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Why Valuation Matters

why valuation matters The other day, a client asked why valuation matters. It seems like a lengthy process that is complex and differs in each case. You see, I didn’t respond in an elaborate explanation of the different methods of valuation. Instead, I start off by saying that life is very unpredictable.

Have you ever experienced a life-altering moment (good or bad)? One moment, you are driving; then the next, you are upside down. In another moment, you walk into the office proud of the company you built. Then the next, you are being served with a suit that will put your company out of business. In a less severe example, you may have everything together for the day, only to spill your hot coffee everywhere. Life happens. And unfortunately, there’s nothing that we can do to take the uncertainty out of it.

But there are things you can do to prepare for those unexpected moments. For example, you learned how to punch out a car window in the case of an accident. In another example, you never start a project or venture without completing a full SWOT analysis so that you can minimize any legal risks. Or you simply learned not to carry too many things – especially with hot liquids.

But have you ever thought about the value of your company? You might be thinking why valuation matters. My health is good. My life is good. And the economy is good. We all know that some things in life just happen, beyond our control.

In fact, when our founder, Jim Wilkinson, unexpectedly passed away last June, we found our answer on why valuation matters. You can’t wait for life to just happen to react to it. Preparation will make everyone’s lives less stressful and more productive.

Why Valuation Matters

Before we go into why valuation matters, we need to know what valuation is and why a company needs to be valued. Valuation determines the economic value of a business, asset or company. Although the goal is to determine the fair market value, there is no one way to be certain of the ultimate price paid. Typically, it depends on many factors including industry, sector, valuation method and the economic conditions.  You can also count on a fact, you can have your business valued by two professionals and you will come up with two different answers.

A company needs to be valued if it is being bought, sold, or liquidated. Sometimes a company must provide a value of its assets or company as a whole to raise debt also. A valuation professional typically employs the financial statements, cash flow models, and market analysis. In other words, they are going to look at the discounted cash flow (DCF), market valuation multiples, and comparable transactions. A strategic buyer will also value your company. They may use some of the methods already mentioned, but they will also look at your management team.

Believe it or not the status of your accounting records will also influence the value of your company. Especially when you are looking to sell the business. I have been told twice by Investment Bankers (I.B.) that having clean accounting records based on U.S. GAAP vs. Not having good accounting records based on GAAP can have a difference of a multiple of 1 x turn of EBITDA by one I.B., and the other I.B. stated a difference of 20%-30% of value. That is because if you do not have good clean accounting records based on U.S. GAAP, how are they ever supposed to have confidence in your reported EBITDA or Net Income? The buyer will need to build a cushion for his acquisition, even if they love your company and are a strategic buyer.

why valuation mattersHow To Deal with Valuation

When dealing with the valuation process, it is important to get as many facts as possible with 1-2 clear goals. Why are you valuing? What are you trying to accomplish with this valuation? You need to assess what the purpose of this valuation is.  It could be shareholder disputes, estate planning or gifting of interests, divorce, mergers, acquisitions, sales, buy-sell agreements, financing, and purchase price allocation.

To identify areas of improvement for your company’s value, it would be wise to identify any weaknesses or threats that are destroying your value. Click here to download our Top 10 Destroyers of Value whitepaper. Don’t let the destroyers take money from you!

Valuation for Mergers, Acquisitions & Sales

Interested parties during a merger, acquisition, or sale need to obtain the best fair market price of the business entity.  They need to look at their return on their investment.  (your company is their capital being deployed).  This will ultimately be negotiated between the buyer and the seller.

In buy-sell agreements, you transfer equity or assets between partners and/or shareholders.

Valuation for Estate & Gifting

Death is a fact that everyone is going to face. But the timing of that event varies for different people. If your business is part of your estate, you need to conduct a valuation of your business. This can be done either prior to estate planning, gifting of interests, or after the death of the owner.

The IRS also requires this type of valuation for charitable donations.

Valuation for Disputes (Shareholder or Divorce)

When a couple divorces, they need to divide the assets and business interests from one another.

Occasionally, a breakup of the company is in the shareholder’s best interests. This could also occur when shareholders are withdrawing and need to transfer their shares.

Valuation for Financing

Banks hate risk. As a result, they need to validate their investment in your company before they provide capital. At this point, they request for a business appraisal of your assets.

Valuations are important, but there are “destroyers” that are lurking to limit the value of your company. If you are valuing your company, click here to download our Top 10 Destroyers of Value guide.

why valuation mattersPricing Your Deal Right

There is no one way to value a business and there are multiple valuation approaches, including Income, Assets, and Market. Valuation can be a very complex process. It can also bring up issues that weren’t previously addressed – such as an owner’s differing interest from the other shareholders. In order to price the deal right, you need to figure out which approach will best work for your company and which one really applies.

