Author Archive | Lauren Jefferson

Status Quo in Business Movement

business movement Have you ever treaded water for lengthy period of time? At first, it’s easy to maintain that movement; but at some point, your muscles start cramping and treading the water becomes more difficult. Everyone knows you can only tread water for so long before you either move or sink. So, when we look at our business, why do we think we can maintain the status quo for a long period of time?

Truth is: your business will either move upwards or downwards, not stay in the same place for a long period of time. This is because there are too many factors, including competitors, customers, vendors, etc., that impact your business movement.

Status Quo in Business Movement

Over the past two years, the oil and gas industry has been struggling with the declining price of oil. A frequently asked question in the energy business community is how long the price is going to remain in the $40 range. At $47 a barrel, that price point is not good for the industry or the economy of cities with a high concentration of energy related businesses. Although we do not have a timeline outlining when the oil price will recover, we do know that something must happen to make it move. By not innovating, changing, or moving, the entire economy is aching. Either companies will adapt and find a way to make it work or their competitors will do so.

Although dealing with a challenging market price can limit your ability to change your status, there are many other ways to counteract those external factors. But first, how do you get stuck?

Lead your company forward and keep your business moving! Download the 7 Habits of Highly Effective CFOs to learn the habits of leading the company to success.

How You Get Stuck

There are two ways to get stuck in the status quo: no one is pushing to make a change in your business or external factors limit the amount of business movement you can have. It is quite easy to get stuck in your business. You accept that the economy is bad and you cannot change those external forces. Although those external forces, like the oil prices, may limit what you can do to make a change, you will get stuck if you do not do something. Change can be hard if you are not prepared for it.

Some signals that you are becoming complacent and risk not moving in the right direction include:

HINT: Not taking a risk may be worse than betting on an investment or launching a new idea. Calculate the opportunity costs and risks associated with doing nothing compared to doing something.

Why It Is Not Good

No one likes to drown, so why do we allow our businesses to do so in “calm” waters? You are treading water in a large body of water. You are comfortable in the water that you are in; the water is the perfect temperature, the sun is not too hot, and you are with friends. But as you tread the water… The sun goes down, waves get bigger, friends go home, and now you are all alone.

Treading water is wanting everything internally to stay the same and still expecting all the external factors to remain the same. After a short time, it becomes impossible to continue to do both. Competition moves forward and customers transfer their business to other companies, leaving you with a company without any innovation, progress, or cash. Getting stuck is not good as it decreases the value of your company, allows for an increase in the amount of competition, and has the potential to destroy the future of the company.

business movement

Competition

Forbes once said, “your competitor isn’t your real competition: status quo is.” Although the unknown may be scary, it’s important to compare the costs of investing in something to keep you moving forward versus staying complacent and letting your competition pass you by. If you stay in the status quo for long enough, not only will your current competition pass you up and take your customers but more competitors will flood your market.

Not doing anything at all is worse than trying and failing. The moment you decide not to take a risk when all odds are against you is the moment when a competing firm will take a risk.

Competition cannot be accounted for in the financials, but as a financial leader, you can guide your executive team to success. Download the 7 Habits of Highly Effective CFOs to see the bigger picture and steer your company in the right direction.

Loss of Business

Everyone should want to be the latest and greatest. So why would your customer stay with you if you haven’t changed/updated/reacted to new technologies that the customer expects to see?

If you were the customer, would you stay with a company that has stopped investing in their product or service or move to another company that has improved their services to adjust to the technology changes or the moving economy? Most people would choose the latter. My guess is you would too. Don’t lose business over being complacent!

Start Moving

business movementIn today’s world, it is no longer safe to just survive. In fact, companies must be working on the offensive side rather than the defensive side to succeed. What does this mean exactly?

Instead of reacting to a declining or expanding economic climate, it’s time to start making educated decisions before it is time to react. For example, our team at The Strategic CFO has consistently looked at what other companies in other industries are doing. If we felt that what they were doing was a good investment and we would be first-to-market in our specific industry, our team would “start moving.”

If times are slow, this is a great opportunity to improve your skills, train your staff, brainstorm, strategize, streamline your processes, and trim off some of the fat of your company. Invest a little in projects, marketing, and training. Although it seems counterintuitive to spend when sales are slow, you will be better equipped to grab a bigger share of the market when the economy picks back up.

It Starts with Leadership

If your company is just trying to maintain the status quo and is avoiding risk/innovation/change/etc., then it is lacking a real financial leader. As a financial leader, you must lead your company forward rather than keep your team in a holding pattern. To learn more financial leadership skills like managing your company’s ideas, download the free 7 Habits of Highly Effective CFOs. Find out how you can become a more valuable financial leader.

