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Product Life Cycle Stages

What is the Product Life Cycle?

A product life cycle includes stages the product experiences throughout its lifetime – from conception of the idea to the decline and abandonment of the product. Some products experience longer life cycles than others; however, all products go through the product life cycle stages.

Product Life Cycle Stages

What are the product life cycle stages? They are introduction, growth, maturity, and decline. Some may add other stages in between the four listed, including research and development, abandonment, and revitalization.

Introduction

The introduction stage is often preceded by a research and development stage. For the purposes of the product life cycle stages, we will start from when the product is first introduced to the marketplace. This stage is by far the most expensive stage in a product’s life cycle. Sales are typically slow, so a company may be bleeding cash until the product hits the next stage.

Pricing and promotion are critical in this stage of a product’s life. If it is not priced profitably or promoted effectively, then the product will arrive at the decline stage much quicker than anticipated.

If you want to see if you have a pricing problem and learn how to fix it, then click here to access our Pricing for Profit Inspection Guide.

Growth

The next stage is the growth stage, where the company ramps up its sales and profits. The company will now be able to take advantage of economies of scale, profit margins, and increased profitability. Companies typically reinvest in this stage to grow the potential.

As the product gains more market share, increases distribution, etc., it will be ever important to scale the manufacturing and distribution effectively. A company needs to have an effective supply chain and logistics process to grow supply to the increasing demand. The worst thing that a company can experience in the growth stage is not being able to keep up with demand. Remember, growth impacts a company’s cash flow.

Maturity

In the maturity stage of the product life cycle, a company will start broadening the product’s audience, use, and availability. It is now able to maintain a consistent market share. A company will also continue to increase its production and logistics as demand continues to grow. The product becomes more popular during this stage. As a result, a company needs to be more careful in what marketing.

For example, when the iPhone was first released, many early-adopters acquired that technology. It took a few more years for it to become one of the most popular smart phone brands. As the product matures and continues to gain popularity, Apple continues to release newer, better, and greater models for a higher price.

Decline

Demand will eventually decline for a variety of reasons. Some of those reasons may include that there is a better product on the market or there is no need for that product anymore. This decline stage ends in total abandonment. A company usually has three options during this decline stage. Those include:

  1. Offer the product at a reduced price
  2. Add new feature or revamp the product
  3. Allow it to continue to decline, resulting in the elimination or abandonment of the product

If the company decides to take option 3, then the entire product line is discontinued. Furthermore, they will liquidate any remaining inventory for that product.

What Stage Your Product Is In

So, what stage is your product in? As a financial leader, it is important to know what stage your product is in because it impacts profitability and the company’s value. If you are in one of the first 3 stages, then it’s time to check your pricing for your products. Are you pricing them to result in profit every single time? If you are not sure, then download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Product Life Cycle Stages

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Product Life Cycle Stages

See also:
Product Life Cycle
Company Life Cycle
Why You Need a New Pricing Strategy
Increasing Pricing on Products

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Cost of Turnover

If you take a look at any company’s income statement, you will notice that one of the largest expense items is salaries or compensation. While companies require employees to conduct business, it is expensive to have them. What happens when those employees leave? Many times, companies do not calculate the cost of turnover and how it impacts the bottom line.

What is the Cost of Turnover?

The cost of turnover is the cost associated with turning over one position. This calculation includes the cost of hiring for that position, training the new employee, any severance or bonus packages, and managing the role when it is not filled.  Every company will experience some turnover. When a company has high employee turnover, they risk impacting the profitability of their organization, the culture, and the productivity.

Every organization should strive to retain their employees for as long as possible. If they see a uptick in employee turnover, then they should take action to reduce turnover and improve retention. This results in more efficient operations and higher profits.

How Turnover Impacts Profitability

Previously, we mentioned that turnover impacts profitability. There are various ways employee turnover impacts the profitability of a company, including employees picking up duties (overtime pay, injury, exhaustion, decrease productivity), the cost of hiring a new employee, and the overall state of the company’s culture. For example, a company that has a heavy presence on the web looses its marketing director. The current employees will have to figure out what that position actually did, pick up extra responsibilities, work overtimes, etc. If it was a planned departure (more than two weeks), then the transition may be more smooth; however, if it was an unexpected departure, then the company will be in a bind.

Now, it’s time to fill that vacant role. That takes time – especially, if you are slow to hire and quick to fire. In addition, the current hiring process is not cheap either. No matter where that employee lies on the income statement – in COGS or SG&A – employee turnover has a huge impact to the bottom line. Either, you experience a sales person that is not selling (decreased revenue and increased costs) or a support person that is just increasing costs.

