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Knowing Your Economics: The Discipline of the Financial Leader

knowing your economicsMichael Gerber said it best in his book, E-Myth Mastery, “there is nothing in the creation and operation of a company that so seemingly conspires to confuse, intimidate, overwhelm, complicate, rationalize, and metastasize the plain ignorance of the average business guy, or woman, then money” (172). But why is that so? It’s because as humans, we tend to overcomplicate and twist even the simplest of things… Because it can’t be that easy! As we dig into the discipline of the financial leader and knowing your economics, let’s get on the same page. Money can mean different things to different people, but in the end, money is meaningless without people – just like business is meaningless without people.

The Discipline of the Financial Leader

Over the past 25+ years, The Strategic CFO has made it our mission to convert number crunchers into financial leaders. Anyone (relatively speaking) can account, but it takes someone specific to be a financial leader. The financial leader is simply that, someone how leads the company financially. But it’s often difficult when you have multiple leaders in the company without a focused vision or goal. Thus, Michael Gerber expands that “to the degree the enterprise leader is clear about her vision, the financial leader can build a financial model of that vision…” (174). That being said, you need to be in constant communication with your entrepreneur, CEO, and executive team. Sometimes the best conversation is where the financial leader is listening. That communication will transform you from a financial guru to a leader – where you need to be if you’re going to succeed. Knowing your economics or financial statements is just the first step to becoming a discipline financial leader.

When you discipline yourself to knowing your economics (or financials), knowing your cash position (balance sheet), knowing how every decision impacts the bottom line, you will find yourself leading the company forward. The basics are critical. Often, we find that accountants, Accounting Managers, Controllers, CFOs, etc. are only concerned about the costs. But they also need to be involved in the sales and operations of the business. There shouldn’t be a day that you as the financial leader do not think about the entire business.

A best practice that our leaders have implemented is to walk the plant, go out to the field, and spend time in the manufacturing facility. The key here is to get out of the office.  Having conversations with the field people and shop people can often lead to great ideas the financial leader can implement.

Knowing Your Economics

Again, it seems simple… Do you know your numbers? So many times when we come into a company, we find that not the CFO, CEO, COO, CMO, or anyone in leadership truly knows their numbers. The numbers we’re talking about are your unit economics. Unit economics shows your revenues with their direct costs associated with that one unit. Look at the following example for a simple unit economic breakdown:

   Revenue       $10

COGS          $3.5  

   Gross Margin  $6.5

It’s best if you can allocate each cost to a single good. While it may take some work to do that, some companies neglect to address SG&A when they look at their unit economics. That results in false economics or financial results; and eventually, you will find yourself out of cash. While the example above is really simple, it works. If you find that it doesn’t work, then you may not have a good costing system in your manufacturing facility, your margins may be off, and again, you income statement may not be accurate.

If your income statement not profitable or need to be improved, click here to download our free Know Your Economics worksheet. It walks you through how to become more profitable, starting with the basics.

Once you have accurate financial statements, the only way they will be of any value is if and only if they are completed timely.  Getting your financial statements 1 or 2 months later does no good and does not provide decision makers timely information they need.

Improves Decision-Making

Knowing your financial situation helps improve your decision-making. When you know how much you sell a product for, what its associated costs are, you know how much margin you have. If your costs go over a certain threshold, then you will be unprofitable. Knowing your unit economics is a simple test to know if a decision will be a profitable one or not.

Using the same example above: if you want to implement a new software that would automate the sales but it costs an additional $7 per unit, then you would be unprofitable. As a financial leader, express this with your sales team. If they cannot provide evidence or sales projections that increases the number of units sold (thus reducing the software cost per unit), then the decision is no.

Expands View of Business

When you know the economics, margins, and financial position of your business, you are able to see a lot more. It’s the basics of doing business – much like eating and exercising. You need it to remain healthy. Ingrain the economics of your business in your entire team. Marketing, sales, finance, operations, etc. need to know how each decision impacts the profitability of the company. When you do this, each employee is able to think more constructively. In addition, you build a culture of financial leadership. With the basics under your belt, you are able to expand your view of the business.

For example, when we bring on interns in the summer, we drill our unit economics. Then as they get further into their internship, they bring more value because they know how the business works. They may see something that we as long time employees/leaders don’t.

Weather Storms or Sunshine

Unfortunately, recessions roll around occasionally. Economic crisis is a natural cycle. Then sales start booming and you can’t fulfill those orders fast enough. Whether you are weathering storm or sunshine, it’s critical that you know the basics of your business. When you know your economics, you can shape your economics to result in profit – in storm or sunshine. If you need help shaping your economics, click here to download your free Know Your Economics guide.

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1

How Growth Affects Cash Flow

Growth is great! Whether it is expanding into your third country or tapping into a new market, it’s an exhilarating process (especially for the entrepreneur). But it can also result in a crisis… You can’t fulfill orders; processes are being thrown out the door to just get it done; inventory isn’t leaving the warehouse. Growth can result in a disaster. When a company is growing at any speed, there are often growing pains that come with it. Over the past 20+ years, The Strategic CFO has witnessed and been a part of some incredible turnarounds that started from a few simple steps of improvement. The #1 growing pain stems from cash. Or, actually the lack of it.  We often forget how growth affects cash flow, but it has huge repercussions if you are not watching it carefully.

