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Bank Lending Cycle: Cracking the Code

bank lending cycleSo your cash is tight and your loan renewal is approaching, but sales are picking up and you need additional capital to keep up the pace.  You approach your banker about increasing your line or obtaining new financing and they aren’t willing to take the risk. What now?

This isn’t a new story. In fact, if you’re in finance, either you or the person in the office next to you has experienced this. In this blog we’ll give you some general guidelines on what to watch out for in the bank lending cycle.

What is the Lending Cycle?

After a financial crisis, banks tend to tighten up their loan underwriting making capital more difficult to obtain. During this time, businesses seeking additional sources of funding will likely face an uphill battle convincing their lender that they are a risk worth taking.

As the economy improves and the lending environment becomes less risky, credit structures begin to soften and financing becomes easier to obtain.  These easy-to-borrow periods are marked by lower interest rates, lower requirements and conditions, and a large amount of available credit.

Not surprisingly, with all the new capital in the marketplace, an economic bubble builds. Eventually, the bubble bursts causing another financial crisis and the cycle begins anew.

When determining whether or not a banker wants to lend to you, they usually evaluate how risky the investment is. Obviously, banks do not lend to anyone and everyone. Rather, they calculate how much of their lending is trustworthy. What is this company’s credit history? What other debt do they have? How are their financials?  These are just a few things that a lender evaluates before making the final decision.

Why is the bank playing hard-to-get?

As a business person, you’re probably familiar with how “flirty” a bank can get with you. When you actually need the loan, they don’t want to give it to you. Then they tease you with a good rate and terms when you don’t need the loan. This isn’t just because you walked in wearing the wrong clothes, or even because of your numbers. Sometimes, because of the bank lending cycle, it’s just more difficult to get a loan at that time.

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Loans and the Economy

In one of our Wolff Center for Entrepreneurship classes, I asked the question: “Is it a good idea to start a business in a recession? Raise your hand if you think it is.” Only a few people raised their hands. In a way, it is a good idea, and this is why:

Like any product in the economy, prices and rates fluctuate due to supply and demand. When the demand is lower for a loan, banks are more inclined to charge a lower interest rate. When demand is high, banks implement a higher interest rate. During a recession, businesses are more debt-averse, driving down interest rates. When rates are low, there’s pretty much a “discount” to take out a loan. And every entrepreneur loves a discount.

Similar to demand, supply also affects the interest rates for a bank loan. When banks are flush with cash from customer deposits, they need to put those assets into service in the form of loans.  With lots to lend, banks tend to offer more attractive credit terms and interest rates. When the economy is suffering and banks don’t have as much on deposit, the supply of capital is diminished and, consequently, is more expensive.

The Environment Affects the Economy

This is why it is crucial to understand the environment and industry your company is associated with. It amazes me how many people conduct business without reading or looking into their industry’s current events. Those current events affect what sale you’re going to make, how cheap your supplier will sell you a part, and… whether or not it will be possible to get a loan.

Imagine walking into work a day after the housing market crisis in 2007 and saying, “I’m going to invest in a condo.” Assuming you’ll still have a job at that point, anyway. If you take away anything from this article, understand this: Stay updated in your industry, because those events directly affect the economy.

Loan Officers are actually Salespeople

bank lending cycleLoan officers are people who recommend consumer, commercial, and mortgage business loans for approval. They typically work as intermediaries for the bank lenders and the borrowers. A person represents an entity, and promotes a product for a commission… sound familiar?

Loan officers are really salespeople selling loans. They have quotas like salespeople. When there is low demand or availability of capital, loan officers are often less aggressive or even laid off. This is similar to a salesperson who is laid off due to a decrease in revenues. When capital is flooding the market, banks will often hire hoardes of new loan officers to put their money to work.  This explains why your banker rarely calls on you when you really need them but pursues you doggedly when times are good.

Conclusion

In conclusion, the economy affects the bank lending cycle. It may seem like common knowledge to stay aware of your industry, but you would be surprised how many clients I meet that have no idea what is really happening in the world. If you understand the economy, then you’ll understand the patterns of what a bank needs. A bank is like a business, so if you start thinking like a bank (which you most likely already do), then you’ll be speaking their language in no time. Catch next week’s blog about how to appeal to your banker, and how to get a loan even when banks aren’t budging.