Calculate the Cost of Turnover

So, how do you calculate the cost of turnover? First, know the primary costs that are associated to turnover 1 position. Those include, but are not limited to, the following:

  • Cost of hiring
  • Cost of training and/or onboarding
  • Any severance or bonus packages upon departure
  • Loss in productivity during vacancy
  • Errors in customer service
  • Loss of engagement from other employees

Use the following formula to calculate the cost of turnover:

Cost of Turnover = (Cost of Hiring + Cost of Onboarding and Training + Severance + Loss in Productivity) * Number of Employees Lost

Focus On Employee Retention

Turnover impacts profitability, so it is important that you focus on employee retention. There are several reasons to focus on employee retention, including consistency, the bottom line, culture, and reputation.

Learn how to be a financial leader who increases employee retention in their organization with our execution plans, whitepapers, webinars, office hours, and so much more in the SCFO Lab.

Consistency

Consistency is key in any company. If your company is experiencing turnover in a client facing role, then turnover will cause more problems than profitability. For example, a consulting agency has 5 project managers in a year. The clients do not know who is there project manager or if anything is getting dropped or who to contact. It’s simply frustrating. In another example, a company looses all of its experienced team members within a few months. Now, they have new employees that are not familiar with the process, systems, team, or company. It will be hard for that company to gain any momentum without a consistent staff or a staff dominated by rookies.

Bottom Line 

On average, every time an employee leaves, it takes 6-9 months of salary to find a replacement. For example, if a person leaves and made $40,000, that’s anywhere between $20-30,000 of hiring and onboarding costs that were not previously anticipated. If you lose a higher level employee, then expect to pay more. The cost of turnover makes a dent in the bottom line.

Culture

How can you establish a company culture when your workforce is constantly changing? Establishing a good culture is difficult to do, but establishing a culture when there is no consistent workforce is near to impossible. We have seen how culture impacts the financial results of the company.

Reputation 

Beyond company culture, high employee turnover impacts the company’s reputation. Job seekers research the companies when applying to a position. If you cannot retain employees, then what does that say about your company? Your brand and reputation will be impacted by turnover. Unfortunately for the company, there are online resources such as Glassdoor that give employees and ex-employees a platform to give honest feedback about the company.

Employee Retention Definition

The employee retention definition is the company’s ability to retain its current employees. If a company has a 95% retention rate, it means that the organization retained 95% of its employees for the given period. Every company should strive to improve their employee retention rate as it influences the culture and impacts the company’s profits.

Effective Employee Retention Strategies

The following includes effective employee retention strategies.

Establish Clear Goals and Expectations

First, establish clear goals and expectations. Employees become frustrated when they are unsure as to what their duties and expectations are. Communicate clearly with your team what your expectations are and what their responsibilities are. In addition, make goals together as a team. They will be more attainable, and everyone will be on the same page.

Offer Competitive Benefits

Among many reasons, studies rate salary as a top reason why employees leave a company. If your company is not able to exceed competitive benefits, then at least offer comparable benefits. Remember, salary is not the only reason why employees leave.

Culture

Culture has been proven to impact the financial results of an organization. Establish a company culture that makes it enjoyable for your employees to work there. Some companies like Zappos are extremely customer centric. Other companies may offer flexible working environments (remote work, flex desks, etc.). Moreover, create a culture of open communication. The #1 reason why someone leaves a company is not because of salary, but it’s because of the manager. If there is an issue, fix it the first time you hear about it.

Value Employees 

Above all else, make your employees feel valued. If an employee works 40 hours a week, then you (the company) take approximately 24% of their time up by work alone. And if that employee sleeps an average of 8 hours a night, then about 57% of their week is either working or sleeping. Then the remaining 43% is spent eating, running errands, spending time with family and friends. With such a significant amount of time at the office, reassure them that their work is valuable. Show them how they are contributing to the bottom line.

Start addressing turnover by recruiting a star quality team that is right for your organization. Determine which candidates are the right fit for your company, and click here to access our  5 Guiding Principles For Recruiting a Star-Quality Team.

Cost of Turnover

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Cost of Turnover

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Customer Profitability

Customer Profitability Definition

The customer profitability definition is “the profit the firm makes from serving a customer or customer group over a specified period of time, specifically the difference between the revenues earned from and the costs associated with the customer relationship in a specified period” (Wikipedia). In other words, customer profitability focuses on the profitability of a specific customer. How much revenue do they bring in? How much time, resources, etc. do they require from your company? By calculating the profitability of each customer, you have some great business insights on productivity, resource allocation, etc.