Growth Affects Cash Flow

What Happens When a Company Grows

When a company grows, the first visible thing that happens is cash gets tight. It’s very common for your marketing and sales team to see grow as only a good thing; nothing bad could be caused from growth. But when more sales come in, more employees are needed, more offices are required, more inventory is purchased, money can very quickly fly out the door. We say it frequently because it’s true: cash is king.

As you gear up for growth or are in the early stages of growth, also iron out some of the issues that may grow into problems as the company grows. For obvious reasons, start addressing any issues that impact the cash flow of the company. Then address other issues including management, accounting, product development, and labor.

Another thing that normally happens is that we are so excited about growth, and maybe cash is controlled, but we forget about controls, specifically internal controls.  Money is flowing and product is flying off the shelf, but no one is watching what may be lose ends.  Such as in a manufacturing scenario, material is being ordered as fast as you can get it and raw materials are being converted to finished goods. But maybe waste is also going through the roof because no one is watching that.  Or maybe tools are mysteriously disappearing from the shop, or maybe your margins are actually suffering because your indirect costs have grown more than anticipated.  The lack of having process and controls in place can lead to the mentioned issues, thus also leading to squeezing cash.  Because ultimately, it all results in cash or consumption of cash.

Growth Affects Cash Flow

Growing Too Quickly?

If you are in a company that is growing too quickly, it may be time to get some capital. There are several types of capital that you can acquire to fund your rapid growth. Ultimately, there are three ways to get capital.

  1. Debt
  2. Equity
  3. Or a mixture/combination of debt or equity, or debt that can convert to equity

Giving up equity is the most costly way to raise capital because as your grow you have given up some of the upside. The sources of either debt or equity include and are not limited to the following:

At The Strategic CFO we can help you analyze the different cost of this capital and the most efficient structure for your business.

Start-ups, development of new products, etc. often require a good amount of working capital to support the rapid growth for those products or services to have a steady foothold in the marketplace. Consequently, they require a significant amount of cash and leadership for it to be catapulted into success. If this is you, start the cash flow improvement strategies early. Make it part of your culture and processes. The key is to manage your cash effectively so that each dollar can be stretched to the max. Download our free 25 Ways to Improve Cash Flow guide to start implementing tested and successful cash flow improvement strategies into your company.

Growth Affects Cash Flow by Absorbing Cash

If you haven’t figured out by now, growth has a way of absorbing cash. When a company wants to increase sales, it requires fuel – cash. As the financial leader of your company, shift your focus on improving profitability and providing fuel for your sales team to grow the company. While your CEO needs to grow the company, he or she needs a wingman to lean on. You are that wingman. Instead of acting as a CFnO (say it like CF No), provide a path for your CEO to grow the company. Guide them in your new cash flow improvement strategies.

Don’t know where to start in improving your cash flow? Click here to download our 25 Ways to Improve Cash flow and get an invitation to our SCFO Lab – the premier financial leadership coaching platform.

Growth Affects Cash Flow

Cash Conversion Cycle (CCC)

As you continue to look how growth affects cash flow, start by analyzing your cash conversion cycle. Simply, it is the amount of time that you are able to convert processes, resources, etc. back into cash. There are some simple steps to reduce your Cash Conversion Cycle (CCC) or operating cycle, but let’s see what it is and how you can use that to improve your cash flow.

What is the Cash Conversion Cycle?

The Cash Conversion Cycle (CCC) calculates the amount of time it takes to convert resources into cash flow. To calculate your CCC, use the following equation:

CCC = DIO + DSO – DPO

DIO stands for Days Inventory Outstanding. DSO stands for Days Sales Outstanding. And finally, DPO stands for Days Payable Outstanding. By using the CCC, you will be able to identify areas of improvement.

For example, if you are collecting receivables every 45 days, you may have an opportunity to reduce that to 30 days. By collecting receivables 15 days earlier, you will not be in as large of a cash crunch because that cash is in the bank 30 days after the service is rendered versus 45 days. To calculate DSO, use the following formula:

DSO = 365 * (Average Accounts Receivable / Total Credit Sales

How to Improve Your Cash Flow

There are several ways to improve your cash flow using the Cash Conversion Cycle. Some of these include improving collections (A/R), invoicing quicker, obtaining deposits faster, extending vendors so that you can pay later, and reduce the amount of inventory stored. For example, a few of our clients are in the oil & gas industry. When the oil & gas industry takes a downward turn, we are impacted because they cannot pay us as quickly, but they need us more than ever. One of the tactics we put into practice to improve our cash flow was to invoice within 24 hours. Our clients were being trained to respond to us quicker and pay our invoices. Therefore, we were then able to do more to help them.

There are so many other ways to improve your cash flow, especially in times of growth when cash is tightest. If you are seeking more ways to make a big impact in your company, download the free 25 Ways To Improve Cash Flow whitepaper to find other ways to improve your cash flow within 24 hours.

