Category Archives: Finance

How Do You Boost Short-term Cash to Finance Growth? Three Approaches

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Situation: The CEO of a company is seeing an upswing in work and backlog, but doesn’t have cash on hand to support the work. The bank won’t increase their credit line. How can they increase cash flow and better position themselves with the bank? How do you boost short-term cash flow to finance growth?

Advice from the CEOs:

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How Do You Open a New Branch Office? – Five Analyses

Situation: A company plans to open their first branch office. There are considering several possible locations as well as the details that they should consider while opening in the new location. What are the most important considerations as they prepare? How do you open a new branch office?

Advice from the CEOs:

  • Perform a ROI analysis for the planned office. How will the ROI for the branch office differ from your primary office? Look for potential economies of scale in your business model. This may prompt a rethinking of how you generate your products or services.
  • Simultaneously, look at the potential costs per location and the level of business required to (1) break even and (2) to match/exceed home office return in the new location. As you consider different geographical locations, compare costs and potential contribution of each against the others’.
  • Decide whether you need to build full operations in your branch office, or whether you can use a distributed services model, working from a central hub that performs some operations that needn’t be replicated in the branch office as well as future branch offices.
  • Once these three analyses are completed, perform a make/buy analysis to determine whether you get a better return from setting up your own office or purchasing a local company in the new location, if one exists.
  • Lower risk by starting with a relatively low cost operation – essentially a satellite office with minimal staff. As the new office develops initial business, they can be supported by your home office operations. They will serve as local feet on the street to evaluate the true potential and local barriers to entry within the new market.

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How Do You On-board a New CFO – Four Imperatives

Situation: A company is hiring their first CFO. Previously, as a small company the founder and an accountant handled this responsibility. How do they integrate this key person into the company? How do you on-board a new CFO?

Advice from the CEOs:

  • The company and its key players should reflect the values, needs and desires of the CEO. The talents of the CEO and CFO should complement each other. Have a clear discussion and agreement with the CFO candidate on values, role, and organizational structure before hiring or announcing anything to the company.
  • Recommended announcements and timeline: When the new CFO is announced, simultaneously present the new organization chart with broad responsibilities, but not with detailed position descriptions. Set a timeline for realignment of roles. It is not necessary to specify exact roles at the time of the announcement. Let everyone know that this is a work in progress and give a time frame within which all will be resolved.
  • Once the CFO is in place, the CEO and CFO should meet at least weekly to assure that the CFO has the support and resources needed to accomplish his/her responsibilities. All decisions within the CFO’s group, personnel responsibilities and any shifts in roles should come from the CFO, with the support of the CEO. This will help the new CFO to assimilate into the company more rapidly and will give him/her the authority needed to manage his/her organization.
  • The CEO may put the CFO in charge of areas that they want to delegate – accounting, administration, finance and contracts. The CEO should remain involved in banking relationships.

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How Do You Facilitate a Move to a New Space? Five Recommendations

Situation: A company has taken advantage of favorable lease rates to secure a larger space. How can they minimize work flow disruption during the move? How do you facilitate a move to a new space?

Advice from the CEOs:

  • Plan the move in detail: electrical, intranet and telephone needs; office space and facilities; design or production space and facilities. If you can’t move everything over a short period of time – like a 3-day weekend – consider moving in steps, a series of discrete moves over time, each with its own requirements and timetable.
  • If you carry inventory, pre-build inventory to see you through critical steps of the move. If you have a major customer with strict delivery deadlines, try to negotiate a delivery window during which you can conduct the move. Determine if there is seasonality to order delivery that makes a particular time of year more convenient to move critical operations. Custom work will require special planning.
  • If you plan to upgrade equipment, consider purchasing, installing and operating the new equipment in the new location instead of your existing location.
  • If you will be leasing the new facilities and possibly be even if you are purchasing the facility, ask the new lessor or seller to provide cash to: (1) finance delayed shipments at a price discount and (2) cover expenses of the move and outfitting the new location to your needs.
  • Consider converting to a wireless intranet and telephone system to avoid the expense of wiring the new facility. Look at plug and go options.

