Category Archives: Finance

Are You Planning Salary Increases This Year? Five Thoughts

Situation: A company’s staff is highly paid. Historically, annual raises have been 4-5%; however some individuals are above industry salary ranges. The CEO doesn’t want to lose key individuals who would be expensive to replace. The company is planning salary increases for the end of this year. If the level is lower than historic averages they are concerned about the impact. Are planning for salary increases this year? How will you communicate your decision to employees?

Advice from the CEOs:

  • What’s the problem? Even in an improving economy your employees are lucky to be making what they do! On top of this, you need to consider profitability compared to last year as well as historic levels. Selectively share financial data with your employees as well as financial realities – your and their top priority are to keep the company healthy.
  • Gather data on salary ranges for roles in your industry. Good sources are Salary.com for national data (it may be dated) or Assets Unlimited’s Silicon Valley Survey for up-to-date salary information by industry and position. This will help you to prepare for conversations with employees who are currently paid above the range for their positions.
  • If you have employees above the range and do not want to give them raises, give them bonuses or spot bonuses for work well done.
  • Formalize your bonus system – base bonuses on performance metrics. Consider tying bonuses to net margin performance for the company or for departments that can impact new margin.
  • Whatever you decide, make announcements about salary levels a positive event.

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How Are You Responding to Market Instability? Seven Thoughts

Situation: Market swings in recent weeks have shaken up some people. A CEO is curious about how other companies are seeing this as well as how the see their companies doing in the current economy. How are you responding to market instability?

Advice from the CEOs:

  • Business turned back up two years ago, and we are working on major sales opportunities.
    • Actions Taken:
      • We reduced executive expenses.
      • We are sharing a bookkeeper with another business to reduce salaries.
  • In April we increased staff to respond to strong first quarter demand; however since April revenue is flat to declining.
    • Actions Taken:
      • Let a few people go, may have to do more of this.
  • The current economy benefits our industry because our service thrives in an uncertain economy. We have not yet had to make adjustments.
  • We continue to see a big shift from direct hire and full-time to temp and part-time employees – this is working in our favor. Weaker competitors have closed shop.
  • Business is going well. Most customers have cash. The major decision that we face is how much to grow. We’ve seen some project cancellations, but not enough to hurt.
  • What concerns you about the future?
    • Availability of credit lines.
      • Varies by bank and your relationship with the bank.
      • Securing additional or increased lines may be difficult.
      • Anticipating a raise in rates by the Fed, lines may carry a higher interest rate.
    • The trickle-down effect from consumer spending continues to be weak. We are looking for opportunities less sensitive to swings in consumer spending.
    • Receivables are being pushed out.
  • What are you doing about this?
    • Proactively having employee meetings and being straight with employees about how the company is doing.
    • Good opportunities to lean up:
      • Cutting expenses.
      • Cutting less productive employees.

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When Does It Make Sense to Buy a Company? Three Guidelines

Situation: A Company has a key customer that wants to upgrade the Company’s status as an approved supplier. This comes with a catch – the customer demands that the Company reduce the amount of its total revenue represented by its business with the customer. The customer doesn’t want the Company to be overly dependent upon them or their business. One option that the Company may explore is purchasing another business. When does it make sense to buy a company?

Advice from the CEOs:

  • The Company may be working under a false premise.
    • If the Company is truly a critical supplier, the customer is not likely to go away just because they don’t like a single ratio on how the Company runs its business.
    • The risk that the Company takes on buying another business is that this distracts the Company and ends up jeopardizing current business both from thus customer and others.
    • It makes more sense to explore acquiring another company if the Company’s broader goal is to become more diversified, or if new business commitments are forthcoming from this or other current customers.
  • What about this strategy makes sense?
    • Provided that the purchase of another company makes strategic sense, it may be feasible to finance the purchase of that company through a leveraged buy-out.
    • Be sure to build an earn-out with incentives contingent upon the seller staying on and helping to maximize long-term value of business.
  • As an alternative to buying another business, it may be possible to build a new lower cost/price version of the Company’s current product or service and build a new customer base for the lower cost version. This is how automobile companies use the same or similar frames, engines and many of the same components to create different cars for different markets.

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How Do You Raise Capital for an Expansion? Five Guidelines

Situation: A company needs to expand to meet growing demand and has opportunities to expand in several locales. They can finance this expansion through bank loans, or by selling either a minority or majority interest in the company. How do you raise capital for an expansion?

Advice from the CEOs:

  • Minority shareholders have appeal. Just be aware that they have rights. If they own interest above a certain percentage, they gain legal rights such as the ability to force liquidation. Research this percentage, and figure out a percentage of minority ownership that will work for you. Based on this, look for a minority partner who will give you the capital to expand for ownership below this threshold.
  • Consider a hybrid solution combining a smaller loan with sale of a limited percent of the company.
  • This is a risk equation.
    • The loan option is risk / reward for long term profit. You may have to secure the loan with personal assets.
    • On the other hand, selling a minority interest could set you up for life.
    • Look at both options, plus your personal goals and decide which combination of risk, reward and personal security fits you best.
  • One sale option is a phased buy out.
    • Example: sell 30% now, with options under conditions that you accept, to buy a larger share of your company later.
    • Continue to involve the key stakeholders in these discussions.
  • Assure that you secure your own future, and then secure the future of other family members.

