Tag Archives: Expense

How Do You Fund Growth Strategically? Five Approaches

Situation: A CEO is looking at a significant investment in capital equipment. Being considered are not just the cost of the investment, but the opportunity cost of not making the investment and the impact that this will have on the business. An additional consideration is the business mix of the company and whether to shift focus from low volume/high margin to low margin/high volume products. What tools have others used to assess these trade-offs? How do you fund growth strategically?

Advice from the CEOs:

  • Review the company’s approach to contracts. It may be desirable to revise the approach in light of the new objective. The switch from low volume/high margin to low margin/high volume products impacts not only production but also marketing, sales, finance and accounting.
  • Price some early new contracts below market to finance the additional equipment expenditures, as well as to test market response to the new offering. This will help to identify additional adjustments that are needed for the new approach and offering to succeed.
  • Structure the financing options for equipment purchases creatively, for example by allowing for participation by customers and investors.
  • Watch changes in working capital at all times and keep it under control. Working capital is a commitment of resources just as is buying equipment or facilities.
  • Consider all resource commitments as investments, regardless of the way the accountants deal with them as in expensing vs. capitalizing these investments on the balance sheet. For example, a marketing program is an investment even though it will show up as an operating expense. Make sure that this can be justified in terms of future cash flows expected.

[like]

How Do You Best Use Cash Flow Statements? Five Points

Situation: A CEO is familiar with and regularly uses income statements and balance sheets in financial discussions and planning. However, cash flow statements present more challenges, particularly when comparing cash flow over time. A second question is whether cash flow statements are more important to C versus S corporations. How do you best use cash flow statements?

Advice from the CEOs:

  • Most companies use the P&L and Balance Sheet to “stay on top” of the business on a short-term basis. However, these statements do not provide detailed insight into where cash is coming from and where it goes.
  • The cash flow statement represents a tracking tool to highlight trends and make projections about important changes in financial flows. All three financial statements are used to plan and monitor performance against the company’s financial targets. However, the cash flow statement is the most meaningful of the three, regardless of business size.
  • If 1/3 of a company’s expenditures is fixed cost how does this impact planning?
    • Carefully watch changes in volume over time and the impact on cash flow before deciding to expand.
    • When deciding whether to commit new resources it may be wiser to allow finances to be stretched for a while or even to turn down some marginal business opportunities before committing to a new layer of expenses.
  • The cash flow statement is not really affected by the corporate structure, since its three areas of focus – operations, investment, and financing – are common to all three.
  • Business is getting more complex. It really pays to understand the key elements that drive the business, and their impact on cash.

[like]

Where Should You Focus the Business? Four Recommendations

Situation: A company has experienced limited growth and profitability for the past five years. It is also short of resources. They have invested a lot of time and effort in a new technology which has yet to bear fruit. The CEO seeks advice on the company’s future direction. Where should you focus the business?

Advice from the CEOs:

  • Continue to support BOTH business – the core product line and the new technology – but rearrange priorities to boost revenue and profitability growth. Simultaneously, focus new R&D investment in the company’s core product. This has three principal benefits:
    • The company’s primary expertise is in its core product line. This product is its principal source of revenue and has the greatest potential for profitability and growth.
    • R&D and start-up production of new iterations of the principal product is less resource intensive than the new technology.
    • Further, sales of the core product are far less cyclical than the market for the new technology, and therefore more promising to a small, niche company.
  • Looking at this recommendation sequentially, the group recommends that the company:
    • Continue to sell the current product line a well as existing complimentary products to maintain revenue and profits.
    • If additional work or resources are needed to mature the new technology, have someone else take the lead role in R&D and private label the technology for the company.
    • Focus all new R&D investment on improvements to the core product.
    • Refocus market research on current and potential customers for the principal product line to determine their greatest needs to guide product line innovation.
  • The company needs access to advanced equipment to support development of the core product line. Consider creative ways to gain access to this equipment at little expense.
    • Look for advanced equipment that is available at distress or liquidation-sale prices by companies who made poor investment decisions.
  • Find a partner that wants to focus on the new technology, but who also wants and needs the company’s expertise in its core product line.
    • The company focuses on the core line; let the partner develop the technology.

[like]

How Do You Expand Business Development Efforts? Four Thoughts

Situation: The CEO of a software company needs to increase revenue to cover expenses. He doesn’t want to cut salaries because if employees leave it will be hard to find replacements with the required skills. The better solution is to increase revenue. How do you expand business development efforts?

