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The Importance of Knowing Your Leadership Competencies

Knowing Your Leadership Competencies, unique ability

Two weeks ago, our team celebrated 1 year since the acquisition of The Strategic CFO. In the past 12 months, we’ve grown significantly in the number of team members and clients. In our meeting, I put the quote up on the screen…
“Life is simple… People complicate it.”
Everyone laughed because it is so true.
As we shared stories, challenges, successes, etc. in my team meeting, I asked them if they knew what they were competent and incompetent at.
Everyone is incompetent at something.
Financial leaders need to understand the importance of knowing your leadership competencies.
Truly successful people spend 80-90% of their time utilizing their excellent and unique abilities and delegate the rest.

The Importance of Knowing Your Leadership Competencies

Before we begin, I want to define leadership. It’s the ability to guide, direct, and influence people. There are four types of ability that a leader must know about themselves. Those include the following:

  1. Incompetent
  2. Competent
  3. Excellent
  4. Unique Ability
Become a better financial leader by learning exactly what CEOs want from their CFOs. You can find these habits or traits7 Habits of Highly Effective CFOs whitepaper in our .

Know What Your Incompetencies Are

First, you need to know what your incompetencies are. Incompetent indicates the activities that you are not good at and the things that you don’t do well. Everyone is incompetent at something. Some incompetencies could be translating the numbers to something the CEO could use to make decisions, knowing the ins and outs of your accounting system, or working with technology. Before you can start to figure out what you are competent at, you need to know what you are not good at.

Write those incompetencies down. If you are asked to do work in those areas, either defer or delegate. It is not worth your time to invest in those areas when they are not profitable.

Know What Your Competencies Are

Then identify your competencies; these are activities that you are okay at, but the majority of others are better. In other words, the general population is good at that thing. For example, all accountants will know where assets, liabilities, and equity go on the balance sheet.

What Are You Excellent At?

After you have identified your incompetencies and competencies, then ask yourself… “What are you excellent at?” This refers to the activities that you excel at, but so do a few others. If you have a knack for knowing where to unlock cash after just looking at the financial statements, then it may be time to focus more of your energy there. Not everyone will have this skill though.

Know Your Unique Ability

Finally, know your unique ability. Your unique ability are the abilities only you possess. These are activities that drive value for yourself and others. In addition, your unique ability must be valued by society.

Strategic Coach outlines the four areas that you need to look at when identifying your unique ability:

  • Passion
  • Superior Skill
  • Energy
  • Never-Ending Improvement
So, how do you tell the difference between your unique abilities and your incompetence activities? Your unique ability gives you energy and your incompetence zaps your energy!

Inventory of Role

If you want to be really effective as a CFO and a financial leader, then you need to know what you are already doing and what your CEO wants more of. In our Financial Leadership Workshop, we walk our participants through an extensive inventory of role. Some of the areas that CEOs wants more from there financial leaders include:

If you want to go through this exercise AND 32 hours of coaching from me, then click here to learn about our Financial Leadership Workshop. Registration for our series starting December 2018 is now open. Contact us for more information and to register.

The Role of the CFO

While the CEO must balance the vision, growth, implementation, cash, and profitability of the company, the role of the CFO is to compliment the skills and unique abilities of the entrepreneur. You would not find Steve Jobs or Jeff Bezos in the accounting department, but they sure need(ed) support from their financial leader to make innovation happen.

To learn other ways to be more effective in your role as the financial leader, click here to access our most popular whitepaper – the 7 Habits of Highly Effective CFOs.

Knowing Your Leadership Competencies, unique ability

Strategic CFO Lab Member Extra

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Knowing Your Leadership Competencies, unique ability

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Strategy for Managing Cash

managing cash

Does your company have a strategy for managing cash

Many companies have established procedures for purchasing materials, collecting customer payments, and paying vendors.

But often people either do not communicate these procedures or simply don’t follow them consistently.

Even when everyone is aware of and follows the established protocol, your system may be flawed. Before we show an example, you need to know how to manage cash flow

Know How to Manage Cash Flow

We all know that cash is king – liquidity is essential for survival. Many entrepreneurs only know how much is in the bank, but they don’t understand how much cash they actually have. So, how does one manage cash flow?

First, you need tools. 