Growth Affects Cash Flow

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3

7 Ways Your Company Can Be More Like Amazon

As we transition into Quarter 3 of 2017, companies are already planning for what 2018 is going to look like. Over the past year, we have seen a lot of change in the business landscape. Amazon acquired Whole Foods and dramatically sliced prices. Apple released not just one, but two iPhones in the past month. President Trump took office at the beginning of the year. Great Britain voted to Brexit from the European Union. Alfred Angelo, a bridal store giant, filed for bankruptcy. There has been innovation, disruption, uncertainty, destruction, and so much more in the business landscape. One thing that we do know for 2018 is that to survive, you must be innovative. Fast Company has already named Amazon to be the most innovative company in 2017, so let’s learn how your company can be more like Amazon.

7 Ways Your Company Can Be More Like Amazon

Amazon has impacted how businesses must compete in today’s world. Instead of just competing in one market, Amazon now competes against retailers, grocery stores, logistics, technology providers (Apple, Google), and many more industries and markets. After researching how they have grown, especially over the past 5 years, we have created a list of 7 ways your company can be more like Amazon.

1. Experiment

NASA has been around for 59 years. In that time, they went through ample amounts of experiments to get people into space… They tested every aspect of the shuttle, the gear, the computers, the communication, etc. While there were thousands of failures, they were the first to walk on the moon. Likewise, Amazon has used the same theory to experiment in many different fields. Ever heard of Amazon Webstore, Amazon Destinations, WebPay, Askville, and Amazon Auction? These are just a few examples of products that Amazon either shut down completely or morphed them into a product more successful.

Obviously, you may not have the same cash flow as Amazon does. But that doesn’t mean you do not have the capabilities to conduct an experiment. The most important part of experimenting plenty is to change your perspective to innovate. Start by testing variations of your product through A/B testing. Then test everything! Your product, your processes, your departments, your services, your customers, your placement. Everything. Continue to test until you are pleased with the outcome, then test some more. As technology advances and society changes, things will change more rapidly than ever before. These experiments should never stop.

Amazon’s Advice About Experimenting

In Amazon’s 2015 Letter to the Shareholders, Jeff Bezos discuses this concept on experimenting frequently.

Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.

We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

If you are looking to start experimenting, you need to know what external factors could impact the success of your experiment. Download our External Analysis whitepaper to learn more.

2. Expect to Fail

When you begin to experiment, you can expect to fail more than you succeed. Once your company has created a culture of encouraging failure, innovation will begin to happen. Thomas Edison, one of America’s greatest inventors and businessmen, once said, “I have not failed. I’ve just found 10,000 ways that won’t work.” Your company can be like Amazon if the leadership encourages each employee to fail. Although that sounds counterintuitive, this aspect has resulted in Amazon’s massive growth.

As the financial leader of your company, structure the company’s ability to fail. Because you need to protect the financial future, put in some guidelines for each experiment. Check that they are going to improve something that will move the needle. You don’t want your employees to be experimenting on senseless things – wasting both time and resources.

3. Innovate Everything

If your company wants to be more like Amazon, you should innovate everything in your company. Ask even the lowest employee why you do things a certain way. If your team responds, “that’s just the way we’ve always done it,” it is time to innovate. There must be a reason for everything you do, and if there isn’t, then you either need to cut that process out or innovate it.

Check out Amazon’s product listing that can be found at the bottom of their website. Notice how they cater to various customers, needs, and desires. From cloud storage to groceries to comics to videos and movies to publishing, every customer can find at least one product that they can use. When we say to innovate everything, we mean everything. Amazon is continually updating, improving and innovating their systems and products to better serve… Their customers!

your company can be more like amazon

Now, providing various products does not necessarily work for every company – and it shouldn’t. But Amazon has made the web their playground and has innovated everything related to the web. Find your playground and start innovating.

4. Be Customer Centric

One thing that has set apart Amazon from the rest is their customer centric, customer obsessed culture. In a Forbes interview with John Rossman, a previous executive at Amazon, he said that “there are 14 leadership principles at Amazon. They weren’t written down, they weren’t codified when I was there, but you saw them being used every day. The first one is ‘Obsess over the customer,’ and the 14th is ‘Deliver results,’ and there’s 12 in between those two.” To get results, you must start with the customer. A business can have all the best processes, accounting, logistics, etc., but if your company does not have a customer, it doesn’t exist.

Refocus every employee on the customer. What do they want? How quickly can you get what they want to them? What does your customer need? How can we better serve our customer? What needs do they not know aren’t being met? Every decision made in the company should be directed towards the customer. You company can be more like Amazon if you are customer centric. Jeff Bezos once said, “Focusing on the customer makes a company more resilient.”

5. Get Out Of Your Comfort Zone

Change for some can be uncomfortable. Even those that thrive on that adrenaline pumping adventure, some change can feel like walking on a tight rope across a canyon. Get out of your comfort zone when you are innovating. Just because you are in the financial leg of your company doesn’t mean you need to stay there all the time. For a company to be effective, every employee needs to be involved in every aspect of your company. For example, you should be concerned how marketing is spending their budget. Marketing, likewise, should be wary of how their decisions impact the bottom line.

6. Base Strategy on Reliable Facts

Your company can be more like Amazon if you base your strategy on reliable facts. While this seems like a simple task, many companies base their strategy on what they want to outcome to be… Not on fact.  At re:Invent 2012, Jeff Bezos elaborated on why you need to base strategy on reliable facts.