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Is Centralization Dead?

centralization versus decentralizationIf you’re an entrepreneur, you’ll find that when you start your business you must decide on a structure – centralization versus decentralization. If your business expands, how will you control it? Will you have an office? Is it required that your team works at the office in order to drive value? As a business owner myself, I found these questions to be particularly helpful when developing the structure for my team to thrive in.

Last week, I attended the Traffic & Conversion Summit of 2017. I found that there were more small vendors and individuals doing contract work remotely than I had previously thought… which brings me to today’s topic: centralization versus decentralization.

What is “Centralization”?

First of all, what is Centralization? According to the business dictionary, centralization is “the location of all or most main departments and managers at one facility.”

In other terms, people might consider centralization more than just the location – should the actual structure of the company be centralized? In business dictionary-terms, this means “the concentration of management and decision-making power at the top of an organization’s hierarchy.”

Advantages of Centralization

Focus. When you have your team with you, it’s easier to have quick results. For example, if you have a project that is time-sensitive, then you won’t be worried about picking up the kids, buying dinner tonight, or anything else you might remember while you’re at home. 100% of your focus will be on work for that time.

Communication. Communication is crucial, even if you have a decentralized organization. One of the perks of having someone in your office instead of off-site is that, well, they’re in your office! If you have any questions or concerns, your colleagues are right outside of your door.

Conflict Management. If you have a miscommunication or issue with how a project is being conducted, you can walk to the next office rather than waiting until the next day to meet or talk. Don’t prolong your issues anymore than you have to! It’s easier to manage a conflict with someone if they are in a close vicinity, rather than miles away.

Accountability. Every manager should be able to trust their staff, but let’s say you have a major account and you give it to one of your employees. You want to be able know what went wrong if someone decides not to work with your company anymore. The accountability causes everyone in a company to drive forward.

Example of Centralization

One of my former students told me a story about his friend who works with a large amount of generation X’s and baby boomers. She is not only the only woman in the office, but she is the youngest there. She said her colleagues are rarely in the office, and when they are in the office, she hardly gets the information she needs. From the looks of it, the main problems she faces is a lack of clarity on her tasks, and communication.

One day, she decided to take her work home with her, and stay home for the day. She operated like she normally would have, which meant calling her colleagues, asking them questions on how to complete the project. After 10 minutes, they realized she wasn’t at work and threatened not to pay her for the hours she worked from home.centralization versus decentralization

How could this dispute have been avoided? If you have a centralized organization, make sure that you are holding up your end as a leader in the company. If you combine a centralized structure with a decentralized attitude, that doesn’t work either. In this blog, we will discuss how decentralization and centralization can work together.

This mix-up of structures and attitudes when evaluating your company can be the very thing that is destroying your company’s value Click here to download your free “Top 10 Destroyers of Value” whitepaper and discover other areas where you might be lagging in value.

What is Decentralization?

Now we will look at the difference between centralization versus decentralization. According to the business dictionary, decentralization is the “delegation of commensurate authority to individuals or units at all levels of an organization even those far removed from headquarters or other centers of power.” Or, in more simplified terms, delegating the responsibility and decision-making power to individuals or units, even off-headquarters.

Advantages of Decentralization

Freedom to give feedback and discuss. Decentralized structure allows opinions from many people in the company besides the primary decision-makers. This discussion then leads to…

More creativity and innovation. More discussion amongst different people results in more ideas. One of the benefits of having a decentralized organization is the ability to innovate. As a result, innovation leads to…

More change, adaptability, and growth. The long-term benefits of having a decentralized organization is the ease of growth. With a centralized organization, change is typically slower because of the many levels of approval and decision-making. With decentralized government, this process is quicker.

Example of Decentralization

Our team here at The Strategic CFO is mainly decentralized. Because my team consists of very few people, I prefer to have small huddles rather than constantly having them in the office. During the summer, we operate in an office 4 times a week to educate and train the new intern. After that, we operate on our own and meet once a week.

This doesn’t mean that we lack communication. In fact, we communicate digitally the same, if not more, than we would in an office. One of the best parts of decentralizing my team is the ideas that come out of it. If I didn’t have a decentralized team, I probably wouldn’t have as strong of a website as I do today.