For example, if your customer service department is overwhelmed with work, then you can assess the number of requests per paying client. If a customer that is at the towards the bottom for revenue and the top for requests, then you can conclude several things. Those can include that you need to either increase their price, fire that customer, or limit the amount of requests for that customer.

The Purpose of Measuring Customer Profitability

Customer profitability is a key metric utilized to inform decision making in various areas of the company. These decisions affect the value exchange between the customer and the company. Once we measure the profitability of our customers, we are now able to understand who our customers are and how we make a profit. It can provide great insights on the business that lead to focusing on what is best for the customer.

How to Measure Customer Profitability

Before you measure the profitability of customers, you need to confirm how your company calculates revenue and expenses. Remember, Profit = Revenue – Expenses. Some companies recognize revenue when it is received (cash basis accounting). But we recommend that organizations use accrual basis accounting – or recognize revenue when it is earned. If you are bigger than a hot dog stand, then you should be using accrual accounting. In regards to expenses, it’s also important to allocate as many expenses through the customer as possible. Think about capital, debt, operational costs, etc.

Once you have figured out the respective revenue and expenses for a specific customer, then you are able to calculate its profitability. Next, you need an analysis all of your customers.

Customer Profitability Key Performance Indicators

There are various KPI’s that can help you understand how your customer profitability is doing at the moment. Here are examples of a few:

Average Revenue Per User (ARPU)

A measurement of the average revenue generated by each user or subscriber of a given service. Use the following formula to calculate the average revenue per user (ARPU):

 Total Revenue / Total # of Subscribers 

Customer Lifetime Value (CLV)

A projection of the entire net profit generated from a customer over their entire relationship with the company. Use the following formula to calculate the customer lifetime value (CLV):

Annual profit per customer X Average number of years that they remain a customer – the initial cost of customer acquisition

If your customer isn’t valuable or is costing you too much, then reassess your pricing. Click here to learn how to price for profit with our Pricing for Profit Inspection Guide.

Customer Profitability Analysis

Customer analysis, defined as the process of analyzing customers and their habits, is one of the most important areas of study in a business.

By observing the actions of various customers you start to see a trend of what your average customer is like and what their habits look like. This is a hint at who your target market could be. Behavioral trends amongst customers are important in how your company decides to carry on their marketing efforts. Once you analyze your customer base and determine your most profitable customers it is important to allocate the majority of your efforts towards them to make your most profitable customer your target customer.

Managing Customer Profitability

Managing customer profitability is larger than just the sales or fulfillment of product/service for the customer. It also includes marketing, finance, customer service, product, and operations. If you manage the profitability of customers, then you will have a better chance of catching areas of inefficiencies.

Areas to Improve Profitability

Some ways to improve customer profitability are to change the way you provide commission to the salesperson. Instead of paying their commission based on revenue, base it on the profitability. This can either be focused on the margin percentage (i.e. a sliding scale) or on the dollar amount in profits.

Why It’s Important to Manage

Managing customer profitability is important for various reasons, not only does it set you apart from the competition by providing more value to your customers, but it also improves the company’s revenues. When you manage customer profitability you are making the value exchange from company to customer more efficient and more profitable.

If you are looking for other ways to improve profitability, then download our Pricing for Profit Inspection Guide.

customer profitability definition

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Corporate Veil

Corporate Veil Definition

The corporate veil definition is a legal concept that separates the actions of an organization to the actions of the shareholder. In addition, it protects them from being liable for the company’s actions. It does not necessarily mean that the protection is always in place. A court can also determine whether they hold shareholders responsible for a company’s actions or not.

Piercing the Corporate Veil

“Piercing the corporate veil” refers to a circumstance in which courts set aside limited liability and hold a company’s investors or directors personally liable for the organization’s activities or debts. Corporate veil piercing is common in closed corporations. While the laws vary from state to state, courts will generally abstain from piercing the corporate veil unless there have been signs of serious misconduct.

Factors for Courts to Consider

Components that a court may consider when determining whether to pierce the corporate veil incorporate the following:

It is critical to take note that not all of these aspects should be met all together for the court to pierce the corporate veil. In addition, a few courts may find that one factor is so convincing in a specific case that it will find the investors personally liable. For example, numerous large enterprises don’t pay dividends, with no indication of corporate indecency. But for a small or closely held company, the inability to pay dividends may indicate financial indecency.