Here are a few tools that can help a company manage cash flow:


Download eBook 28 Ways to Improve Your Business's Cash Flow


Manage and Work Your Operating Cycle

Then you need to manage and work your operating cycle. Your operating cycle is “how many days it takes to turn purchases of inventory into cash receipts from its eventual sale”. It indicates true liquidity – how quickly you can turn your assets into cash. Calculate how long your operating cycle is using the following formula:

Operating cycle = DIO + DSO – DPO

Watch Your Expenses

Watch your expenses carefully. If you do not have an eye on SG&A and procedures on what can be purchased, then you risk racking up unnecessary overhead. Think about too much inventory, unnecessary equipment replacements, extreme marketing budgets, etc. 

Use Cash Wisely

Use your cash wisely. Always be thinking about will this add value to my company? when spending your valuable cash. If you will not see a return on your investment, then consider spending the cash elsewhere. 

Collect Quicker

Another method to manage (and improve) cash flow is to collect quicker. This is a great method to use if you are in a cash crunch and can only make small improvements. For example, there is a $10 million company that collected their accounts receivable every 365 days. They had a lot of cash tied up. If they improved their DSO 5 days, that would be an extra $137,000 of free cash flow

Example of Strategy for Managing Cash

Let’s look at an example of a strategy for managing cash flow. Imagine that Company A has 120 days of inventory on hand. They collect receivables in 60 days. And they pay payables within 30 days.  Even assuming that this is their established cash management strategy and everyone follows it, Company A will still find itself in a cash crunch. This is because of the disparity of time that cash is tied up in inventory and receivables versus the speed with which it pays its payables.

So what can Company A do to free up cash?  Here’s a link to an article that talks about how to develop a strategy for managing cash and techniques to improve cash flow.

Strategy for Managing Cash, How to Manage Cash Flow


Originally posted by Lisa Knight on February 19, 2015. 

Strategy for Managing Cash, How to Manage Cash Flow

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Does Your Management Team Understand the Financials?

As companies grow, more and more people get involved with the operations of the business. Whether you have a manufacturing business or service business, this eventually grows beyond a one-man show. Sales people, engineers, and technical people often become the leaders responsible for driving your business and adding to the top line. Everyone understands what a new client means and what revenue is. So, does your management team understand the financials?

Management Team Understand the FinancialsDoes Your Management Team Understand the Financials?

The challenge is when a business grows, companies add people to operations, the management level, vice president positions, etc., but they do not have a solid understanding of the financial statements. We often see this in high growth businesses, where the focus is on sales as it should be, but only the CEO, Controller, or CFO understand the other parts of the financial statements.

Why Your Operations People Should Understand All The Financial Statements

I recently witnessed a business that had a steady run rate of sales and EBITDA at a very attractive rate.

Then, the operation was handed over to an “expert” in the industry. This industry expert does know a lot about how to technically process something, but he has no clue about how a business really operates.

In one month, he changed the focus of the production to one project. While, this one project was completed in record time, all other projects came to a standstill.

Now, the business ran out of work in process and finished goods, and sales suffered the following month.

If the industry expert understood the balance sheet, inventory, A/R and A/P (in addition to sales, cost of sales, and cash flow), then the company would have avoided this poor performance in the following month. Anyone in charge of an operation or in a management position must understand how their activity affects the balance sheet, income statement, and cash flow. They are all tied together and all get affected with operational activities.

It All Turns Into Cash or Lack of Cash Eventually

My prediction is that in the following 4-6 weeks, that business mentioned above will find itself in a cash tight position. Remember, CASH IS KING!  Everything you do will have an effect on cash one way or another. The lack of planning in a production environment causes work in process inventory to run out, sales to suffer in the following month, and ultimately, cash to get tight.

Cash is king. That’s why we created the 25 Ways to Improve Cash Flow. This valuable resource has helped many of our clients get out a cash tight situation and become flush with cash.

Educate Beyond the CEO, CFO, and Controller

I am a big believer that it is the company’s responsibility to educate the management team that has “P&L Responsibility”. I do not mean  just the P&L.

Everyone with responsibility for the bottom line, profit, and cash should have a general understanding of the impact to all three financial statements.

Not everyone is an accountant, and they should not be.

But it is our responsibility to educate those that have operations responsibility that affect the bottom line. I am a big proponent of workshops and educational courses for operations people. In a few days, you can give them enough knowledge to at least have them ask the right questions. But as CFOs, Controllers, and CEOs, we need to provide that education so that the people making operational decisions have a positive impact on the bottom line and cash.