“I very frequently get the question: ‘what’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘what’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two – because you can build a business strategy around the things that are stable in time….in our retail business, we know that customers want low prices and I know that’s going to be true 10 years from now. They want fast delivery, they want vast selection.

It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon, I just wish the prices were a little higher [or] I love Amazon, I just wish you’d deliver a little more slowly.’ Impossible [to imagine that future]… When you have something that you know is true, even over the long-term, you can afford to put a lot of energy into it.

For your company to be successful, you need to start identifying what is going to be true ten years from now. They are going to want a better product or service. Your customers want to get that for a lower price. And they want value.  Once you write down the facts, you can strategize your company’s next move.

7. Remove Any Risks

Obviously, we are not going to recommend that you innovate or experiment without having thought it through. In fact, you need to prepare before you begin the experiment. Remove any known risks associated with that experiment and be aware of any potential risks that could come about. Create an External Analysis to overcome any obstacles that come your way and be prepared to react to those external factors. Although you may not be able to prevent those obstacles from occurring, you can prepare how you are going to react to them. Download our free External Analysis whitepaper to gear up your business for change and your company can be more like Amazon.

your company can be more like amazon

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0

Why You Need a New Pricing Strategy

Larry is operating a lemonade stand, and he thinks that his lemonade is the most valuable drink available. Because he interprets his lemonade as highly valuable, he decides to charge $85 for a glass of lemonade. Larry wonders why no one buys his lemonade. Although he may seem highly profitable when you work out his unit economics, he has not sold a single glass of lemonade. Like Larry, you may need a new pricing strategy.

What is your current pricing strategy? For example, you may be setting the prices on your perceived value of your product/service like Larry. But have you thought about how you could price your products/services better to improve your company’s profitability?

need a new pricing strategy

What is a Pricing Strategy?

To determine if you need a new pricing strategy, you need to identify what pricing strategy you are currently using.

Often, pricing is seen as the marketing and sales department’s role. But as the financial leader’s role morphs into a value adding position, you must work with every department (including marketing/sales) to be able to squeeze profits from every corner of the business.

The Variety of Pricing Strategies

When you are looking for a new pricing strategy, you should assess the different types of pricing strategies and the reasons for picking a one over another. Some of the more common pricing strategies include neutral, penetration, forward, skimming, and value-based. Although there are other strategies that we could dig into, these are among the most popular.

Neutral Pricing Strategy

The first pricing strategy that companies can use is the neutral pricing strategy. As the most common strategy, businesses price their products or services so that their customers are indifferent between a competitor’s product and yours. After taking into account all the features and benefits of the product, the price is set – essentially making you neutral in the pricing game.

While this may seem intelligent, it makes it difficult to expand your customer base as they have no real reason to choose your product over another of the same price. There is no value expressed in the neutral pricing strategy – thus, limiting the profit capabilities.

If you want to gain more profit margin, neutral pricing strategy is a safe (and ). To price your product or service correctly, download our Pricing for Profit Inspection Guide whitepaper!

Penetration Pricing Strategy

If you want to be more aggressive than the neutral pricing strategy, you may want to choose the penetration pricing strategy. This strategy is used to gain market share, but it has several drawbacks. For example, price wars can start between competitors. Because you don’t want to lose your market share, you may be tempted to lower your prices. But your competitors will likely lower their prices as well to compete for their customers. If you continue to lower your prices, your margin will be squeezed until you are unprofitable.

Grocery stores most commonly use the penetration pricing strategy. Most recently, Amazon acquired Whole Foods (a traditionally expensive grocery store chain) to compete with other grocery stores such as Walmart, Target, Kroger, and other local stores. As Whole Foods slashes their prices, stock prices in major grocery stores have declined in anticipation of them having to reduce their prices to compete. It’s too soon to see the result of implementing a penetration pricing strategy; but unless these stores gain more customers or offer other profitable products, they will become less profitable.

Forward Pricing Strategy

Like the penetration pricing strategy, a forward pricing strategy focuses on the future costs associated with that product or service. Companies are willing to price below cost of goods sold at first if they know that in the future, they will have higher margins. If a company cannot predict that if they sell X units by Y date, then having a forward pricing strategy may not be the best strategy for your business.

If you need a new pricing strategy, you need to think about pricing for profit. Download our Pricing for Profit Inspection Guide to learn if you have a pricing problem and how to fix it.

Skimming Pricing Strategy

Converse to the penetration pricing strategy, skimming pricing strategy allows companies to segment the market to gain access to those customers who are willing to spend more per unit. Most commonly, a company utilizes skimming at two different periods in the product life cycle, the beginning and the end of the product’s life.

Apple’s Skimming Pricing Strategy

For example, businesses that are in a semi-monopolistic positions use the skimming pricing strategy when launching the product. Think of the iPhone. Apple set their prices for the iPhone high as they were only wanting to sell to those customers with the willingness and ability to pay. As that small market depletes or slows down, Apple reduces their prices to sell to the next tier and then the next. Recently, Apple released the next generation of iPhones – iPhone 8 and iPhone X. If you’re looking to access the iPhone 8 with 256GB, expect to pay $849. You can get the iPhone X for $1,149 with the same storage as the iPhone 8.

