Author Archive | Lisa Knight

If It’s Always On Sale, Is It Ever On Sale?

When you walk into a shopping mall, what do you see? I see sale signs everywhere! How could a company ever make money if its products or services are always on sale? 50% off, buy 1 get 1 free, 70%… It never ends.always on sale

Have you wondered if it’s always on sale, is it ever on sale?

Marketing in action

Organizations such as Checkbook.org compare the regular price, lowest sales prices, etc. to the public. This non-profit organization has studied companies (especially in retail) to shed light to how those businesses are always advertising sales.

Truth is, we’re all suckers for a good sale. The way marketing works is that they tap into expressing a higher value for a product for a cheaper price. AND it works! If you see a shirt that’s on sale for $15, having been marked down from $45, you’d probably think that’s a great deal. You’re a winner. But what if I told you that that shirt, priced at $45, was produced at $5? At that cost, you’re looking at a 200% profit margin for one T-shirt on sale. And you’re going to buy it because you didn’t have to spend $45. They made you feel that you’re getting a valuable deal. And the next day, this particular store takes 10% more off, giving you an 80% sale.

Now, this example might be a bit extreme. But if something is always on sale, is it ever on sale? This type of selling has been known to be very profitable and effective. Consumers believe that they are getting a good deal on a product or service if the percentage off is high (20-80%).

Bucking the trend

One company decided not to be “always on sale”… with disastrous results. After the 2008 recession, JC Penney’s new CEO, Ron Johnson, made some radical changes in how the company was going to move forward. The company was struggling to find its identity in the competitive world of middle market retail.  Johnson decided that rather than their usual practice of offering an item for $100 only to mark it down to $50 a few weeks later, the store would offer no discounts but would price all its items at what it called “Fair and Square Everyday Pricing”.  The everyday low prices strategy offered the product for less than the initial $100 offer, but slightly more than the $50 sale price.

The problem?  JC Penney’s customers had grown accustomed to discounts and sales prices and went elsewhere when none were offered.  The store’s efforts to attract new customers with it’s simpler pricing policy were a failure as well resulting in decreased sales to the tune of $1 billion.

Want to learn how to price for profit while still catering to your customer’s needs? Click here to download our free Pricing for Profit Inspection Guide!

Pricing could be seen as a form of psychology. People are willing to spend up to a certain point on a product. Johnson failed to see the psychology behind pricing and completely disregarded his customers.

Know Your Customer

This is Marketing 101. Know who your target customer is. What’s the easiest route to obtain and hold on to that customer? Look at marketing’s 5 C’s: customers, company, competitors, collaborators, and context.

  • Are you addressing your customers’ needs?
  • What are the limits of what your company can do to fulfill a customer’s needs?
  • What are your competitors doing?
  • Is there a business that through collaboration could reduce your cost of goods and overhead?
  • What’s going on in the world that’s impacting your business?

JC Penney wasn’t addressing its customers’ needs; therefore, the company lost much of its customer base. The company was also implementing new products and services within the store. Because they didn’t have the capital to execute, JC Penney had to seek additional capital to implement the plan. Competitors  were selling at a lower cost with higher quality material. JC Penney’s customers began flooding to those competitors.

Shipping through Amazon, hiring temporary staff, and so many other strategies could have been implemented through collaboration with another company. JC Penney was implementing a completely new business strategy after the 2008 recession when consumers couldn’t really afford to spend a lot on new clothes.

Target Your Customer

This is your playing field. Focus only on this customer base. Your marketing department is most likely enthusiastic to reach every type of customer through one product. It’s better if you sell to 90% of 100 people than 30% of 300. Why? If you’re only focused on that niche market, then those customers are going to be more loyal to a company that is solely focused on their needs.

Whole Foods and Walmart do an excellent job of targeting their customer. Whole Foods caters to the middle to upper class that desire healthy, organic foods. Their target customer is willing to pay a premium price in order to get a quality product. Whole Foods doesn’t try to target Walmart’s target customer. Walmart caters to low to middle income people who aren’t particularly concerned with the quality of a product, but are looking for the best price. If Walmart were to start selling premium products for a Whole Foods price, Walmart’s customer might be hesitant to continue shopping there for fear that all prices might increase.

If you’re like JC Penney targeting middle-class families, your prices should match what your target customer would be willing to pay for a product or service. JC Penney failed to target their customer because they were only looking at their bottom line.

Price for Profit

If you’re company is constantly having a sale, are you actually making a profit? It is imperative that you examine your results to monitor if these sales are working and how they are impacting your bottom line.