From Operations to P&L Leader

We have specifically designed a 4-day workshop for this exact purpose. It is called “From Operations to P&L Leader”. We are not out to have operations people become accountants; however, our goal is to simply provide enough data and understanding of how operations and the financial statements are tied together. Furthermore, we show participants how their decisions in operations affect all three financial statements – the Income Statement, the Balance Sheet, and the Cash Flow Statement.

Educate, hold accountable, and have deliverables. This will lead to a successful organization!


If you want to increase cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

Management Team Understand the Financials

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

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Management Team Understand the Financials

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How to Make Dramatic Changes in Business

How to Make Dramatic Changes in Business

Recently, we had a coaching participant mention to us how her company was wanting to make a huge change in their business that would ultimately destroy the current business.

This happens more often that you would think…

The owner or founder of the company wants to make a shift, a change, but the leadership did not full think through what that would actually look like.

In our coaching participant’s case, her company had been around for a long time. They were known widely for their innovation. They were also a non-profit. The founder wanted to convert the company into a for-profit entity.

That change would change EVERYTHING.

In fact, it would be an entirely different company.

In this week’s blog, we look at how to make dramatic changes in business while avoiding catastrophe and how to reinvent your company.

Change requires a strong leader. Learn how to be a more effective leader here.

How to Make Dramatic Changes in Business

When a company makes dramatic changes in their organization, it’s important to ensure the change will be sustainable and has the benefits outweigh the risks. This starts with questions like…

How can we better develop our product/service to provide more value to our customer?

What organizational changes can we make to reduce overhead and increase productivity?

Is our current company structure the best structure for accomplishing our mission?

Do we need to totally reinvent ourselves just to survive?

In our first example, changing the organization from a non-profit to a for-profit would only stuff the founder’s pockets; however, upon further conversations with their Finance Director, we came to the conclusion that that organizational structure change would change everythingmarketing, branding, funding, employees, legal aspects, and accounting. It would cost more to make that dramatic change than to stay the same. They would most likely loose their funding, their employees, and their entire culture.  They apparently were making a change for the wrong reasons.

Driving Radical Change • McKinsey

In a McKinsey article called Driving Radical Change, they outline how to make dramatic changes in business. It first starts with the aspiration – the goal for the change. Then, the leadership for the change needs to be addressed. Who is doing what? What are the priorities? The next two steps include articulating actionable steps for employees to act on and the direct impact they have on the change. This stage is what really fuels the change. Leadership needs to engage and energize their employees during change (change is scary for most people). Read more about making radical change here.

How to Make Dramatic Changes in Business

Why Make Dramatic Changes in Business

So, why make dramatic changes in business? Sometimes, it just needs to happen. Businesses can get stuck in a “rut” where they continue to practice the way that they have always done without evaluating the changing environment or their team. If your company has not made a change (or at least evaluated current practices) in a decade, then it’s time to look at whether radical change is necessary.

Reasons to change include but are not limited to the following:

  • It’s just not working
  • Competition is growing and taking business away
  • There are legal restrictions
  • The market is shifting
  • Technology shift (this is probably the most common in the last decade)
  • New opportunities identified
  • Customers demand something else

Changes could include the following:

Sustaining Business After Big Changes

So many businesses have made changes due to technology advancements, competition, etc. Barnes & Noble has been through numerous CEOs because they did not continue to press on with their Nook and e-commerce platform. Netflix went through a period of declined stock prices as they pressed on to be a primarily online-streaming platform. Sustaining business after big changes can be difficult, but it all comes down to the leadership. Forbes contributor, Erika Anderson, says, “When CEOs and their teams fail to fully commit to change, change fails.” The entire company needs to commit to making this change successful. If one link in the chain is weak, then the whole project will fall.

Here are a few more notables:

  • Amazon started as an online book sales company; it is now a large distribution and logistics company
  • Western Union started as a telegraph company, then it grew to one of the largest money transfer companies in the world
  • Nokia started selling rubber boots; it is now is a major cell phone manufacturer
  • Shell (the major oil company) started in a small store in England importing and selling shells

There is a great quote that I saw in an article from MONEY… “A successful company is like a giant great white shark. In its prime, it chews up the competition, but if it dares to sit still for too long, it dies.”

