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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.


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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.


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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 is 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, and 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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Invest in Leadership Development

When you invest in leadership development, you are making an investment. It’s something that you pay good money for and expect a return on your investment. But what many leaders don’t realize is that leadership development should be strategic. We once had a coaching participant (CFO) who worked in a family company. Once the CEO retires, the CFO is set to become the CEO. Instead of going into the job blind or get coaching at the wrong time, this individual sought out coaching before he was set to take over the company. So, why invest in leadership development in the first place?

Invest in Leadership Development

Why Invest in Leadership Development

People will always be a good investment. Why? Because without people, you will not be able to accomplish all  of your goals for your company. There’s a phrase… The tone starts at the top or the fish rots from the head down. Whichever phrase you prefer, it hints at the same thing. Success (or failure) is a result of the leadership of a company. If you want a future for your company, then you need to focus on your leadership and management. You can accomplish this in 2 ways – 1) hire good leaders and 2) invest in leadership development for existing company leaders.

A legal entity should stand on its own no matter what changes are made at the top. There should always be a succession plan whereby management should be able to step up to executive roles. Without investing in your team, this will not happen.

The second option rides on the fact that you have already invested in a current employees with their compensation, benefits, etc. Now, it’s time to get them the coaching they need to further increase their value to your company.

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

Reasons to Invest in Leadership Development

There are several reasons to invest in leadership development including improving profitability, retaining talent, and improving return on investment. Harvard’s research report on The State of Leadership Development discusses how leadership development addresses the “demands for change to address threats from global competition and technology-driven upstarts; the need to engage a multigenerational workforce with a range of work styles; and the imperative to cultivate a new generation of leaders who can meet these needs and thrive.” Simply put, companies need to address competition, culture, work styles, and generational differences to compete on a global scale.

Improve Profitability

If your leaders know how to improve profitability with the tools, resources, and second-hand experience from a leadership development program, then they will become evermore valuable to your firm. Leadership development will coach them how to make strategic decisions, how to lead effectively, and how to find opportunities. All of those benefits have the opportunity to improve profitability.

Day 2 of the Financial Leadership Workshop is all about improve profitability and cash flow. Click here to learn more, then contact us to register for the next series.

Retain Talent

In addition, companies cannot motivate all people by money. In fact, financial gain isn’t the only thing many employees negotiate. The next “gain” many negotiate for is mentorship, training, coaching, and further leadership development. That should tell you something. We all know the cost of turnover is high and can potentially make a dent in profitability. Your company’s goal should be to retain talent for as long as possible.

Improve Return on Investment

Many leadership development programs do not effectively communicate how they are going to improve return on investment. A good CFO or financial leader should be able to increase value 1-2% of sales in profits. For example, if a company has $1mm in sales, then a CFO should be able to increase profitability at least $10-20,000. And it goes up from there! If the investment is greater than 1-2% of sales, then I would advise you to find a different program. How much return can you expect from investing in your leaders? Financial leaders should always be looking at ways of adding value.

Financial Leadership Development

More specifically, your financial leadership needs to be further developed in their leadership skills. In our Financial Leadership Workshop, I enable my students to go beyond the role of CFO/CEO to become the central financial leader in the company. Furthermore, our curriculum empowers you to become both an influence and decision maker in your company.

Any financial leadership development program worth investing in should accomplish a couple things. It should make the shift from numbers cruncher to financial leader. It should also cover how technology changes the role. Obviously, it should address profits and cash flow. There are many other topics that I could list here, but you can read more about what you should be prepared to walk away from a coaching workshop here.

Finding the Right Financial Leadership Development Program

It all starts with who is coaching the program. For example, if a 26-year old with no financial executive experience began coaching financial leadership, then there would be no credibility or experience behind that program. In comparison, if the course is coached by a 28-year financial executive who is seasoned and experienced either in a niche market or a variety of markets, then the only thing you need to look for is the fit. Finding the right financial leadership development program begins with the curriculum. Does it coach on the topics you need to coached up on? If so, then you need to also evaluate the following:

  • Logistics (time, location, schedule, etc.)
  • Cost
  • Benefits
  • The Coach

Right now, registration is open for our Financial Leadership Workshop Gamma Series starting this October. Click here to learn more about our program and contact us to see if it’s the right fit for you.

