Author Archive | Jim Wilkinson

Improving Profitability – Fuel for Growth

How do you focus on improving profitability instead of just boosting sales? 2016 wasn’t the best year for some of us, but the new year provides a perfect opportunity to reassess goals. An entrepreneur’s natural tendency is to increase sales in order to balance out last year’s financials. But what many entrepreneurs fail to consider is are those sales actually profitable?

There’s Only So Much Cash

Why is improving profitability instead of simply increasing sales so important? Because, believe it or not, you can actually grow yourself into bankruptcy.

Huh?

Many are quick to say that more sales is the solution – however, there are a lot of factors you have to consider before you start selling everything. One of the most important metrics you must know is your cash conversion cycle. The cash conversion cycle is the length of time it takes a company to convert resource inputs into cash flows.

Cash Conversion Cycle Formula:

Cash Conversion Cycle (CCC) =Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) – Days Payable Outstanding (DPO)

– or –

CCC = DSO + DIO – DPO

improving profitability instead of salesDaily Sales Outstanding (DSO): This metric measures the number of days it takes to convert your receivables into cash. Ideally, the faster you can collect, the faster you can use the cash to fuel growth.

Days Inventory Outstanding (DIO): This is an indicator of how quickly you can turn your inventory into cash. Reducing DIO is good. If all of your cash is tied up in inventory that isn’t moving, then you might have a problem.

Days Payable Outstanding (DPO): This measures how quickly you are paying your vendors. If you are consistently paying your vendors more quickly than you are getting paid by your customers, then you risk running out of cash. If your vendors aren’t giving you a discount for paying early, then why are you paying early? If you have 30 days to pay, then why pay on the second day? Use that cash for the other 28 days you have for other vendors who offer you discounts or to fuel growth.

Managing the cash conversion cycle is a key way you can enable your company to grow.  And we all know how fond entrepreneurs are of growth…

(Click here to learn How to be a Wingman and be the trusted advisor to your team.)

Cash is like Jet Fuel

Often, entrepreneurs (especially those from a sales background) focus on improving sales. What many fail to realize is you can actually sell yourself into bankruptcy.

Let’s compare a business to a jet. If a jet is moving at a constant pace, then the fuel used to power the jet runs out at a constant pace. From a business perspective, if the sales in a company are constant, then the cash and assets required to fuel the company is also constant and predictable.
improving profitability instead of salesHowever, if a company decides to increase sales, then this requires more “fuel” or cash.

But if an entrepreneur decides to increase sales to a greater degree than cash flow, almost vertically, then the business may run out of fuel (cash) and can ultimately crash and burn.
improving profitability instead of sales

The quicker you grow, the quicker you burn cash.

improving profitability instead of sales

Sustainability is Key

The sustainable growth rate of a company is a measure of how much a company can grow based upon its current return on assets. The sustainable growth rate of a company is like the wind turbine of a jet. Naturally, the wind turbine gives the jet a 5-10% incline. But what if you want to grow to 25%? Or 50%?

To grow faster than your return on assets, you’ll need to take on additional debt or seek equity financing. Either you pay for it, or someone else does. To avoid increasing debt or giving up control, it’s important to maximize your current asset velocity (think managing CCC) and make sure your sales are profitable.

(Be more than overhead. Be the wingman to your CEO by increasing cash flow!)

How to Grow Your Business

If you want to grow your business, there are a couple of things you can do:

(1) Increase your profitable sales. This means deciding which projects have the lowest risk, but highest reward for your business. Time is money, so which customers are worth your time? In exploring this, you might have to conduct some market research for your target market.

For example, if you have some customers who are slow to pay, they’re straining your liquidity. Although it may be difficult, you might have to fire some customers and focus your resources on customers that aren’t such a drain.

(2) Increase capital. Capital is the funding you need to grow the business. Capital can be an investment from an outsider, or it can be cash generated internally by increasing cash flows and maximizing profitability.

Internally: A company can increase cash flow by managing the cash conversion cycle. Collect your receivables faster and manage inventory levels and payables. It is a good idea for a company to grow as organically as possible, meaning growing cash internally.

Externally: If you’ve tightened up your CCC as much as possible, it might be necessary to look for outside sources of cash. However, having external sources of cash is a trade-off; you’ll have debt with a bank, and you might have to give up part of your company to investors (depending on the terms).

Conclusion

So when your business owner says, “let’s increase sales!”, remember focus on making profitable sales. Look at improving the Cash Conversion Cycle to make the most of your internal resources.  Consider outside financing when/if your existing return on assets won’t get you where you want to be.

Don’t crash and burn – make sure your company has the fuel it needs. Your business owner is looking to you to help them grow their business. To learn how to do it, access the free How to be a Wingman whitepaper here.

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The New Supreme Court Justice and Your Business

What does the new Supreme Court Justice and business have to do with each other?

With all of the hullabaloo surrounding the election of 2016, it’s easy to forget that there is a vacancy on the Supreme Court that will be filled by this president.  Many of a president’s decisions over his or her term of office will be forgotten (or reversed by the next administration). But the ability to leave a lasting impression on the American justice system is an example of the power of the office of President of the United States.

The Presidential Decision

A president’s term is only 4-8 years, but the decisions he or she makes in those years are crucial for America’s future. Since Supreme Court justices serve for life, whoever is appointed will influence our legal system for decades.

Some of the historical decisions that have impacted the US were:

  • Marbury v. Madison (judicial review over Congress)
  • McCulloch v. Maryland (federal power over states)
  • Gideon v. Wainwright (right to attorney)
  • Roe v. Wade (right to abortion)
  • Obergefell v. Hodges (same-sex marriage)

While there are many of good (and bad) examples of how the Supreme Court has shaped the United States, it is crucial to note the significance and importance of a Supreme Court Justice nominee.

(Before any nominations are made, it’s wise to analyze areas in your company that would be impacted by a Supreme Court decision. To do this, check out our free External Analysis whitepaper by clicking here.)

