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How Businesses Can Prepare for Natural Disasters

How businesses can prepare for natural disaster

How businesses can prepare for natural disasters in the future and how to best react to them is something financial leaders and business leaders often neglect to address until after the fact. Hurricane Harvey made landfall almost two weeks ago on the Gulf Coast of Texas and Louisiana, impacting some 50 counties. It dumped an estimated 16.5 trillion gallons of water which is approximately 10 trillion more gallons than Hurricane Katrina. Entire cities have been wiped out. While the rain may have stopped, mandatory evacuations are still taking place as rivers are cresting, dams are not holding the water, and reservoirs are being released.

Because of this severe natural disaster, business has been severely disrupted. In addition, many businesses will continue to be under water for an uncertain amount of time. Some have projected that it will take up to a decade to completely rebuild from the destruction Hurricane Harvey caused. How could business owners and financial leaders have been better prepared for this natural disaster? How can they better prepare for future natural disasters? Whether it’s another hurricane, wild fire, tornado, earthquake, etc., it is important to know how your location, government assistance and external factors impacts your business. To learn what is going to impact you the most, click here to download the External Analysis whitepaper.

What We Learned From Hurricane Harvey

Flooding, loss of power, displacement, wind damage, and death have plagued the coast of Texas and Louisiana these past two weeks, and that doesn’t include the emotional toll the storm has had on many. Although we cannot change Mother Nature’s course, we can set up our businesses for success by preparing for those natural disasters that you are more prone to getting. As we discuss this topic, it is important to keep in mind that this list is not fully inclusive of everything we learned from Hurricane Harvey. We are still learning. As entrepreneurs, business owners, CFOs, and financial leaders, we should be taking note of what is happening, what works, what preparation paid off, and more.

Expect and Prepare for the Worst Case Scenario

As a business in Houston, we couldn’t help but see that a lot of businesses did not prepare for the worst case scenario. With all the computer models looking like spaghetti, many did not take the worst case scenario seriously until it became our reality. Regardless of how you approach business decisions, we cannot emphasize enough to prepare for the worst case scenario. Fifty-one inches of rain in a matter of days will cause severe damage anywhere. Infrastructure damage, flooding, and interruptions of supply chains have all been a part of our business world over the past two weeks. Even if your office is on the 32nd floor, you are not exempt from being impacted; loss of power, flooding in the parking garages, and access to the building will be interrupted.

Some of the largest oil and gas companies this past week have not been able to enter their office buildings because of flooding and convoys taking thousands to shelter. Grocery stores have had issues restocking their inventory. Gas stations across Texas have seen shortages, not because of a lack of gas, but because it cannot get there. Restaurants must go to their suppliers to collect food because their vendors will not come to them. One of the busiest airports in America has cancelled all flights. The fourth largest city in the United States has essentially stopped to focus on rebuilding homes, businesses, and lives.

How Businesses Can Prepare for Natural Disasters

All Natural Disasters Have a Worst Case Scenario

It does not matter if this was technically the worst case scenario or not; many of you and your employees in the impacted areas have been flooded, displaced, and are starting to make your slow recovery back to normal. Although our thoughts at The Strategic CFO are focused on those impacted by Hurricane Harvey, other natural disasters have occurred during the same period. Unfortunately, we cannot predict when they are going to impact us.

The first step in how businesses can prepare for natural disasters is to complete an external analysis on their business. Why? Because you need to assess what is going to impact you before you make preparations. You would not prepare for a hurricane if you were in Idaho.

If you’re ready to prepare your company for natural disasters, click here to download your free External Analysis whitepaper to start the preparation process.

How Businesses Can Prepare for Natural Disasters

Like we said before, we cannot ever fully prepare for a natural disaster because these events have a mind of their own. First, create an external analysis of your company to assess what natural events you will most likely encounter. Then create a natural disaster plan that includes a temporary location, communication plan and a way to protect any unrecoverable assets. Lastly, create a recovery plan.

Remember, keep it simple stupid. Make the plan simple so that each member of your team can remember it.