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How Do You Access Key IP? 3 Steps to the Dance

Situation:  A company is moving from a specialty solution to a complete solution. They have identified a partner with intellectual property (IP) that will help them fulfill this vision. How should the CEO approach this company to access their IP? How do you access key IP?

Advice from the CEOs:

  • There are two aspects of any deal: technical feasibility that will produce both value and the emotional needs of the principals of each company. The technical aspects are the most straightforward and easiest to value. Frequently, a favorable deal hinges not on technical feasibility, but on the desires of the principals and their ability to trust one-another.
  • If you are convinced of the value, you must convince the other party that their best option is to work with you. This accomplished, you can negotiate the specifics. Sell your vision: the technologies together are much more valuable than they are alone: 1 + 1 = 5! If control of the technology is an issue, negotiate an arrangement where they are comfortable with your control. Do you and the other party have a trusted advisor in common or is there an individual who is respected by the principals of both companies? A person like this can help communicate your good intentions.
  • If your best efforts do not produce an appealing arrangement, your fallback position may be a partnership. If the partnership is backed by modest investment with options for future purchase, this can be another way for you to eventually gain control of the technology.

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How Do You Pay Sales Reps? Two Options

Situation: A CEO is considering two options to pay sales people – base/draw plus commission, or no base/draw and larger commission. What do other CEOs find most successful? How to you pay sales reps?

Advice from the CEOs:

  • Align the sales incentive plans to company objectives. Two examples were offered, one of an aligned system and one of a dysfunctional system:
  • The aligned system. Sales reps are 100% commission (plus expenses) with no caps on income. They are measured by two sets of metrics. To keep their jobs, they have to achieve a minimum of 85% of their revenue goal. Fall below this and the rep is out the door. However, commissions are calculated on the gross profit achieved on sales, and reps are provided with software to calculate GP and commission. This company is the most successful in its market.
  • The dysfunctional system. Sales reps are paid a base plus quarterly commissions calculated on achievement of revenue goals. The net result was that reps had no incentive to preserve gross margins. The result was constant conflict between sales and finance. The situation only started to improve as reps’ commissions were converted to a combination of revenue and margin.
  • The Key Issue: What is the role of the rep within the sale? Is the rep a door opener or a closer? What percentage of the close is attributable to the rep? In a complex or staged sale, allocate commissions based on contribution to the close. Reps who can’t close are not as valuable as those who can.

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Is it Better to Sell or Downsize? Four Perspectives

Situation: A company is losing money and has been approached about a merger. The CEO’s ideal outcome would be to get cash on the table, integrate with the merger partner and continue business. The other alternative – downsizing – may hurt company morale. What are the best options available? Is it better to sell or downsize?

Advice from the CEOs:

  • The realities of mergers: 70% of mergers fail, and the merger process often leaves founders with a minority stake in the company. The experience of others with partners has been disappointing – it’s better to control your own destiny. Look at all alternatives before you jump into a merger. You founded the company and have brought it this far. The company will be a different company following a merger, and not the company that you founded or have led to date.
  • The message to your potential merger partner: Be a reluctant bride. “We are making improvements to return to profitability and I’ve joined a board of CEOs who are consulting me through the process.” If the partner sweetens the offer to keep the merger on the table, make sure that you get 51% of the merged company and retain control of your own fate.
  • Downsizing: Others have found the downsizing experience wrenching, but with more positive results than they expected. A 10% cut resulted in a 30% increase in productivity. Employees once thought to be critical were not missed post-layoff. The employees generally understood more about the situation than the CEO knew, and those remaining responded positively to a restructuring that allowed them to keep their jobs. Some companies used a layoff as an opportunity to cross-train employees and increase company flexibility.
  • Smoothing the layoff process: Communicate with the employees. Let them know the truth and share enough of the situation so that they understand. Challenge employees to come up with ways to save money or make processes more efficient and cost-effective. This can have a remarkable impact. Consider a cross-the-board salary reduction as a temporary alternative to layoffs. Position this as a layoff to restructure expenses – this keeps you on the right side of employment law. Obtain assistance from a personnel consultant who can help to handle the process effectively.
  • Smoothing the layoff process: Communicate with the employees. Let them know the truth and share enough of the situation so that they understand. Challenge employees to come up with ways to save money or make processes more efficient and cost-effective. This can have a remarkable impact. Consider a cross-the-board salary reduction as a temporary alternative to layoffs. Position this as a layoff to restructure expenses – this keeps you on the right side of employment law. Obtain assistance from a personnel consultant who can help to handle the process effectively.