President-Elect Trump’s Potential Nominees

Justice Antonin Scalia’s untimely death in February 2016 created a vacancy on the US Supreme Court. President-Elect Donald Trump has compiled a list of potential replacements – with the majority having a conservative agenda. Additionally, the two liberal-leaning justices are also approaching retirement. With 1 vacancy and 2 potential vacancies in Trump’s tenure as President, he will potentially have 3 positions to fill.

As a result of these positions being empty and the need for them to be filled, the landscape of the business environment will dramatically be shaped due to changing policies, justice, and rulings.

According to Business Insider, Trump’s potential nominees are as follows: (links are attached for biographies)

  1. Keith Blackwell
  2. Charles Canady
  3. Steven Colloton
  4. Allison Eid
  5. Neil Gorsuch
  6. Raymond Gruender
  7. Thomas Hardiman
  8. Raymond Kethledge
  9. Joan Larsen
  10. Mike Lee
  11. Thomas Lee
  12. Edward Mansfield
  13. Federico Moreno
  14. William Pryor
  15. Margaret A. Ryan
  16. Amul Thapar
  17. Timothy Tymkovich
  18. David Stras
  19. Diane Sykes
  20. Don Willett
  21. Robert Young

So why does this affect your business?

As we discussed earlier, decisions made by the judges have the ability to change the course of the economy, justice system, and social system. With the new justices, however, decisions that have already been decided on may be reviewed again.

Supreme Court Justices and business go hand in hand due to the close nature that business has with policy, social, and economic issues.

Example: Affordable Care Act & Gay Marriage

The Supreme Court has already ruled on the Affordable Care Act and the legalization of gay marriage during President Barack Obama’s tenure. While these may seem like social issues – right to basic health care and right to gay marriage – there are huge implications for businesses as well.

Who gets benefits?

Previously, only the employee, their spouse (heterosexual), and their children have the opportunity to be provided healthcare through their company or through Obamacare.

But with the legalization of gay marriage, more people are open to healthcare. Great for the people affected, but companies are footing the bill. After talking to multiple small businesses (1-10 employees) across Texas, I’ve seen companies go out of business due to Obamacare and others that are now spending over $12,000 more than what they were previously spending.

Companies must provide benefits to all marriages (401k, health, parental leave, etc.). This leaves companies paying more than before for benefits. While this is great news to these employees, it’s a great example of just how Supreme Court decisions impact the bottom line of companies.

Review

Due to the extreme discontent among businesses nationwide, the Affordable Care Act will be amended and potentially reviewed again by the Supreme Court with a different justices. With a new set of justices (with a potentially different ideology), decisions could be overturned.

Review isn’t always bad though. After looking through our rough history with segregation and slavery alone, reform and change is necessary to keep the country (and business) moving forward.

Want to know how to make decisions easier for your company? Download our External Analysis whitepaper to take control of your business during this unpredictable time!

How Supreme Court Decisions Impact Businesses

supreme court justices and businessBefore we go into how Supreme Court decisions impact business, we must go over how cases get to the Supreme Court. Cases reach the Supreme Court in 1 of 3 ways – original jurisdiction (dealing with mostly foreign affairs and diplomats), state Supreme Courts, and Federal Courts. A case progresses from the lower courts upward; if it is granted appeal enough times, it reaches the Supreme Court. The lower court’s previous ruling stands if there is not a majority decision.

The Supreme Court also has checks and balances on the other branches of government. Their main priority is to uphold and interpret the Constitution; therefore the 9 (8 current) Supreme Court justices will try anything debated as unconstitutional in Congress or the executive office.

Nine Supreme Court Justices make decisions about the constitutionality of matters brought before them. Consequently, businesses are impacted because money is involved in most of these matters.

What Areas You Should Watch For

Fortune Magazine outlined several areas to watch for, especially after Scalia’s death. The 5 areas that could be impacted by the Supreme Court in the new year are: immigration, class action suits, pollution regulations, unions, and intellectual property.

For example, United States v. Texas deals with immigration and DAPA (Deferred Action for Parents of Americans). As one of the states that did not join the original suit, Texas faces the decision that 2.2 million illegal aliens residing in Texas (out of the 3.6 million total illegal aliens) are eligible for DAPA. This potential decision will increase competition for jobs, increased benefits and taxes for those added employees, and increased unemployment rates due to the millions being added to the limited job pool.

Oil, gas, and mining companies can expect major change stemming from a Supreme Court decision on pollution regulations.

Technology and medical companies can expect change when it comes to intellectual property, patent law and potential changes to the Affordable Care Act.

Companies located in northern America will face adjustments in union laws, since the majority of unions are located there.

Conclusion

Whatever industry you are in, it’s important to know what type of decisions will greatly impact your company. Conduct an external analysis to start your path towards capitalizing on strengths and opportunities alongside minimizing the negative impact of weaknesses and threats. Get your free copy of our External Analysis whitepaper here.

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Inconsistent Revenue Streams

When valuing a company, investors look for 3 things: reliable, guaranteed, and steady revenue streams. But what if your business model involves inconsistent revenue streams? Regardless of why your company is experiencing inconsistent revenue streams, it’s important to learn what is happening and how to resolve it.

Entrepreneurs (typically from a sales or operational background) and CFOs/Controllers (financial function) see this issue in completely different lights. But let’s get into the very definition of inconsistent revenue streams.

What is an “inconsistent revenue stream”?

An inconsistent revenue stream occurs when your product and/or service is not able to consistently provide a reliable revenue number to use for projections. One month you may sell 43 widgets while in the next month, you sell 2. This causes some serious problems with putting together sales projections, annual budgets, operational decisions, etc.

The problem with inconsistent revenue streams is that a lot of entrepreneurs survive off the “pops” — those moments of big return, when a calculated investment finally pays off, the moment when you land a big fish that has big business to offer you, the moment when you get a “Win.” But these are conditional occurrences that are inconsistent, sometimes unexpected, and may be dependent on a particular sales person, economic climate, or a referral based on your connections.