How Businesses Can Prepare for Natural DisastersIdentify Responsibilities

Just like the CFO manages the finances and the COO manages operations, each person in your company has responsibilities of their own. Identify those responsibilities in the event of a crisis. Some of the responsibilities required in the event of a natural disaster include and are not limited to:

Write It Down

The most important part of having a plan is writing it down. Even if the plan needs to be changed later, this foundation will give you a good place to start. Include evacuation routes out of the office, hiding places (in case of tornados), emergency numbers, contractor vendors for recovery, and everyone’s updated contact information.

Secure Your Assets

There are two types of assets in a disaster – recoverable and non-recoverable. For those non-recoverable assets like systems, servers, software, or documentation, consider uploading it all onto a secure cloud. By doing this, you and your team will be able to access everything needed remotely. For the recoverable assets like furniture or your building, discuss the structural integrity of your building or furniture placement for quick protection/evacuation.

Securing your assets also includes having a temporary location if your current location is out of commission after a disaster.

Communication Plan With Employees

Communicate, communicate, communicate! Your employees are most likely your largest expense so make sure to protect them. Often when a disaster strikes, companies have their employees check in with the company to update them on their situation. Have someone responsible to accounting for every person.

Communication Plan With Clients

Update your clients on what is happening with your business. When are you resuming business again? When is their product/service is going to be delivered? How does this disaster impact them? Answer all their questions as best you can. Most businesses tend to struggle getting back to a normal schedule. Simply update your clients on what is going on and why.

Create Recovery Plan

When recovering from a natural disaster, look at your national or state emergency response organization. In the case of the United States, continue to look at FEMA’s site for updates on issues regarding water usage, access points, road closures, flights, permits, helps, donations, etc.

In summary, prepare for the worst case scenario and hope for the best. Start the recovery process slow and communicate the reasons for this ramp up. Download the External Analysis to prepare your business for any natural disaster.

How Businesses Can Prepare for Natural Disasters

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How Businesses Can Prepare for Natural Disasters

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Optimistic Projections

By publishing overly-optimistic projections, your company could be at risk for internal financial problems, misleading investors, miscalculating inventory and staff, and more. As we reach the halfway point in the year,  it’s time to revisit whether your company has realistic or optimistic projections.  Are your sales projections still on target?  Now is a good time to review your projections and adjust them if need be for the third and fourth quarter.

Optimistic Projections

Recently, a client met with one of our consultants. When the consultant began preparing their sales projections using our Sales Genie Tool, the client started complaining:

Our CEO, Ryan is too optimistic. He comes from a sales background, so he consistently over-projects sales whenever I, the CFO, ask for them. I don’t want to deal with sales!  I’m not the salesperson.  But our bank is frustrated that we’re not meeting our sales.  I can’t trust Ryan to make smart sales projections goals anymore. 

Sound familiar?

Having overly-optimistic projections is like waving a loaded gun… bad things will happen.  Stakeholders in your company rely on these projections and it’s important not to mislead them.

Why are CEOs and salespeople so optimistic?

Sales-minded people often set “stretch” goals…  an appropriate way to move a company forward, but it can shoot you in the foot.  Basing projections upon stretch goals can create problems when getting financing and allocating resources.  Your banker will wonder why you fell so short of your target and your inventory manager will be scratching their head wondering why there’s excess inventory.  In short, what starts in sales can lead to issues in operations and finance down the road.

The “Bullwhip Effect”

Bullwhip_effectThe Bullwhip Effect is a term coined by Stanford University to refer to supply chain changes. The same theory can be applied to sales projections.

A financial leader who doesn’t want to (or doesn’t know how to) project sales typically trusts that the sales team is projecting correctly forgetting that they are prone to cockeyed optimism when it comes to their performance.  The financial leader then submits projections based upon those forecasts to the bank and company management thinking that they’re completely accurate.

