Tag Archives: Cash

What are Your Key Business Metrics? Seven Suggestions

Situation: A CEO has been analyzing the metrics that she uses to track her company’s performance. Historically she has used common metrics like sales, gross and net margin, profit and net operating income, budget plan vs. actual expenses, and sales forecast vs. actual sales. She is curious what other companies use to track performance. What are your key business metrics?

Advice from the CEOs:

  • The most important financial metric for many companies is actually cash flow – how much cash you have on hand and your cash flow forecast. Two metrics that can help you to better understand and boost cash flow are:
    • Receivables – aging rate
    • DSO – Days Sales Outstanding
  • Additional financial metrics include:
    • Portfolio performance
    • Variable versus fixed cost ratios
  • To augment understanding of profitability, track “good” profit – revenue from customers who are profitable, as opposed to revenue that is either break-even or unprofitable.
  • Sales metrics to measure future revenue include:
    • Order backlog – by month for X months out
    • From this, forecast beyond visible orders
  • Marketing metrics include:
    • Net promoter score – would the customer refer us to a friend or family member?
    • Client and referral client retention rate
  • Metrics for utilization of resources for a service provider include:
    • Total hours paid versus total hours billed
    • Resource utilization
  • Business trend tracking. If business is seasonal, look for historic peak to peak times – this may be 3 months and may be 18 months. Determine this and make the rolling cycle equivalent to your business cycle.
  • Review your metrics regularly to reinforce their importance across the company

What Will You Do Differently in 2015? Six Observations

As we begin 2015 more people are feeling upbeat about the economy than they have through most of the last six years. The dollar is at new highs against global currencies. The US is approaching energy self-sufficiency. However, some still see regulatory headwinds and downsides. What do you see and what will you do differently in 2015?

Advice from the CEOs:

  • Over the last six years, software companies have seen large increases in outstanding credit to clients, combined with restrictions on clients’ credit lines available and fewer new purchases. We hope for a better year in 2015, and will focus on reducing outstanding credit to improve cash flow.
  • Cash continues to be king. B2B business sectors with good cash positions are solid.
    • If your product/service saves clients money and makes financial sense, you’re in good shape.
    • Raising money will continue to be a challenge. Investors have been focusing on accelerating deliverables, creating a difficult environment for entrepreneurs. The Wall Street Journal says that the share of people under 30 who own businesses has reached a 24-year low, referring to young entrepreneurs as an endangered species,.
  • What is your current planning horizon?
    • We continue to plan quarter to quarter. There are too many variables for a longer horizon. We pay up our credit lines, and cover multiple payrolls with safe bank deposits.
    • We are watching headcount and dollars in the bank.
    • We are communicating more with our best employees and bringing them into more decisions so that they won’t be looking elsewhere.

How Do You Craft an Effective Trial Offer? Five Suggestions

Situation: A professional services company has developed a new trial offer to promote their services to prospective clients. The offer includes a discount for an initial evaluation accompanied by a discount on services should the client choose to proceed with recommended solutions. They seek guidance on whether this is an effective approach. How do you craft and effective trial offer?

Advice from the CEOs:

  • The suggested approach is similar to what others offer to new prospects, but only goes half way. A discounted offer only works if you’ve convinced the prospective client that first, they need your services, and second, that there will be a positive financial impact to their bottom line if they agree to your trail offer. You need to add recommendations that will demonstrate a significant short term financial benefit.
  • Target your message. Give the prospect a reason to spend scarce dollars now.
  • Offer to apply all or some of the initial fee to future expenses if they contract you to solve problems that you identify in your initial review.
  • An example of a more targeted offer would be as follows – we will audit your accounts receivable as well as any debts that you’ve written off last in the last 2-3 years. Based on this audit, our past experience has been that you can boost short-term collectibles from these accounts by 30%. An offer like this demonstrates an immediate impact on cash flow.
  • Do you feel comfortable offering a guarantee? You will save the client $X over a guaranteed period or the service will be free.

What are Best Ways to Boost Cash Flow? Five Guidelines

Situation: A company is frequently short of cash at payroll time. It has good revenue and profitability, but timing of receipts can make it difficult to meet payroll. Are the CEO and CFO doing something wrong, and what changes should they look at to better manage cash flow needs? What are best ways to boost cash flow?