There are three primary business valuation theories that fall into the following groups:

  • Income Approach – this applies to a going concern
  • Asset Approach – the asset theory considers a liquidation approach
  • Market Approach – considers value to be related to other companies, (or real estate) in a similar line of business

Income Approach

The income approach determines a company’s value based on the income. This may include:

Asset Approach

In comparison, the asset approach determines business value based on the assets of the company. This is where you might engage an appraiser to discuss value of assets based on market value and possible liquidation.

Market Approach

The market approach decides the value by comparing it to similar companies. A valuation professional will focus on the comparative transaction method. Then, they will appraise competitive sales of comparable businesses to estimate the economic performance of revenue or profits.  This works well with publicly traded companies where earnings information is readily available or when looking at real estate it is easy to find recent comparable transactions.

Valuation Destroyers to Watch Out For

There are a couple valuation destroyers to watch out for. Hopefully, you aren’t in a moment where you have to value immediately and are just preparing for a potential event. Some of the destroyers of value include having:

  • No recurring or consistent revenue
  • No good accounting records
  • A lack of clear direction or a weak management

To discover other potential destroyers of value and to learn about the above three destroyers, click here to access our free Top 10 Destroyers of Value whitepaper.

why valuation matters

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How Decision Making Impacts An Organization

In my 28 years of working for different types of organizations – public, private and consulting for companies from $4 million in revenue to $1.5 billion in revenue – I continue to be surprised how decision making impacts an organization. I’m even more surprised how the lack of decision making negatively impacts an organization. In order to accomplish anything in your company, there are two options: to make a decision and control the outcome OR to not make a decision and react to whatever happens. 

What It Takes To Make A Decision

The University of Massachusetts (UMass) Dartmouth publicized a paper that summarizes how to make a decision effectively and successfully.

#1 Identify the Decision

First, a leader must identify the decision. In other words, you need to identify when a decision needs to be made. Clearly define the nature of the decision. 

#2 Gather Information

Then, gather relevant information that will help you make a good decision. 

#3 Identify Alternatives

After you gather internal and external information, identify the alternatives as you are likely to have different paths or choices to make. List those alternatives. 

#4 Weigh the Evidence

Next, you need to weigh the evidence. This is an internal process. It can also be an emotional process. This is what takes the most time in the decision making process. 

#5 Choose an Alternative

After you have weighed the evidence, you need to choose among the alternatives. This is based on the first four items listed above. 

#6 Take Action

Then, you can take action. Only do this when you are ready to take a positive action based on the alternative you chose. 

#7 Review Decision

Finally, review your decision. Remember, this will take some time to accomplish. 

The above 7 steps really apply to business every day. From making a large acquisition of a competitor to hiring your CFO, these rules should be utilized. 

Your CEO needs a trusted advisor. They need you to help guide them through the decision making process. Learn how to get to the trusted advisor level by downloading the free How to be a Wingman whitepaper (and get an invitation to join our SCFO Lab)!
 

Many Business Leaders Are Not Good Decision Makers

Unfortunately, many business leaders are not very good about making decisions.  They either rush through the steps, many times skipping a step, and end up with a bad decision. Or they get stuck on number 4 – weighing the evidence – and never move to step 5, which is making a choice. 

What Happens When You Skip The Steps

But what happens when you skip the decision making steps? The steps mentioned above in the paper from UMass Dartmouth are critical and should not be taken lightly. They are there for a reason. My guess is that some bright minds with real life experience put these together. I mention this because in my 28 years of business experience, I can relate to each one. 

I have seen “decision makers” (oxymoron) skip one or more of these steps.  This can be in a routine day-to-day business matter, or in a strategic major multibillion-dollar decision. The outcome is always the same. The wrong decision was made. The cost of a wrong decision to an enterprise can be catastrophic. Or at the very least, the cost is an expensive one and sets back an entire department/business unit for months. 

How Decision Making Impacts An Organization

How Decision Making Impacts An Organization Case Studies

It is sometimes difficult to see our own faults in decision making until we hear or read about a similar situation. In my 28 years of experience, there have been hundreds or thousands of examples that I could pull from. See below for 2 case study examples. 

Real life Case Study #1 – Regulated Utility

I was once involved with a regulated utility that was installing an ERP system. The company completed Step #1 (Identify the Decision) and that’s about it! Someone with title and power in the organization decided to skip steps 2-7, and the result was a very bad system implementation that cost the company 50% of its revenue. Because of the lack of decision making and follow-though in the decision making process, they ultimately had to shut down a whole division. 