But in this example, sales overshoots the forecast by 15%. Operations has hired a few more people to manage the incoming sales and acquired more inventory. Sales sees the numbers coming in, still believing that those numbers are accurate; they give discounts freely and don’t collect in a timely manner. Accounting recognizes that the sales have happened and accounts receivable builds to an unmanageable amount.

All of a sudden, the financial leader is in a bind. Sales aren’t meeting the goal of a 15% increase; it’s more like 2% growth. Operations has tied up all the cash expecting increased sales.  Accounting is attempting to collect all of the sales as quickly as possible. The company is out of cash.

Things have spiraled out of control due to one small, well-meaning error.

How can CFOs or other financial leaders counter over-optimism?

Unfortunately, most sales projections fail due to a one-faceted (sales only) approach to forecasting.  When projecting revenue, it is imperative that you as the financial leader set guidelines and boundaries for your sales team to prevent optimistic projections from becoming gospel.

Here’s how you do it…

#1 Set Expectations

Schedule a meeting time for the financial leaders in your company to meet with your sales team. Set expectations as you move forward in creating sales projections.

These expectations could look like:

  • Review projections quarterly and adjust them if need be at that time
  • Have sales submit weekly reports to accounting to track trends
  • Schedule weekly or monthly meeting to discuss projections

#2 Create Projections Together

The biggest cause of optimistic projections is the accounting department asking sales to provide a number without any validation or input. Without any questions, those numbers are blindly put into the forecast.

There are two different types of sales numbers you should ask for from your sales team: the actual projection and the goal projection.

The goal projection, or a stretch goal, is often what causes these optimistic forecasts. Their purpose is to set a number high enough to motivate sales team to reach it. Oftentimes, it is set higher than is possible to reach. But this sometimes results in sales improving over the previous month or year.

For example, ABC Company’s sales were $20,000 in 2015. When forecasting sales, ABC set their goal projection to be $30,000 or a 33% increase in sales. Historically, there has only been a 5% increase over the previous year. The actual goal should have been a 5% increase as that has been the trend over the past 7 years.

In a meeting, explain the difference between the two types of goals. You need to actual sales goal for your projections, not the stretch goal.

If you’re still not sure how to accurately project your sales, click here to access your free Goldilocks Sales Method tool. This tool allows you to avoid underestimating or over-projecting sales.

#3 Communication

As we’ve said multiple times, there are three essential pillars within a business: accounting, operations, and sales.  Communication between these departments is critical to the success of your company.

Set expectations between accounting and sales that communication should be a priority. If your sales team indicates that they underestimated sales, then it is their responsibility to report that adjustment in sales.  Ask sales to track sales. They should have a weekly average of sales that they need to hit. If there is a trend that they are not meeting the projections, then it’s time to adjust.

Make communication an absolute priority. There is no shame in not meeting projections;  the trick is to adjust expectations going forward.

Conclusion

By proving that you as the financial leader or CFO can add value to a company through setting realistic and accurate sales projections, you’ll be better equipped to set yourself up for success.

For more ways to add value to a company, download the Goldilocks Sales Method to start projecting accurately and building credibility through your sales forecast.

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How to Manage Organizational Diversity

diversityIn the United States, we live in a melting pot of diversity. Since diversity is present in American society, you would probably expect it to be prevalent in most workplaces. Unfortunately, as a society we often look at diversity as a disadvantage instead of an opportunity to help us succeed. Interpersonal conflict caused by diversity leads organizations in the wrong direction. We should instead utilize diversity to unite and strengthen our organizations, not to create divisions.  Diverse demographics, experiences, and knowledge in organizations will foster creativity, innovation, and improvement.

How to Manage Organizational Diversity

Following are strategies on how to manage organizational diversity in your business:

1.  Effective Communication

Communication in the workplace is crucial to unite and strengthen the organization on the same values, policies, and goals. Thus, employers should clearly communicate expectations to employees. In the beginning, employers and managers must outline expectations for employees about workplace conduct, including how employees should handle workplace diversity. Adapting to diversity keeps an organization flexible and strong.