Combining Centralization and Decentralization

Another option tcentralization versus decentralizationhat we’re starting to see more now than ever is combining both centralization and decentralization. If you’ve ever tried both centralization and decentralization, you’ll realize quickly that doing too much of one or the other might be detrimental to your company.

An example of combining a centralized structure with a decentralized company is Asana, a project management application. We use it here at The Strategic CFO, and it manages all of our tasks. It’s easier to review and manage progress, rather than letting everyone roam freely.

Who is killing Centralization?

Like I mentioned before, too much of centralization versus decentralization, or vice versa, may be damaging to your company. Our generation likes structure, because that’s what we’ve seen for years. When the new generation entered the job market, we started to see the structures evolve into a more decentralized structure. Are millennials killing centralization? Or maybe it was the applications people have created to make structure easier for decentralization, such as Asana.

Conclusion

In the end, you have to focus on moving your company forward. There is no right way to do things… but you have to realize what is best for your company. This may mean changing what you consider a “normal” structure. When you figure out what works, you’ll start to reap the benefits of centralization versus decentralization, or vice versa.

So what do you think kills centralization? Leave your ideas in the comments below!

Download the Top 10 Destroyers of Value to learn what is destroying your company’s value. It may be centralization or decentralization! Maximize the value of your company by clicking below and get an exclusive invite to our Strategic CFO community. Don’t let the destroyers keep taking money from you!

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Do you need to be a CPA to be a CFO?

cpa to be a cfoNot too long ago, the Academy Awards took place, and they played reels of the Academy Awards that happened in the past 80 or so years. It reminded me of the time when I showed my grandson an old western movie… I thought some of the parts were hilarious, but my teenage grandson was horrified by the social commentary.

What do the Academy Awards and Old Westerns have to do with traditional CFO practices? There are norms that are acceptable now that were never allowed before. When the audience changed, the Academy adapted to the audience. So when the new generation steps into your office, you have to re-evaluate what it really takes for them to advance their career. Some might have capabilities of a CFO, even though they haven’t traditionally trained for it.

In the past, there was a certain path that you take to become a CFO. Some think the key is being a CPA to be a CFO. But now that times are changing, is it really necessary?

We like to talk about technology, millennials, current events, and politics, but they pretty much all say the same thing: if we constantly live in the past, we won’t have much of a future.

Timeline for a CFO

My friend’s nephew is graduating in accounting, and he’s wondering… “Do I need to get a CPA or MBA?” In other words, do you need financial expertise to be a financial leader?

Now don’t get me wrong… some people are really successful in this path. In fact, I definitely agree that CFOs, or any financial leader in general, should have a broad range of skills other than financial skills. Here is a pretty common path to CFO success:

cpa to be a cfo

Earn a CPA to be a CFO (and/or MBA).

Some might say you won’t have a successful financial career without a CPA license. The primary purpose of a CPA is for financial authorization, such as auditing and reviewing financial statements. Careers in finance such as accounting and auditing mostly require a CPA. Benefits of a CPA include larger salary potential, more career opportunities in larger companies, job security, and trust within larger companies. Larger and older companies with more revenues require more tenured and experienced employees.

MBAs are more broad. Studies show that those with MBAs have higher employment rates (around 60-70%) and higher base salaries. With MBAs, you can specialize in skills in addition to finance, such as supply chain, marketing, management, etc. So if you’re looking to gain new skills other than finance, MBA might be a better choice.

Gain financial experience within the company.

Typically within the first few years, new hires will learn the basics such as budgets and accounting. As time and experience grows, new opportunities are formed, such as capital investments and larger accounts. Financial employees will gain expertise in skill sets before moving on to the next step.

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Take on bigger roles outside of your comfort zone.

This is where getting an MBA and taking initiative comes in. CFOs are more than financial experts – they are leaders. By this point, basic accounting practices should be like reciting the alphabet… it’s that easy.

Financial leaders should always want to learn more skills. Taking on bigger roles outside of their comfort zones reflects that mindset and makes them stand out against their competitors.

Hold Controller positions.

This is pretty self-explanatory. The controller positions create more responsibility for the financial leader. After all, how can they handle a C-level position if they can’t handle a standard leadership position first?