If you look at the prices of each of their products, expect to pay 2-3 times as much for a similar product compared to other competitors. So how are they so successful? Apple has created a culture in which people are willing to spend a large amount to remain in the Apple community. Unfortunately, not every company will be able to replicate Apple’s pricing strategy. But it’s important for you as a financial leader to study what other brands are doing in regard to pricing.

Value-Based Pricing

Ask yourself this question: How much is your customer willing to pay for your product or service? There is a price that your customer is willing to pay for something without having any knowledge to how much it costs to produce or anything else. Value-based pricing is the next pricing strategy. While implementing this strategy is not simple, you can potentially gain more profit than using any other pricing strategy available.

In business school, students are taught to use the cost-plus method. Instead of adding value with their product, business leaders simple decide on the margin that they would like to have. There’s no real thought process in cost-plus pricing, but it is an easy way to bypass your customer and be in sync with your competitors.

For example, Apple has created a value for its products. They didn’t decide on a margin, but instead established such a perceived value that people cannot wait to get their hands on the next product. Some have converted all their technology over to Apple because of that added value. It’s not going to be the cheapest technology on the market and may not even be the best. But the customer is willing to pay for it at the price Apple has set. According to CNN, Apple is worth $750 Billion so they are doing something right!

need a new pricing strategyWhy You Need a New Pricing Strategy

Unfortunately, your company may be pricing your products or services too low (or too high). And your customers are not buying. You may need a new pricing strategy. Ask yourself some of the following questions:

  • When did you last interview your customers about your pricing?
  • When did you review your pricing strategy last?
  • Have you ever tested your pricing on different groups?
  • Which markets have you not be able to get into yet?

Pricing is the basis of your business and is the most important factor in profitability. If your company is solely relying on something other than pricing to improve profitability, you may need to assess why.

Buttress The Business

As you decide if you need a new pricing strategy, assess whether your pricing is a buttress of the business. We can agree on the fact that businesses exist to provide real value. Your business should be structured to support and validate the reason for the price per unit (and the value provided). McKinsey & Company highlights that most businesses do not pay enough attention to their pricing!

Most businesses fail to test customer value perceptions and price sensitivity after products launch and have no idea how the critical trade-off between price and volume shifts over time. Second, companies must make pricing decisions in the context of their broader product portfolios because when they have multiple generations of a product in a market, a price move for one can have important implications for others.

Increase Profitability

Price Intelligently references to a “landmark study [that] was published in a 1992 Harvard Business Review by Michael Marn and Robert Rosiello, both senior pricing folks at McKinsey and Company. The dynamic pricing duo studied the unit economics of 2,463 companies and found that a 1% price improvement results in an 11.1% increase in operating profit, which compares to 1% improvements in variable cost, volume, and fixed cost only resulting in profit increases of 7.8%, 3.3%, and 2.3% (respectively)” Having a value-based pricing strategy will improve your profitability. If you are looking to drive more profits this next quarter, you need a new pricing strategy. To learn how to price for profit, download our Pricing for Profit Inspection Guide.

need a new pricing strategy

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1

Ethics Affects the Financial Results of a Company

ethics affects the financial resultsWhen you think of Enron, WorldCom, and Arthur Anderson, what do you think? Do you think of how successful and innovative they are? Do you want to be their financial leader? Their use of questionable behavior to squeeze more margin and gain more market share has caused each of these companies to be challenged. But today, we are arguing that good ethics can affect the financial results of your company in a positive fashion.

How Ethics Affects the Financial Results of a Company

Although ethics does not have a “price tag“, we have seen the impact of questionable ethics. Stock prices take a dive, customers leave, protests occur, and other companies restrict their ability to do business together. Yet some companies survive because some consumers are willing to overlook ethics in order to get the best price.

If you’re looking to destroy the value of your company, having poor ethics is a guaranteed way to go. Click here to learn about the Top 10 Destroyers of Value and how to increase the value of your company.

ethics affects the financial results

Good Ethics Affects the Financial Results Positively

One brand that comes to mind when thinking about good ethics is Patagonia, the outdoor clothing and equipment retailer. Take a look at their mission statement: “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” Unfortunately, we are not able assess the financial success of the company as it is a private entity. But Patagonia has gained the loyalty of customers. Now, they sell their products in 150 countries because of the ethical decisions they made.

Poor Ethics Affects the Financial Results Negatively

Regulators believe that Volkswagen may have lied about the fuel efficiency of their vehicles. Most aircrafts have banned the Samsung’s Galaxy Note 7 because it has caused multiple injuries due to its exploding batteries. But they could have prevented this recall of three million phones by adjusting the design of the product. Unfortunately, bad ethics affect the financial results and profitability of the company. Unlike companies who hold themselves accountable and obey the law, other companies fail to maintain their integrity and seek to gain every bit of profitability by cutting much needed corners.

You as the financial leader of your company need to manage the standard of ethics maintained in your company. Consequently, this means that marketing, sales, operations, finance, manufacturing, etc., all need to adhere to a strict code of ethics to gain huge value. If one leg of the company falls short of these standards, the whole company falls.