Real Life Case Study #2 – Chemical Company

In another example, a chemical company needed to fire a CFO and hire a new one. The original CFO had a bad track record of poor decision making. Technically, that CFO was good. But he was a bad people person and managed people with a hammer. As a result, a bad culture had developed. People hated working for the CFO and in turn, hated the company. Finally, the Board of Directors insisted that the CEO fire the CFO. 

The CFO was fired, but the company’s moral was terrible. The worst part is that since the CEO was snake bitten, he was gun shy on making a decision to hire the replacement CFO. The CFO position was left open for almost one year. As a result, the company suffered due to the lack of leadership. During that time, the company loosened its internal controls, and the budgeting process became a mess.  The lack of decision making by the CEO caused the Board of Directors to lose confidence in the CEO. There was a lack of leadership in the entire organization.

Analysis Paralysis

Step #4 (Weigh the Evidence) requires some analysis. We can all get lost in the weeds during this process. You may have heard the term Analysis Paralysis before. Analysis Paralysis is where someone is overthinking the analysis so much that a decision is never made. 

This is actually very real, and it can happen to any of us – especially people who tend to be more detailed-oriented and analytical.  First, you need to realize that in any decision we make, the perfect alternative does not usually exist. We wish there was, but in reality, there is not. 

Is there the perfect car? 

What about a perfect acquisition target? 

Is there a perfect CFO? 

The answer is probably no on these.  We need to work with what we have and make the most educated selection based on the alternatives before us. 

How Decision Making Impacts An OrganizationTrust the Professionals

As professionals in our respective area, we are confident in what we know, or as they say, know what you don’t know. 

If you hired a trusted advisor to assist you with your decision making and they are a reputable person, then trust your advisor’s opinion. 

When I was growing up, it seemed like my father who was a physician would change his tax CPA what seemed to be every year.  He just did not “feel good” about taxes and did not trust anyone. Not even the trusted advisor he hired!  My dad was very talented and dedicated as a physician, but he knew nothing about business or taxes.  So, his lack of knowledge in this area created a huge “monster effect”. There was no monster nor was there a person trying to screw him out of taxes. He simply did not know what he did not know.  We cannot emphasize enough: trust your advisors. 

How Decision Making Impacts An Organization

Decision making makes a huge impact on an organization. It can either propel it forward and into success. Or it can destroy the company’s value. The worst thing that a leader can do is to not make a decision. There is always a better decision than not making a decision. It reduces the uncertainty because you have already collected evidence, weighed the alternatives, and went through various scenarios of how each decision will potentially turn out. 

Poor or Lack of Decision Making

Remember, poor decision making, skipping necessary steps or simply a lack of decision making is a sign of lack of leadership.  Not only is there a perception problem, but most likely your business enterprise will suffer due to the lack of decision making.  As the business leadertrust your professional advisors and allow them to help you in the difficult decision making process Download our free How to be a Wingman guide and step up into the trusted advisor role. 

How Decision Making Impacts An Organization

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Beware of the J Curve

J Curve

An increase in sales sounds great! Right? But have you ever heard about the colloquialism of growing out of business? Growth requires cash flow, but sometimes, quick growth doesn’t allow you to keep up. If a company is run by leaders with sales backgrounds, they will be more focused on the growth than supporting that growth. Sometimes, it’s difficult for a company to sustain growth, especially if they aren’t collecting receivables quickly. This leads to some companies turning away clients. The analysis and forecasting of working capital is crucial in a high growth situation.

What is the J Curve?

A j curve is an initial loss followed by an exponential growth. This curve is used in the medicine, political science, economics, and in business. The quicker you grow, the quicker your burn through cash.

Cash is king, net working capital which is current assets less current liabilities is an indicator of the companies ability to meet short term obligations. In a high growth situation you will burn through net working capital and need to manage it carefully.

Looking to improve cash flow in your business? Click here to download our 25 Ways to Improve Cash Flow and get an invitation to join our SCFO Lab.

J Curve Effect

Initially, there is a decrease in sales, then there is a sudden growth. This growth ties up cash flow. Inventory requires significant cash to supply the demand. But if the company invoices the customer, then there is a risk of not being paid for 15, 30, or 60 days. Even if the company collects the cash up front, it doesn’t always align with when payments are due.

Let’s look at the Cash Conversion Cycle!

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

There are three things that impact the cash status for a company: sales, inventory, and payables. In other words, revenue, COGS, and overhead. If one of those are out of balance, then profitability will be impacted. If they are out of balance and net working capital is on a decline, then you are really in trouble. When you experience a j curve effect, you will see all increase in all areas with more emphasis on payables.

When J Curves Are Likely to Happen

There a couple instances where j curves are more likely to happen. Fasting growing firms and startups are two examples where we frequently find j curves in action.