This seems like a pretty solid path, doesn’t it?

Looking at companies now, however, aren’t as “solid”… and here’s why:

Modern-Day CFOs

When you think of a CFO after 2012, what do you imagine? Long gone are the days of bluetooth-talking, pinstriped suit-wearing CFOs, white-haired males. When I picture a modern-day CFO, I picture someone in a plaid long sleeve, young, and focused on multiple aspects of the company. That seems like an exaggeration, because it is! Overall, it is also a representation of how different the CFOs of today are, compared to Generation X and Baby Boomers.

The Past 5 Years

In our survey held in 2015, the average tenure for a CFO is 3-5 years. This contradicts the timeline above… Why would a CFO want to work 3-5 years after 15+ years of building his or her career?

As generations evolve, the tenure decreases. For example, the average tenure for millennials, according to our survey, is around 4 years.

cpa to be a cfocpa to be a cfo

2015 Survey Results: http://strategiccfo.com/blog/results-average-tenure-of-a-cfo-survey

Over the past 5 years, the CFO role has proven to be more complex and centered on leadership ability. CFOs now are more adaptable to change, hence the short tenure of a CFO.

The Next 5 Years

Ever heard of the “gig economy”? It’s the growing trend that contract workers and short-term “gigs” are commonly practiced. A great example of this influence is a friend of mine, who has 35-40 years of financial leadership experience. He recently quit his job, and is now looking for contract work. This puzzled me at first. He is a great person, and a very knowledgable asset to any company. As you can see, the gig economy is not only for the millennial generation. It’s a growing trend, for all leadership types.

Is this a reference for the trends to come? In the next 5 years, we can expect more contract work and less “climbing the ladder”… like getting your CPA to be a CFO.

Conclusion: Learning to Adapt

One of the ways we can grow as companies and financial leaders is to learn to adapt. If the world is shifting closer to a gig economy, explore that theory. If the average tenure for a CFO is less than 3 years, maybe we should change our hiring and training practices. Anything is adaptable if you’re constantly taking initiative and thinking one step ahead.

Don’t forget… the CFO is the CEO’s wingman. Learn how you can be the best wingman with our free guide!

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A Tinder Moment: Unlocking Value from Vendor Partnerships

value from vendor partnerships

At The Strategic CFO, we believe in the saying “You scratch our back, we scratch yours.” Everyone always sees other businesses as a competition; to some extent, they are. But sometimes, you just need to let people make money.

As we’ve become more focused on optimizing technology, we have started to outsource tasks/projects to outside vendors nationally and, depending on the task, internationally. I was talking to my associate the other day, when we asked our vendor partner to help complete a project. She was concerned about pricing, and whether or not it was worth the money to ask our vendor to do the engagement. They charge about $25 per hour of assistance, and we needed easily 3 or 4 hours of advice.

In the past, this vendor has always stepped up and helped us. That’s because we give him business. Let’s explore why this is important…

Cutting Costs and Unlocking Value

What happens when you need to cut costs while still maintaining the same value? Everyone knows that increasing revenue and cutting costs increases your bottom line. But are you actually maintaining that value or are you manipulating that?

Let’s say you’ve already cut as many costs as you can, but you still need to cut more. This is where you have to make financial decisionsWhat do you value most – your profit or your relationships? 

Cutting costs doesn’t mean you have to cut out the relationship forever. In fact, unless they do something unforgivable or you won’t ever need them again, you should keep that relationship open. For example, our vendor doesn’t work with us 24/7. However, we still maintain the relationship by giving him tasks once every couple of months. They act as an extension of our team.

 Are you ready to unlock real value in your business? Click here to access our three best tools to unlock value! 

Business Meets Tinder

Have you ever used (or heard of) Tinder? Chances are you’ve at least heard of Tinder, especially if you live in the United States. Tinder is a location-based, social search mobile app that connects individuals based on their interests. It’s all user-based, so if the user sees your pictures and swipes right, that means the user would like to meet. If not, then the user probably doesn’t want to meet you, and swipes left to move on to the next person. If both users swipe right, then they have a match! The process is fairly quick, and users on average swipe 30 times per day! (Good thing I’m already married, right?)  

Making the Connection

So how does Tinder connect to your business?