  • All financing begins with your cash flow pattern! Your ability to manage cash flow is the foundation of credit worthiness. It is both a reflection of past performance and specific future performance expectations.
    • What can you do to optimize your situation?
      • First – put your own house in order!
      • Review your business model and the aspects of the business model that are causing cash flow challenges. Based on what you find, fine-tune your business model and its cash flow capacity. If receipts are the challenge, work with your customers to focus on timely payments.
      • Understand your financing needs in their full context. What short-term financing options are available? Will your bank offer you better terms on your line of credit to keep your business.
    • Stop, think and analyze before you act.
      • Framing:  View the problem in its full context!
      • Alternatives:  Consider all relevant choices!
      • Trade-offs:  Get more than you are giving up!
  • It is important to fine tune your business model, not just in slack times when you have the time, but also in good times so that you are well-prepared for the next slack period.
  • When times are flush, set aside funds to invest in analysis of your business model.
  • Special thanks and in memory of Eric Helfert, PhD for his advice in this discussion.

Which is Preferable C or S-Corp Status? Six Suggestions

Situation: A company’s accountant advises them to transition from a C Corporation to an S Corporation. Remaining a C Corp would force them into accrual accounting with significant tax consequences. The accountant also advises that it is easier to sell an S Corp to a buyer, and S Corp status would relieve problems with retained earnings. Which do you think is preferable, C or S Corp status?

Advice from the CEOs:

  • Accountants disagree. Get a second opinion. Also consult a tax or corporate lawyer who will provide another perspective.
  • Another company looked at S vs. C status and found two key factors:
    • S Corp status is great if you expect to lose money for a few years because of the benefit that it can offer to personal taxes. Over the long-term you should look at the difference between personal and corporate tax rates and set your strategy so that it makes the most sense.
    • An S Corp cannot have non-U.S. shareholders.
  • There is more flexibility with C Corp status in your ability to grant options, sell shares, etc. For a suitor, purchase of C Corp shares prior to a full acquisition is like a date before deciding on marriage.
  • C Corp status is good if you are building an empire. S Corp status is better if want to have employee ownership under an ESOP as an option for exit.
  • Since taxes are a significant part of this decision, think carefully before you shift from cash accounting.
    • Once you commit to accrual accounting you can’t go back to cash basis.
    • To the extent have an accrued tax liability you can extend payment of this liability over multiple years.
  • You also may want to consider a hybrid accounting method:
    • Accrual for sales
    • Cash for service
    • Look at whether there are tax advantages to a hybrid model.

Better to Focus on Cash or IP Protection? Three Suggestions

Situation: A company is resource constrained and faced with a serious trade-off: do they focus on short term cash needs – immediate product improvements that will speed new product iterations to boost sales; or longer term strategic concerns – assuring that they have good IP protection on their technology before they launch new versions? When you are resource constrained, does it make more sense to focus on initiatives that will quickly produce cash or strategic concerns that will protect your future?

Advice from the CEOs:

  • Build two timelines – one for shoring up the patent portfolio so that you can safely build and launch new IP-protected versions of your technology and one for quickly completing product improvements to speed development of new product iterations which will generate cash. Assess both the energy requirements and the dollar risks and implications of each timeline. If you do not have the resources to do both in parallel, this analysis will help you to determine your best course of action. The risk analysis of each timeline should take into account what would happen if another company were to duplicate your technology and get to market with improvements before you do.
  • As a compliment to the above exercise, ask what happens if I don’t do either A or B? Do a SWOT and investment analysis on both. Which is the greater risk – launching with insufficiently protected IP or risking not being first to market?
  • These analyses will help you assess whether it may be feasible to accomplish part or all of either task with dollars in lieu of your own resources.

How Can You Unwind a Redemption Clause? Six Options

Situation: A company exchanged a small percent of their stock for a Series A unsecured note 4.5 years ago. The company has not undergone an IPO because of the recession and if the note is not repaid in 5 years, the holder has the right to call the line. If the company can’t repay the line, the holder gains governance rights. Revenue declined during the recession and while it is on the upswing, the company doesn’t have the cash to repay the note. What are the best alternatives for the company to unwind this redemption clause?

Advice from the CEOs:

  • Raising money to repay the debt will be problematic because of the current liability. Investors want their investment to fund growth and returns, not to simply repay debt.
  • Assuming that your revenue rebound is sustainable can you prioritize resources to accumulate cash to repay the note? Jack Stack, in The Great Game of Business describes how he was able to rally his company’s employees to pay off a seemingly impossible debt load in one year to save his company,
  • If raising the cash to pay the note is impossible, you have 5 options:
    • Convert the note to long-term debt that you can service.
    • Convert the note to equity at a lower evaluation and take some dilution.
    • Renew and push out the note, with a sweetener.
    • A combination of the above.
    • File Chapter 11 if you can’t produce or raise the funds.
  • Have your options in place at least 2-3 months before the note is due. This gives you time to talk to and bargain with the note holder.
  • Start a PR campaign with the note holder.
    • Look for leading and lagging indicators that show your progress.
    • Build a story that lends credibility to your forecasts of future success.
    • Pitch that you are a good long-term investment, and now is the prime time to trade the note for equity.
    • Prep the holder, and build this story gradually over time.