Destroyer of Value

Investors look at inconsistent revenue streams the same way they would look at a company that has made no sales in 3 years. It’s worthless to them from a predictive standpoint. Investing in a company with inconsistent revenue streams comes with high risk and questionable return. An investor that looks at a company that only survives off of those “pops” (that get entrepreneur’s blood rushing) will likely run far far away.

This type of inconsistency is what we call a “destroyer of value”.

To improve the value of your company, identify and find solutions to those “destroyers” of value. Click here to download your free “Top 10 Destroyers of Value“.

Identification of the Destroyer

It’s often said, if you can’t admit you have a problem, then you can’t solve the problem. The first major task is to identify if you have this particular destroyer in your company. There are a couple of things that you can look for. If you experience any of the following, the value of your company might be less than you would like:

  • Decreases in sales that aren’t reflective of economy
  • Surviving on the cash you made during a large sale
  • Extreme differences with month-over-month sales
  • Dependency on one or two sales persons
  • Reliance on a particular person or company for leads
  • A specific and narrow market that purchases in bulk only every so often

Whatever the signal is, identify it and write it down.

Solutions for the Destroyer

Instead of waiting for the stars to align, smart owners increase business value through the creation of a smaller, consistent revenue streams. This typically means a monthly payment from a wider audience. You might have a monthly membership with access to helpful content or you might have monthly, recurring work where businesses have contracted you for a lengthier amount of time at a discounted rate.

Creating a recurring revenue stream means consistent cash flow and a business that is less affected by change. Instead of relying on one big fish or several “pops,” these owners cast a wider net to obtain many little fish that are constantly putting food on the table.

You’re in a business with customers. These customers have needs. Find a way to consistently meet your customers’ needs. Add value to their lives, at a rate they feel is fair and unobtrusive, and you’ll end up with a higher and more consistent cash flow that a buyer will be willing to pay you top dollar for.

Reliable Revenue Streams

The main way to ensure that your company can consistently have revenue is to modify your revenue stream. Answer the basic questions: 1) how easily can you track and predict future months’ revenues? 2) who are your customers? 3) why are they buying your product more than once?

Recurring Subscription Model

From the customer’s point of view, a subscription for a product or service saves the customer time and hassle. What a lot of companies fail to realize is, subscription models for businesses provide value for the customer and the company.

Because a subscription model has high recurring revenue, a business has the ability to calculate the inventory, lifetime value of a customer, and options for promotional offers. According to John Warrillow, the creator of the Value Builder system, a business with a subscription model’s value “will be up to eight times that of a comparable business with very little recurring revenue.”

As you calculate your net present value, make sure there aren’t any other “destroyers” that could decrease the value of your company. Download your free “Top 10 Destroyers of Value“.

Other revenue streams

Other revenue models such as rentals, usage fees, freemium, and licensing are just a few more examples of reliable revenue streams. What do they all have in common? Convenience and consistency.

Conclusion

Don’t limit your business to the simple commercial and retail business. Choose the one that works well for your business and is predictable. Work smarter, not harder.

(Download the Top 10 Destroyers of Value to maximize the value of your company. Don’t let the destroyers take money from you!)

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It’s All “Japanese” To Me!

Diversification and globalization are the keys to the future – Fujio Matarai.

We decided to write something a little different this week. The Strategic CFO partners with the University of Houston’s Wolff Center for Entrepreneurship by assisting with their education on financial leadership. In exchange, we hire interns from the program every year. This past November, the program was involved with a Japanese business networking initiative called “The Kakehashi Project,” where they experienced Japanese tradition, attended lectures about the current economic flaws, and familiarized themselves with Japanese business culture. One of our interns, Lauren Remo, decided to share with us her experience and opinions about the current economic conditions.

A Modern Romance

japanese business culture

Copyright: sjenner13/123rf stock photo

My daughter recommended (and I now recommend to you) that I read a book called Modern Romance by Aziz Ansari and Eric Klinenberg. Ansari and Klinenberg comment on the international cultures of dating in Paris (where casual romance is common), Buenos Aires (where romance is aggressive), and Tokyo (where romance is minimal). They also note that 65.8 percent of Japanese women 16-19 years old were not interested in romantic relations, and 39.2 percent of Japanese women 20-24 years old also lacked interest.

When Lauren visited Japan, she also witnessed this isolation and distance between people. Lauren says, “due to the lack of child-bearing, the government started this initiative to find successors and business relationships outside of the country. And because there are a lot of mom-and-pop shops, there are hardly any children to take over.”

Tradition plays a large part in Japanese business culture. The Japanese government made note of it as soon as the economy started reflecting this change in population. Not only are there fewer people to take over these family businesses, but this phenomenon also affects larger industries. Lower population means fewer people to work, which results in financial changes that directly affect the bottom line. Sound familiar? Well, they knew their economics, and adapted to the change as quickly as possible.

What are they doing to change? One, they are tackling their budgets. Two, they are finding new opportunities and business ideas in which to invest their money. And three, they are opening their country to new international networking opportunities, such as what Lauren experienced a few weeks ago.

Don’t wait for a crisis to occur! Download the free Know Your Economics guide to monitor what’s happening in your business. 

Talking Toilets

japanese business culture

Copyright: Kia Cheng Boon / 123rf Stock Photo

“There were innovative Japanese technologies that we wouldn’t even think of in the United States!”

Another observation that Lauren made was the Japanese innovation she came across during her stay in Japan. One technology was a carbon-fiber cord that held a building in place. The walls were supported by these cords, rather than our typical wood support beams. This technology was created to protect the building from earthquakes, which Japan often is plagued by. Although this and many other technologies serve a useful purpose, Lauren found that some investments were focused on fixing the wrong problems.

The technologies in Japan ranged from toilets that make noises for conservative use, to dome-like movie screens, to vending machines that heat canned coffee. From our perspective, to produce these items on such a large scale seems to be minimally beneficial. Sure, they are interesting inventions, but do they solve the industry’s needs? Do they prevent any potential business crises?