Everyone has that “Tinder” business where you swipe right when you want them, but swipe left and disregard them when you don’t need them. This is a major issue. If we all treated business relationships like Tinder, then we would not have a lot of value, would we? If my associate “swiped left” from the vendor and moved ovalue from vendor partnershipsn to another person, we would not receive the same value. Business would be done quickly and no relationships would be formed.

Keep in mind that conducting vendor relationships is critical for your success. Think about that time when you needed help immediately… If you had a good vendor relationship, they would be able to fix the problem immediately as they already know your business. But if you were a habitual left swiper, then the new vendor would have to get up to speed… Slowing down your progress and leaving money on the table.

Healthy Business = Healthy Business

Ultimately, when you treat vendors frivolously, you’re setting examples for other businesses. Soon enough, those vendors will go out of business because many businesses use the vendors inconsistently and constantly look for a “better deal.” And what happens when that business goes bankrupt? All of the value they put into your company is now gone.

(Keep in mind, you have your own set of vendors AND you are your customer’s vendor. Healthy business equals healthy business.)

What you should really be doing is investing your money, time, and trust in one vendor per task. My associate ended up using the vendor she was skeptical about, because she realized that if she found a new vendor, we would have had to spend the time to get the new vendor up to speed and we would always be looking for someone better and cheaper. It’s a waste of time and time is money.

3 Buckets of Value

There are 3 buckets of value: cheap, timely, and/or good quality. A business can expect to have two of the three when it comes to investing in something valuable, but not all three. This is where you come in as a leader… the best way to solve this problem is to find a compromise.

Pick which bucket(s) you find more valuable. Use that as your foundation or guide to making vendor decisions.

Cheap & Timely

When I first started The Strategic CFO, I wanted everything cheap and timely because I believed in investing in something to get quality work in return. I was young and naive. Customers eat at fast food restaurants because it is cheap and timely, but it isn’t the best quality.

Let’s even use the Tinder example… Constantly looking for new vendors is a cheaper and possibly faster. However, quality is built over time, and you won’t see consistent quality over time.

So think about it… do you really want to compare your business to fast food or Tinder?

 If you like these stories and advice, we recommend you also check out our ultimate CFO resource! Unlock your value today! 

value from vendor partnershipsQuality & Cheap

I was talking to my associate and she told me that she bought a makeup palette from China for only $6, when the price in the United States is $52.00. The only downside is that it took 2 months to get it in the mail! When she finally received it, it looked as if she bought it here in the US. The same concept can be applied to outsourcing tasks internationally, because of the time and language barriers. Sometimes we don’t see the work for 2 weeks to a month. This is good for tasks that don’t need to be completed right away, such as graphics for a future project.

Timely & Quality

For this example, we can use salaries. If you look at your staff, they have to be timely and of good quality. That’s why salaries consume the majority of your expenses. This is because you invest in them for your company. If we started seeing vendor partner as valuably as we do staff, the timeliness and the quality of the work might actually pay off.

Conclusion

In conclusion, you can’t treat businesses like a commodity, because they will treat you like a commodity. You can have cheap, timely, or quality work. You can expect two out of the three, but not all three. If you want to unlock value from vendor partnerships in your business, they need to know they are valued. How can we do that? Let them make money!

If you want to learn more about how to add real value to your company, click here to access our 3 best tools AND learn more about The SCFO Lab.

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The Key to Having a Unique Business? Unique People!

Over the years of teaching in an entrepreneurship program, I realized a pattern. As expected, every entrepreneur thinks his business is unique. But in having a unique business, who works for you? What value do they bring to the table? Do they make your business “unique”? To some extent, they probably do! These are questions we will explore, but for now, let’s talk about what really makes a business unique.

Is your business really unique?

Every business or inhaving a unique businessdustry has nuances that are peculiar to that market. But is it necessary to restrict your hiring to employees with industry experience?

Business is business is business. Yes it’s different, but you don’t want to make decisions based on pride and skills you don’t have. They don’t make MBAs for each industry, after all. If all businesses were unique, they would make specific MBAs per skill per industry. That’s the beauty of the hiring process… seeing who has the talents and skills, and who doesn’t.

A few tips on having a unique business…

1. DiversifyEver thought about pivoting? Or changing your business model? When we say “diversify”, we really mean looking for something in your company that can be improved. How can you best optimize the assets you already have?