How Can You Ramp Sales With Limited Dollars? Six Suggestions

Situation: A company survived the recession by cutting back and using cash reserves. Business is now on the upswing with significant new opportunities. However, the company has limited resources to invest landing new opportunities. How do you ramp up sales and business development on a constrained budget?

Advice from the CEOs:

  • Identify and focus on your niche market, and invest your limited resources closing qualified clients. This is a rifle shot approach, not shotgun. While seeing new business, make sure that you have sufficient production capacity to handle new business. You want your clients to be satisfied so that they will refer others to you
  • Cash is the most critical resource. Spend carefully and get the most from your investment in business development.
  • While marketing materials are important, they may not be essential if you have and can leverage excellent referral sources. Word of mouth and referrals from trusted clients are your top assets.
  • Leverage Linkedin as a free or low cost resource to identify key contacts in your top 100 customer prospects.
  • You can also use Linked-in.com to recruit additional sales resources who may be amenable to a pure commission sale. This can help you to augment your efforts so that you only pay for success.
  • Your most important current unused resource is leads and referrals from existing satisfied customers. Let them know that you are looking to grow and ask whether they know of contacts in other companies who could use your product. It is surprising how frequently they will share their contacts with you. Ask whether they would call the contact and provide a personal introduction.

How Do You Bridge a Short-Term Cash Crunch? Three Options

Situation: A technology company has grown rapidly over the last year. Two customers representing a significant share of business have temporarily reduced orders for one quarter, resulting in a cash crunch until these orders resume. How do you bridge a short-term cash crunch?

Advice from the CEOs:

  • Do you feel relatively secure that once the quarter is over these orders will resume and your cash crunch will be resolved? If so, ask your bank to increase your cash line. Explain the situation, the companies involved, their order history and the expected timing until you get your next payments. A letter from each company saying that they plan to resume orders will help your case. Be aware that the bank may request a personal guarantee to substantially increase your credit line.
    • If you have to personally guarantee a line of credit extension, make sure that you see this as an acceptable risk, and that you can trust the customers to come through with their orders as promised.
  • If you produce products or subcomponents critical to these customers, ask whether they will extend a bridge loan or make a payment against future orders to assure their place in your production queue once their orders resume. You may have to escalate this request within the customer companies if you are currently dealing with purchasing personnel or lower level management.
  • Can you redeploy excess labor to other projects during the cash crunch? You will have to do this carefully so that you can rapidly redeploy these resources to priority projects once a large order comes in from one of these customers.

How Do You Fund Growth? Five Points of Focus

Interview with Hannah Kain, President & CEO, ALOM

Situation: While funding from banks and institutional sources has been challenging in recent years, growing companies need to fund their growth. How have you funded your company’s growth?

Advice from Hannah Kain:

  • We focus on frugality and prevent wWhile funding from banks and institutional sources has been challenging in recent years, growing companies need to fund their growth. How have you funded your company’s growthasteful spending. However we invest in tools that enable staff to purchase wisely and stay ahead of customer demands. We also collaborate with vendors to manage costs.
  • As a result, the last two years have not forced us to change how we fund growth. We are getting large contracts and work globally to solve customers’ logistics challenges. Our challenge has been moving from centralized distribution to strategically placed centers around the globe, increasing inventory costs and cash needs.
  • Where we have changed is in how we negotiate terms and credit with our customers. We manage vendor accounts payable to maximize cash flow while treating them as business partners. This requires close vendor communications to assure that everyone’s needs are met.
  • We have been cautious with our banks and seldom dip into credit lines. Managing vendor payments has been more effective.
  • Essential to vendor communications are open sharing of information and goal setting. We work to create a team atmosphere. This is similar to what we do in our offices. In our experience, instilling the right culture is far more powerful than financial incentives.
    • We share information through all-hands company meetings and regular updates so that everyone gets the full picture.
    • We also share information with our vendors so that each side is aware of the other’s needs.
    • We create an annual one-page business plan for the company, and parallel plans down to the supervisor level. Performance against plans is updated regularly to assure that we remain on top of situations.
  • We focus training on new tools. Our staff gets technology they need to be successful.
    • We generously provide technology to our employees, provided that they give a logical business rationale. This includes home computers, iPhones or Applets to help them do their jobs.
    • Similarly, when a vendor or customer asks for a service improvement or a new service with a good business rationale, we invest to support this.
  • These methods have allowed us to finance most of our growth internally.

You can contact Hannah Kain at hannah@alom.com

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