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How Do You Cut Excessive Overtime? Five Suggestions

Situation: A family-owned business has a family member on hourly pay who puts in excessive overtime. The cost of overtime significantly cuts into company profits. The CEO wants to cut back these overtime hours and get the employee to work more efficiently. At the same time, she feels that maintaining peace within the extended family is important. How do you cut excessive overtime for a single employee?

Advice from the CEOs:

  • Situations like this within a family business are delicate because of relationships beyond the work place. Treat this individual respectfully, but make it clear that you have to act in the best interests of the company and all employees.
  • Develop a job description with this employee that will help to get their overtime under control.
    • Communicate to the employee: “I don’t want to take advantage of you by requiring this much overtime.”
    • Let the individual know that you are looking for additional talent and want to more tightly define the roles.
  • Develop a company policy on overtime that limits the amount of overtime that any one individual can accrue. If anyone starts to approach this limit, then have a process in place that shifts additional overtime to others.
  • This is a serious problem for the company. It calls for company transformation. Enlist the employee as a champion for the cause of transforming the company. Keep this a positive vision.
  • If the individual is not a keeper: start controlling hours, but don’t give a raise. Let them leave on their own time.
  • If the individual is a keeper: give them raise, while cutting overtime hours.

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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

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How Do You Maintain Company Culture as You Expand? Six Ideas

Situation: A company wants to open a satellite office in a lower cost geography where they can provide current services at a reduced cost to improve margins. In doing this, the company wants to maintain the same culture and controls on quality of work that they enjoy in their home office. They also need to accurately forecast revenue for the new office. How do you maintain company culture as you expand, and how would you forecast revenue for the new office?

Advice from the CEOs:

  • Maintaining company culture is tricky as a company expands geographically. Assign one of your current managers, someone who buys into the company culture, to head the new office. Also maintain the same hiring and personnel management policies that you have at the home office.
  • As the biggest concern is cost efficiency, make sure that the office manager has clear objectives to realize anticipated savings.
  • Look for an incubator that can handle all the peripheral office details so your staff can focus on their work instead of managing facilities.
  • When it comes to revenue forecasting:
    • Given the lower costs associated with the new geography, look for opportunities to trade margin for longer contract commitment windows to improve revenue forecasting.
    • Both margin and delivery can be lumpy when opening a new location. Obtain a credit line to help you smooth the rough spots in your revenue stream.
    • Investigate deferred revenue options to spread revenue risk – right of first refusal on next generation projects in exchange for a lower cost per project to the customer.

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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.

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How Do You Merge Two Firms Under One Umbrella? Five Points

Situation: A company has been approached by a customer with a proposal that the two companies combine. The customer believes that the combined companies will represent a greater market presence than either presents alone. This may make it easier for the combined entity to gain business from larger customers. How do you merge two firms under one umbrella?

Advice from the CEOs:

  • For a company to merge with a customer is a tricky process, assuming that the company has more than one customer. The merger places the company in competition with its other customers who may respond by seeking alternate providers. If this happens it will create a short term hit to revenue. This possibility has to be modeled into merger financial forecasts.
  • Different companies have different cultures. This fact is often ignored in merger discussions because culture is difficult to quantify or measure objectively. However if you ask those who have been through mergers, culture conflict between merging entities is most often the reason for their failure.
  • It may make more sense for the company to focus on ongoing sales to the customer than to entertain a combination that would result in the current owners losing control. In declining the proposal, it is important to emphasize your interest in maintaining a healthy ongoing relationship with the customer.
  • If the customer offers terms that are appealing, an alternative to a merger is a limited scope joint venture as a trial project to test the viability of collaboration.
  • Establish with your co-owners a price at which you are willing to give up control. This will help you to refuse offers that are below this price.

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What Changes in Benefits Do You See for 2015? Five Points

Situation: A CEO is doing benefit planning for next year. The company is small, with just under 100 full-time employees. They are growing, and anticipate reaching over 100 FTEs in the next 12 months, unless they consider either contract or less-than-full-time employees. The CEO is curious about what other companies are planning for employee benefits. What changes in benefits do you see for 2015?

Advice from the CEOs:

  • Including employer-paid social security and Medicare matches, CEOs in the group are seeing a range of from 12.5% to 30% in benefits. This does not include 401K matches or bonuses.
  • Over the last five years, there has been a big shift in benefits, in particular a move from traditional health coverage to high deductible HSA plans.
  • ACA requirements for businesses kick in during 2015/2016. In 2015 employers with more than 100 FTEs will need to provide coverage to at least 70% of full-time employees. Starting in 2016 employers with 50 or more FTEs will need to provide coverage to 95% of their full-time workforce.
  • Much depends upon your annual cost per employee is for health coverage as well as your philosophy on employee benefits.
    • Starting in 2015, if a business is supposed to insure its full-time workers but does not, they will have to make a $2,000 per uninsured employee payment on their year-end federal income taxes.
    • The fee is $3,000 if the employee gets health insurance subsidies through the Health Insurance Marketplace.
    • Some companies who currently pay more than this in annual premiums per-employee are considering boosting employee pay and having their employees self-insure through the Marketplace, or by purchasing the same policies available in the Marketplace directly from health insurers. The policy cost is no different, assuming that the employees will not qualify for subsidies, but policies purchased directly from insurers may provide a better network of physician providers.
  • Before you make any decisions, it is best to consult an outside HR professional who is knowledgeable in both health care alternatives and the ACA.

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