Strategic Value Optimization: How to Maximize Profits and Cash Flow
We finally did it!
You’ve been asking (some of you begging) for us to put our financial knowledge base online and, at long last, we decided to listen.
To help lead you through our financial leadership wonderland, we put together this guide. Whether you’re new to our process or just looking for a compendium of the resources we offer, keep reading.
When our founder, Jim Wilkinson, first began financial consulting over 25 years ago, every problem was new. So each solution he created was one-of-a-kind.
Over time, he began to anticipate how these solutions could be applied across multiple clients’ problems. Even better, he could prevent the “problem” from occurring by implementing the known solution ahead of time.
But as he began to document these processes and solutions, it became clear to me that most of the problems he encountered were related to profitability, cash flow, or both.
And so he decided that to truly add value as a financial leader, he must have a system to maximize profits and cash flow.
We decided to call the system Strategic Value Optimization (SVO).
Steps to Strategic Value Optimization (SVO)
Below is a map of the Strategic Value Optimization system. Although it’s not fancy or detailed, adding value as a financial leader isn’t about neat tricks and slick marketing. It’s really very simple… you must maximize profits and cash flow.
Click here for a PDF version of the map
These are the SVO steps:
- Ask questions (lots and lots of questions)
- Analyze the present
- Anticipate the future
- Assess your opportunities
- Advise your team
See, we told you it was simple. The most powerful solutions are often the simplest.
In this guide, we’ll walk through each of the steps in the Strategic Value Optimization process. Additionally, we’ll direct you to additional resources that you will find for free on our blogs and wikis as well as tools and training only available to our SCFO Lab members.
So let’s get started…
Step 1 – Ask Questions
Step 1 may be the most difficult for some of you introverts. It actually requires you to get out of your office and go talk to the friendly folks in all the other departments around your company. This is the only way you’re going to get the real story behind what’s going on. Staring at spreadsheets won’t tell you much.
Who do you talk to?
- Sales force
- Operations team
- Human resources
Nobody is off limits. You might be surprised how much intel the person in the mail room has for you. Profit and cash flow improvement ideas could be hiding anywhere.
What do you ask?
- Sales projections for the near term
- New projects on the horizon
- Large projects falling off
- Problem customers
- Turnover issues
- Availability of talent
- Planned capital purchases
- Productivity issues
- And the list goes on…
You basically just talk to them about their job. How do they know if they’ve had a good day? What information or resources would help them do their job better? What key metrics do they use to gauge departmental performance?
Then you go back to your nice, quiet office and chew on all the new information you’ve gathered.
Asking these questions not only gives you the info you need for Step 2, it helps you build important relationships within the company that you’ll need in Step 5.
Step 2 – Analyze the Present
Now that you have the lay of the land, it’s time to do some analysis. And no, we don’t mean start digging through the financial statements looking for answers…
Why not? Because traditional financial statements only tell you what happened last month, last quarter, last year. You need to be out in front of issues and to do that, you need more timely information.
Consider the chart above. Week 1 you lose money. In Week 2, you also lose money. Then in Week 3, you make money. By month’s end, you’re down $2,000. Unfortunately, you don’t know it until 6-8 weeks later (depending upon how fast you crank out financials). If only you had known at the end of Week 1 that you’d lost money…
Fortunately, that’s possible. You had the initiative to talk to your peers in other departments and you know what metrics they are looking at (or what they wish they had).
Here are some of the interim reports you can develop using the metrics you’ve gathered:
Developing and maintaining these reports will allow you react to conditions on the ground much more quickly. It will also help you make sure that you have the resources you need to keep moving forward.
Step 3 – Anticipate the Future
Now that you’ve got some more current info to make decisions with, it’s time to shine up your crystal ball. Daily/weekly reporting is very useful and can help you react quickly, but wouldn’t it be even better if you knew what trouble or opportunity was ahead before showed up in your reports?
Enter projections, stage right…
You probably wouldn’t think of driving your car solely looking in the rearview or side mirrors, would you? Of course not!
Running a business without projections isn’t much different than driving your car looking into the mirrors. In order to prepare for what’s ahead, you need to be looking down the road.
What Should You Project?
- Income statement
- Balance sheet
- Cash flows
- Debt covenants
- Inventory levels
- Pretty much anything you can anticipate!
You may already have some of these projections in place. But chances are, there are items on this list that are missing. While some of these things may seem unnecessary, having your finger on the pulse of everything that’s coming can often mean the difference between seizing an opportunity and simply dealing with consequences.
Who will help you come up with these projections? Your new friends in sales and operations, that’s who. You can take your best guess at what the sales pipeline and upcoming orders look like, but only the “boots on the ground” will know what’s really coming and when. See, aren’t you glad you got to know them?
So, you’ve developed your projections. You’re done til next year, right? Wrong. Most projections are worthless after a couple of months unless they are adjusted based upon changing expectations. You must revisit and revise your projections every month based upon current information!
Step 4 – Assess Your Opportunities
Ok, so you’ve figured out what the issues are. Now what?
Now you start looking for the root cause of the issue and developing a plan to address it. Often, the cause comes to light because of negative trends in the metrics you’ve been tracking. Other times, you may need to dig a little deeper…
- Costs out of whack
- Prices problems
- Productivity issues
- Cash is tight
- Causes yet to be uncovered
Once you’ve identified what’s causing the issue(s), you can move on to the fun part – developing a solution. That’s right, you get to be the hero now…
Here are some possible opportunities you have based upon what’s causing the issue:
Step 5 – Advise Your Team
The last step in the Strategic Value Optimization process is to advise your team. You’ve done a lot of work uncovering issues and opportunities and developing a plan to address them, but none of it matters if you don’t execute the plan.
In order to do that, you’ll need help.
It’s highly unlikely that all of the solutions you developed can be executed by you alone, so it’s time to once again get up out of your chair and go talk to people. Only this time, it’ll be more challenging. You want people to help you and you have to convince them to do it. Aren’t you glad you built those bridges?
A huge part of providing leadership is establishing yourself as a leader. Regardless of your position, you can be a leader. In fact, having a “leader-like” title won’t get you very far in convincing people to follow you. True leaders are the people others look to when there’s a problem. They’re the people with answers.
Ways to Demonstrate Leadership
Here are a few ways to demonstrate leadership:
- Assist in team building
- Develop incentive comp plans
- Analyze key ratios and develop plans to improve them
- Assist with due diligence
- Get involved in the banking relationship
- Interface with investors
You’ll notice that most of these ideas have little to do with finance. Being a leader means looking at the company as a whole and identifying ways you can add value beyond your current role. Furthermore, it’s the soft skills that set leaders apart from the rest.
It’s All Up To You
While it’s true that the Strategic Value Optimization process is simple, it does take a good deal of time and work. So why would anyone want to go to the trouble?
Imagine that through Strategic Value Optimization, you identify a way to improve profitability or cash flow by a mere 2% of sales.
In a $10 million company – that’s a $200,000 improvement
And in a $50 million company – that’s a $1,000,000 improvement
And in a $250 million company – that’s a $5,000,000 improvement!
Think that might get someone’s attention?
The fact is, it’s not terribly difficult to identify ways to maximize profitability and cash flow. The trick is actually doing it and getting everyone on board to help you. To do that you need a system.
Strategic Value Optimization is that system.
So there you have it – the product of over 25 years of consulting with entrepreneurs small and large. We’ve showed you the way, the rest is up to you.
(If you want unlimited access to all of our tools, tip sheets, and execution plans, then click here to join the SCFO Lab.)