Status Quo in Business Movement, Business Movement

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5 Cs of Credit – How to Be More Credit Worthy

Are you credit worthy? Right now, is your credit good enough for a lender to give you a loan or line of credit today? If your answer is no or if your not sure of your answer, take a look at the 5 Cs of Credit. This 5-point checklist allows loan officers to easily determine if you are going to be good for their banking business. Although, banks don’t strictly rely on only the 5 Cs of Credit, it’s good to know where they start.

But first, what are the 5 Cs of Credit?

5 Cs of Credit

The 5 Cs of Credit include cash flow, collateral, capital, character, and conditions.

5 cs of creditCash Flow

The bank need to know that your company can generate (and has generated) enough cash flow to pay off the debt. To increase your chances of getting approved for a loan, display how you have paid off debt before, had consistent cash flow, and plan to pay off debt in the future. Remember, cash is king. Because of that, this is one of the most important Cs.

If you need to improve your cash flow, download our free 25 Ways to Improve Cash flow whitepaper. Get approved for that loan!

Collateral

Unfortunately, some companies fail. Regardless of whether the company fails or not, the bank wants to make sure that it can be paid. The bank looks for sufficient collateral to cover the amount of the loan as the secondary source of repayment. This C allows the bank to cover all their bases because at the end of the day, they just want to be paid.

The bank wants to make sure it is protected if you cannot repay the loan. As a result, the bank will look into your savings, investments, and/or property.

5 cs of credit

Capital

Capital is a huge sign of commitment. One of the reasons why the bank looks at capital to approve a loan is to confirm that the company can weather any storm and ensure that the owner will not just walk out any day. The bank needs to know that there is a significant commitment, that being an investment, from the owners of the company.

Character

One of the suggestions we give to clients when developing a banking relationship is to take their banker out to lunch. This provides an opportunity for the banker to assess your character. What are they looking for? Integrity, honesty, respect, and other virtues reflect a good business person who will stick with their commitments in the good times and the bad. Sound character is critical in business. The banks want to feel safe when doing business with you.

Indicators of character include credit history and stability. The biggest question asked is, “will you be able to repay the debt?”

Conditions

With any business, there are external factors that could impact the company’s success. Therefore, the bank looks for conditions surrounding your business that may or may not pose a significant risk to your ability to succeed (and pay off your loan). If there is high risk, the banks will be more cautious when approaching you. But if the risks are small and do not impact any of the 5 Cs of Credit, then the bank is more willing to offer a loan.

Ask yourself: can you repay the debt?

Why do banks follow the 5 Cs of Credit?

In short, banks follow the 5 Cs of Credit to mitigate any risk related to loaning to a company. The risk a bank incurs from lending money to companies can be managed by assessing different areas of credit. Although not every bank uses this list, it’s safe to assume that when approaching a bank, you need to address each of these factors.

Relationships

Business deals with people; therefore, it is critical for the management (especially the owner/CEO/CFO) to have a good relationship with their banker. Imagine a random person coming into your office to ask for a $350,000 loan. Because you have no relationship with them, you don’t know how honest they are, if they have integrity, how willing they are to pay back the loan, how they do business, etc. Because there are a lot of unknowns, the risk increases dramatically.

Trust between a bank and a company is developed when you have proven that you are able to pay off your loans, have long-lasting relationships with customers, vendors, suppliers, etc., and alert the bank if your projections are a little off.

5 cs of creditWhat Lenders Look For

Lenders look to reduce their risk. They are willing to provide loans that may not have the highest return over risky loans with high returns. Areas of risk include the amount of credit used, the number of recent applications for loans, how much the company makes, and available collateral.

To start the process of applying for a loan, address areas that need to be fixed before the application, explain any red flags that your banker might raise, and prove you are credit worthy.

How to be More Credit Worthy

Creditworthiness is a valuation method banks use to measure their customers, your company. Although there may be slight differences between personal and business credit scores, it is a good start to improve your personal credit score. If you follow the same guidelines in your business, the company’s creditworthiness will increase.

Be more credit worthy by:

  • Paying bills on time
  • Pay more than just the minimum amount required
  • Manage credit card balances
  • Limit or manage the usage of debt

In addition to addressing the factors that directly impact your credit score, take a look at the 5 Cs of Credit. If you find yourself lacking in any one of those areas, make it a goal to increase your creditworthiness in that area over the next quarter. If you have decided to start tackling the first “C” – cash flow – download the free 25 Ways to Improve Cash Flow whitepaper. Make a big impact today with this checklist.

How to Be More Credit Worthy, 5 cs of credit

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Selling Your Business

Companies are constantly being bought and sold; so regardless of what position you are in or what industry you service, selling your business is one of those topics you need to know about.