Advice from the CEOs:

  • Look at the markets which are growing rapidly:
    • Gaming. This is currently a good investment area. Large casinos are spending heavily on high end projects, and people just keep gambling!
    • Medical imaging. Potential targets include:
      • Pharma and Biotech R&D and Marketing/Sales – the ability to show how a drug binds with the cell receptors and how this impacts the cell is interesting to both groups. Also look at Medical schools. This is where you find the top researchers and they love teaching and presentation aids.
    • Military markets, particularly simulation spaces and unmanned vehicles. They value realistic simulated environments. Also look at training programs that value visually intensive simulations including marine and naval applications, aircraft, and battlefield simulations.
  • Consider the company’s business focus and strategy. How can it move from a “next project” model to a recurring revenue model? Is it possible to write client agreements to include a piece of the recurring revenue stream from client products?
    • Look at what the company does and package this as a product/service vs.an hourly problem-solving model. Focus on where the market is going. For example, iPhone apps – cheap to the customer, so millions buy them People now interact differently using electronic media. This opens new options.
  • What is the company’s key focus – Product Leadership, Operational Excellence or Customer Intimacy? How is the company’s differentiating strength presented consistently to client audiences?
    • It is important to clearly define the company’s niche – what makes it truly different. The communication must be clearly understood both by the engineers, and the business development and marketing people.
  • Invest additional funds in business development – with payments highly weighted on success.

[like]

How Do You Boost Employee Ownership of Job Safety? Four Ideas

Situation: A company is concerned because recent accidents on the job have boosted their Modification or MOD rate and increased company expenses. They have held workshops with employees and talked about increasing safety, but employees have been lax in complying with safety measures because these are time-consuming. How do you boost employee ownership of job safety?

Advice from the CEOs:

  • Safety is key to the bottom line and future of the company. Enlist employees to monitor each other and point out when others are acting unsafely.
    • Allow / encourage employees to “harass” (in a playful sense) each other if they see someone not working safely.
    • Anyone caught in inappropriate unsafe behavior is penalized and required to pay $1 into a kitty which is spent on a company-wide benefit such as a pizza lunch.
    • Create a presentation, graphically showing the negative impact that a high MOD rate has on the company, and on employees’ incomes. Hold a company meeting, give this presentation and discuss with them how costly hazardous behavior is, and how jobs can ultimately be lost as a result.
    • If nothing else works, explore creating a shell corporation to employ the employees who are subject to potential injury and effectively “outsource” them like high tech does.  This may lower the MOD rate to 100 as a new business.
  • Look for other insurers who will lower the company’s MOD rate.
  • Create consequences for flagrant violations of safety guidelines.
  • Do thorough background checks before hiring new workers. Avoid new hires with a history of disability claims.

[like]

How Do You Create Predictable Costs and Profit? Seven Suggestions

Situation: A company finds that it’s costs and profitability vary greatly by season and during economic fluctuations. Some of this is due to hourly rate fluctuation and payroll costs. They also have excess capacity during slow periods. However, new projects arise quickly, and the company must be prepared. How do you create predictable costs and profit?

Advice from the CEOs:

  • Here’s the grim reality. In volatile markets, forecasts are meaningless. Instead of fretting over forecast accuracy, focus on increasing billable rates and managing expenses.
    • To generate additional revenue per project, add a flat percentage charge for project management on top of time and materials. This is often treated by clients like a sales tax or a gasoline cost adjustment and may not penalize contract negotiations.
  • Is it possible to build a sustainable revenue source to resolve profit lumpiness? There are options:
    • Application maintenance projects. After building a box add a provision for maintenance/upgrades as new capabilities and technologies are developed. This can cost-effectively extend the life of the box and long-term profitability of the product that the box supports, while gaining an annuity revenue stream.
    • Add a maintenance add-on service to leverage the company’s core competence on an ongoing basis. Provide technology upgrades through a maintenance subscription similar to software companies adding optional access to all new releases over the course of a year for a fixed subscription cost. The cost to the company for upgrade downloads is essentially nothing, but it gains an annual annuity revenue stream.
  • Investigate a help desk service to sell via subscription to small companies. Most clients use less than they anticipate; however, they prefer the security of a flat price subscription service.
  • What additional info can be gathered through sales to better drive sales forecasts metrics? Look at the past several years: is there any seasonality in a multi-year analysis. It may not occur every year, but if you there’s a pattern it may enable the company to proactively reduce costs where there’s a predictable dip in project demand.
  • Are sales people responsible for both maintaining client relationships and creating new business?  Most companies split these functions because maintenance is like farming while new business development is hunting – few sales people excel at both.
  • If, in development, the company develops IP, can this be used? When there’s down-time can capacity be leveraged to develop the company’s IP portfolio? Look at IP licensing opportunities. This provides an additional potential source of annuity revenue.
  • While it is important to figure out an annuity revenue stream, the principal lesson from the discussion is that most CEOs say that margins are better on fixed price projects than on time and materials. The key is to control to client requests for add-ins or adjustments and to include provision for these in contracts.