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How Do You Draft a Fair Partnership Agreement: Six Points

Situation: A CEO is negotiating a partnership entity. Her company will fund the entity, and the partner will earn ownership through sweat equity. How do you draft a fair partnership agreement?

Advice from the CEOs:

  • The most important factor is the ability of the two partners to create a successful venture.  Proof of ability to contribute needs to be a prerequisite to allocating ownership.
  • How does the sweat equity partner prove their capabilities? Create a schedule of milestones for the partner to earn ownership, based on mutually agreed objectives or revenue generation. The beauty of this is that you retain control until the partner has proven their value by delivering results.
  • The potential downside is long-term liability of the venture. The longer that you retain majority ownership, the longer you retain majority liability. Insure yourself against this liability.
  • Buyout clauses are important to retain your interest if the partner fails to deliver. Include a liquidation clause in case the venture fails.
  • While negotiating the agreement draw up a 6-month letter of intent. Specify what each side brings to the table and what each commits to deliver. Set clear, measurable, time-bound objectives. Negotiate fair protections desired by each party. Consider a consultant to facilitate settlement of areas of contention.
  • Theoretically, each party needs their own legal counsel. This adds expense but provides protections for each in the final agreement. Factor the cost of legal advice as well as consultant facilitation into your planning model.

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How Do You Protect Your IP from Infringement? Six Suggestions

Situation:  A company has a competitor who is infringing their key intellectual property. Legal counsel tells the CEO that his company has a case, but to expect the process to take 2-3 years and to cost $2 million minimum to defend. The CEO is concerned that if the company starts down this path, it will drain the company of both time and cash. How do you protect your IP from infringement?

Advice from the CEOs:

  • The risk here isn’t just the company’s IP; it’s the value of the company! For example: if the company’s current valuation based on their IP is a 5x multiple of revenue, and if 60% of this IP is at risk, 60% or more of the company’s valuation may be at risk. Under this scenario, the company cannot allow the infringement to go unchallenged.
  • The hard reality is this: can the company withstand, in time and of money, a large and distracting suit? If the infringer is larger than the company is, they may be gambling that the company won’t sue. Remember, the loser pays the winner’s out of pocket costs, plus damages. If the company’s case is good, it may be possible to get a lawyer to represent the company on a contingency basis.
  • If the company decides to sue, it must be a surprise. If not, the infringer may outmaneuver the company by setting venue, etc. through countersuit.
  • Get a second opinion, and as much independent advice as possible without showing your hand.
  • A key Question: Can the company show its IP and research predates the competitor’s? If the company can clearly demonstrate that it is the true developer of the IP, then this provides an important edge.
  • Is there a middle ground or a settlement scenario that makes more sense than an all-out suit?

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How Do You Finance an Early Stage Company? Three Considerations

Situation: The CEO of an early stage web company is looking at steep ramp-up expenses. Many companies have bootstrapped their way to success. However outside investment may speed the process. How have others evaluated these options? How do you finance an early stage company?
Advice from the CEOs:
• Raising money takes time and is a major distraction to the development process. The two big variables will be investor interest and the timing of investment. Talk to Angels and venture capitalists now. Start by presenting a broad outline of your technology and business model. Ask what they will want to see to offer you funding at different levels. This will give you a reality check as to investor interest in funding the company. It also creates a roadmap to funding if the response is positive.
• What is the company seeking – money or accountability? One CEO bootstrapped her company during the early stages, then looked for outside investment to gain accountability and advice – a whip to help move things along. This CEO found that investors brought few of the anticipated assets, and added a new level of distraction and pain.
• If you are looking for funding to purchase content to serve through your Internet portal, consider a more creative way to gain content. Can you use a Web portal through which your target audience provides both the content and the consumer audience in a marketplace exchange? Establish the audience and then add premium services to monetize the model. This can minimize your upfront cash investment requirements, and may create a faster track to positive cash flow.

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