In the meantime, I also wanted to gift you our 7 Habits of Highly Effective CFOs. This whitepaper is by far our most popular whitepaper and is just a snippet of what to expect in our Financial Leadership Workshop.

Invest in Leadership Development

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Realizing Profit Potential

Over the years, we have asked our clients what business issues keep them up at night. Consistently, realizing profit potential was one of the top issues that kept business owners up at night. Is there money left on the table that hasn’t been realized? Is there potential that hasn’t been capitalized on yet? As a financial leader, it’s your job to maximize the profitability of your company.

Realizing Profit PotentialWhat is Profit Potential?

Profit potential indicates the capacity for a company to make more money in future business and trading transactions. I like referring to it as the monetization of your total capacity to drive earnings. Furthermore, profit potential measures the profit a company can achieve if all their operations are at peak efficiency. This includes pricing, efficiencies, operations, turnover, etc. Also, look at profit potential as the maximum revenue with the lowest possible costs. It’s important to keep in mind that “potential” hints at what a company can accomplish with ideal conditions. But most companies do not meet these conditions in reality. Also, be realistic about peak performance. For example, a manufacturing plant simply can not run at 100% capacity. There is down time for things like maintenance.

A great way to start realizing profit potential is to look at your pricing. Click here to learn how price effectively with our Pricing for Profit Inspection Guide.

Steps to Realizing Profit Potential

What are the steps to realizing profit potential? While I could probably write hundreds of different ways to realize a company’s profit potential, I have compiled a few steps that every small to medium size company can focus on first.

Focus on Throughput

Throughput is “is the number of units of output a company produces and sells over a period of time.” Remember, only units both produced and sold during the time period count. Profit potential lies between producing X number of products while simultaneously reducing operating and inventory expenses.

Do not forget to take into consideration your Total Units produced must consider down time for routine maintenance.

To calculate throughput, use the following formulas:

Throughput = Productive Capacity x Productive Processing Time x Process Yield 

Throughput =   Total Units    x  Processing Time  x  Good Units 
             Processing Time       Total Time        Total Units 

Analyze SG&A

Another step to realizing profit potential includes analyzing your company’s SG&A expenses. SG&A stands for Selling, General, and Administrative expenses. It is also known as overhead. When a company analyzes SG&A, they will realize this is the easiest place to looking for unrealized profit potential. Does your company have a large number of non-sales personnel? Are those employees needed to operate? If not, then merge responsibilities for those employees into the roles of essential personnel. Do you carry a lot of expenses that if cut would not disrupt either the manufacturing or sales processes? If so, then analyze whether those expenses are necessary or required.  Do you have sales people that are compensated with a base salary when it should be commission based?  How did you build your budget for SG&A this year? Did you just take last years budget and add 5%, or did you really analyze SG&A?

If you have cut all the SG&A possible and are still not profitable, then take a look at your pricing with our Pricing for Profit Inspection Guide.

Realizing Profit Potential

Know What Is Valued

Companies are giving away more value per dollar of revenue than ever before. That’s what marketing teams are being taught to do. However, many companies are giving value away without being able to actually afford it. Look at your minimum viable product. Is all the extra bells and whistles you are adding to your product and service actually adding value to your bottom line? Ask yourself whether customers would leave if you cut those extra “value-adders”. If you determine that they would not leave, then streamline your product and/or service.

Of course, I am not saying to decrease the quality or tear away value that is actually valued. However, companies should know what the company values. Then, they should focus on that. For example, Tesla offers an incredible experience with its technology. It’s no doubt that they have found value in their vehicle. But what if Tesla started including a fuzzy steering wheel cover? Their customers would probably think that the fuzzy cover is tacky and does not add much value. They want to feel the leather under their finger tips. Therefore, Tesla should stop spending money purchasing the unwanted fuzzy steering wheel covers for their customers.

Address Your Culture

Another thing that may be impacting your profitability is your company’s culture. When you address your culture, look at productivity, efficiency, accuracy, moral and the people.

For example, a sales driven firm knows they could be more profitable. They have reduced their costs and priced their products for profitability. However, there is still something missing. The financial leader walks through the sales department, factory floor, and ends up in the customer service department. There are no smiles, yelling, and phones slamming. Unfortunately, no matter how hard sales and operations worked, customer service representatives were loosing more customers than normal. The financial leader discovered that their culture was all about making the sale and delivering it. They did not value servicing customers or continuing to build a relationship with those customers.