Your CEO needs a strong leader – especially a strong financial leader. Learn our 7 Habits of Highly Effective CFOs and become the strong leader your CEO needs.

Supporting Change as the Financial Leader

Change is uncomfortable for everyone because there is uncertainty about the results.

Accounting type people are often prone to being the no-sayers during change… It’s too expensive, too risky, and too advantageous.

When making dramatic changes in your business, it’s important for the financial leader to support the change.

If a certain change will dramatically impact cash flow and profitability, then work with your CEO to figure out what you can do.

Do not just say “no”.

The CEO needs a trusted advisor, a confidant, someone who they can rely on for a more financially sound way of doing something.  In my experience, change has usually been good and for the right reason. To learn other ways to be more effective in your role as the financial leader (and to become a trusted advisor), click here to access our most popular whitepaper – the 7 Habits of Highly Effective CFOs.

Dramatic Changes in Business

Dramatic Changes in Business

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Is Your Business Bankable?

Is Your Business Bankable

Businesses call us for many reasons but here are two very common reasons why we get called…

They are growing and want to strengthen the financial function.

OR

They are in financial distress and can’t find a way out.

Why does a business need to be bankable? What does being bankable mean? In this blog, we are going to answer all those questions and advise you how to strengthen your banking relationship (something all businesses need to do).

What metrics are you using to gage your company’s performance? It’s important to identify and track those KPIs. Need help tracking them? Click here to access our KPI Discovery Cheatsheet, and start tracking those KPIs today!

Is Your Business Bankable?

Before we answer the question “is your business bankable?”, what does bankable even mean?

Bankable is a financial jargon that indicates that a business is sufficiently healthy to receive interest from lenders to loan. It’s a basic indicator of a company’s success. If a bank is willing to loan a business cash and/or support a business, then the risk of it failing or not paying is low. A bankable company has significant assets, profits, liquidity (cash), and collateral.

An article from Forbes says it like this, “The bank is your cheapest, but often most difficult, source of capital with which to operate and grow your company.”

So, is your business bankable? There are several things to consider.

Financial health will be the primary focus of determining if your business is bankable. There are other things, such as collateral and the character of the person, behind the loan.

Financial Things to Look for

Financial things to look for:

Non-Financial Things to Look for

Non-financial things to look for include the following:

  • Do you have a strong management team?
  • What does your industry or segment look like (strong, declining, etc.)?
  • Do you have a business plan?
  •  The character of the people behind the company and signing the loan documents
  • Will you provide a personal or corporate guarantee?

If you are unsure, then just ask your banker.

Is Your Business BankableThe Need to be Bankable

We deal with companies that are both highly successful or maybe in a distress situation. If you are successful, then you may want to acquire another company, have a distribution, or invest in CAPEX. In today’s market of relatively cheap access to capital, why would you use your own cash? If you are growing, then you really need to consider a line of credit to help you grow. We see very successful companies in a high growth scenario bleed out of cash and working capital. In those cases, a line of credit would make life so much easier.

 Click here to access our KPI Discovery Cheatsheet, and start tracking your progress to be bankable!

Bankable Business Plan

Now, that you have determined if you are bankable or not bankable, it’s time to put together a bankable business plan. There are several things that banks (and investors) want to see before they invest in your and your company. There are ten sections to a bankable business plan.

(HINT: If you do not have a good banking relationship with your banker, then even the most perfect business plan will not guarantee you will get the capital or line of credit you need/want.)

Value Definition

What ares in your business create value? In a bankable business plan, you need to define your value-generating centers (core-business activities). A successful business will continue to come back to the value that they provide to customers; however, an unsuccessful business will continue to get distracted by other areas of the business that are not generating any or as much value.

Needs Assessment

A Needs Assessment identifies the company’s priorities. It also defines what needs to be accomplished and the steps that need to be taken to achieve the goals. This is a great tool to use to identify what you know and don’t know about your business. Use this process to analyze every part of your business. Score.org provides a Needs Assessment that will gage how well you know your business and your needs.

Differentiation and Competitive Assessment

Porter’s Five Forces of Competition is used in the differentiation and competitive assessment to identify competing products/services and to start the process of differentiating yourself from the competitors. For example, there are 3 companies in Houston that provide the exact same product; however, ABC Co. is working to be bankable. So ABC Co. works to position their product differently and to provide more value than their competitors. Without conducting a differentiation and competitive assessment, ABC Co. risks loosing valuable market share.