2. Innovate. This includes solving new problems, creating a new product, finding new business partners, and many other factors that go into making new plans for your business. But be careful not to introduce too many things at one time!

3. Hire unique people! Who else is going to implement these changes? Building a better team will help solve new problems that your company might not have seen before. You just have decide from there… will you hire based on degree or drive?

How do you build that unique team? Download our free whitepaper to learn how to recruit the perfect team for your business!

Degree vs. Drive

The term “degree” in this blog is a loose term. It generally means the typical employee who has gone to college, and worked 5-10 years in a job to acquire skills. If you think about it, who knows the nuances of the business better than anybody? It is the entrepreneur and his core team!

In the Strategic CFO, we work primarily with established companies rather than solely start-up companies. Although we don’t always work directly with the entrepreneur, we still see the patterns of pride within the company. Pride, in this context, means more than believing your company is the best and undeniably different than any other company.

Recently, I visited a client that wanted to recruit a CFO. They told me they wanted to hire someone with “industry experience.” How would you interpret this? “Industry experience” can mean one of two things: 1) years of experience in any given industry, 2) knowledge of the industry, or 3) both. Notice that I never mentioned talent or drive in this analysis.

Hiring for Degree

Advantages

having a unique businessNow don’t get me wrong, hiring for experience has its perks. Those with experience are familiar with the industry jargon, and understand the processes. If you’re lucky, you won’t have to train them for longer than a few weeks! Having a more tenured employee also appeals to customers and other partners, because not everyone trusts a young, fresh new hire.

Disadvantages

Experience is often short-sided. If hiring for experience was the main criteria for hiring new graduates, then there might be a lot of holes in the skill set of your company. Take the MBA, for example. You hire this person based on experience and their years of study in the industry. But what if there was a new skill set that not a lot of people have studied in? You’ll be paying a lot more to receive a lot less. Experienced employees tend to go by the book, and generally don’t go outside of what they know. After a while, tenured employees are less innovative, which is an essential part of diversifying your business and solving new problems.

Hiring for Drive

Advantages

Harvard says, “hire for talent, train for skills.” When you have someone that’s talented, you can get that person up to speed in any industry. For example, the marketing specialists in the Strategic CFO staff weren’t always tech-savvy when I first hired them. However, I chose them from a pool of talented people with drive. Within months, they became digital marketing specialists. People with drive are also innovative. They won’t stop until they’ve finished a project or solved a problem. Finally, they’re affordable. If you think about it, they’re usually young hires. Young hires are cheap!

Disadvantages

Although young hires are cheap, they might take longer to train and familiarize with industry jargon. Additionally, you can’t always send millennials out on cold calls or familiarize them with regular clients.

“Teaching tall:” more on hiring for talent

In my opinion, I think hiring for talent is more valuable than hiring for experience. It’s an investment. John Wooden, the famous head basketball coach at UCLA and creator of the “Pyramid for Success,” had this saying… “I can teach anybody how to play basketball. I can’t teach tall.” Basketball players are known to be tall, muscular, and fast. John Wooden showed us that anyone can do something if they have the drive for it. The same can be applied to business and building your company.

Conclusion

So we explored the idea of having a unique business by having a unique team, what other things you can do to make your company unique, and the advantages/disadvantages of hiring for degree and drive. The key to having a unique business: hiring unique people! You can accomplish anything for your business if you have the right resources and make productive decisions. You can get there, it’s just a matter of how soon you and your team are willing to do it. Your business can be unique… and you definitely can’t do it alone.

Don’t do it alone. Download our free 5 Guiding Principles for Recruiting a Star-Quality team today!

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The Butterfly Effect: Planning with External Analysis

planning with external analysisEvery decision you make as a financial leader affects your business. Looking back on 2016 to now, a lot of events happened and changed the course of business. Often, there are events occurring in the world that either directly or indirectly impact your company. As a financial leader, it’s up to you to decide how to change your business, or if you should keep it the same.

How external factors destroy a business

Worst-case scenario, a company will collapse due to an event that occurs externally. Here are a few examples of why external factors might actually destroy your business:

Your company can’t keep up

It’s all about infrastructure. How does your company stay in the game? If you think about it, the core of the company requires a strong group of individuals to keep the company together. Without a strong team, the company will crumble. Analyze your internal situation as well as your external situation: be aware of bitterness, fatigue, and boredom within your staff.

