Tag Archives: Payment

How Do You Optimize the Business Model? Four Suggestions

Situation: A company works on a project basis, and the CEO is concerned that the return per project is too low. She is looking for ways to boost the return per project without substantially increasing project risk. How do you optimize the business model?

Advice from the CEOs:

  • What are the risks and potential upsides surrounding the projects?
    • The principal risk is long-term liability, connected with residual liability following project completion.
    • This risk can be mitigated by purchasing a wrap policy; however, this can cut into the profit generated by the project.
    • It is possible to build scale more quickly with larger projects. The percentage return may be lower, but the dollars can be higher.
  • What are the principal components of the company’s time risk?
    • Higher cost of money and greater exposure to fluctuations in prices and interest rates over the project period.
    • This risk can be mitigated using financial derivatives particularly over longer-term projects.
  • How broad is the company’s geographical scope?
    • Currently customers are within a 30-mile radius of the company’s office primarily because company personnel are frequently at the client’s site.
    • This area will broaden as the company’s reputation becomes known.
    • Consider the creation of branch offices to extend the breadth of the company’s service area.
  • What are the key variables that the company faces completing projects?
    • Payment is not received under current contracts until a project is completed.
    • This can be mitigated by creating milestones with payments due at the completion of each milestone.
    • It may be worthwhile sacrificing a level of project profit in return for more frequent payments to boost the company’s cash flow.

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How Do You Find the Right Funding Source? Six Solutions

Situation: A company is short of cash and needs a source to fund their cash flow needs. Their needs are mapped out for the next four years and they can fund current operations for a few months. However, their bank will not extend their credit line. How do you find the right funding source?

Advice from the CEOs:

  • Try another bank. Ask friends and contacts about their banks and see if they’ll refer the company to their bank.
  • Explore renegotiating the company’s lease to ease the cash flow needs.
  • Explore renegotiating payment terms with suppliers. See what can be worked out. The bottom line – if the company goes Chapter 7 or 11, they get nothing.
  • Consider going to a larger company and working out an arrangement.
    • Ask that they allow the partners to operate as an “independent” entity retaining their titles.
    • In exchange for funding the company’s cash needs, the larger company shares in the profits.
    • Seek a temporary arrangement to allow the company can get back on its feet financially.
    • Use the friends and reputation that the company has developed over the years. The company is a good outfit and respected. Others may help if asked.
  • A similar tactic is to approach a larger company to negotiate an arrangement that will allow the company to survive. Start with a business plan.
    • Highlight the company’s reputation and the quality of its products. Use references from highly satisfied customers.
    • Highlight the company’s key strength – developing the critical path and plan for a successful project.
    • The thrust of the presentation: the partner gets a quality team and shares in the profits from projects completed. The partner provides the cash to fund the projects. Compare the risk and return on these funds compared with other investment options available to highlight the value of the proposal.
  • Other CEOs shared similar situations that have worked for them.
    • The financial realities were kept secret from staff, customers, and competitors.
    • All unnecessary expenses were cut.
    • The focus was on making money today.
    • Supplier payments were delayed as necessary to manage cash flow.
    • The process was managed creatively, sometimes with the assistance of friends, and the companies were able to prevail.
  • There is no shame in facing and dealing with this problem. Determination will pay off.

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How Do You Add More Discipline to Quotes and Pricing? Four Points

Situation: A CEO faces challenges with clients. The first is vague customer specs because they don’t understand the product. Second is misunderstandings as to timelines. Third is insistence on strict timelines while simultaneously demanding revisions to previous work. How do you add more discipline to quotes and pricing?

Advice from the CEOs:

  • Is the company’s technology strategy aligned with its capabilities? Currently the company is trying to build advanced solutions in multiple international markets with a small staff. There does not seem to be the technology or development discipline to convert current capabilities into a sustainable market advantage.
  • For near term focus, because of commitments and milestone payments due from the key customers, focus resources on finishing the last piece of these projects. Once this is done, step back. Look at options and determine the company’s technology strategy moving forward.
    • The key challenge is to define ONE beachhead on which the company will focus and which they can dominate. The objective is to leverage existing engineering creativity to create a sustainable competitive advantage.
    • As this exercise is designed, start with a clean slate. Don’t burden the process with a lot of restrictive assumptions. Consider using an outside facilitator to help facilitate this process.
    • Until this exercise is completed does it really make sense to seek additional work or to commit the company to the next phases with current customers?
  • Once the company has selected and committed to a technology strategy, the decision process becomes different.
    • The objective is to develop laser-like focus on the technology. Minimize distracting the team with other opportunities.
    • It may be OK to lose money on development projects if this work will significantly impact or accelerate the development of the company’s core technology.
  • How does the company justify asking for payment for development for future projects?
    • First, determine and clearly state the company’s technology strategy. Evaluate all future development projects and decisions in terms of their alignment with this strategy.
    • Second, if a particular project is completely aligned with the technology strategy, the company may waive the requirement of payment for development. This, ideally, will be the only exception.
    • Ask for a limited time/scope project to jump start and define new projects. This provides proof of company capabilities and establishes its credibility.
    • If is it necessary to negotiate or bid, start high and bargain down to but not below the best estimate of the cost of development.
    • Remember that deciding what NOT to do or quote is often harder, but just as critical, as deciding what to quote.

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Where Should You Focus for the Next Year? Three Points

Situation: A CEO has had to shift half of the company’s employees to part-time due to reduced business. This has hampered new product development. The situation has been exacerbated by slow payments from customers. Where should you focus for the next year?

Advice from the CEOs:

  • The company has a lot going on. Validate the company’s market potential for products in development, and start gearing up the marketing program so that it will impact this and next year’s sales.
    • Get a feel for how many customers want the new products in development. Invest in some market research to validate this.
    • The bottom line is that product development only pays if the company can sell a lot more product! The team needs to know whether customers for the new products exist, in what numbers, where and who they are, and their most critical needs. Without this market intelligence, the company is in no position to tell whether there is a market, nor is the company prepared to address it.
    • Assume that there is a market, that it can be quantified. Once the company knows who and where the customers are and knows their most critical needs, the next step is to prepare to attack this market. This is not something that is done in 1-2 months, after the product is ready to sell. The company needs to be starting now if marketing is to be initiated in 6-8 months.
  • Past practice has been to split R&D costs with the customer. The company has the expertise, the customer the money – this is close enough to 50/50. There is no need to show them the numbers. R&D should not be funded through future sales but should be making money now.
  • One project has been taking so much attention that it is hobbling the company. The company is so focused on getting this “just right” for the customer that sales and market development have been neglected.
    • For the next 3 months, focus on completing this project, getting it out the door, and getting the company’s focus back on growth. A sense of urgency is needed!

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How Are Your Relations with Your Bank? Seven Points

Situation: A CEO’s company is short of cash to make a scheduled payment against a line of credit. They have been notified that if the payment isn’t made, the bank will transfer cash from the company’s checking account to satisfy the payment. This would compromise their ability to meet payroll and pay vendors. How are your relations with your bank?

Advice from the CEOs:

  • What the company needs is time, so that they can pay down the line of credit from cash flow. It is best to compartmentalize any discomfort with this situation. Remember that any bank action generally takes time.
  • Advice from the company’s lawyer is that if they stop making deposits, the bank will notice and react negatively. Given that the current interest rate on the line is low, a negative reaction from the bank could lead to an increase in the rate.
  • The company has a bargaining chip. The bank does not want to show the company’s line as delinquent. If they admit that a delinquency exists, it puts them in a bad place.
  • Develop a contingency plan to guard against the company’s biggest risk – inability to make payroll. Assure that this can be covered.
  • Use checks paid by customers to move a portion of company assets to another bank.
  • Secure a new line of credit with another bank to cover credit needs, including salary coverage if the current bank acts adversely.
  • Assure that any conversations with the bank are documented in letters to the company’s contact at the bank.

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How Do You Create and Communicate Urgency? Seven Solutions

Situation: A CEO perceives that the company has a conflict between performance and planned timelines. Of concern is performance against key metrics like pipeline performance and closing new business. A sense of urgency isn’t present. How do you create and communicate urgency?