Protecting the Corporate Veil

There are various ways to ensure you are safe from being liable for a company’s wrongful actions. Read to following ways protect yourself:

  1. Keep your records present and finished. Your documentation should be detailed enough that you can clarify any exchange years after it occurred.
  2. Have a strategy for success or objective that shows how you intend to develop the organization.
  3. If you have stockholders or investors, then keep complete meeting minutes.
  4. Keep your personal finances and your business finances on separate bank accounts. Never purchase something personal with the business funds.
  5. Make sure you have enough money in your business bank account to cover all current exchanges and liabilities. Try not to fund your business from your personal account.

How to Keep the Corporate Veil Closed

The answer to this seems somewhat obvious: keep everything separate. Probably the most important area for separateness is in the financial arena. Document all transfers between the companies. In addition, do not be afraid to have inter-company contracts (i.e. lease agreements, notes, and contribution agreements). Then allocate expenses (including salaries) between the companies so that each pays it’s share. Have policies in place. In addition, practice keeping everything about the businesses separate. You may also consider having separate boards of directors and offices if that is practical.

If you want to take your career to the next level and step up into the trusted advisor role, then download our How to be a Wingman guide.

corporate veil definition

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Chain of Command

Chain of CommandThe chain of command in a company refers to the different levels of command within the organization. It starts with the top position such as CEO or the business owner, all the way down to the front-line workers. Companies create a chain of command in order to flow instructions downward and accountability upward by providing each level of workers with a supervisor.

Establishing a Chain of Command

Each company has a different organizational structure, which translates to its chain of command. A company’s hierarchy starts with the CEO at the top. Following the CEO are the vice president and upper management employees who report directly to the CEO. Then, there are department managers and supervisors who report to the higher-level executives. Lastly, come the front-line workers who report to their respective supervisor and department manager. Every employee recognizes the structure of the company when a chain of command is in place.

Levels of Management 

There are three general levels of management: top, middle, and front-line managers.

Chain of Command

Top Managers

Top managers are in charge of the overall performance and health of the company by controlling and overseeing the entire organization. They are the ones who set the goals, objectives, and mission for the company. Top-level executives spend the majority of their time planning and decision-making and consistently scan the business environment for opportunities and threats.

Some of their duties include:

Some examples of a top managers include the following: Board of directors, chief executive officer (CEO), chief financial officer (CFO), chief operating officer (COO), president, and vice president.

Middle Managers

Middle managers are responsible for achieving the objectives set by the top managers by developing and implementing activities. They oversee the first line managers and make sure they are properly executing the activities they set out.

Some of their duties include:

  • Report to top management
  • Oversee first-Line managers
  • Allocate resources
  • Design, develop and implement activities

Some examples of a middle managers include the following: General managers, department managers, operations manager, division manager, branch manager, and division manager.

First-Line Managers

First line managers are in charge of supervising employees and coordinating their day-to-day activities. They need to make sure that the work done by their employees is consistent with the plans that the upper management set out for the company.

Some of their duties include:

  • Report to middle managers
  • Supervise employees
  • Organize activities
  • Involved in day-to-day business operations

Some examples of a first-line manager include the following: department head, foreman, office manager, section head, shift boss, and supervisor.

Advantages of a Good Chain of Command

There are numerous advantages that can come from having a good Chain of Command, including the following:

Responsibility – Having different areas of the business can improve accountability by giving everyone a different responsibility. Everyone has their own separate duties, and their own supervisor to keep them accountable.

Efficiency – A functional chain of command helps improve efficiency when communicating with workers. As a result, this helps them improve workflow and adjusting their management methods.

Clarity – Having a good company structure makes the chain of command very clear. Furthermore, this lets everyone know which decisions they are allowed to make and which ones to present to their supervisors.

Employee Morale – Companies that have a clear chain of command create an environment without uncertainty and chaos. It improves the morale of workers leading to high productivity and low employee turnover.

Career Path – It makes it easier to create career paths for employees and track their progress toward their goals outlined in their respective areas.

Specialization – Making employees focus on narrow functional areas can create groups of specialists that heavily impact the functions of the company.

Why Chain of Command Matters to a CFO

Even though most top-level executives do not often interact with front-line operations, they still need to be aware of everything that is going on in the company. CFOs especially need to make sure their ideas/objectives are properly being executed and delegated through the chain of command. Even if top-management has the biggest impact on the company, front-line workers are the ones that interact the most with the customer most of the time. For example, ABC Co. is a company that owns office supply stores. The store employees are constantly receiving criticism for being rude and uncourteous to customers – ultimately leading to people choosing to buy office supplies elsewhere. This can directly affect the company’s revenues and therefore, the CFO‘s projections. A good top-manager should occasionally check on its bottom managers to see if they are properly carrying out their tasks to prevent problems like this from happening.