Competitors fix the problem before you do

“When the going gets tough, the tough gets going.” If we really think about this phrase, it’s true.”The going gets tough” means the situations around you are getting increasingly more difficult. “The tough get going” means that the strongest people work through the problem as fast as possible. If your competitors can solve the problem before you can, then your company becomes irrelevant.

Customers adapt to the change

Like we discussed in last week’s blog, the number one reason for startups failing is creating a product that customers don’t need. This can also be applied to businesses that already exist. If a customer doesn’t need a product, they won’t buy it. For example, the hard drive market shrank rapidly after the creation of the cloud. The cloud solved the issue of limited storage. Since then, customers adapted to the change and the hard drive market continues to shrink. Now, it’s up to the hard drive companies to make their change in order to gain new or keep current customers.

Not used to change? Planning with External Analysis helps anticipate obstacles before they affect your business. Download now!

Planning Strategically

As you can see, it takes a lot of adaptation. Over the past year or so, we’ve been getting a lot of traffic from the middle east. Everyone at the Strategic CFO wondered, “Why is this happening?” We caught up on the news and realized that oil prices collapsed.

As a result, the people in the middle east have a renewed interest in all things financial because they wanted to take initiative and start their own companies. To adapt to this change, we shifted our focus and paid more attention to them in our blog and communication.

You, too, can adapt to change. It’s a matter of staying alert, and responding to a pattern. In this case, we took note of our target demographic, and shifted to cater to them.

Porter’s 5 Forces

planning with external analysisPorter’s 5 forces was created by Harvard Business School Professor, Michael Porter. The model exhibits 5 forces of competition within an industry, affected by multiple aspects of the industry and the environment. The 4 aspects that affect competition include the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products.

Analysis of Porter’s 5 Forces

If you think about it, all four of those aspects affect the competition equally, and are affected by spontaneous events. Bargaining power of buyers means that the consumers create pressure for a business to change its product and overall model.

Supplier power refers to the amount of influence the supplier has over a business’s decisions. An example of supplier power is oil and gas pricing. Due to the events that happen in the oil reserves, the prices fluctuate.

Threat of new entrants is the threat that new competitors present in any given industry. In a profitable industry, competition will be saturated. One of our interns told us about an ice cream owner the other day, and he said he and his partner were going to open their shop in Los Angeles. Unfortunately, they couldn’t enter the market because of the competition. As a result, he moved to Houston, posing as a threat to the Houston ice cream market. His product is common with a unique twist, but he entered a less-saturated market.

Finally, the threat of substitutes is the threat of a new product replacing an existing industry’s product. Let’s use an airline as an example. If a new airline provided a better price and better experience, consumers would most likely choose that airline.

Dealing with competition is always tough. Download this External Analysis to beat your competition to the punch!

Planning with External Analysis

planning with external analysisSWOT analysis considers Strengths, Weaknesses, Opportunities, and Threats. Opportunities and threats are the focus for external factors. These environmental changes are most likely variable, unpredictable, and out of your control.

Environmental changes are similar to “the butterfly effect” – the concept that small changes have large effects. What happens across the world may have a large impact on your company. Not all change is negative – it is possible that what happens halfway across the world might increase your revenues in some way. In that case, you’ll still have to prepare… even if it’s not for the worst.

“Plug In” as a financial leader

As a financial leader, you have to be plugged in. News isn’t always for entertainment! In a way, it’s an indication of what your next move is. When planning with external analysis, consider more than what is happening today. Consider what might happen 3-6 months in advance, based on what is happening and has been happening lately.

Conclusion

Some say that the flap of a butterfly’s wings control the tides on the other side of the world. This concept, although somewhat overstated, is a great metaphor for environmental changes. What happens in Saudi Arabia may not affect us now, but maybe it might 5-6 months from now. The best part of adapting: always preparing for the worst.

Prepare for the best… and the worst. Download the External Analysis to gear up your business for change.