[like]

Can Outside Board Members Help a Struggling Company? Four Thoughts

Situation: The CEO of a family-owned company has struggled to align family members with the business plan. When difficult decisions must be made, established personality patterns and family history hinder consensus on what should be done. The CEO seeks advice on whether the addition of one or more outside Board Members can help to build consensus. Can outside Board members help a struggling company?

Advice from the CEOs:

  • The CEO of another closely-held company brought in an outside Board member two years ago. This has added considerable focus to the Board discussions. The addition of a fresh and respected perspective has helped to clarify decisions and reduce conflicts among the founders.
  • First, have a conversation with the team. Give them the opportunity to straighten out things themselves. Present the addition of an outside Board member as an option. Get their support. This will make the addition of an outside Board member a company decision, rather than the CEO’s.
  • The experience of other companies is that compensation can range from free – a retiree who wants to help – to expensive. Arrangements and expense will depend on what the company leadership wants to achieve.
  • Investigate SCORE – a well-established source for outside board members for small and family businesses.

[like]

How Do You Manage Culture as You Grow? Six Solutions

Situation: A tech company has grown to twenty people. The CEO is concerned that if they grow much beyond this their culture will start to change. The principal question is whether team leadership structure will remain tight and focused, while teams will continue to be flexible and have fun. How do you manage culture as you grow?

Advice from the CEOs:

  • Other companies have grown to twice this size and continue to increase their number of employees.
    • One uses component owners as leads, with people under them. Leads are more technical than managers and aren’t expected to be superb managers.
    • They grow middle managers organically instead of hiring from outside.
    • If an individual’s plate is full, give them the ability to delegate work to an up and comer.
  • Active communication has number limits.
    • The optimal functioning group is 7-12; higher functioning teams are even smaller with 7-8 members.
    • Create flexible teams that maintain communication pathways and culture.
    • Consider using reconfigurable space.
  • When one company grew from 25 to 60, they noticed that at 30 people it became difficult to track people; they needed to develop systems and internal management tools.
    • Much more attention was needed on sales forecasting and expense elasticity. The solution was to study peaks and valleys and built a model that could function within historic peak /valley limits.
  • How do you maintain the contractor pool?
    • Keep a list and actively communicate with them about current and anticipated needs.
    • One company’s rule: consultants are 100% billable – functionally they are only able to realize 98%, but the rule keeps this number high.
  • Use contractor pools to supplement project tasks. If your primary differentiating focus is on successfully closing projects, focus contractors on ramping new projects.
  • Hire people who embody you and your culture. Hire in your own image.

[like]

How Do You Create Accountability? Four Suggestions

Situation: A CEO is concerned that there is insufficient fairness and accountability within her company. One manager is paid hourly and the CEO is thinking about shifting this person to salary plus bonus both to put them on par with other mangers and to create more accountability. How do you create accountability?

Advice from the CEOs:

  • What exactly are you trying to achieve? An operations manager is paid competitively at hourly rates, even compared to salaried employees. The issue is that this person has no responsibility for results as they relate to the P&L. Given this, the group consensus is that it is better to have this person on an incentive program that ties compensation to the performance results that you want.
  • One objective is that you want this employee to contribute more to planning, strategy or the company’s attempts to develop solutions to the challenges that they face. Have you spoken to the employee about your expectations? Does the employee realize that you want or value their input? Direct communication with the employee is important.
  • While the employee understands his responsibilities in the operations area, be sure that he is aware that he is also important to the profitability of the company, and managing operational expenses which are contributors to that profitability. Depending upon the individual’s background, he may need training about the links between expenses and the P&L.
  • Given these factors consider the following options:
    • Adjust the employee’s compensation by switching from hourly to salary. Make the base livable, but not comfortable, and tie the bonus (which will make the total compensation package comfortable) to the profitability of the business. This will have an immediate effect.
    • Clearly explain to the employee that you value his creativity and input. Give this person the freedom to contribute and make it clear that his contribution is expected. Early on encourage this and acknowledge contributions in meetings.
    • You may want to make this person a part owner of the business. This will have a long-term effect.

[like]