It almost sounds like they are doing things backwards: problem-solving for the sake of innovating, not innovating for the sake of problem-solving. In business, it’s much easier to do the latter. Once you’ve identified the issues within a business or industry, that’s where the real opportunity lies.

High Risk, High Reward

japanese business culture

Copyright : imtmphoto / 123rf Stock Photo

I began to wonder if Japan’s conservative nature led to the slow progress to fix their national debt.” 

In 2013, the national debt of Japan exceeded over one-quadrillion yen, an equivalent to 10.5 trillion U.S. dollars. Since then, the government debt to GDP ratio grew from 220 percent to about 230 percent.

Japanese business culture reflects their conservative nature. Decisions are based on many meetings, approvals, and caution. This contrasts greatly from America’s “high risk, high reward” mentality. The main purpose of their process is to minimize error.

For all we know, Japan might be correct to think this way. More calculations, less error, less money to be spent to fix the problem. However, problems can’t wait for months, maybe years of approval. If a company is increasingly losing money each month, what will they do? Wait for the customers to get back to them next week? If you know your economics and KPIs well enough, you won’t have to dwell on calculating decisions.  Understanding how your business makes money can make decision-making much more efficient.

Conclusion

By no means do we believe that Japanese business culture is any better or worse than ours. Everyone has their own style of doing business, even within their own nations. Based on our observations, the Japanese government and companies are extending their culture and businesses internationally, initiatives that will hopefully improve their current situation. We also found that their culture is one of respect and approval from many different hierarchies. Finally, their priorities differ from ours as well, such as technology and work ethic. We can learn from Japan because they take note of their issues and work to fix it – one of the perks of knowing one’s economics.

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What’s the purpose of attending holiday parties?

It’s that time of the ywhats the purpose of attending holiday partiesear when every night, weekend, and day is filled with Christmas parties, company holiday parties, and gift giving galore! If you’re an introvert like most financial types, it can be exhausting to put yourself out there socially. I always ask every year, “what’s the purpose of attending holiday parties?” Trust me when I say, there are numerous benefits to attending holiday parties this year.

The Purpose of Holiday Parties

Although some may dread getting an invitation to a holiday shindig, there are important things you should take into consideration

Purpose of Attending Holiday Parties

Company culture is a major contributor to how employees perform in a business. This is a company’s chance to show their employees how important they are. It is an opportunity to mingle with a different department. Whether or not your boss made it mandatory, holiday parties are a great excuse to network and show how valuable you really are. Who knows, maybe you’ll get a shiny new promotion out of it! Most importantly, a holiday party is a way to show gratitude to employees in a personal and professional manner.

Not all holiday parties you will be invited to attend will be for your own company.  Don’t shy away from attending that party your banker invited you to.  While it may sound exhausting to mingle with people you don’t know after a long day of work, seize the opportunity to build your professional network in a fun and non-threatening environment.  After all, wouldn’t you rather network over a cup of holiday punch than across the table at a boring seminar luncheon?

How It Impacts Financial Leaders

Financial leaders (and potential financial leaders) do more than simply find results and number-crunch. Financial leaders familiarize themselves with the goings-on in other departments, including sales and operations. This benefits the decisions they make in the future. A financial leader understands the importance of combining the strengths and opinions of everyone in the company, not just the finance department.  A holiday party is a free event (for the participants, at least) to network and build those relationships.

The best financial leaders recognize the importance of having a strong professional network.  Holiday parties for organizations other than your own give you the opportunity to expand your reach and meet people that you otherwise wouldn’t be in front of.  The nice lady from the software company might have just the answer you’ve been looking for to your inventory tracking problem.  The young recruiter from the staffing firm might seem pushy right now, but you may need him in 6 months.

You never know when the connections you make outside your office will pay off.

Introvert vs. Extrovert

What kind of person are you? Are you the type who stands in the back of the room, checking your watch? Or are you the person to catch everyone’s attention (sometimes a little too easily)? Here’s how to handle different personality types awhats the purpose of attending holiday partiesnd how to absolutely rock this year’s holiday parties.

Need guidance in networking? Download your free Networking for Introverts guide and start building your network today!

How To Handle Different Types of People

Handling different personality types can be tough, but after a lot of practice and the right guidance, those 2-3 hours will fly right by. First is understanding the people around you – are they the life of the party, shy guy, new hire, or gossiper? These aren’t the only personality types you encounter at a holiday party, but they generally fall under one of two categories:

  1. Introvert: This is the person that hides behind their drink. The best way to socialize with an introvert is to thank them for taking the time to come, and acknowledge something small. If she has a new outfit, compliment her. If he brought a dish, try it out! It always feels better to know you exist in a large group of people. If you are the introvert, then the best way to survive the night is to participate in the festivities, but conserve your energy by taking frequent breaks. Know yourself, and know your limits – not everyone has the same caliber of excitement. Finally, know that it is okay to leave. Have your exit plan ready when you need it.
  2. Extrovert: Extroverts love a good party. They often tell a lot of stories and have a great ability to connect to others. However, sometimes extroverts might overstay their welcome. As an extrovert, a good way to avoid this is to have a plan. Know who will be there, keep a few stories and events in your memory bank, and remember to eat. All that talking can’t be done on an empty stomach!

How To Rock Holiday Parties

Other than handling different personalities types, here are a few more suggestions to consider.

Prepare some conversation kickstarters

Before you get to the holiday party, have some helpful phrases to break the ice with people. Some of these include:

“What are your New Year’s resolutions for 2017?”

“Have you gone on any vacations this year? Are you planning any vacations for next year?”

Or even referring to something you’ve read about them this year is a great ice breaker. Remember to listen, and not always tell your own experiences.

Choose 3-4 people to connect with

Many people are intimated by the sheer number of attendees at a holiday gathering.  The important thing to remember is that you don’t have to talk to everyone.  Instead, spend your time engaged in meaningful conversation with a few people that you’ve been wanting to connect with.  How do you make sure that you get in front of the person you’d most like to chat with?