Market Analysis

Bankers want to mitigate their risk. Conduct a market analysis to explain exactly that your market is doing. Is it new and expanding? Or is it saturated and declining? This will help explain your company’s growth potential.

Marketing Planning

Put together a marketing plan. Identify how you are going to market your product or service, what your target market is, and how you are going to continue to grow.

Sales and Promotion Strategy

Now, that you have built out your marketing plan, identify your sales and promotion strategy. For example, if a $1 trial for a subscription is critical to your sales strategy, then write that out and explain how it has contributed to your company’s growth.

Organization Design

What does your organization look like? Are you bombarded with too many non-essential personnel or administrative functions? Or is your company designed to optimize all positions to cover both value-adding functions and administrative functions?

Financing Needs

Identify your financing needs. How much do you need to sustain your company? How quickly do you need financing? Answer all this questions

Financial Projections

Next, build out your financial projections. Be sure not to have optimistic projections that are hard to near impossible to accomplish. They need to be realistic, detailed and logical.

Risk Analysis

Finally, what risk does your company have? For example, a company who relies heavily on the oil and gas industry needs to identify what risk they will face if that industry declines.

Conclusion

In conclusion, being bankable is a measurement of success. As previously stated, there are several things you need to watch to remain bankable and profitable. Measure and track those KPIs. Click here to download our free KPI Discovery Cheatsheet.

Is Your Business Bankable
Strategic CFO Lab Member Extra

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

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Is Your Business Bankable

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Exploit New Business Opportunities

In this age of technology, it’s time for companies to be willing to exploit new business opportunities. More than ever before, companies are navigating this fast-pace and uncertain terrain. Bankruptcies, mergers, acquisitions, reductions, etc… It’s all changing the business landscape. But if companies do not exploit new business opportunities in fear of failing, then they are sure to fail or fall behind competitors. As financial leaders, how do we enable our leadership to take risks without neglecting the numbers?

Exploit New Business OpportunitiesWhy Exploit New Business Opportunities

The reason why one would exploit new business opportunities is to stay ahead of the ever-competitive marketplace. What needs are not being fulfilled yet? How can you gain more market share? What competencies does your company have that can be expanded into other areas – customers, markets, etc.? Opportunity exploitation is what keeps businesses moving forward. In this day and age, we need to continually reinvent our companies or we will not be around very long. Our competitors are doing this every day.

Have you identified any opportunities yet? If not, then click here to access our External Analysis Whitepaper.

Opportunity Exploitation Definition

According to Wiley Encyclopedia of Management, “opportunity exploitation refers to activities conducted in order to gain economic returns from the discovery of a potential entrepreneurial opportunity“. Typically, entrepreneurs are known to exploit opportunities or identify opportunities because it is in their nature; however, financial leaders know what the numbers say and can identify opportunities that make economical sense for the business while balancing risk and reward.

Example: Planet Fitness and Vacant Malls

E-commerce has been growing significantly while brick-and-mortar stores have been steadily decreasing. Shopping malls are more vacant than ever before. But there is one company that is taking advantage of those vacancies and benefitting from it. In a recent Wall Street Journal article, “Planet Fitness Inc. is the rare mall tenant expanding its share of commercial real estate even as many retailers shrink their physical footprint as more commerce moves online.” This is a great example how to exploit new business opportunities. Furthermore, Planet Fitness is focusing on those that do not already have gym memberships. This combination of target market and location is proving profitable for them as they have reported “revenue increase 31% to $140.6 million compared with the same three-month period last year”.

How Entrepreneurs Identify New Business Opportunities

According to Babson College, “entrepreneurs are often characterized by their ability to recognize opportunities (Bygrave & Hofer, 1991) and the most basic entrepreneurial actions involve the pursuit of opportunity (Stevenson & Jarillo, 1990).”

Steps to Identify Business Opportunities

There are several steps to identify and exploit new business opportunities that Babson has outlined:

  1. Preparation
  2. Incubation
  3. Insight
  4. Evaluation
  5. Elaboration

Preparation

Experience is the prime ground for preparing yourself or your company for opportunities. Identify what experiences your team has and what your company is good at. For example, if your company excels in supply chain and logistics, then an opportunity that needs incredible supply chain and logistics processes will be a good fit.