2.  Cultural Sensitivity

Organizations play a role in employees’ sensitivity to different cultures. From the start, employees should be taught to handle organizational diversity in a professional and respectful manner. Structuring projects to be balanced with diverse ethnicities, genders, ages, and races will expose employees to diversity and eliminate prejudices and discrimination. As a result, this enables employees to identify and emphasize with others.

3.  Commitment to Diversity

The top management of an organization must serve as an example to other employees by demonstrating a commitment to diversity. If inequality or interpersonal conflicts exist due to diversity, management must intervene. Accountability is critical if managers want employees to take be respectful of diverse individuals. If managers and employees are accountable for their conduct, then they will take pride in how they treat other employees.

It takes hard work and commitment to manage a diverse workplace. Top managers and employees should therefore strive to create an organizational culture taking pride in the individuality of people. By utilizing employees’ unique talents and abilities, you can then unite and strengthen your organizations and develop a competitive advantage in the market. What types of diversity do you have in your workplace?

If you want to learn more financial leadership skills, then download the free 7 Habits of Highly Effective CFOs.

How to Manage Organizational Diversity

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Manage your Banking Relationship

See Also:
Financial Jargon
Categories of Banks
Finding the Right Lender
Funding Source Versus Lender
Interest Definition
Is it Time to Find a New Bank?

Manage Your Banking Relationship

In order to manage your banking relationship a key strategy is to establish lines of open communication with your banker. Treat them as your friend instead of an adversary. If you are in danger of breaking a covenant, you could very well have a much better experience if you make the banker aware of the potential problem than attempting to hide it or delay breaking the news. The earlier the banker is aware, the more likely it is that they can assist you in mitigating the problem and finding a suitable solution for you both. In addition, the more trust you build with your lender, the easier it may be for you to borrow in the future as your needs change.

Managing your banking relationship is a part of being the trusted advisor to your CEO. Learn how you can be the best wingman with our free How to be a Wingman guide!

manage your banking relationship

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Relationship With Your Lender

See Also:
What do Lenders Really Look at
What Does a Lender Want to Know
Don’t Tell Your Lender Everything
Due Diligence on Lenders
Every Business Has a Funding Source, Few Have a Lender

Relationship With Your Lender

The question I get most often from people is “What affects my relationship with my lender the most?”

Communication

The answer is communication. Communication or lack there of is the greatest area of weakness between entrepreneurs and their lenders. When news is bad, entrepreneurs tend to shut down communication thinking the lender will be upset. The entrepreneur needs to understand that the lender may be concerned, and their reactions will be far less negative than if they are told nothing. Just as in your personal relationship, nothing upsets your partner more than surprises. The same is true with your lender.

Changing Jobs

Don’t blame yourself totally, because not all the weaknesses in this lending relationship rest with the entrepreneur. Lenders change jobs more frequently than politicians change their minds. As a result of these jobs changes, many lenders are unfamiliar with their customers, and become wary of extending credit even when the business deserves the credit.

Relationships Are Challenging

Relationships, whether personal or business, are always challenging. But in order for the entrepreneur to survive, an environment must be created that is conducive to fostering a productive, long-lasting relationship with your lender. Clear, frequent, open lines of communication are the most necessary component of a strong entrepreneur-lender relationship. Business owners and lenders should talk at least quarterly. And, when things are changing rapidly in the business, they may need to be talking weekly.

Invite Your Banker Inside

Lenders will always require financial statements and the frequency will depend on the type of loan. However, the entrepreneur has to realize there is more involved in communication than mailing out financial statements. Invite the lender to tour you facilities, but don’t extend the invitation just before you need their money, as that will create suspicion. Communicate with your lender when something important happens, such as gaining a major account. Be sure to put your comments in writing. This provides your lender with documentation should questions arise.