You should be able to price at a point where you would be profitable. Oftentimes, we analyze the revenue, the big flashy sale signs, and how well the sale is doing. But what if you hosted a sale that didn’t allow for you to make a profit?

Looking for how to price for profit?  Click here to download our free Pricing for Profit Inspection Guide!

Regardless of whether your company is hosting a 20% off, a BOGO, or an 80% off sale, you can still price your products to give you the return you need. JC Penney did a number of things wrong in addition to missing their target customer, but in the end it led to the firing of the CEO and a lengthy recovery period that some still say they aren’t quite through. They didn’t price for their target customer or price at a point that would return a profit.

To make sure that you’re setting your prices at a profitable level, check out our Pricing for Profit Inspection Guide here.

Pricing for Profit Inspection Guide

 

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Why Prepare Budgets?

Do you need to take an umbrella to work today?

Without a trusty weather app or friendly meteorologist, it would be difficult to know the answer. Fortunately, you probably have one of these tools to help you make an informed decision.

The CFO/Controller is the meteorologist for the business.  It’s your job to help the company decide when, and if, you’ll need an umbrella.  How do you do this?  By preparing a budget.

prepare a budgetWhat is a budget?

A budget is an estimate of income and expenses within a given amount of time. It contains economic goals, boundaries, and limits on expenditures of the organization.

By creating a budget, you’ll be able to hold the company accountable for its expenditures, reduce costs, and prepare for a worst case scenario. It serves as a measurement tool that can visually illustrate if you have enough cash to operate or to grow.

The steps in the budgeting process are:

  • Prepare the budget
  • Negotiate and agree on the budget
  • Monitor the budget

Prepare the budget

First, you as the financial leader must choose what type of budgeting method you want to use. There are two main types of budgets: zero-based budgets and traditional budgets. While zero-based budgeting allows you to re-examine all of your costs, traditional budgeting is more user-friendly.

Feel free to use this image, just link to www.SeniorLiving.Org

Typically, annual budgets are prepared before the fiscal year begins. This window of preparation helps facilitate execution.  Early decision-making will provide boundaries within which the company must abide. Oftentimes, if a budget isn’t prepared ahead of time and is created on the spot, arguments and internal issues begin to arise. You can avoid disputes when executing a budget by preparing early.

During preparation, it’s important to focus on fiscal targets. Fiscal targets are are goals for specific financial categories. These could include profit, debt payback schedule, operating expenses, projected borrowing requirements, etc. By laying out these goals, you’ll be better equipped to prepare a budget that will allow negotiating and finalizing of the budget to go smoothly.prepare a budget

As a reminder, an overoptimistic budget can result in late payments and disorderliness in regards to keeping in compliance with the bank. There are several ways you could be overoptimistic in your budget, the major one being you are not projecting your sales correctly. If you’re a couple cents off, it’s okay.  A budget should be seen as a “set of guidelines, not rules, based on the best forecasts at the time but always open to amendment as circumstances warrant” (Accounting at Your Fingertips, p. 332).

To reduce the chances of creating an overoptimistic budget, it’s important to go back to the basics. By focusing on the economics of your business, you’ll not only create a realistic budget, but you’ll be better able to project future growth.

(NOTE: Want an easy tool to analyze your company’s economics? Download the Know Your Economics Worksheet to make sure you’re pricing for profit!)

Negotiate and agree on the budget

As with most things in business, negotiation comes into play.  The purpose of negotiation is to allocate resources according to your targets and policies with everyone’s best interest in mind.  However, fiscal policies should provide the framework for budget formulation. Make sure that you consider your company’s economics when structuring the budget.

During this negotiation process, it is vital for you as the financial leader to maintain the meeting as a negotiation rather than let the meeting turn into a bargaining session. Bargaining results in a win-lose situation where the goal is to get as many of your points on paper over another person or department. It may drive the process, but it is not effective. Often, the outcome of bargaining is inefficient resource allocation.

By comparison, negotiation is all about a group of people working towards one goal. Part of this goal should be to comply with fiscal policies and targets.

Monitor the budget

So much time and hard work goes into creating a budget, yet so many companies fail to utilize the budget. The purpose of a budget is to measure operational efficiency and performance issues.

The efforts of budgeting should be focused on improving revenue forecasting or projecting. A budget is useless unless utilized in a dynamic manner. While budgeting provides the short-term execution plan, forecasting allows you to take historical data to measure the reality of success in executing your budget. You’ll be better able to allocate resources to the right departments.

(Check out the 5 tools that you might not be using but should be implementing along side your budget.)