Startups

Startups typically begin out of a need seen in a market. At some point, their product/service clicks with the market and they take off. This is great for the start up! But if the company doesn’t have liquidity or cash, then it will not be able to support the growth. In addition, you risk the quality of your product/service, dealing with legal issues associated with poor quality, and having bad reviews. For example, a startup finally hits the market at the right time with the right product. Sales boom and the entrepreneur is ecstatic! But they have no processes, they are buying materials for the product without thinking strategically, and are only looking at the sales. While sales were booming, they were buying everything on the company’s Amex. At the end of the month, the fees and lack of consideration for the timing of purchase outweighed the increase in sales. They ended up in the red.

Fast Growing Firms

Fast growing firms also see the same issues that startups deal with. In addition, fast growing companies tend to grow overhead quickly or lose sight of how big it is actually getting – larger operations, more employees, bigger reputation, etc. For example, $1 Billion fitness company Beachbody released a new fitness program earlier this month. Unfortunately, they did not forecast the sales accurately and were not prepared for the amount of sales they received. What could be a great opportunity turned into a scramble to deliver on the equipment needed for a new fitness program. As a result, they sent other similar products as a temporary solution. Customers could ask for the product that they ordered and they would be put on a waitlist – essentially asking for 2 products for the price of one.

Manage Your J Curve

J curves need to be managed because they can easily get out of control, leaving a large mess to clean up. Some of the factors you need to look at when managing your j curve include assessing the type of sales you are having and the ideal sales, the timing of when you purchase materials, and managing (retaining) your talent. Remember, the quicker you grow, the faster you run out of fuel.

Types of Sales

There are good sales, and then there are bad sales. We’re talking about the types of products/services you’re selling and who you are selling to. If you accept both good and bad sales, you are not managing your j curve effectively. Maintaining healthy profit margins in a high growth situation is also critical.  Sometimes, it can be more productive and profitable to fire a particular customer than take their money.

Timing of Purchases

Ever had to purchase something without having cash in your pocket? If you’re like most people, then you would defer that payment until you have cash. But companies disregard their habits in their personal lives… Sales means cash, right? Wrong. Work with your vendors to delay payments until you have cash in the bank.

Talent Management

Your talent is one thing you need to look at when managing your j curve. The reason is because with increased growth comes increased stress. If you are not taking care of your employees, then employee productivity and morale is going to decrease and eventually, turnover. We all know that high employee turnover is a cause of bleeding cash in you business. First, there’s decreased productivity that makes product produced or sale made that much more expensive. Then, there’s severance and continuing benefits for a certain amount of time. Finally, there’s the expensive hiring process that potentially includes staffing, recruiting, hiring, training, etc.

Effective Business Planning with a J Curve

Focus on the cash flow and profitability of your company. We show every company that we work with in our consulting practice and coaching workshops how to improve its profits and cash flow. When it comes down to it, that’s all the business is made up of. And every company, regardless of whether you are in a fast growth company or not, needs to effectively plan using cash flow forecasts and reports, flash reports, and flux analysis. 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.

j curve

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Flash Reports Are a Game Changer

Flash Reports

When we talk to people who have sales or operations backgrounds, we quickly pick up on their hatred/dislike/disdain/etc. for accounting. We get it. Accounting can be boring, especially if it’s not used for management purposes. But when we talk with the management team either in our coaching workshops or our consulting practice, we always implement a flash report in their company. Why? Because it’s a management tool that should be used by every leader in an organization! Flash reports are a game changer when it comes to leading a company financially. In fact, I will be bold enough to say every company should be using a flash report to make any decision in the company. (Keep in mind, we are not recommending that this is the only tool you should use to make decisions.)

What is a Flash Report?

First, what is a flash report? We have defined Flash Reports (or financial dashboard report) as “periodic snapshot(s) of key financial and operational data.” It measures three factors in your company, that include liquidity, productivity, and profitability. Unlike what sales and operational leaders typically think about accounting, this tool is supposed to guide them with the numbers. In addition, the numbers from flash reports aren’t going to be a 100% accurate. But if they are 80-90% accurate, then they are accurate enough for the management to make decisions.

Flash reports have changed how financial leaders lead the rest of their team. It’s just one of the ways that you could be more effective in your role. If you want to learn more, click here to access our free 7 Habits of Highly Effective CFOs.

Flash ReportsHow a Flash Report Changes the Role of the Financial Leader

Stereotypically, an accountant or someone with accounting/finance background is a numbers cruncher. They want to look at all of the numbers and want the management team to also get excited about every number. In reality, there is not enough time to focus on every number. Instead, you should be looking specifically at 6-8 numbers that drive your business. We call them your key performance indicators or KPIs. Anyone in your company should be able to look at your flash report (a one-page report) to assess what the KPIs are doing.