Enron: A Company Once On Top of the World No Longer Exists

“America’s Most Innovative Company,” Enron, once ruled the energy world – growing and blooming into a highly profitable company. But behind closed doors, masterminds were putting together one of the greatest accounting fraud and corruption scandals in recent history. Enron and their relationship with the Arthur Anderson accounting firm is now the perfect example of how important ethics is and how unethical decisions can disrupt thousands of lives. As executives were inflating financial records and participating in insider trading, they were in a downward spiral.They inflated the numbers and prevented themselves from being caught the first time. Thus, forcing them to repeatedly inflate the numbers to cover their tracks. Unfortunately, auditors at Arthur Anderson did not report this fraudulent behavior either.

As a financial leader, you must maintain the utmost level of integrity especially when it concerns financial records and reporting. If you are looking to sell your company or undergo a capital valuation, make sure your ethics are not destroying the value of your company. To learn about other potential destroyers of value, download our free Top 10 Destroyers of Value whitepaper.

Equifax – The Enron of 2017

As the second largest security breach in the world, Equifax is facing numerous issues – including possible insider trading, not protecting the security of customers, and not promptly responding to this breach. The Wharton School at the University of Pennsylvania discusses this Equifax issue and reports that the CFO was not informed about the breach. Equifax is struggling to maintain its discretion with Social Security Numbers, the most important number Americans have. This breach impacted over 143 million Americans.

How could Equifax have prevented this breach and improved their position?

  • Respond quicker to the situation
  • Invest is better security measures, rather than settling with a mediocre security

Even though the breach occurred in July, most Americans did not find out until early September. We currently don’t have the details about what happened during that period. But Equifax should have released information about what was going on sooner. In addition, a company that deals with highly sensitive information should have had the best possible security measures in place to prevent this type of nightmare.

ethics affects the financial resultsGood Ethics Returns Huge Value

Unfortunately, we have seen many companies forget their ethics and tumble to their inevitable demise. But there are companies that have found that good ethics return huge value. The Guardian newspaper states that “the way the values represented by the code are embedded in the organization which makes the difference. The more the values are lived, the better and more consistent the decision-making at every level, the greater the amount of trust, the more confident and motivated the employees and the less the chance of costly damage to the company’s reputation. The virtuous circle can be expected to embrace customers, suppliers and other stakeholders.”

Huge Value & Huge Profits

In a Wall Street Journal article, they conducted an experiment that measured what people would pay for an item based on ethics. They divided each testing group into three categories: highly ethical, control, and unethical. Those presented an brand of coffee beans regarded as highly ethical were willing to spend $9.71 a pound. Conversely, those presented with a brand of coffee beans considered much less ethical were only willing to spend $5.89. That’s a staggering $3.82! If you sell 1000 pounds of coffee beans, the difference in revenue is $3,820.

While that may not seem like a lot, think about this. Your cost of goods sold are $4.23. By being ethical, you have $5.83 margin whereas the less ethical brand has only $1.66. Which situation would you rather be in?

Ethics affects the financial results of your company greatly! If you want to access huge value and huge profits, it’s time to focus on your company’s ethical standards. Discuss with your sales, operations, and finance departments how you can be more ethical internally and present a high ethical standard externally. 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.

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Corporate Zombies: Combat the Rise of Unengaged Employees

Recently, we have seen a new term emerging regarding the type of employees some companies have: corporate zombies. Why should you as a financial leader care about the type of employees your company has? It all lies in your income statement. One of the largest (if not the largest) expense item is your human capital. If some of your employees are corporate zombies, that cannot be good for the financial future of your company and we’ll explain below.

What are Corporate Zombies?

So what are corporate zombies? Let’s break it down by starting with the word zombie. Zombies are depicted by popular culture to be reanimated corpses with a focused hunger for flesh (namely brains). But you put these zombies in a corporate setting, you find that they are hyper-focused on reaching a title or level within the company. They are speedy and efficient. But like general zombies, corporate zombies neglect to look left or right for any other solution to a problem. They lack creativity and instead, corporate zombies have an unquenchable hunger for power and influence. These employees neglect to innovate, go out of their way to serve customers, or solve problems. And they are rising up…

corporate zombiesWhy are Corporate Zombies rising up?

Corporate zombies are rising up for three potential reasons. They are:

  1. Unengaged in their current work
  2. Laser-focused on reaching management level
  3. No interests outside of work because they spend all their time in the office

In addition, we are seeing that corporate zombies in recruiting are hiring the same type of person. This person is on the fast track to management, are unengaged with doing the job that they currently have, and are spending all their time at work. While it may seem good to have those that want to be promoted and will work for that promotion, you must address whether they are putting in the work for the job they were hired to do. The army of corporate zombies are rising up as those in charge of hiring are adding more and more of the same type of person into their company.

Is your company overwhelmed by corporate zombies? If so, it’s time to start revamping how your company hires. Click here to download our free 5 Guiding Principles for Recruiting a Star-Quality Team whitepaper.

Why are Corporate Zombies destroying companies?

The 2AM emails, rolling into the office late, staying late, accommodating everyone, and living for the gold stars. When you add all these factors up, you will see an unproductive, uncreative, and exhausted employee that are wasting your time and money. Not good. These employees are destroying your company before your eyes, and they need to be stopped.