By linking the budget and the forecast, you’ll be more equipped to monitor the budget.  Contrast this with a static budget that is often useless after the first month. It all starts by knowing your unit economics and then assessing your economics to judge whether they are working for your company.

To ensure that your budget is built to achieve your business goals, make sure to start with the basics. Find out more about how you could utilize your unit economics to add more value to your organization by clicking the link below.

Know Your Economics (on blog)-2

(Are you budgeting for capital expenditures? Check out different methods to budget here.)

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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

Click here to learn more about SCFO Labs

There are many methods you can use to improve productivity in your company. Click here to download a PDF of 10 Ways a CFO Can Improve Productivity.

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Annual Survey – The Average Tenure of a CFO

Ever feel like you’re the only financial professional you know that changes jobs frequently?  Or, maybe it seems like you’re one of the few who has had the same job forever.  No matter who you are, we’d like your help…

We’re asking all of our readers to help us out with a little bit of research in the name of (pseudo) science.  Our goal is to track the trends in CFO tenure over the years.

Click on the survey link below to let us know how long you’ve held your current position as a CFO, Controller, VP Finance or other type of financial manager.

Take the Survey

We’ll post the results of this survey and take a look at how the results compare to past surveys in a future post, so stay tuned!

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How long can a company lose money without running out of cash?

Only when the tide goes out do you discover who’s been swimming naked.
– Warren Buffet

 

Is the Houston economy’s metaphorical “tide” going out?  It’s hard to say, but some businesses are definitely feeling a bit “naked” these days.  They may not even realize the peril they’re in because they still have positive cash flow despite the fact they’re losing money.  This begs the question…

 

How long can a company lose money without running out of cash?

 

The simple answer to the question “how long can a company lose money without running out of cash?” can be found by using this equation:

 

Liquidity / Burn Rate = Timeline
 
… where Liquidity = the amount working capital of the company that can be converted into cash
 
… and Burn Rate = the amount of cash spent each month
 
 
This formula can be very helpful in projecting how much time you have to find a solution to turn things around.

 

Let’s assume you have $1,000,000 in working capital and are losing $100,000 a month.  According to the formula, you will only have 10 months before you run out of cash. The trouble is, you’ve predicted the downturn to last up to 18 months. 

 

Now what?

 

Managing “Crisis”

The character for the word crisis in Chinese is actually comprised of two other characters  – danger and opportunity.   The key to surviving, even thriving, during times of crisis is to find the opportunity amidst the danger.

 

Your first answer to the crisis was probably to cut costs.  Most likely, you’ve already done as much of that as you can so let’s look at some other ways to weather the storm.

 

Improving productivity

One way to stretch your working capital is by improving productivity.  Productivity can be defined as:

 

Productivity = Throughput/Resource

 

Examples of throughputs are hours worked, widgets produced, etc.  Resources are people, materials, etc.

 

In order to improve productivity you must:
  1. Understand the processes – How do we do things around here?
  2. Identify and measure drivers – What’s really driving results?
  3. Identify bottlenecks & inefficiencies – What’s going wrong?
  4. Simplify the process – What can we cut out?
  5. Communicate to everyone – Everyone needs to be on the same page.
  6. Tie rewards to results – What gets rewarded gets repeated.

 

Improving cash flow

If you’re worried that you’ll run out of cash before things turn around, it’s time to focus on reducing your cash conversion cycle

Cash conversion cycle = DSO + DIODPO

Where:

DSO = Days Sales Outstanding

DIO = Days Inventory Outstanding

DPO = Days Payables Oustanding

Some of the ways to reduce your Cash Conversion Cycle are:

  • improving collections
  • invoicing faster
  • obtaining deposits
  • extending vendors
  • reducing inventory

Lastly, you must measure cash flow on a daily, weekly, quarterly and annual basis.

You can’t manage your cash flow if you don’t measure it!

 

Want a step-by-step guide to improve your cash flow?  Download our free tip sheet 25 Ways to Improve Cash Flow.

The Strategic CFO
In order to measure cash flow effectively, you’ll need to take a look at your cash flow statement. On the cash flow statement, you’ll see three different type of cash flows:
  • operating
  • investing
  • financing

Operating

Your operating cash flows focus on the measurement of cash generated by your operations.  This is the most important cash flow type to look at when experiencing a positive cash flow and a negative net income. Because a positive cash flow is able to maintain current operations and potentially grow the operations, operating cash flow could be the main determinant in why you’re running out of cash in a positive cash flow period. If you’re experiencing this, you either are hiring personnel and can’t avoid it, OR you’re experiencing collections problems and/or have poor debt structure.