Not just anyone in accounting cannot create a flash report… It would quickly get out of control because there are so many angles, numbers, and perspectives that you could interpret the data from. Unfortunately, there is not enough time in the day to look at all the data. It would take forever for management to look at all the information and make a decision. We know there is an art to be a financial leader. There is also an art to creating flash reports or dashboard reports. The goal is for the flash report to be prepared and completed within 30 minutes. It should cover a week’s data for the company to quickly pivot or adjust if need be.

How to Prepare a Flash Report

For a flash report to be a game changer, you have to set it up correctly the first time. Prepare a flash report by producing the following sections in consecutive order.

Productivity

First, the financial leader (CFO/Controller) needs to meet the owner or executive leaders to come up with some metrics for the productivity section. Both finance and operations need to be involved in this conversation because this section is what sets up the next two sections. You will know you have succeed when you have an indication of the key performance metrics of your company. These metrics also connect operations to the financial performance of the company. It’s an accountability partner. If you are looking to improve productivity in your company, then click here to read about our insights on how to do it.

Remove some of the barriers between departments in your company to increase your value to the company. To learn more how you can be effective, click here to download our 7 Habits of Highly Effective CFOs.

Liquidity

When you prepare a flash report, this section is where your CEO is going to look at first. It’s the pulse of the company because it tells them how much the company is generating cash (or not generating cash). The cash situation is often the first issue we discuss with consulting clients. Unfortunately, we find a lot of companies are not able to tell you if they have enough money to pay the bills and keep the lights on. Remember, cash is king.

Profitability

This is going to be accounting’s favorite section because it deals with what they focus on! The reason why you need to produce it last is because it needs to connect with the rest of the business. It should give management a rough idea of how much money they made during a given period. You will need to have a good understanding of your accruals if you are going to provide profitability in as part of the flash report.

Remember, timeliness is more important than accuracy in this flash report. There’s a reason why it’s called a flash report! Furthermore, management needs to focus on how the trends change over time.

Flash Reports Are a Game Changer

Flash reports are a game changer in the business world because it pushes companies to break down barriers in the business. We frequently say that CFOs and the financial leader of a company should walk around the office/warehouse and talk with sales managers, warehouse workers, operations managers, etc. Financial leaders need to get out of accounting so that they can lead financially. But the same goes for operations and sales persons. It may not be exciting, but they need to visit accounting.

This past week, we hosted a live webinar for those operations employees that were promoted to a P&L Leader. They were great at their job, but now they manage an entire department/division/etc. So, we touched on how they should be using flash reports as they manage their operation. Anyone in your company can be a financial leader. You just have to have the right tools, and flash reports are a great way to start.

Tips for Monitoring Your Business

Your flash report should be a living, breathing document that your business uses. As a result, we wanted to share some time for monitoring your business as you move forward with your flash report. Include the 3 most recent historical periods in addition to the current period in the flash report. This allows you to analyze trends in the same document. Have your entire management team agree to commit to the document. You may need to adjust it as time goes on, and that’s okay. Review weekly with your management. During these meetings, it may be useful to convert the sections into graphs so that the non-accountants can see what the numbers are communicating.

Producing a flash report is just one of many ways to be highly effective as a financial leader. Download the free 7 Habits of Highly Effective CFOs to find out how you can become a more valuable financial leader. Let your flash reports be a game changer in your business!

Flash Reports

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E-Commerce is the New Black

You may have heard the phrase, “[insert color, thing, etc.] is the new black”. It stemmed from the fashion industry in reference to the color. Ever heard of “pink is the new black?” Black has always been a traditional, stylish color that will never go out of style. That’s why today, we’re saying the e-commerce is the new black. As the Internet as evolved and technology has improved dramatically, we see the Internet becoming a more prevalent opportunity that needs to be sought out by every company.  

The Internet is just one external source that could have a dramatic impact on your company. Are there any other factors that you may be missing? Click here to access our free External Analysis whitepaper.

e-commerce

What is E-Commerce?

Simply put, e-commerce is the transfer or selling of products or services via the Internet. When built well, it can integrate your supply chain management, customer service, inbound sales, online transactions, etc. As a result of e-commerce platforms, many business owners around the world are able to sell while sleeping. The Internet world has connected people from all around the world together to address a specific issue. For example, we have built this website full of content and we connect with people on the other side of the world daily.

But how does e-commerce make (or not make) your life easier? Unless a technology disaster occurs, you will always have a platform to sell on. Even if your local market tanks (like we experienced with the recent oil & gas crisis in Houston), then there are still potential buyers not impacted by an industry/economic crisis that are wanting what you’re offering.