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Why do most startups fail?

why most startups fail

Right now is the time of innovation – kickstarters and new types of marketing campaigns are popping up everywhere. You might have an idea yourself, regardless of whether you’re a Millennial, Generation X, or even a Baby Boomer! So how do you know if your idea is a good one?

As I have mentioned in previous posts, I am an adjunct professor at the University of Houston Wolff Center for Entrepreneurship. In one of our first classes, we discussed an interesting topic: the survival rate of a new business, and why most startups fail.

According to Fortune, 9 out of 10 new businesses fail. The number one reason for why most startups fail was not having a product that serves the market. I asked the students this question, and now I’ll ask you… Do you think a good product is enough to survive in the market?

Top 5 Reasons Why Most Startups Fail

The answer to that question is no. A number of factors play into why most startups fail. Here are a few:

#1: People don’t need it!

The number one reason for the failure of a business is creating a product for a market that doesn’t need it. The first thing you should do, before you spend all of your cash on producing and prototyping your product, is market research. Who is your customer? How many customers are out there? How much are they spending on a product that serves a similar function? If you can’t answer all of these questions about your idea immediately, then maybe this isn’t the best business to invest in.

 #2: Cash wasn’t King

Where are you spending your money? Research shows that 29% unfunded startups fail because they ran out of money. We can assume that they spent the money on research and development, marketing, salaries, and other overhead expenses. How did they run out of cash in the first place? Because the financial leaders overlooked important, and possibly tedious details.

Also consider that different businesses see profits at different times. You may go 5 years without seeing a dime. Or maybe it’s the other way around –  some startups might skyrocket after a couple of years. But do they have enough cash to keep them afloat? Looking ahead is always important when you manage your finances. Like gas in a jet, cash is the fuel to keep your business running. Cash is king.

Even if you aren’t starting a new business, taking a look at your company as a whole is always a good idea when making big decisions. Download our free Internal Analysis whitepaper to learn how!

#3: Lack of a Quality Team

why most startups failObviously when you start a company, you want the best staff you can build. However, most startups can’t afford “the best of the best.” There may be certain skills that you need, tasks that need to be done quickly, but your staff simply cannot keep up.

Let’s say your team has all the skills you need, but they don’t communicate or work well with others. You’ve just invested your money in a team that could fall apart. It’s better to a have a team that learns the skills and has a positive attitude, versus a skillful team with a negative attitude. In this case, quality is defined by the talent in the person, not just the skills they bring.

#4: No Competitive Advantage

On top of marketing research, you also have to conduct competitive research when you start a business. What makes your company unique? In a way, a condensed competitive scope may indicate that your product is needed. What you have to figure out is how to make your brand more attractive than your competitor’s.

This means more than just “being the cheaper alternative.” The intellectual property itself has to have that secret sauce… which also means that you answer your customer’s problem better than your competition.

#5: Poor Pricing

Poor pricing is another reason why most startups fail, so don’t underestimate the power of smart pricing.

The Startup Roadmap

Solve a Problem > Build a Good Team > Research/Develop the Idea >

Financial Projections > Look for Funding > Develop Product >

Disrupt a market.

This is a general roadmap of a startup. Typically, it takes 3 years to be successful in an industry. Think about it – when you apply for a job, they look for people with 3+ years experience. Why? Because they have 3+ years experience in a skill set. The interviewee knows how to navigate a problem and has practiced solving it. Same goes for a business.

Why Banks Turn Startups Away

The research pwhy most startups failreviously mentioned shows data for companies that have been around 3-5 years. I like to think that after you pass the first three years, things get easier for your company. For example, banks need to see at least 3 years of financial statements. You may not need profits for all three years, but you should be trending upward by year three for banks to consider investing in your business.

Banks turn away companies less than three years old for multiple reasons. One is that new or small businesses are more risky than larger businesses. Post-recession, banks have to be more strict with who they lend to. Banks also earn less profit on smaller loans. If you think about it, banks underwrite a $5 million loan for the same cost of underwriting a $50,000 loan. It makes more sense to focus on the larger loans, with a less risky business.

Conclusion

Although it seems like everyone around you is looking for that next big idea, really think through your next venture. Do you have a market, cash, and a good team? What is your competition like? And finally, what is your pricing strategy? If you create a roadmap and make financially sound decisions, your startup should already look better than most.

Speaking of making financially sound decisions, check out our free Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

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