Conclusion

And remember, a lending relationship is identical to any relationship, because it is based on trust. Therefore, a lending relationship is the same as your personal relationship, in that it needs to be nurtured day in and day out, not once a year. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

relationship with your lender

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How to Run an Effective Meeting

How to Run an Effective Meeting

When you run an effective meeting, it saves both time and money. In addition, you are also able to accomplish more. There are 5 steps on how to run an effective meeting, including the following:

Consensus/Feedback

Take a few minutes at the start of a meeting to clarify everyone’s understanding of the basic elements: purpose, agenda, ground rules, process, etc. Leave a few minutes at the end of a meeting for feedback, e.g. what worked, what didn’t work; did we achieve the meeting goals, why / why not.

Agenda/Purpose

Nothing ruins a meeting faster than getting off-track. Staying “on point” per an agenda should be your primary objective when you are running a meeting. All agendas should be in writing. Distribute them in advance whenever possible and make sure everyone understands why they’re there at the start of the meeting.

Ground Rules

Set rules for your meetings. Are cell phones allowed to be on? Is anyone allowed to speak up anytime he/she has something to say? When are challenges or criticisms allowed? Ground rules governing group behavior should be posted somewhere in the meeting space where everyone can see them. Get “buy-in” during your opening remarks.

Leadership/Facilitation

Just because you called the meeting or just because you’re “the boss” doesn’t mean you have to lead or facilitate the meeting. Ideally, someone who is not a stakeholder in the meeting should facilitate. Two benefits come from this. First, the facilitator can concentrate on making sure the meeting is productive without worrying about the content of the outcome. Second, you are free to engage fully in the meeting content without worrying about the process of the meeting. Also, ask another person to be a scribe when lists are being written on a flip chart or dry-erase board.

Process

From brainstorming for a new idea to getting through a highly structured weekly staff meeting, there is a process that can help move the group smoothly from start to finish. Get clarity that everyone understands the process, and then get everyone involved.

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

how to run an effective meeting

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how to run an effective meeting

See Also:
How to compensate sales person
How to Hire New Employees
Employee Health Insurance Plan
How to develop a controller
How To Train People For Success

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Estimate Expenses for Annual Budget

See Also:
Capital Budgeting Methods
Zero-Based Budget
Cash Flow Projections
ProForma Financial Statements
Proforma Earnings

Estimate Expenses for Annual Budget

How do you estimate expenses for annual budget in your company? Estimating expenditures for your business can be much more than just a guess. You can use data and previous experience to make an educated estimate, therefore, creating a much more realistic budget.

A budget is only successful if the expense and income estimates are feasible. This means that whatever you put on paper can only work, if it is possible. This is where making educated estimates is going to be much more useful than a simple guess.

Make Educated Estimates for Annual Budget

The steps you will need to take in order to make an educated estimate are as follows:

1. Start with what you know. If you know that the rent on the building will always be $1,000 this becomes an expenditure that you know. If you know that every month for the last three months you have spend $300 on supplies for productivity, then estimate that you will be doing the same.

2. If you anticipate increased/decreased expenses due to external economic factors, increased sales resulting from added expenses (ex: marketing), or other changes in expenses due to market/business factors (ex: insurance premium rate changes), it is recommended to use percentage changes if dollar figures are unknown.

3. Be sure to look at any previous data you have gathered where your expenditures are concerned. The more data you have, the better your educated estimate will be. This is because patterns are bound to repeat themselves.

4. Do not be afraid to over estimate. It is better to have a little extra ready for expenses, than to be short of it. For instance if know your communication expenses have been averaging $545.00 per month then up your expense to $600 per month.

5. Also do research of other business that are similar to yours. Ask other professionals who work in your business, or other businesses what they would estimate for their expenses.

Conclusion

Overall the best way to make educated estimates on your expenses is to know as much as you possibly can about what you need to pay out. Expenses are not always precise. They may be something that you will need to at least be prepared for. So if possible always allow a little extra for the unexpected. Because expecting the unexpected will help you to be prepared for those expenses you do not plan on.

These ideas should help you to be prepared for estimating for your expenses for your business when writing an annual budget. Keep in mind that the best budget allows for some flexibility.

Estimate Expenses for annual budget

 

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