In another example, a company noticed they were only focusing on the unprofitable or lower margin clients. The profitable customers did not have the same level of attention. Instead of loosing the unprofitable clients, they chose to pull back support and created a paid support program. If those needy customers wanted more support, then they were going to have to pay for it.

Analyze Pricing

Are you pricing for profitability? By now, you should have looked at your COGS and SG&A (or operating expenses). If you have already reduced those costs as much as possible, then determine if you are profitable or not. If you are still not profitable or as profitable as your shareholders want, then you need to make changes at the top – pricing. Access our Pricing for Profit Inspection Guide to learn how to price profitably.

Realizing Profit Potential

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The Silo Effect

Silo Effect

We hear about the Silo effect in companies all the time. Silos are formed in the large public companies as well as in small private companies. These organizational Silos can impact the profit potential of an organization because each department or silo is kept separate from one another. In this blog, we’re looking at the Silo Effect and how it impacts your company.

Organizational Silos In Your Company

In business a Silo is a department, service unit, operating unit, business unit that does not have good communication with other units.  Thus leading to a dysfunctional organization.  The Silo operates only for its own benefit and not for the benefit of the entire enterprise. One Silo usually points to other silos when there are problems or issues. Silos have may have their own teams, but they are not part of a broader team – the company as a whole.

Get the financial leadership skills you need to be more effective in breaking down organizational silos. Click here to access our 7 Habits of Highly Effective CFOs and guide your team to a silo-free environment.

How Silos Are Created

Before you can break down the barriers (Silos) between departments, you need to know how Silos are created. I have found that like everything else, the tone starts at the top. If the top brass does not permit his company to have Silos, then you will not. Many CEOs may argue that it is easier said than done. I once operated a fairly good size company and they had two very distinct business units. One was a service company, and the other was a regulated utility. You could not have a more diverse culture in each business unit. As a result, each business unit had deeply entrenched Silos. Once the top brass held management and employees accountable, we saw silos starting to dissipate.

silo effect

Difficulty in Breaking Down Silos

When the CEO or owner allows for different areas in the company to develop Silos, it is very difficult to break those down. But it is doable. Two of the most common areas that are affected by Silos is the operations side of the business and the accounting side of the business. It is easy to allow these to develop. Operations people are the people dealing with customers and the outside world; they directly generate sales. They all understand how to make a widget or draw up complicated engineering plans. While the accountants tend to be “the back office”.  The accountants do not usually interact with the customers and remain in their own department.  Few accounting departments or accountants understand how to make the widget. I bet many have never left the office to understand the field operations or manufacturing facility.  So it is easy for the accountants to develop their own Silos.

So, who is right and who is wrong? They are both wrong. It is up to leadership to ensure that the operating side of the business understand why things are important in the back office. It is also very important for accountants to understand the complexity of any business.

It’s up to you as the financial or business leader to break those silos down. Access our 7 Habits of Highly Effective CFOs to learn about the financial leadership skills you need to do that.

From Operations To P&L Leader

This is precisely why we developed our new workshop From Operations to P&L Leader. I have seen it time and time again… A talented sales person or operations person who gets promoted, and someone hands him a P&L (Profit & Loss Statement). They expect that promoted person to manage the P&L. But has anyone trained the operations person and really explained what a P&L is? Or how to analyze it? Or better yet, has anyone educated the operations person on working capital, the balance sheet, and the cash flow statement? If someone is going to manage the P&L, then that person should probably understand more than just the P&L. Well, we do offer this 4-day workshop to operations leaders. Learn more about the workshop here.

silo effect

What about the accountant? I believe it is up to every CFO to educate the Controller and their accounting department on what the operation does. How do you make the widgets? What do those smart engineers do? What are the challenges and obstacles day to day? Why are the required raw materials constantly changing for that petrochemical plant? If an accountant does not understand what a reactor looks like, then the accountant is missing a big piece of the puzzle. Once the accountants understand the operations, things will work smoother.