Advice from the CEOs:

  • Management knowledge of company financial status and performance against key metrics – particularly key drivers like pipeline performance – is critical to their being able to assist the company.
  • A company decision to focus on project profitability may have the unintended consequence of exacerbating the lack of urgency. If revenue growth lags, the only option for managers who are tasked to hit a profitability target is to cut expenses. This delays projects and can negatively impact morale.
  • Accountability comes from meetings. Not 1-on-1 meetings but team meetings. Peer pressure is an important component of accountability. Nobody wants to be the individual who is consistently behind on projects or initiatives.
  • The challenge may be more external than internal. When business closes more slowly then everything else slows down: hiring, new development, investment and profits. All of these are driven by new business acquisition.
  • Another CEO has same issue with her contracts. All contracts include a timeline. If work or deliverables slip, the customer wants to slow down delivery and billings. Her solution is to include stop work and delivery delay fees in the contracts.
  • What actions would others take to address this?
    • Institute progress payments. For example, instead of charging 50% up front and 50% on contract completion, shift to, for example, 50/30/20 with the 30% due on completion of project framework. This way, only 20% can be delayed due of customer timing issues.
    • Built financing into total pricing. The customer is free to delay projects, or aspects of projects, but there is a charge calculated into delayed delivery which covers the cost of money and additional management.

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Do You Move or Negotiate a Lower Rent? Five Suggestions

Situation: A company has been looking at alternatives for expansion but would be willing to stay in their present site if the landlord is willing to lower their rent without requiring more time on the current lease. Another option would be to purchase a building and lease out extra space until they need to expand. The CEO seeks advice on how to move forward. Do you more or negotiate a lower rent?

Advice from the CEOs:

  • Much has to do with the current real estate market. If the market is slack, there are more options whether the decision is to move or renegotiate the rent with the current landlord. However, if demand for space is high then landlords and sellers have the upper hand. This is a classic demand-supply situation.
  • Investigate lease buy-out options if the decision is to move. Better yet, if the decision is to move ask the new landlord to pay off the old lease.
  • For the money required to move an operation of substantial size, why not buy? In this case, the decision is balancing the size of the down payment with the company’s current cash position.
  • If the decision is to buy, consider creating an LLC to purchase the property and fund the purchase through a Small Business Administration loan.
  • The Devil’s Advocate Perspective while you make the decision: don’t worry about the least until it runs out. Instead focus on making as much money as possible and prepare for a move closer to the end of the lease. Renegotiating a lease and looking for a building at this time can consume a lot of time.

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How Do You Fuel Early Stage Growth? Five Suggestions

Situation: An early stage company has assembled an impressive team and has a solid service offering. The immediate challenge is bringing in clients to fuel growth. The team has the capacity but needs some creative ideas on where they should focus their efforts. How do you fuel early stage growth?

Advice from the CEOs:

  • Fully utilize the team’s talents. Team members with established expertise can offer clinics featuring the company’s service offering at local colleges, business organizations and other venues to target audiences. Think about business organizations with members who would benefit from the company’s services. Also reach out to venture capitalists and the entrepreneurial market.
  • Develop a strong value proposition:
    • Go-to Organization
    • Eyeballs on the market
    • Links to highly qualified resources
    • Demonstrated expertise in your space
    • Claims tied to the top priorities of target clients
  • For start-up and entrepreneur client targets:
    • Offer a packaged set of services for a fixed fee. Be open to creative payment options to fit the financial needs of entrepreneurs.
    • Start developing a full suite of services. Start by assessing the need and developing a target list of early clients. VC portfolio companies can be a great target.
  • Build a good web-based communications interface for client use. Think of what is needed to create an attractive menu and let this drive service development.
  • Develop a separate brand for ancillary services that will complement the current offering, but which is outside of the current offering. Look at markets which would benefit from the service, including medical and nursing providers.

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How Do You Finance Growth? Three Options

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.

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What is a Reasonable Broker Commission? Five Thoughts

Situation: A company has contracted with a broker to sell the company. At the minimum acceptable sale price to the founder, the commission would be 2.5%. Is this reasonable? How should the founder think about earn-outs, residual payments, and role post-sale? What is a reasonable broker commission?

Advice from the CEOs:

  • The proposed commission structure looks reasonable. To validate this, ask merger and acquisition experts what they think reasonable commission rates on a sale of this size looks like in the current market.
  • Beware of earn-outs – don’t take them if offered, at least not without a fight. The challenge with earn-outs is that it may tempt the buyer to report the books in a way that minimizes your share. This will depend upon the terms, but experience advises against this alternative.
  • Similarly, you don’t want a residual payment conditioned upon your remaining with the company for a period following the sale. The buyer will ask because they see you as important. Counter with an employment agreement at twice your current salary.
  • Your job following the sale is assuring a smooth transition, not company growth. Growth is the new owner’s responsibility. They wouldn’t be talking to you if they didn’t see a growth opportunity.
  • Understand that their vision for the company is not yours. Accept this gracefully. Once the company is sold it is no longer your company.

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