Tip: Walk in the store-front or factory floor at least every week or every other week. Get to know the people that are dealing with your customers or are producing your product. They will also let you in on the secrets that mid to upper management either won’t tell you or simply don’t know.

If you want to take your career as the CFO to the next level, then you need to start acting like your CEO’s wingman. Be the eyes and ears for the company. Click here to access the How to Be a Wingman guide.

chain of command

Chain of Command

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Book Value of Equity Per Share (BVPS)

Book Value of Equity Per Share (BVPS) Definition

Book Value of Equity per Share (BVPS) is a way to calculate the ratio of a company’s Stakeholder equity (as stated in the balance sheet) to the number of shares outstanding. Investors commonly use BVPS to determine if a stock price is under or overvalued by looking at the company’s current state.

Book Value vs Market Value

Investors use both Book Value and Market Value to build strong portfolios. The market price of a stock provides hints to the company’s future growth and financial stability. The book value reveals the current state of a company calculated by its balance sheet. Using both values can assist you in determining whether a stock is valued correctly, thereby helping you invest your money wisely. For example, a company’s BVPS is $4 and the market value is $10. In this case, it does not necessarily mean that the stock is overvalued. However, it might mean that the company’s assets have a high earning power or potential. In comparison, it doesn’t necessarily mean it is an undervalued stock if a company’s BVPS is $4 and the market value is $2. Instead, it might mean that the financial market has lost confidence in the company’s ability to generate future profits.

Formula

Calculate the BVPS of a company by dividing total stakeholder equity (excluding preferred shares) by total shares outstanding. Refer to the following formula to calculate BVPS:

BVPS =  Value of Common Equity / # of Shares Outstanding

Example of Book Value of Equity Per Share (BVPS)

For example, ABC & Co. has $30,000,000 of stockholder’s equity, $7,000,000 of preferred stock, and an average of 5,000,000 shares outstanding during the period measured. Calculate BVPS using the following formula:

$30,000,000 Stockholder’s Equity – $7,000,000 Preferred Stock ÷ 5,000,000 Average Shares Outstanding

= $4.60 Book Value Per Share

Download the Top 10 Destroyers of Value to identify any destroyers of value and maximize the potential value.

Book Value of Equity Per Share (BVPS)

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Book Value of Equity Per Share (BVPS)

See also:
Price to Book Value Analysis
Price to Sales Ratio Analysis

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Benefits of Using Margin

What Are the Benefits of Using Margin in Pricing?

Do you know your gross margin? What about your profit margin? Your company’s margin indicates whether it is profitable or not. A company can have an extraordinary volume of sales, but without the proper gross margin built into the economics of the company, it results in an unprofitable business.

Start pricing your products or services to result in profit every time. Click here to download our Pricing for Profit Inspection Guide to begin.

The profit margin is the amount that sales (revenue) exceeds costs. So if your profit margin is low, then it may mean that you are making little to no money at all. Setting the correct price on a product or service is the key to profitability. You want it high enough for you to make money, but low enough for products and services to still sell.

Use margin to help you calculate exactly how much you are trying to make per unit, how much you need in order to break even, and most importantly, how efficient the company is.

Margin vs Markup

It is easy to interchange and confuse both terms of “Margin and Markup.” After all, they are remarkably similar. But when it comes to the bottom line, they are recorded and calculated different. Terminology speaking, markup percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the profit.

For example, suppose the price of a product is $100, and it costs $80 to make. Both the markup and the margin would be $20. We calculate the profit margin percentage by dividing $20 by the $100 selling price and that equals to 20%. However, we calculate the markup percentage by dividing $20 by the $80 cost and the markup percentage would be equal to 25%.

Price for profit with our Pricing for Profit Inspection Guide.

It is very important to remember that there are more factors that affect the selling price than merely cost. What the market will bear, or what the customer is willing to pay, will ultimately impact the selling price. The key is to find the price that optimizes profits while maintaining a competitive advantage.

Focus on the Profit Margin

A company’s main focus when it comes to pricing should be based around their profit margin. The margin measures the efficiency of a company when using their labor and raw materials in the production process. The profitability of a company relies on the established profit margin. For this purpose, a company should spend the proper time and effort to calculate the perfect profit margin for their industry and needs.

Pricing for Profit

Discover your company’s perfect price for maximum profitability. As you analyze the benefits of using margin, it’s an opportune time to also take a look at your pricing. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Benefits of Using Margin

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Benefits of Using Margin

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