The Silo Effect

 Let’s look into the Silo Effect. What is the effect of a Silo or Silos in your company? It increase the number of inefficiencies in your company. You risk duplicating the work, not communicating between departments, wasting time etc. There is a lack of communication between departments in your company. As a result, the company does not work as one. It will cost you in cash. Tension will eventually rise among the different departments. And rumors will begin to spread. There will be delays in the operation – impacting both throughput and/or progress and the bottom line.

Case Study On The Silo Effect

For example, a manufacturer had a somewhat complicated business. They had very talented people in the operating side of the business as well as very talented people in accounting. Their cost accounting is a mess after the implementation of a new system. The system was supposed to solve a lot of issues, but the margins made no sense at all. (Operations blamed accounting, accounting blamed operations). After many interviews and site visits, we concluded in our assessment that the technical cost accounting part of it was relatively not that complicated. What was the problem? The company created Silos.

Accounting never explained to the operations side of the business what accounting needed, and they were sticking to their old ways of doing things. Accounting and operations needed to “talk” to each other and understand what the other needed. The lack of communication led to garbage in and garbage out of the system. They thought they were communicating because they would sit down monthly and have a meeting. But just because they were sitting in front of each other, it did not mean they were “talking” to each other. The meetings included a bunch of finger pointing. Furthermore, both sides not willing to change or listen to the other.

These silos contributed to bad data and unreliable financial statements. It also resulted in issues with lenders and investors. I wish I could say that our firm provided this incredible technical solution for cost accounting. What we did provide was identifying the silos, the lack of communication, and the lack of processes. Then we took corrective action with the ownership and broke down the silos.

Breaking The Silos

By breaking the silos, forcing departments to communicate and having both sides take ownership of the processes established, they can now enjoy reliable financial statements and less pressure from lenders/investors. How do you identify if your company is feeling the silo effect? You need to look from the 40,000 foot level. This is just 1 of the 7 Habits of Highly Effective CFOs. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

Silo Effect

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Battling Uncertainty in Your Company

Battling Uncertainty in Your CompanyUncertainty is all around. Sometimes, it’s more apparent than not. We subconsciously disregard a good chunk of unknowns in our personal life, but in our businesses, anything uncertain tends to cause chaos. Where is my next customer? Am I going to be able to pay bills? Is the economic climate going to pick up? We ask all these questions (and much more). For example, many parts of Houston got destroyed by Hurricane Harvey and it’s 51 inches of rain. As a result, many businesses were underwater and would take months to repair their brick-and-mortar store front. Other business, such as real estate, had to navigate multiple properties being under several feet of water – and no longer sellable either at all or at the same price. Battling uncertainty in your company is a continual fight that you must endure if you want to success.

Battling Uncertainty in Your Company

When you are battling uncertainty in your company, figure out what you know and don’t know. Why? You may be surprised of what you do know and don’t know. It also allows you to see areas of strengths, weaknesses, opportunities, and threats. For example, let’s look at the Astros baseball team – also, the World Series Champions of 2017. They had great players, great coaches, and excelled in every practice and game. But there was no guarantee that they would beat the San Diego Dodgers. In fact, it could have very easily gone the other way as the Dodgers have great players, great coaches, and excelled in every practice and game. There’s a level of uncertainty that has influence over your future. If the Astros were not able to identify a huge external threat, then they could have been potentially blindsided.

Also, it is important to know what you can control and what you simply cannot control.  Many times, we spend hours worrying about those things we cannot control. If you can’t control it, move on and spend your time solving those things you can control. I saw how uncertainty affected many companies with the most recent downturn in the oil and gas industry. Many companies where either affected directly or indirectly when oil prices plunged from $100/BBL down to below $30/BBL. This industry change caused a lot of companies to go into panic mode and uncertainty.

That’s why it is so important to conduct a SWOT Analysis while battling uncertainty in your company.

battling uncertainty in your company

Conduct a SWOT Analysis

Once you have identified what you know and don’t know, conduct a SWOT Analysis. This is a snapshot of what is going on both internally and externally. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and weaknesses addresses your internal company health. What are your core competencies? Are you maximizing their potential? In comparison, opportunities and threats addresses the external factors that have influence over your company – government, policy, economy, movements, etc.

To get started on your SWOT Analysis, click here to download our External Analysis whitepaper – addressed the OT of SWOT.