Unengaged Employees

According to the most recent Gallup poll on employee engagement, 67% of employees in companies located in the United States are unengaged. Most of the time, you will not be able to walk into a company and see this. But after spending a little with employees in different departments, there will be a couple things that stick out to you. People are watching the clock, trying to prove how much work they are doing (and completely disregard the quality of the work completed), and are sucking up to their superiors. While they may be engaged with their position, they are not engaged with the work needing to be done.

In addition, these unengaged employees are looking to step up into a more superior management position. But another interesting thing to note is that not everyone should be a manager. Gallup also reports that “only 10% of human beings are naturally wired to be great managers — and some others, while not naturally gifted, are teachable. But companies choose candidates with the right talent for the job only 18% of the time.” By putting employees that may “work hard” but do not produce quality work into management roles, leaders will continue this cycle of building a zombie-like company.

Reduced Productivity

If you told an eight-year-old to clear the dinner table and put things in the dishwasher, you may find that although the task will get done but it may be done not correctly. Employees in your company do each task and move onto the next so quickly that there is no check of the work done. Down the line, those or other employees will have to redo those tasks – wasting the company’s money. Their hyper-focused attention on reaching the end goal skips over the full scope of a project.

Although millennials are most often blamed for this, all employees that leave late, stay up late, and are on the clock essentially 24/7 are destroying their own productivity. 24/7 work creates exhaustion, tension between the employer and employee, decreased productivity, and reduced loyalty. An employee starts out exhausted. They think that to get to the next level, they need to be on the clock always. Then if they don’t see progress on getting that promotion, they begin to resent the company. That resentment quickly morphs into decreased productivity. If more work doesn’t move the needle, then they start producing less work. Eventually, they leave the firm. Everyone knows this: employee turnover is a killer for companies.

Response Not Initiative

Have you noticed that your company is more responsive than proactive? After a customer, vendor, or employee brings up a complaint, your company then begins to find a solution. But there is no initiative to find a solution beforehand. It can be frustrating when you hear the same complaints repeatedly. You start to question whether there is something that can be done to prevent these situations from arising. Sound like your company? Corporate zombies may have overrun your company.

The best companies in the world attempt to predict potential issues in advance and work to find a solution to those issues before they become a problem. They think about how they could improve the current product or service. They don’t just move onto the next project because they finished the previous. This lack of initiative in companies is destroying any chances of gaining real value.

How to Combat Corporate Zombies

A general does not go into battle without a game plan, so why would you? To take down the army of corporate zombies that have been building up for years, you need a firm strategy to combat them. Some of the strategy needs to include changing the culture of your company and taking control over the hiring process. You cannot allow that army of zombies to continue to build.

Build a team that defies the norm. Click here to download our free 5 Guiding Principles for Recruiting a Star-Quality Team whitepaper and start combatting those corporate zombies.

corporate zombiesThink Critically

The best way to combat those cash-sucking employees is to encourage critical thinking. Try not to just settle for the easiest and quickest solution. Instead, create teams to provide the best solution for your company and for your customers. If you do not encourage and demand that your employees think beyond what they have been taught to do, the cycle of producing the same type of person will continue. Hire each person for a very specific purpose. As one of your largest expense items, it is your role as a financial leader to cultivate the best employees.

Challenge your management to do better instead of letting them do their jobs like they have been for years. Corporate zombies do not like to be attacked. Defy the norm and think critically about how you can go against the grain.

corporate zombiesTransform Your Culture – Reengagement

If you are a company full of the same type of employees, step up and reengage the management with the reality of what is going on. The culture of the company needs to shift before it inevitably falls. Create a culture of accountability by implementing teams, improving leadership philosophies, and building on the strengths of individual employees. Harvard Business School Professor of Leadership, Leslie Perlow, describes transformation of company culture this way: “If you try to do things differently, you will find it incredibly valuable. It’s rallying together to recognize that if we continue to work in this way, it’s undermining our productivity, our sustainability, our creativity.” (Entrepreneur)

Address quality in your company. Create quality controls in your company to push your employees to do better than they did yesterday. Your company, customers, and shareholders will be thankful that you did that (and your competitors will be cursing you).

Take Control of Recruiting

As the financial leader of your company (CFO, CEO, controller, entrepreneur, etc.), take control of your recruiting. If you are looking to be successful and grow substantially, you must have the right employees. They must challenge you like you challenge them. Although it may feel nice to have a yes-man, a yes-man is only looking to get your job or to get on your level. A star-quality team requires different people to contribute to the overall success. Start assessing your current team and transform your hiring process by learning what it takes to have a star-quality team. Download our free 5 Guiding Principles for Recruiting a Star-Quality Team to stop the rise up of corporate zombies in your company.

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How Businesses Can Prepare for Natural Disasters

How businesses can prepare for natural disaster

How businesses can prepare for natural disasters in the future and how to best react to them is something financial leaders and business leaders often neglect to address until after the fact. Hurricane Harvey made landfall almost two weeks ago on the Gulf Coast of Texas and Louisiana, impacting some 50 counties. It dumped an estimated 16.5 trillion gallons of water which is approximately 10 trillion more gallons than Hurricane Katrina. Entire cities have been wiped out. While the rain may have stopped, mandatory evacuations are still taking place as rivers are cresting, dams are not holding the water, and reservoirs are being released.