Incubation

Incubation refers to the brain processing a potential idea or opportunity subconsciously. They are already attempting to solve a problem that they haven’t yet written down. This is an ongoing process.

Insight

Then, in the insight stage, an entrepreneur will have the “eureka” or “ah-ha” moment where it all makes sense. As a financial leader, it’s important to talk with your CEO about their ideas so that you can engage in this insight stage. You may even see how to exploit the opportunity before the CEO does.

Evaluation

This step is where the financial leader truly steps up to the plate. Research and analyze whether this opportunity is worth pursuing. At the end of this stage, it could end up in either one of two ways:

  • The idea is not feasible and they kill it
  • The idea is feasible and you move forward.

Elaboration

Finally, the elaboration stage is where you exploit the new opportunity through business planning and implementation.

Example of Identifying a New Business Opportunity

For example, a steel manufacturer primarily sells to commercial developers who require the steel for building and/or roadways. One day, they realized that they were not using any scraps of steel, and the company was just throwing them away. Instead of continuing to throw away those scraps, they inquired whether there was an opportunity to take advantage of it. One day, the entrepreneur stumbles across a custom scrap metal design company where they create home decor out of scrap metal. The entrepreneur goes back to his CFO to discuss this potential idea. The CFO knows of a team member who actually does this in his spare time. They gather a team and start outlining a business plan. Eventually, they decide that it is a profitable idea, and they go forward with it.

If you are not familiar with the petrochemical sector, they are experts at this. Nothing goes to waste in the petrochemical business. A chemical is made or processed, it generates a bi-product or waste, and there is always another business in the petrochemical space that buys it to make yet another product, and on and on and on… Eventually, very little is true “waste”.

Manage New Business Opportunities

So, how do you go about managing new business opportunities? It is so easy for entrepreneurs to get caught up in their ideas and chase “squirrels“. They lose focus and may not capitalize on the opportunity sitting in front of them. As a financial leader, it is crucial for you to manage those new business ideas as part of your strategy to improve profitability.

Exploit New Business OpportunitiesConduct a SWOT Analysis

First, conduct a SWOT Analysis on your company with your team. A SWOT Analysis stands for Strengths, Weaknesses, Opportunities, and Threats. There are two view points in this analysis: internal focused and external focused. This analysis provides a comprehensive look at what your company does well and what it may be lagging in. This also helps the CEO/entrepreneur figure out what opportunities they need to look for to convert those weaknesses to strengths and those threats to opportunities.

If you want to get started on your SWOT Analysis, then click here to access our External Analysis Whitepaper.

Enable Your CEO to Make Calculated Risks

Then, enable your CEO to make calculated risks. Entrepreneurs need to take risks and make moves – that’s part of their nature and gift. But, they do not need to make uncalculated risks or risks that will cause more harm than good. As the financial leader, help them to mitigate risk and enable them to do what they do best – find opportunities and grow the business.

Do you know the opportunities and threats that your company faces? If not, then the time to figure it out is now. Click here to access our External Analysis to gear your business for change.

Exploit New Business Opportunities

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Exploit New Business Opportunities

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Protect Yourself: A Guide to Non-Compete Agreements

Oftentimes, businesses see their competitors as their biggest threat. But what if your star quality team continues to leave to join your competitor’s team? That is, in my opinion, the bigger threat. You have already invested in hiring, training, coaching, and developing those individuals. Then, they leave and directly compete against you. We see this commonly in consulting practices, but it occurs in every industry. In this week’s blog, we are taking a look at how to protect yourself and your company with non-compete agreements.

Non-Compete Agreements, Guide to Non-Compete AgreementsWhat is a Non-Compete Agreement?

A non-compete agreement is an agreement between the employee and the employer that attempts to prevent the employee from working for a competitor within a specified time period and geographical area. Furthermore, it must adhere to all state and national employment regulations. It is best to hire a labor law attorney to verify conditions and ensure that it will uphold in court.  The laws for non-competes and the effectiveness of non-competes vary greatly from State to State. In addition, ever changing laws and precedent will challenge the effectiveness of your non-compete.

According to the American Bar, a good non-compete agreement should prohibit a former employee from doing the following

  1. “… Working with a competitor
  2. … Soliciting former coworkers to be employed in his or her new company
  3. … Soliciting or disclosing confidential information, such as customer lists and data, learned in the course of their employment.”
If you want to protect your company’s future, then it’s important to know what could potentially destroy value. Identify “destroyers” that can impact your company’s value with our Top 10 Destroyers of Value whitepaper.