In addition, we only live for a certain amount of years. We see business owners unexpectedly pass away, and unfortunately because they didn’t have any e-commerce platform or web presence, their company becomes non-existent. As a financial leader, you need to invest in the next generation of your company. There’s a reason why so many companies are investing in their online presence. It’s because that’s their “succession plan”. Obviously, a Chevron or Apple would have a succession plan if anything were to happen to its leadership. But they have also heavily invested in their online presence.

Monetizing Your Website

One of the primary components of e-commerce is that a site must be monetized. It used to be the case that websites were just pretty brochures, right? But websites have changed for the better. Retail stores are being closed because their online presence is so strong, they can cut the overhead that comes with having a building. Training is no longer available in a classroom, but at the touch of your fingertips. Working at trade shows, conventions, or other markets? Now, you can do the same amount of sales everyday by using your online presence.

Monetizing your website comes in multiple forms. For example, a site could sell real estate to ad platforms or to other companies that have similar audiences. Affiliate marketing is also a viable way to monetize your site. You can also sell your own widget, whether it’s your e-book, a product, 1-hour consultations, etc.

When you take advantage of opportunities because you are actively seeking them out, you get ahead of your competitors. Stay ahead by downloading our free External Analysis whitepaper.

e-commerceE-Commerce Business Models You Should Consider

As a financial leader, it’s important to be in tune with what’s going on in the world and how your business reacts to it. Successful companies do not continue to do the same thing for X amount of years without reacting. Even in the past several years since the 2008 recession, we have seen companies dramatically change to adapt to the changing economy. As a result, you should consider how having an e-commerce business model can improve your numbers. Let’s look at several e-commerce business models to consider if you haven’t already yet done so.

Freemium

When companies apply the freemium business model, it allows them to offer a portion or a limited amount of time in their product. For example, Canva is a design site that allows people design graphics easily and without needing any training for free. They make their money by only offering a limited amount of free templates, icons, etc. and showcasing all paid templates, icons, etc. A typical person would not subscribe to a graphic design service because there is a learning curve associated. But this company made it easy to buy into because they allow people to enter in their product.

Subscription

In comparison, a subscription model is when a company charges a customer the same price monthly/annually for their product or service. This typically automatically renews until the customer cancels the subscription. Furthermore, this recurring revenue is a very attractive feature to a prospective buyer of your company.

For example, the SCFO Lab is a subscription service. For only $37.90/month, subscribers are able to access the tools, checklists, and resources one would need to be a successful financial leader.

Wholesaling

While wholesaling is often seen in physical businesses, we have seen it grow as an online business. This is a great way to move more units of inventory and increase the amount of cash flow in your company.

This also relates to dropshipping. Simply put, dropshipping is where a customer buys off a website. That website offsets their liabilities by paying another company to deliver the requested product. So the website becomes an intermediary between the shipper and the end user. This is very common in the retail industry.

White-Labeling

Another popular e-commerce business model is white labeling your product. For example, a software company created this incredible dashboard. Their customers are marketing agencies, and those agencies wanted a dashboard for each of their clients.  So that software company sells the shell of their dashboard so their customers (the marketing agencies) can customize their dashboards to reflect their branding. Those agencies are able to bypass creating their own program, but their clients don’t know the difference.

Why Everyone Should Be Using E-Commerce

In some form or fashion, every company should be applying e-commerce to their business. In 2018, it’s an assumption that if you are in business, then you have a website. Instead of leaving it as an asset that isn’t making money, strategize with your marketing and sales team how you could generate sales and make money off of it.

Furthermore, e-commerce isn’t the only thing you should be looking at as an opportunity. Click here to download the External Analysis to gear up your business for change, find other opportunities, and identify threats/obstacles to avoid.

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The Next Generation of Financial Leaders

Next Generation of Financial Leaders

As the baby boomers are retiring from the workforce and Generation X are becoming the most senior employees, it’s time to start looking at the next generation of financial leaders. Currently, the Millennial generation is the largest working generation in our economy. They have some quirky habits and behaviors – namely, their use of technology. That leaves some executive clueless on how they will eventually take over the leadership of their organization. With the average age of retirement being 61-65 in America, we are quickly approaching a workforce that is solely comprised of Generation X and Millennials. You may be asking questions… What is your part in raising the next generation? How will you pass on the figurative baton (if you are a Generation X or Baby Boomer)?

It’s important to not neglect the next generation, regardless of how their habits might annoy you. Let’s look at where previous generations have adopted their financial leaders.

The financial leader of the company is responsible for being the strategic partner to the CEO of the company. But there’s no guide. Until now… Access our How to be a Wingman Guide and learn how to be the trusted advisor your CEO needs.

Where the Next Generation of Financial Leaders Comes From

Just like when you acquire talent for other positions in your company (especially high-level positions), there are two options. Either you promote from within or you hire new talent outside your organization. There are benefits to both options. Regardless, as Millennials start to climb the proverbial ladder in your organization and baby boomers retire, it’s critical that you start mentoring and providing some structure for them to climb.