Well you should plan to…

whats the purpose of attending holiday partiesGet there early

Getting to a holiday party early has more perks than just having the first access to all of the food. Remember that this is a professional event, and most likely everyone will show up on time to leave on time. Get there early so that you can survey the room as people arrive and make sure that you get to talk to that one contact you’ve been hoping to get in front of.

Arriving early also allows you to “stake out your territory” so that you make sure to get a prime spot to meet people rather than being stuck in the back corner of the room where no one can get to you.

Be fun & professional

Since this is a professional event, there are some limitations. Dress appropriately, don’t overstay your welcome and eat and drink in moderation.  It’s easy to get caught up in the holiday spirit, but you want people to remember you for the right reasons, not because you look great with a lampshade on your head.

Conclusion

For an introvert, an invitation to a holiday party can be about as welcome as a root canal.  Rather than seeing the experience as painful, recognize the opportunity it presents to have fun with your co-workers or build your professional network.  Don’t worry about being the life of the party and meeting everyone in attendance.  Focus on those few people that you really want to connect with and make sure that you leave a good impression with them.

And most importantly, have fun!

How will you get through your holiday parties? Download your free Networking for Introverts guide to help build those relationships. 

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Financial Leaders and Cyber Security

Does your company bank online? Have QuickBooks or PeachTree online? Take credit card transactions online? Have any financial information online? Have a website or an email address? If you answered yes to any of these questions, you are at risk for a cyber security threat.

It’s no question that as technology evolves, the issue of financial leaders and cyber security becomes more important to deal with. There have been countless companies in the last 10 years that have experienced cyber security issues.

But what do financial leaders and cyber security have to do with one another?

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Financial Leaders and Cyber Security

In December of 2013, Target experienced a major security breach where over 40 million credit card numbers were stolen. Apple battled the United States government in the San Bernardino case because creating a back door would open Apple’s customers to huge security risks. In late 2015 into 2016, Home Depot had 56 million credit card numbers stolen over the course of a 5-month period.

Even though Target, Apple and Home Depot are large companies, small companies are also a major target for cyber attackers. Just in Houston, I’ve come across stories of impersonation of an entity to capture checks, tales of credit card breaches and email hacking, and these are only a few examples.

Cyber Security Definition

Cyber security is defined by Wikipedia as “the protection of computer systems from the theft or damage to the hardware, software or the information on them, as well as from disruption or misdirection of the services they provide.”

The issue of cyber security is ever growing. Hemanshu “Hemu” Nigam, founder of the security advisory firm SSP Blue, estimates that this industry will reach $170 Billion by 2020. There’s a reason for this growth though: an increased supply of hackers and the security threats they cause creates increased demand for cyber security tools and programs. Just like you would install a security system to protect your home, it’s important to create a wall of protection around your web-based assets.

How It Impacts Financial Leaders

Cyber security and financial leaders are not often associated with one another. But if we break it down, cyber security threats occur primarily because of one reason – money. As a financial leader, it is your sole responsibility to safeguard the financial assets of the company.

Managing cyber security is a necessary evil that can sometimes add up to a sizeable expense on your income statement. Ideally, everything in your company needs to be protected. But if you are a small business owner with a only couple of employees, that may not be an option.

Consequences

There are two types of consequences to a cyber attack or threat: immediate and long-term. Both of these need to be quantified. What will it cost you to deal with the immediate crisis at hand (stolen credit card numbers) as well as the long-term damage to your reputation?  It’s easy to see how the costs of a breach can add up.

Conduct an external analysis to discover areas that outsiders might find attractive to penetrate. Where are you vulnerable?  Just like you would protect your social security number from identify theft, protect the financial integrity of your company.

Don’t skip evaluating all external factors that can impact your company. Download the External Analysis whitepaper to learn how to start.

Cyber Attacks

The US Department of Homeland Security warns that,

Cyberspace and its underlying infrastructure are vulnerable to a wide range of risk stemming from both physical and cyber threats and hazards. Sophisticated cyber actors and nation-states exploit vulnerabilities to steal information and money and are developing capabilities to disrupt, destroy, or threaten the delivery of essential services. A range of traditional crimes are now being perpetrated through cyberspace. This includes the production and distribution of child pornography and child exploitation conspiracies, banking and financial fraud, intellectual property violations, and other crimes, all of which have substantial human and economic consequences.

Types of Cyber Attacks

Cyber attacks of various forms are recognized as a real problem that destroy a company.  But what are some examples of cyber attacks that impact financial leaders?

  • Corporate Security Breaches
  • Malware
  • Phishing
  • Social Media Fraud
  • Advanced Persistent Threats (APT)
  • Individual Wiring Attacks

Phishing

Phishing is an email scam that retrieves access to your computer after clicking a link. This is like opening the back door for thieves to take your TV, computer, prized possessions, etc. from your home as you sit on the couch watching.  These sinister emails often play upon fears that if you don’t click the link some sort of harm will follow.

You’ve probably received phishing emails personally, but can it really be a business issue?  Imagine receiving an email saying that your company website is being used for spamming and spreading malware and that you need to download a report to check it out.  Your first instinct is to protect your company’s reputation, so you are understandably alarmed and tempted to check out the report.  Sensible financial leader that you are, though, you realize that this is a scam.

Sound far-fetched?  It happened to a client last week…

Other types of cyber-fraud

Companies experience impersonations or social media fraud which can severely impact a company’s image, brand, and reputation.

Have you ever seen those emails where a superior grants you access to wire a large sum of money into an account? This type of attack targets individuals rather than the company; but the company still loses out.

How to Prevent Cyber Attacks

As firms get larger, they become more of a target for hackers, phishers, and cyber-attackers. Another way to prevent cyber attacks is to vet who comes in the door in the first place.  Criminal background checks, monitoring of access, and password difficulty are all ways to reduce the risk of attacks, increase the limits of the flotation of financial information, and decrease the ease of accessing company documents.

