It is perfectly acceptable for a vendor of consigned materials to bear the risk of product that is not to specification.
    • In any contract for manufacturing, require that the vendor carry insurance to cover the full cost of materials and processing in case of damage either during manufacturing or shipping.
  • It sounds like this is a new opportunity and situation for the company. In the process they have not guaranteed that both cost and risk are covered.
    • There is no point in assuming all this risk.
    • For future opportunities like this, take on the work as a time and materials project at an appropriate hourly rate for the market, and with a significant mark-up to cover risk as the project is transferred to a contract manufacturer.
    • Another option is to take on the project under a project management contract, and to bill engineering separately.
  • This situation sounds familiar for an evolving project. In the future try to unhitch the manufacturing piece from the engineering. Engineering should be more profitable, which will allow the company to more successfully manage the project into early manufacturing.
  • Strategically, this could be a good move for the company provided they partner with a reliable vendor to facilitate early stage manufacturing. One option for paying sub-vendors is to pay for yield – particularly if early stage work has a high failure rate.
  • If the market opportunity is there do two things:
    • Set up an organization with professionals who know early stage manufacturing.
    • Be aware this group will have a different culture and approach compared to design engineers.