Create Plans for Known Threats And Opportunities

This is a great time to create plans for known threats and opportunities. The Harvard Business Review says that, “Uncertain times, when some things are on hold, provide a good opportunity for fix-ups and clean-ups. Uncertainty makes it tempting to let things deteriorate (maybe we won’t keep this office going or live in this place any longer).” First, fix the things you know are broken and improve on the things that could be better. Create an action plan that will address these known threats and opportunities.

In addition, times of uncertainty usually harbor very creative doomsday scenarios. Rumors spread quickly, and this season of uncertainty can cause strife among your team. Use this creative energy to find an opportunity that will make one thing certain. Ask your team to research, talk about, think of, and find opportunities to take. Sometimes, it begins will brainstorming where (not what) the opportunity lies.  As a business leader/executive communication is a priority in times of uncertainty.  You would be surprised how many times I have seen business leaders go silent in times of crisis.  This is the worst thing you can do, and it only makes things worse in your company as a whole.

Battling Uncertainty in Your CompanyAddress Your Company Culture

Typically, whenever an entrepreneur or CEO loses sight on what is going to happen, they become frantic and are not able to think clearly. As a result, that panic travels down the organization chart and no one can make a smart decision. In times of battling uncertainty in your company, address your company culture.

Address your challenges upfront. There will always be things you cannot tell your employees but share what you can. Get a feel for moral in the organization. If you have to make some difficult decisions do so and assure those staying this was the best for the company as a whole and benefits them directly.

Then, harness their creative juices to generate ideas and to find opportunities. Engage every employee – from the lowliest employee to the top leader.

After your employees are feeling certain that something is being done to make the uncertainty certain, engage your customers. Thank them for their loyalty and share your genuine appreciation for them. The last thing that you want to happen is for you to lose a big customer and for your employees to follow suit because they are uncertain of their employment.

Where Uncertainty Comes From

Business Dictionary defines uncertainty as a “situation where the current state of knowledge is such that (1) the order or nature of things is unknown, (2) the consequences, extent, or magnitude of circumstances, conditions, or events is unpredictable, and (3) credible probabilities to possible outcomes cannot be assigned. Although too much uncertainty is undesirable, manageable uncertainty provides the freedom to make creative decisions.” In other words, uncertainty comes from what we don’t know. There is no way that we could ever know everything! But there’s an opportunity when looking at the certainty of uncertainty.

The Certainty of Uncertainty

The good thing about uncertainty is that we are certain it will always be in our midst. If you know that there will always be uncertainty, then you can separate what you know and don’t know. Think about science – whether it’s how the world was created or how gravity works, etc. Scientists have created these theories will all the information that they have found and researched. Those theories hold true until more information comes along that proves otherwise. If we compared theories 300-400 years ago to now, we would be shocked that they thought that way. In the spirit of science, financial leaders must make decisions knowing what they know at the time and adapting as they get more information.

Leading Through Uncertainty

Ram Charan, author of The Attacker’s Advantage: Turning Uncertainty Into Breakthrough Opportunities, says that, “risk takers are catalysts, operating in offense mode… They’re doers who take risks based partly on fact and partly on their imagination about what could happen when those forces combine in what others might later call a convergence… The catalyst, in fact, is the one who often creates the convergence” (Fast Company). When you are leading through uncertainty, make a decision and avoid delaying for more information that you know is not going to be there. Take ownership of those decisions and charge forward. Remember, a fish rots from the head down. If you as the financial leader fail to lead confidently, then the company underneath you will begin to crumble.

It is also important to be a servant leader! A Harvard Business Review article says that, “when lives are on the line, servant-leadership is the only leadership model that truly inspires a team, because servant-leadership demonstrates that you, as the leader, put your people’s welfare ahead of your own.”

To prevent chaos, it’s important that you know how to overcome obstacles and consequently, be prepared to react to external factors. Click here to access our free External Analysis Whitepaper and gear your business up to navigate uncertainty.