If you feel that you’re at a greater risk for attack, get cyber insurance to help mitigate the costs and expenses associated with recovery.  Not only does this cover expenses if you are attacked, you will need to put preventative measures and best practices into your firm to decrease the risk of attack in order to get the policy in the first place.

Harvard Business Review’s Take

HBR argues that most cyber threats occur internally. Financial leaders need to see these internal attackers as an external force that has infiltrated the company. HBR suggest starting with the basics to prevent cyber attacks. While keeping communication open between team members is key for a transparent environment, being too naked will tempt a team member, such as Bob the accountant, to steal information for his own benefit.

Because business consists of humans, it’s important to realize how flawed people are. Analyze your team’s habits, current life status, and anything else that might cause them to act out. If you work with them daily, acknowledge their cyber and interpersonal activities. If you begin to see them change those habits, raise up a flag because there may be an issue that could damage your company.

Even well-intentioned employees can cause harm if they are uninformed.  Educate your team on the various ways that scammers can attempt to breach your company, particularly through phishing emails.  Encourage them to check their social media and personal email accounts on their own devices while on breaks to minimize the exposure of company data to outsiders.

Conclusion

Cyber attacks are a real external threat for companies of any size.

To mitigate potential damage, it’s important to put into place practical prevention tactics. But where do you start?

Begin by educating employees (especially those with access to financial information), creating difficult to crack passwords, updating any software/plugins/compliances, and being aware of areas of vulnerability.

Once you are able to identify areas that hackers might infiltrate, it’s time to start building a strategy to respond. Download the free External Analysis whitepaper identify those areas. Overcome obstacles and be prepared to react to external forces.

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Traditions Turned Financial Fluctuations

TTraditions turned financial fluctuationsraditions turned financial fluctuations are to be expected in the American economy. Commercialism takes over this time of year with the holiday rush. With an overload of red sales tags on toys, electronics, clothes, and more, consumers are quickly adjusting to this being a norm.  Now with Thanksgiving is right around the corner, we are taking a look at how it has changed drastically from a traditional national holiday to a massive sale.

Financial fluctuations can severely damage your profits. Learn how to price for profit as we go into the most popular sales season! Download the Pricing for Profit Inspection Guide here

Traditions Turned Financial Fluctuations

Financial fluctuations generally shape patterns throughout industry seasons, with one of the largest humps being in the last quarter of the year (especially for retailers). As a financial leader, it is your responsibility to allocate resources to cope with the massive influx of sales, manage profitability, and mitigate any potential liabilities with hosting a sale.

Traditions turned financial fluctuationsHistory of Thanksgiving

Thanksgiving originated in 1621 when the Wampanoag Indian tribe and the colonists shared a meal together after the first successful corn harvest. In 1863, President Abraham Lincoln declared it a national holiday. The tradition is to express one’s thankfulness while sharing a hearty meal of turkey, stuffing, veggies, and a variety of pies.

While the holiday still remains a tradition to this day, the past few years have seen Thanksgiving invaded by the financial juggernaut of Black Friday.

Black Friday

Black Friday is one of the most sought after sales days (for consumers at least) in the United States. Traditionally, Black Friday takes place the day after Thanksgiving in the wee hours of the morning. People camp out to get the best deals on clothes, appliances, technology, etc.  Over the past few years, however, retailers have begun opening their doors to Black Friday shoppers earlier and earlier.  This year, many stores will be open on Thanksgiving day for holiday shopping.

As it’s evolved into an expectation for businesses to have great deals, we’re now starting to question the profitability of this type of event. With Black Friday being a commercial norm, Brown Thursday (Thanksgiving day) and Cyber Monday (Monday after Thanksgiving) are rapidly being seen as just another leg to this madness.

Traditions turned financial fluctuationsWalmart

This massive company is an infamous example of Black Friday hysteria. Having had deaths during their sales in the past due to stampedes of people, Walmart has continued to expand what was originally a Friday sale to a continuous sale starting Thursday at 6pm (in most stores).

Let’s tally up all the costs associated with putting Black Friday (Brown Thursday and Cyber Monday) into action:

  • Employee’s hourly pay (and potential overtime)
  • Manager compensation
  • Product stock and inventory
  • Crowd control training
  • Security to help manage crowds
  • Electricity of buildings, lights, and registers
  • Food for staff (Thanksgiving dinner for employees)
  • Time to price each SKU profitably
  • Liability insurance (in the case of casualties)

Traditions turned financial fluctuations

With all of these extreme sales, companies like Walmart have been able to stay profitable as this “holiday” has grown into a giant. One of the major factors that go into that is inventory. By acquiring a large amount of inventory, you minimize the cost per item and thus create a more profitable ticket item.

Putting Black Friday into production is not cheap. In addition to all of the above, the most important thing is to make sure your products are being priced for profit. Profitability is the number one thing that you need to keep in mind, as you have a responsibility to company stakeholders.

RTraditions turned financial fluctuationsEI

By contrast, REI, an outdoor recreational equipment retailer, has opted-out of participating in Black Friday festivities. Financially, they may have missed out on a slight increase in revenue.

But the real question is, what’s the best decision to make for your brand? Some decisions to gain more profit while going against values may actually compromise your company and result in a loss. No amount of pricing products for profit can counteract any decision that is against the brand.

Traditions turned financial fluctuations#OptOutside has been a movement that aligns with REI’s mission and vision.  They are able to maintain their customer base and grow year over year without offering the Walmart-style sales. This tradition has smoothed over typical retail sales cycles.

One of the main differences between Walmart and REI comes down to the price difference on their products. REI sells higher quality, more expensive, and sustainable products. People who are seeking their equipment are not the type of customer that demands cheap products.

Deciding whether to host a sale throughout out the holidays? Make sure you have priced your products or services for profit. Download the Pricing for Profit Inspection Guide to help you price accordingly and point out areas where you are not currently producing profit. 

Seasonal Sales – Good, Bad, or Ugly?

With all things, there’s a good, bad, and ugly side to it; seasonal sales are not excluded from this.