Similarly, last year we wrote a blog about one of our interns going to Japan because the workers were not concerned about who was to take over their positions. Japanese workers were so focused on their work that they weren’t having babies. As a result, the Japanese government was facing a pending economic crisis because there were not enough Millennials to take over. The time is now to start looking at potential financial leaders and how to further develop them.

Baby Boomers          1946-1964          Ages 54-72

Generation X          1964-1980          Ages 38-54

Millennials           1980-2000          Ages 18-38

(Keep in the mind that the above age ranges may be different from what you have read. This is because there are no standard start/finish dates for each generational cohort.)

Next Generation of Financial Leaders

Promoting From Within

The first option to replace high-level leadership is to promote from within. This is a great option because they will have seen multiple areas of the company from different positions. They also know the culture and experience how the organization reacts in good and bad times. Although promoting from within is the ideal option for continuing an organization’s mission, it comes with significant costs. Some of those include training, mentoring, and salary and benefits over the years. It takes time to prune talent to eventually promote them.

There is also time to tone parts of the Millennial down as well as enhance the current leadership’s weaknesses. This not only creates a stronger organization now, but it also prepares the organization for the future.

Hiring New Talent

Conversely, hiring new talent brings in some fresh perspective into the company. This would be ideal for a company who does not have the right talent to promote or needs a change in direction for the organization. Many companies use headhunters, retained search firms, staffing agencies, recruiters, etc. to find the talent take over after the current talent either leaves or retires.

The risk of hiring new talent is not knowing how they react to situations in real time. Unlike promoting from within, you are not able to predict the hire’s reaction (at first).

The Difference Between the Next Generation and the Current Generation

The main difference between the current generation that holds those top roles (Baby Boomers and Generation X) and the next generation of financial leaders (Millennials) is the world they grew up in. For now, we’ll focus on the two largest generational cohorts in the workplace: Generation X and Millennials.

Millennials experienced two economic crises (2000 and 2008), a war on terror, social media, growth of student debt, advanced technology becoming more available, and information at a moment’s notice. They have a reputation for moving around jobs, focusing on technology, and being more risk tolerant. But one of the most important factors in a Millennial career path is that they are mentored, cared for, and valued in an organization. Furthermore, they want to feel a sense of purpose.

Although this description seems far from Generation X, we have found that more than half of Generation Xers want to mentor and give their mentees a sense of purpose. The Association for Talent Development says that, “Through mentoring, Gen X can help Millennials learn crucial people skills—such as empathy, adaptability, group dynamics, employee motivation, communication styles, and relationship building—as well as management and leadership styles. They can therefore increase the odds that younger Millennials will be successful in a future management or leadership role.”

In addition, the next generation of financial leaders are going to be more risk tolerant – knowing that success only comes from failure. They will test more ideas than the current generation. In fact, the current generation could capitalize off of the Millennials to take more risks.

Building the Next Generation of Financial Leaders

When building the next generation of financial leaders, start early and know how to optimize your relationships with the next generation. Deloitte reports that the 6 most important leadership qualities to develop as you are building the next generation of financial leaders include:

  1. Maintain Strong Executive Engagement
  2. Align Leadership Strategy with Business Strategy
  3. Define Tailored Leadership Competencies
  4. Target All Levels of Leadership
  5. Integrate with Talent Management Processes
  6. Apply Blended, Targeted Solutions

As the current financial leader of your company, guide your CEO on how to prune your employees to take over your role when you retire or move onto another position. Download our free How to be a Wingman guide and take your career to the next level and step up into the trusted advisor role.

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Culture Drives Financial Results

culture drives financial results

As social media and search engines become more intelligent and prevalent, companies are battling the image that others outside the organization see as well as what employees feel. Entrepreneur Magazine even said that, “Company culture is more important than ever. It’s not that company culture was ever unimportant, but it’s quickly proving to be a “must-have” rather than a “nice-to-have.”” Have you ever worked in a company that had a bad culture? I have. I counted down the minutes until I could leave the office. Work for me was not enjoyable. As the financial leader of the company, I was not focused on driving financial results. Simply put, culture drives financial results.

Culture starts with your team. Before you add anyone else into your organization, click here to access your free 5 Guiding Principles for Recruiting a Star-Quality Team.

How Company Culture Drives Financial Results

Before we get into how company culture drives financial results, what is culture? Investopedia defines culture as “the beliefs and behaviors that determine how a company’s employees and management interact and handle outside business transactions.” In other words, you cannot say and it be with culture. Culture is organically developed over months or years. It depends on how is in the organization and how the organization acts as a whole through trials and successes.