Why You Should Use Non-Compete Agreements

Take a look at your sales persons and/or consultants. They have developed a relationship with the client and have goodwill with that customer; however, if they decide to leave for whatever reason, then that positive relationship may be in danger. In addition, if that same sales person works for a competitor, then they may poach that customer with the goodwill they have already built up.

Non-compete agreements discourage employees from leaving the current company and competitors from poaching those employees. This only occurs if the non-compete agreements will hold up in court and if the company (you) will take the employee to court. I have seen non-competes work and prevent stealing customers and employees. I have also seen non-competes not hold up in a case. It all depends on the case law, the State you are in, and your luck with the judge hearing your case. 

Tip: A contract is useless unless you enforce it. You must be prepared to take a broken contract to court.
Discover if there are any “destroyers” in your business with our free Top 10 Destroyers of Value whitepaper.

Who Should Use Non-Compete Agreements

You should consider these agreements for employees, clients, shareholders, suppliers, and partners; however, non-compete agreements are typically reserved for executives, senior management, research and development, and key sales people. Not all companies should use non-compete agreements.

Non-Compete Agreements, Guide to Non-Compete AgreementsA Guide to Non-Compete Agreements

Here is our guide to non-compete agreements. It covers trade secrets, how to protect yourself, and how to protect your company’s future.

Trade Secrets

Trade secrets need to be protected, especially from competitors. A non-compete agreement helps you to protect those trade secrets in the case an employee leaves for a competitor. Also, your company hand book should remind employees that all inventions, ideas, patents, and creative work they develop while at work, is the companies property. Please check your local laws and precedents for more information.

Protect Yourself

The goal for having non-compete agreements with employees is to protect yourself (your company). As said before, non-compete agreements are usually intended for the key management team or anyone with a direct relationship with customers. It’s important that you understand your State law. Certain states, like New York, do not allow for companies to extend non-compete agreements too far down in the organization. The goal of non-competes to protect yourself from growing competitors or new competitors that may pop up as a result of key players building their own organization.

Protect Your Company’s Future

Protect your company’s future by protecting your most valuable assets – your human capital. Don’t let gaping holes in your employee policy leave your open for financial loss. The American Bar says that, “Having a valued employee defect to a competitor and take sensitive proprietary information such as customer lists, pricing information, marketing strategies, or product and service expertise with him or her can be a devastating blow to any business – large or small.”

Protect your company’s future with our Top 10 Destroyers of Value whitepaper.

Example: Consulting Firm

Let’s look at an example of a consulting firm! They are trying to prevent any client from hiring one of their leading sales person or a critical member of the team. In an consulting firm, the top challenge faces is when clients hire your consultants out from under you. For example, you hire Tammy to work 20 hours a week, 50 weeks out of the year. A client will pay $150,000 for a 1,000 hours of her work. As the owner of the consulting firm, you get 40% of the $150/hour. It’s a win-win situation. You fulfill a client’s need and fulfill Tammy’s need for business.

As the relationship further develops, Tammy and the client decide that they don’t need you. Unfortunately, this option only benefits Tammy and the client. It hurts you. If the client offers, $200,000 a year in compensation, then Tammy is pleased. She has consistent work, focuses on one client, and does not have to worry about any gaps in her hours. On the other hand, the client is pleased because they now have a full-time salaried employee that works 50 hours a week for 50 weeks a year.

Let’s calculate the price difference for the client!

Tammy’s previous hourly rate was $150.

With the client, Tammy costs the client $80 per hour. Divide $200,000 salary by 2,500 hours of work to come up with $80 per hour.

Furthermore, you have lost an income stream. Then you have to find, hire, and train a new employee – continuing to cost more and more. If you continue to loose more consultants, you will no longer have a firm. All employees and clients have left.

Non-compete agreements would have protected you from loosing your company.

Don’t Destroy the Value of Your Company

In conclusion, you should use non-compete agreements to protect the value of your company. There are many other ways to make sure you don’t destroy the value of your company. To improve the value of your company, identify and find solutions to those “destroyers” of valueClick here to download your free “Top 10 Destroyers of Value“.

Non-Compete Agreements, Guide to Non-Compete Agreements

Non-Compete Agreements, Guide to Non-Compete Agreements

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