It’s a common misconception that the financial persons are overhead, are not valuable, and simply just count the numbers. But over the past 25 years, we have been converting those battling that stereotype into financial leaders. In the case of selling your business, a financial leader will do more than just put a nice price tag on the company, but transform it into a more profitable, more attractive company.

But why would someone want to sell their perfectly good company in the first place?

selling your business

Selling Your Business

For an entrepreneur, selling your business is either one of two things: an unwanted but necessary action OR an opportunity to move onto the next venture. There are several events that could cause someone to sell their company. Those might include retirement, relationship issues, an illness or death, or the inability to perform financially (resulting in bankruptcy). Conversely, those in the business to sell might be bored, wanting more innovation and excitement.

Any of these reasons are not wrong; however, it should be important to you to want to get the most value of of your company in the case of a acquisition or merger.

Wanting to sell your company? You need to access our free Top 10 Destroyers of Value whitepaper to make sure you don’t have any destroyers in your business impacting the value of your company! Click here to download.

How would sell your company?

There are a couple different ways that one could go about selling their company. The US Small Business Administration (SBA) argues that “If you have decided to get out of business and are not able to pass your business on, merge it with another business, or sell it as a going concern, liquidating the assets could be the most appropriate exit strategy.”

Liquidation is often used when your company is insolvent or unable to perform financially. This practice is often used to pay off any debt the company might have. Whenever a company is facing bankruptcy, debt restructuring is a vital part of the process to protect the debtors.

You could also sell off parts of the company, such as a practice, a product/service, talent. The reason why most companies would do this is because they have a product or service that doesn’t quite fit into their company. It’s the black sheep of the family! To create more of a synergistic entity, owners sell a part of the company or buy a part of another company. The goal of mergers and acquisitions to to bring more focus to the most profitable side of your business.

Or you could sell the entire company… Now there are two ways to sell the entire company: sell the assets (see above) or sell the stock. The later is more beneficial for the seller than the buyer. An article in the Wall Street Journal compared asset sales to stock sales and concluded that “Stock purchasers… are buying the company itself and thus are exposed to all of its potential problems.”

Valuing Business

Regardless of whether you are selling your business right now or not, it’s important to value your business. This just-in-case action will a) speed up the process if a buyer does come around, b) immediately add value to your company by addressing needs, and c) start the brainstorming session to improve your business. Valuing your business now will mean for a better future.

selling your business

Beware of Those Destroyers

As you are valuing your business, find those “destroyers” that greatly impact the value of your company and take steps to address them immediately. What is a destroyer? We have partnered with Professor of Entrepreneurship at Rice University Al Danto to identify what areas in a business that destroy the value of your company. (You can access his free whitepaper here.)

The two most common destroyers that we see with our clients starts with the leader and the consistency of revenue.

Start with yourself… Are you destroying your company? Something at The Strategic CFO that we’ve always said is that the fish rots from the head down. If the leader of the company is not leading well, manipulating the team, abusing its employees, not managing well, or getting involved in illegal practices, then the business will loose major value. Suppose you are in a situation where you feel you are destroying your company, where do you start? First, do a self assessment on yourself. Then, interview your team on what you can do to change. Finally, put everything you learned into practice. Continue to do these three steps until you see major change in the success of the company.

As a financial leader, it is also your responsibility to communicate the consistency (or inconsistency) of your company’s revenue stream(s). Honesty is key in the financial world. Are you consistent or inconsistent? If the company has inconsistent revenue streams, present solutions to your management team to develop consistency. Buyers are willing to take risks, but they will choose a company that has more consistent revenue than a company that does not.

If you want to learn about the top destroyers of value, click here to download the free Top 10 Destroyers of Value whitepaper.

Prepping Your Company for Sale

The best prep you can do when prepping your company for sale is to actually prepare. What does this mean exactly? Clean up the books. Tidy up any loose ends. Address any issues you feel a buyer would be turned off from. Reflect on past performance, then focus the company to be more attractive to any buyer.

In addition, start the process of valuing your business, improving cash flow, and maximizing profitability.

Value Your Business

There are different methods to value your business, but the most commonly used method is EBITDA valuation. Reach your industry to figure out the most commonly multiple of EBITDA used in mergers and acquisitions. Once, you pinpoint that multiple, plug it into the following formula: Enterprise Value = Multiple * EBITDA

What is your business worth?

Improve Cash Flow

Cash is king. You have probably heard that a million times throughout business school and in your career. That statement cannot be emphasized or repeated enough because without cash flow, there is no business. Prepping your company for sale includes unlocking cash in your business.

Maximize Profitability

How profitable is your company right now? Focus on maximizing the profitability of your company. If the focus of your entire team is to maximize profits and cash flow, great things will follow. If you’re in position to sell or just want to prepare for a potential sale, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

selling your business, Valuing Business, Prepping Your Company for Sale

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Click here to access your Execution Plan. Not a Lab Member?