The Good | How it Helps Businesses

Seasonal sales help businesses around the country and the world. Projections can be easier when a company knows when its sales will peak and decline.

Start by creating a yearly plan. If your company does not do anything besides one big day, analyze typical sales and cross-analyze them with your goals. How are you going to survive the gap?

Offer Other Products/Services

There are many options to subsidize a limited season. Offer those products or services that are popular in-season to another target market. Another option is to create other seasonal sales within the calendar year.

For example, a company that puts up Christmas lights in October-December will find that their off-season takes up the majority of the year. This provides an opportunity for you to adapt. This particular company uses their same inventory (Christmas lights) to do wedding decorations in the April-August months. While it does not completely match the winter sales, they are able to keep up the cash flow throughout the year.

The Bad | How it Hurts Businesses

With all things good come bad. Traditions turned financial fluctuations are not exempt from the bad.

External Dependencies

Depending on one single event, such as Black Friday, for the majority of your yearly sales, is a risky affair! If something externally occurs before or during said sales event, the entire event could be disastrous. But for some companies, that’s all they have.

If you find yourself in this position, it’s time to start finding other sales methods that do not heavily rely on one-time events surrounding holidays, etc.

Staffing: On-boarding & Overtime

It’s often said that a company spends most of its money on people. Seasonal sales only expands these issues. With these financial fluctuations, companies hire seasonal employees. Training, on-boarding, monitoring, salary (typically hourly for retailers), over-time compensation, and any other forms of employee care are just a few factors that hurt businesses if not managed carefully.

The Ugly | Seasonal Cash Flows

Seasonal cash flows are difficult to project and track. This is one of the really ugly parts of having high financial fluctuations.

Price for Profit

Even though Black Friday is in a few days, prepping for seasonal sales are still underway with the holiday season coming quickly. Easily discover if your company has a pricing problem, and learn how to fix it by downloading the Pricing for Profit Inspection Guide.

Traditions turned financial fluctuations
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How to Produce Realistic Sales Projections

2016 has flown by and we are already in the fourth quarter! As we wrap up the year in just over a month, strategic planning for 2017 is happening in businesses across the world. As the person responsible for the bottom line, your job as a financial leader is quite simply to improve profits and cash flow. While that may sound easy, there are many nuances that are outside of your specific function (CEO, COO, CFO, Controller, VP, etc.) that you need to learn to lead your organization financially.

Working on 2017’s sales projections? Are you responsible for the bottom line? Download the free Goldilocks Sales Method whitepaper to learn how to build your sales pipeline and project sales accurately.

While there is still ample time left in the year, it’s never too early to start preparing for next year. If you’ve already started your projections for 2017, pull out your sales projections because there may be things you are missing. However, if you haven’t even thought about next year’s financial situation, here are some tips on how to produce realistic sales projections.

How to Produce Realistic Sales Projections

Producing realistic sales projections is difficult primarily because there are no guarantees. But you can avoid producing overly optimistic projections.

Why Most Sales Projections Fail

Most sales projections fail because of the financial leader’s inability to factor in potential risk and uncertainty. Just like in the children’s story Goldilocks, companies can easily miss the mark by producing projections that are either too pessimistic or too optimistic.

Start Doing Projections Now

Like I said, it’s never too early to prepare for what’s next. Are your sales projections realistic or optimistic? This would be the time to adjust any discrepancies in your financial projections. Don’t forget, 2017 is only a month and a half away!

Ask Questions

As you start working on your sales projections, it is imperative that you ask the following questions to your sales team, executive team, and financial team.

  • Where did the company meet the targets previously set for the company and where did the company fall short?
  • What did your team learn over the course of 2016?
  • What unfinished business will the company take into the new year?
  • What does success in 2017 look like?
  • What steps does the company need to take to increase the probability of success?

Starting Small: Unit Calculations

You can track future sales by calculating the expenses and comparing the number to unit sales. First, consider the expenses your business usually has: rent, loan payments, vehicle payments, utilities. Also include inventory and the equipment needed to produce the items. Tracking every expense for a future budget is crucial. Second, factor in the income sources. This can mean anything from time to units sold. Finally, compare the expenses to the sales. Do they change during the season? Use the year’s patterns to project next year’s performance.

Also take a look at your unit economics.  For every widget you sell, what is COGS and margin?  Is your margin sufficient to cover your fixed costs?  If not, then you should determine whether a pricing adjustment is in order, or if you just need to sell more of the item in order to cover fixed costs.

If you’re still not sure how to accurately project your sales, click here to access your free Goldilocks Sales Method tool. This tool allows you to avoid underestimating or over-projecting sales.

Watching Market Trends

You also need to factor in market trends. Preparing an external analysis will help you strategically plan your year and project accurately. Evaluate sales for companies in your industry, in your city, and your customer’s industry.

In Houston, the oil & gas industry has impacted the local (and even the national economy) over the past 18 months. Our 12-on-12 analysis has analyzed past 30 years of rig count and oil price data; using a guide like this allows our company to estimate how our and our clients’ business is going to fluctuate.

Be a Financial Leader

One of the common misconceptions about being a leader is that it’s all about delegating tasks.  While trusting your team and empowering them to make a difference is a crucial part of leadership, some tasks require your experience and expertise.

One of the most important ways you make a difference as a financial leader is by building bridges between departments in your company.  Since everything in a company is tied in some way to finance, it’s your responsibility to ensure that operations and sales have the information they need to be their best.

Don’t just ask your sales team for their sales forecast and plug it into your projections without another thought.  Instead, work with them to produce a realistic and attainable forecast that will guide the company over the next year.  The tighter your sales projections are, the better your financial projections will be.  As they say, it’s all about sales, the rest is just details.

How To Work With Sales

The idea of working with your sales team can sometimes be daunting. Financial people tend to be cautious and are more likely to understate projections. Salespeople can be very optimistic and will tend to overstate projections. If you ask your sales team to provide 2017’s sales projections, they may say that the company expects to grow 40% in revenue.

