Situation: A CEO is faced with three strategic options that the company could pursue. He seeks guidance on how the company should evaluate the three options. What signs should they be watching for in their marketplace? Are there steps that they should take while completing their evaluation? How do you decide between strategic options?
Advice from the CEOs:
Go with what sells! Listen to the market, and your key customers. Make sure that you have ears out there that will give you early signals.
Until there is a clear indication from the market place as to which is the stronger strategy, keep your options open. A hybrid strategy – maintaining your current strategy while evaluating the strongest strategic option – will allow you to do this and continue to drive revenue from your existing base while the market determines dominance among the new platforms.
Look at the cash flow from your current strategy and each of the new options that you are considering.
What difference is there in upfront payments versus ongoing residuals?
Look closely at your cash flow needs compared to the timing of receipts from each option.
Are there ways that you can strengthen your cash flow depending upon which strategy you select? How will you bridge the gap between current and future cash flows from each strategic option?
Consider hiring a full-time manager in business development.
This will help you to learn more about your customers and what they will buy.
Select someone who has relationships with the key people in your target markets, and who knows what the insiders are doing at important existing or target customers.
Select someone who can give you access to new opportunities and help steer your strategic development.
Consider a long-term strategic partnership with a leader in your market.
Situation: A mid-sized company faces challenges financing their growth. Investment of time, energy and resources precedes the reward of future revenue. It can be difficult to balance the cash needs of current operations with new growth opportunities. How do you finance growth?
Advice from the CEOs:
Have you analyzed growth opportunities and evaluated which could increase your cash flow? For example, if you increase manufacturing efficiency, can the savings help to finance growth?
If you produce parts or products for start-ups, can you structure the relationship so that if the start-up become successful and is subsequently purchased by a larger company there is a bonus payoff for the work that you’ve done?
Analyze – by project, not company – the jobs you’ve done that have eventually become large volume opportunities. Try segmenting your analysis based on the source of the original project: jobs for start-ups, mid-sized and large companies. This may provide insight on where to focus future efforts.
Another company performs clinical services for both big pharmaceutical companies and start-ups. To take advantage of the upside from working with start-ups they take payment both in cash and in stock.
One option is to set up a separate Investment LLC – not tied to the operating company but owned by the same people – that takes the stock position and can, at its option, provide limited venture funding to start-ups.
Start-ups are not yet threats to your large customers but are potential future acquisition targets. Because the stock financing is done outside of the operating company, it is more difficult to trace back to the operating company. Further, competing large companies have not tended to see these investments as threatening the way that they would view direct investment by the company in a competitor. At the time of acquisition by the larger company, the member’s ownership position in the start-up is liquidated.
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:
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
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
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.
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.
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.