Culture is also often created by the corporate governance and leadership of the organization. The tone starts at the top. Cultural changes happen also, especially when there is a change in ownership. A change in ownership can bring a change in governance, personalities, processes, and even language. Depending on the complexity of business, it may take from one year to three years to really complete an integration of an acquisition. The leadership of the organization must know what is going on in the culture of the organization as this has a direct effect on the bottom line.

Increased Performance

If employees are happy in an organization, then they will have increased performance. Some of the causes of increased performance stems from increased flexibility, professional development, and knowing that they are making their mark on the world.

Millennials are the largest generational cohort in the workforce in today’s world. As a result, they are spreading their desires in the workplace to other generations. For example, they value flexibility – the ability to work remotely, to have a standing desk, to work in a co-working space, to have odd-hours instead of the 9-5.

Additionally, they want to be further trained and develop. I once had an employee who told me that they didn’t care about the money if they were able to get professional development. At first, I was hesitant to provide that extra training because they were just going to leave me for more money after I had invested. But that employee didn’t leave. In fact, that employee was the most loyal in my organization.

Millennials are a funny generation! They definitely think outside the box and often bring ideas that the “traditional” worker would have not thought about. A good leader needs to know what drives his employees. What I have learned is that they want to know they are making a difference in people’s lives. They want to know that they are doing more good than harm. This could be supporting the homeless community or sponsoring an orphan. Or it could be storytelling how the organization’s efforts changed a customer’s life. It’s a simply thought, but when you expand work outside of the four walls of your office, those employees have more purpose and passion about their work. Thus, increasing their performance.

culture drives financial results

Increased Productivity

Additionally, you can also expect increased productivity from good company cultures. Think about Google and their office environment. With ping pong tables, napping pods, and playful environments, employees are told that they can have fun. Many times, entrepreneurs and executives think that working hard 8-12 hours a day will result in incredible results. But the employees feel like they can’t relax. There’s increased stress, decreased productivity, and eventually high turnover.

Increased Retention

Staffing, recruiting, hiring, and talent acquisition is both costly and time consuming. When you factor in the time to review resumes, interview, hire, train, onboard, then pay and provide benefits, that individual is an expensive asset on your financial statements. A good company culture will keep and retain those talented assets.

Looking to add more people to your team? Before you start recruiting, download our free 5 Guiding Principles for Recruiting a Star-Quality Team.

Examples of Company Culture Driving Financial Results

One of our team members once helped transition a company through a merger. All hands were on deck. There was no room for mistakes. And every client of theirs seemed angry. The product was great. Clients had great success from implementing the products. But it was clear there was something severely wrong! Employees were either fired or they quit. Within several months after the merger was official, the company was in financial distress. What we found that it wasn’t pricing or the product… Instead, it was the company culture! A good culture has gone bad.

Another example comes from a study that focused on the financial results of companies with and without performance-enhancing cultures. Needless to say, there is a strong correlation between company culture and growth. In the book Corporate Culture and Performance, John Kotter argues “that strong corporate cultures that facilitate adaptation to a changing world are associated with strong financial results.” When we talk about company culture driving financial results, it’s impacts more than just profit – but the shareholders, employees, and economy.

It’s Start With Who You Hire

Zappos has been known for its culture and prides itself in attributing its success to its corporate culture. What they have realized is that it starts with who you hire. Instead of looking at a resume for credentials, the recruiters essentially court them in a relationship. Similarly, we frequently say to our clients that if you can’t have lunch with a potential hire, do not hire them. When you take an employee out of an office and into the real world, you see how they really perform. Are they rude to the waiter? Or are they patient and kind? Do they hold the door open for people or let it fall in their faces?

For example, the CFO position should have discretion, responsibility, and confidence. If they show up to the wrong coffee shop for a meeting due to assumptions or carelessness or if they are indecisive in choosing a meal, then you need to assess whether they are capable for the position of CFO.

Personality Over Credentials

We once had a client that emphasized that trust was by far the most important quality for their CFO to have. It didn’t matter if they had X, Y, and Z qualifications. In fact, the CEO would rather hire someone who maybe wasn’t as qualified but he could trust over someone who was both qualified and untrustworthy. Especially when considering those high level positions, chose personality over credentials. Obviously, we are not saying to hire someone that cannot do their job. But if you had to decide between two candidates with similar credentials, chose the one that will fit your culture the best.

Be Slow to Hire & Quick to Fire

Bad employees can be a huge drain on resources and can potentially cause more damage than anticipated. That’s why the best corporate cultures are slow to hire and quick to fire. Those entities are protecting their most valuable intangible assets. In order to determine which candidates are the right fit for your company, download and access your free 5 Guiding Principles For Recruiting a Star-Quality Team whitepaper.

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