Because of this severe natural disaster, business has been severely disrupted. In addition, many businesses will continue to be under water for an uncertain amount of time. Some have projected that it will take up to a decade to completely rebuild from the destruction Hurricane Harvey caused. How could business owners and financial leaders have been better prepared for this natural disaster? How can they better prepare for future natural disasters? Whether it’s another hurricane, wild fire, tornado, earthquake, etc., it is important to know how your location, government assistance and external factors impacts your business. To learn what is going to impact you the most, click here to download the External Analysis whitepaper.

What We Learned From Hurricane Harvey

Flooding, loss of power, displacement, wind damage, and death have plagued the coast of Texas and Louisiana these past two weeks, and that doesn’t include the emotional toll the storm has had on many. Although we cannot change Mother Nature’s course, we can set up our businesses for success by preparing for those natural disasters that you are more prone to getting. As we discuss this topic, it is important to keep in mind that this list is not fully inclusive of everything we learned from Hurricane Harvey. We are still learning. As entrepreneurs, business owners, CFOs, and financial leaders, we should be taking note of what is happening, what works, what preparation paid off, and more.

Expect and Prepare for the Worst Case Scenario

As a business in Houston, we couldn’t help but see that a lot of businesses did not prepare for the worst case scenario. With all the computer models looking like spaghetti, many did not take the worst case scenario seriously until it became our reality. Regardless of how you approach business decisions, we cannot emphasize enough to prepare for the worst case scenario. Fifty-one inches of rain in a matter of days will cause severe damage anywhere. Infrastructure damage, flooding, and interruptions of supply chains have all been a part of our business world over the past two weeks. Even if your office is on the 32nd floor, you are not exempt from being impacted; loss of power, flooding in the parking garages, and access to the building will be interrupted.

Some of the largest oil and gas companies this past week have not been able to enter their office buildings because of flooding and convoys taking thousands to shelter. Grocery stores have had issues restocking their inventory. Gas stations across Texas have seen shortages, not because of a lack of gas, but because it cannot get there. Restaurants must go to their suppliers to collect food because their vendors will not come to them. One of the busiest airports in America has cancelled all flights. The fourth largest city in the United States has essentially stopped to focus on rebuilding homes, businesses, and lives.

How Businesses Can Prepare for Natural Disasters

All Natural Disasters Have a Worst Case Scenario

It does not matter if this was technically the worst case scenario or not; many of you and your employees in the impacted areas have been flooded, displaced, and are starting to make your slow recovery back to normal. Although our thoughts at The Strategic CFO are focused on those impacted by Hurricane Harvey, other natural disasters have occurred during the same period. Unfortunately, we cannot predict when they are going to impact us.

The first step in how businesses can prepare for natural disasters is to complete an external analysis on their business. Why? Because you need to assess what is going to impact you before you make preparations. You would not prepare for a hurricane if you were in Idaho.

If you’re ready to prepare your company for natural disasters, click here to download your free External Analysis whitepaper to start the preparation process.

How Businesses Can Prepare for Natural Disasters

Like we said before, we cannot ever fully prepare for a natural disaster because these events have a mind of their own. First, create an external analysis of your company to assess what natural events you will most likely encounter. Then create a natural disaster plan that includes a temporary location, communication plan and a way to protect any unrecoverable assets. Lastly, create a recovery plan.

Remember, keep it simple stupid. Make the plan simple so that each member of your team can remember it.

How Businesses Can Prepare for Natural DisastersIdentify Responsibilities

Just like the CFO manages the finances and the COO manages operations, each person in your company has responsibilities of their own. Identify those responsibilities in the event of a crisis. Some of the responsibilities required in the event of a natural disaster include and are not limited to:

Write It Down

The most important part of having a plan is writing it down. Even if the plan needs to be changed later, this foundation will give you a good place to start. Include evacuation routes out of the office, hiding places (in case of tornados), emergency numbers, contractor vendors for recovery, and everyone’s updated contact information.

Secure Your Assets

There are two types of assets in a disaster – recoverable and non-recoverable. For those non-recoverable assets like systems, servers, software, or documentation, consider uploading it all onto a secure cloud. By doing this, you and your team will be able to access everything needed remotely. For the recoverable assets like furniture or your building, discuss the structural integrity of your building or furniture placement for quick protection/evacuation.

Securing your assets also includes having a temporary location if your current location is out of commission after a disaster.

Communication Plan With Employees

Communicate, communicate, communicate! Your employees are most likely your largest expense so make sure to protect them. Often when a disaster strikes, companies have their employees check in with the company to update them on their situation. Have someone responsible to accounting for every person.

Communication Plan With Clients

Update your clients on what is happening with your business. When are you resuming business again? When is their product/service is going to be delivered? How does this disaster impact them? Answer all their questions as best you can. Most businesses tend to struggle getting back to a normal schedule. Simply update your clients on what is going on and why.

Create Recovery Plan

When recovering from a natural disaster, look at your national or state emergency response organization. In the case of the United States, continue to look at FEMA’s site for updates on issues regarding water usage, access points, road closures, flights, permits, helps, donations, etc.

In summary, prepare for the worst case scenario and hope for the best. Start the recovery process slow and communicate the reasons for this ramp up. Download the External Analysis to prepare your business for any natural disaster.

How Businesses Can Prepare for Natural Disasters

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