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selling your business, Valuing Business, Prepping Your Company for Sale

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SWAG Technique

SWAG Technique

During the Vietnam War era, the military coined the term SWAG – Scientific Wild-Ass Guess.

CBS released “The Uncounted Enemy: a Vietnam Deception” in 1982 which highlighted the US Army and their “manipulation” of facts and figures during the Vietnam conflict. CBS claimed that  General William Westmoreland and other military officers were conspiring to misrepresent information, resulting in America being convinced that we were losing the war.

After the news program was released, General Westmoreland filed a$120 million libel suit.

SWAG: Scientific Wild-Ass Guess

In the heat of battle, the military did not have access to facts, figures, graphs, or wifi connection to research what the actual answers were to questions posed by journalists – i.e. the tactics that the Vietnamese were using, the strength of the Vietnamese, how many Americans were down, or when the next shipment of goods was coming in. Because of this lack of hard information, the military gave estimates based upon what they thought was correct at the time.

CBS did not realize that the information they were given was based upon assumptions and reported it to the American public as fact.  Once they realized their mistake, they apologized to General Westmoreland. The libel suit was eventually dropped in 1985.

The lesson… Sometimes, you gotta use SWAG.  But, you better make sure your audience knows it’s SWAG.

So what does the US Army’s term, SWAG, have to do with being a financial leader?

Often, in business, we’re in the tough spot of needing to make a decision quickly without enough information.

“Tom, I need a flux analysis. Can you have it on my desk by the end of the day?”

“Uh…”

Sound familiar?

SWAG vs WAG

So, what’s the difference between SWAG vs WAG? WAG = Wild-Ass Guess. It has absolutely no thought behind it and can cause a multitude of issues down the line because it was simply something you pulled out of thin air.

“Sure, I can have it to you by the end of the day.”

What’s wrong with that statement?

  1. You didn’t think about the time required for the analysis
  2. You’ve already promised to have X, Y, and Z by to Bob by the end of the day as well

Avoid WAG at all costs!

As seen in the the libel suit, even SWAG can have negative consequences if not communicated that that’s what it is (a guesstimate). SWAG might sound like this:

“It’s possible that I can get you the Flux Analysis by the end of business day tomorrow. However, the likelihood is that it will take 3 days to complete, but no more than 5.”

There is never enough information available to make the right decision, but you can make a smart decision using the information you do have.

Offer a Range

People tend to understand that when a range is given, it is a best guess. There are so many factors that play into any estimate, including impressions, experience, and rough calculations among other things. A SWAG is not the best estimate, but rather the estimate with the most information at a given point in time.

For example, Houston, TX is known for its traffic. If your friend wanted to know how long it would take for you to go to the other side of town, what would your response be? (Notice the differences below.)

WAG: “It’ll take me 30 minutes because that’s a good estimate.”

SWAG: “Since it’s 4:00 and I’ve had experience with Houston traffic at rush hour, it will take me anywhere from 30-50 minutes for me to get to the other side of town. If there are any accidents on the freeway, then it may push me to over 60 minutes.”

Estimate: “According to my GPS, it will take me 41 minutes to get to the other side of town.”

By offering a range, you now have some wiggle room if things don’t go as planned. Figure out the low and high end and provide an explanation with your answer. Explain some assumptions as they could affect the different points in the range.

One area where SWAG is particularly important is with projections.  You will never have perfect information to make spot-on forecasts. Knowing your basic unit economics is one tool that you can use in conjunction with the SWAG technique.

(Do you know your economics in order to make a SWAG? Download the free worksheet here.)

Check Assumptions

Update your SWAG as soon as you get more information that would result in a more clear picture. If you are producing projections for the next 5 years, what assumptions are you making as you create the forecast?

SWAG TechniqueEconomy, customer demand, and international trade are three of the more volatile factors in a projection. Is the economy going to boom or is it going to continue to decline for 6 more months? Look at how that’s going to affect your customers. Keep an eye out for factors that are impacting your customer in a way that might have an effect on your company. Read the news. Embargoes, strikes, and natural disasters could have a massive impact on what your assumptions.

Check them and recheck them as more information comes in. Remember, it is okay to adjust your previous range and assumptions.

Manage Expectations

Think of ways you can validate your assumptions and form a more firm estimate. Not only will this give you more information to impact your company’s financials, but it will allow you to think through all the possibilities in order to give a range under certain assumptions.

Utilizing the SWAG technique has its risks. General Westmoreland didn’t expect that giving a statement to a reporter would eventually result in a libel suit.  But some information is almost always better than no information.  SWAG can be a powerful tool if expectations are managed.

SWAG Technique

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SWAG Technique

Sources:

No Uncertain Terms by William Safire

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