Sounds great, right?

Only if the facts bear it out.  Take a look at year over year sales reports. Over the past ten years, the company has only grown 20% year over year. Unless the company is releasing a new product line, etc., then you can make a calculated assumption that a 20% growth rate is more reasonable.

Educating your sales team on past sales trends and listening to them about what they’re hearing in the marketplace will allow you to produce more realistic sales projections than either of you might crank out on your own.

Manage Sales With a CRM

So you’ve worked with your sales team to come up with some killer sales projections.  You’re done, right?

If you’ve ever worked with salespeople, you know the answer to this question.  Giving a salesperson a goal but not holding them accountable for results is a recipe for failure.

What Gets Measured Gets Managed

In order to help them keep track of their goals and measure progress along the way, it’s a very good idea to invest in a Customer Relationship Management system (CRM).

One of the most attractive aspects of using a CRM to track customers and sales is the ability to compile information from many different communication channels (social media, website, telephone, radio, television, direct sales).  Even if your business is currently only communicating with customers in a few ways, it’s a good idea to have a centralized database with all your customer data so that your sales team can document customer preferences, communications, and goals.

Most CRMs will also function as a tracking system for progress towards sales goals.  Just the act of entering and tracking sales in a CRM can help keep your sales team focused on all customers and not just the ones that are causing the phone to ring right now.

Conclusion

Producing realistic sales projections should be a priority for your company, particularly at this time of year. If you need help creating an accurate sales pipeline, download the Goldilocks Sales Method. Let us how you think 2017 is going to look by leaving a comment below.

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What is your business worth?

So, you’re considering selling your business.  Whether it’s to pursue new opportunities or to get out while you can, you need to start thinking about your business from a valuation standpoint. Even if you don’t intend to sell your business in the near future, building a business to be saleable is a sound strategy.  So what is your business worth?

When it’s time to leave

How do you know when it’s time to leave? If you’re experiencing these signs, you should strongly consider creating an exit strategy for your business:

Sick and tired… Literally. Entrepreneurs by nature are constantly looking for new opportunities. As a result, business owners often feel tired, fatigued, and overwhelmed by the business. Imagine constantly building your business for 25 years… it never ends, and it gets exhausting! The natural reaction is to look elsewhere, but before you start searching for the next big thing, you have to take care of your current business first. After all, it is your creation.

Decline in company revenues. A decline in revenues is never a good sign for a company. Let’s say that you’ve been trying new methods for years now, but revenues continue to decrease. Even zero growth is a red flag that you should take action.

Keep in mind, some business owners make their decisions based on this one reason, and some make a move based on a multitude of decisions built up over time.

The market for your business is declining. I used to work with someone that owned a small business before the attack on the twin towers. He flew in nurses internationally to work in his medical business, which provided him steady cash flow and a healthy bottom-line. The demand was also constant… until the terrorist attacks on 9/11. From that moment, it was more difficult to operate a business that relied upon flying in workers from other countries. The delay of bringing in nurses wreaked havoc on his business. Because of this difficulty, he decided to create an exit strategy.

When market changes are out of your control, the best thing to do is prepare. Getting your exit strategy ready before market changes force your hand is better than waiting for it to crash.

Partner disputes and relationships. Starting a business with partners is easier than exiting a business with them. This may be a legal issue, as easy as looking at a contract.

Sometimes, it does get ugly. Facebook is a great example. If you’ve ever seen “The Social Network,” you’ll probably recognize this story. Mark Zuckerberg and former business partner/investor Eduardo Saverin started Facebook together, but when Saverin displayed breach of fiduciary duties, Zuckerberg diluted Saverin’s stake in Facebook. This ended with Zuckerberg’s majority ownership and Saverin’s minimal-to-nothing ownership.

How would this relate to your business relationships? When starting a business, you want to choose a partner that will be able to carry out responsibilities completely. You also should flesh out your contracts, terms, and exit strategy.

“Life is like a box of chocolates; you never know what you’re gonna get.” Things happen in life, like getting married, divorced, sick, and busy.  What are your priorities as a person – what do you value most? Is a business more important than your family, or vice versa?

Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.

Assessing valuation methods

There are different methods to assess the value of your business. Many of these methods are specific to the type of business you have.

Asset-Based Valuation

This method, as the name indicates, calculates total asset value minus total liabilities. This method is criticized, however, for its ambiguity in valuing assets. The assets may not have been recorded on the balance sheet, or may be unique or custom products that are difficult to value.

The method is best used when focusing on real estate or other similar investments.

EBITDA Valuation Multiple

This is the most popular method, and usually references the market in relation to your business.   Businesses typically sell for 3X-5X EBITDA, but this can vary widely depending upon the type of business and the buyer. The ratios are calculated by taking the market value of a business, and dividing it by EBITDA.

According to ValuAdder, EBITDA valuation multiple removes the following when you value your business:

  • Business taxes
  • Effect of capital structure used to finance business operations
  • Cost recovery of the investment in fixed business assets

Who should you give the valuation to?

  • Potential Buyers. Calculating a business valuation before selling your company is crucial if you want to negotiate prices. Let’s be honest – they’re most likely not going to buy it from you unless it’s a good deal. You might even convince them why you chose to value your business the way you did.
  • New investors. Business valuation doesn’t always happen when you want to exit your company. Ironically, you value a business when growing a business, too. When pitching to new investors such as venture capitalists or angel investors, they want to know how much the business is worth before investing in it.

Conclusion

Investors or buyers calculate the value business based on more than just numbers. You might be selling to a current employee, someone well-versed in the industry, or a friend. There are many reasons a business owner might sell the business – relationships, cash flow, new opportunities.  Both the buyer’s and seller’s motivation will affect the price of a business, so it’s important to consider all of the angles and ensure that the method of valuation you choose accurately assesses the value of your business.

Want to know some of the things that may be hurting the value of your business?  Check out our whitepaper Top Ten Destroyers of Value to see where you might be leaving money on the table.

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