The bottom line of your operating cash flow determines whether your company will make a profit or not.

Investing & Financing

This type of cash flow deals with the cash flowing between the firm and its owners. For example, any technology investments or meeting requirements (payroll, etc.) would be considered investment cash flow. This type cannot be controlled like the operating cash flow due to the investment of necessary items.

If you’re experiencing this in your investing cash flows, look at your assets to determine if each asset is absolutely needed. The solution to an investing cash flow problem would be to sell some of these assets. In addition, consider raising capital to get over the hump.

In the end, you need to be mindful of where your working capital is going. Managing your cash flow is just as important as growing your revenue streams. To learn more ways to improve your cash flow, click here to download our free guide.

 

For more tips on how to manage your cash flow, click here.
Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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

Click here to learn more about SCFO Labs

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Does fraud follow economic cycles?

Does this sound like your business lately?  Sales volume is down.  Cash is tight. The company is losing money.  And just when you think things can’t possibly get any worse, you discover that one of your employees has committed fraud…

Sadly, this scenario is all too common and begs the question of whether fraud is more likely to occur when the economy slows down.

Economy down, fraud up?

A survey conducted by Deloitte & Touche in late 2008 showed that 63% of the firm’s clients expected an increase in fraud related to the global financial crisis experienced in that year.  This would seem to indicate that, at a minimum, people expect more fraud to occur during an economic downturn.

However, it may be that fraud is simply more likely to be discovered during times of economic stress.  When business is good, people don’t tend to question anomalies as thoroughly and small frauds might even be dismissed in an effort to maintain focus on growth, not problems.  But when money is tight and management is kicking over every rock looking for profits, it’s much harder to conceal fraud and companies are willing to go after fraudsters to recover precious lost resources.

Public perception of fraud can also make it seem as though there’s an uptick in fraud in lean times.  During a downturn, most economic news coverage is negative.  Discovery of fraud certainly contributes to the tone of the times and is often a lead story during such periods of stress.  Additionally, improved fraud detection measures (think Sarbanes-Oxley) have helped increase the actual number of frauds detected, hence the appearance that more fraud is happening.

So what actually causes a person to commit fraud?

Fraud Triangle

fraud triangle

The Fraud Triangle, first set forth by Donald Cressy, describes three factors that are present in every situation of fraud:

  1. Pressure – the need for committing fraud (need for money, etc.)
  2. Rationalization – the mindset of the fraudster that justifies them to commit fraud
  3. Opportunity – the situation that enables fraud to occur (often when internal controls are weak or nonexistent).

In order to break the fraud triangle, an organization must remove one of the three elements of the triangle.

Pressure

Many things may contribute to the pressure to commit fraud during troubled economic times.

  • Pressure to meet goals
  • Demand for increased productivity
  • Fear of losing job
  • Reduction in salary

Any of these or a host of other factors could pressure a person into biting the hand that feeds them.

Rationalization

How does a person justify theft from their employer?

  • My company can afford it
  • Times are tough
  • My goals are unattainable
  • Revenge

Particularly during a downturn, it’s not terribly difficult for a dishonest person to find a reason to steal.

Opportunity

Times of economic stress present many opportunities to commit fraud that might not be present during better times.

  • Less people doing more work = lack of oversight
  • Same level of supervision over more people
  • Middle managers (supervisors) are generally the first to be cut
  • Battlefield promotions of un- or under-experienced people

It’s important that companies realize the risks associated with cutting resources and take steps to ensure that internal controls aren’t compromised.

(Find out what the 7 Warning Signs of Fraud are!)

An ounce of prevention…

So what’s a company to do?  There are several fraud-prevention tactics that can be used, both in good times and in bad.

  • Review internal control policies/procedures
  • Get a handle on crucial resources
  • Monitor key metrics for anomalies

Most fraud prevention scenarios focus on removing opportunity by strengthening internal controls. While this is a great first-line defense against fraud, it’s also important that a company take stock of its resources (like cash) to establish a baseline from which to measure changes.

It’s hard for fraud to hide out when management is tracking key drivers.  Fraud will usually cause a blip in key metrics, but if those metrics aren’t being watched, the blip could slip by unnoticed.  Not sure what you should be tracking?  Check out our free KPI Discovery Cheatsheet below.

SCFO- Lead Magnet for KPI Discovery Cheatsheet

Whether or not fraud actually follows economic trends is up for debate.  The good news is that there are steps that a company can take to minimize the likelihood and impact of fraud.

 

Leave us a comment with your fraud prevention tips below.

 

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