Battling Uncertainty in Your Company

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Culture Drives Financial Results

culture drives financial results

As social media and search engines become more intelligent and prevalent, companies are battling the image that others outside the organization see as well as what employees feel. Entrepreneur Magazine even said that, “Company culture is more important than ever. It’s not that company culture was ever unimportant, but it’s quickly proving to be a “must-have” rather than a “nice-to-have.”” Have you ever worked in a company that had a bad culture? I have. I counted down the minutes until I could leave the office. Work for me was not enjoyable. As the financial leader of the company, I was not focused on driving financial results. Simply put, culture drives financial results.

Culture starts with your team. Before you add anyone else into your organization, click here to access your free 5 Guiding Principles for Recruiting a Star-Quality Team.

How Company Culture Drives Financial Results

Before we get into how company culture drives financial results, what is culture? Investopedia defines culture as “the beliefs and behaviors that determine how a company’s employees and management interact and handle outside business transactions.” In other words, you cannot say and it be with culture. Culture is organically developed over months or years. It depends on how is in the organization and how the organization acts as a whole through trials and successes.

Culture is also often created by the corporate governance and leadership of the organization. The tone starts at the top. Cultural changes happen also, especially when there is a change in ownership. A change in ownership can bring a change in governance, personalities, processes, and even language. Depending on the complexity of business, it may take from one year to three years to really complete an integration of an acquisition. The leadership of the organization must know what is going on in the culture of the organization as this has a direct effect on the bottom line.

Increased Performance

If employees are happy in an organization, then they will have increased performance. Some of the causes of increased performance stems from increased flexibility, professional development, and knowing that they are making their mark on the world.

Millennials are the largest generational cohort in the workforce in today’s world. As a result, they are spreading their desires in the workplace to other generations. For example, they value flexibility – the ability to work remotely, to have a standing desk, to work in a co-working space, to have odd-hours instead of the 9-5.

Additionally, they want to be further trained and develop. I once had an employee who told me that they didn’t care about the money if they were able to get professional development. At first, I was hesitant to provide that extra training because they were just going to leave me for more money after I had invested. But that employee didn’t leave. In fact, that employee was the most loyal in my organization.

Millennials are a funny generation! They definitely think outside the box and often bring ideas that the “traditional” worker would have not thought about. A good leader needs to know what drives his employees. What I have learned is that they want to know they are making a difference in people’s lives. They want to know that they are doing more good than harm. This could be supporting the homeless community or sponsoring an orphan. Or it could be storytelling how the organization’s efforts changed a customer’s life. It’s a simply thought, but when you expand work outside of the four walls of your office, those employees have more purpose and passion about their work. Thus, increasing their performance.

culture drives financial results

Increased Productivity

Additionally, you can also expect increased productivity from good company cultures. Think about Google and their office environment. With ping pong tables, napping pods, and playful environments, employees are told that they can have fun. Many times, entrepreneurs and executives think that working hard 8-12 hours a day will result in incredible results. But the employees feel like they can’t relax. There’s increased stress, decreased productivity, and eventually high turnover.

Increased Retention

Staffing, recruiting, hiring, and talent acquisition is both costly and time consuming. When you factor in the time to review resumes, interview, hire, train, onboard, then pay and provide benefits, that individual is an expensive asset on your financial statements. A good company culture will keep and retain those talented assets.

Looking to add more people to your team? Before you start recruiting, download our free 5 Guiding Principles for Recruiting a Star-Quality Team.

Examples of Company Culture Driving Financial Results

One of our team members once helped transition a company through a merger. All hands were on deck. There was no room for mistakes. And every client of theirs seemed angry. The product was great. Clients had great success from implementing the products. But it was clear there was something severely wrong! Employees were either fired or they quit. Within several months after the merger was official, the company was in financial distress. What we found that it wasn’t pricing or the product… Instead, it was the company culture! A good culture has gone bad.

Another example comes from a study that focused on the financial results of companies with and without performance-enhancing cultures. Needless to say, there is a strong correlation between company culture and growth. In the book Corporate Culture and Performance, John Kotter argues “that strong corporate cultures that facilitate adaptation to a changing world are associated with strong financial results.” When we talk about company culture driving financial results, it’s impacts more than just profit – but the shareholders, employees, and economy.

It’s Start With Who You Hire

Zappos has been known for its culture and prides itself in attributing its success to its corporate culture. What they have realized is that it starts with who you hire. Instead of looking at a resume for credentials, the recruiters essentially court them in a relationship. Similarly, we frequently say to our clients that if you can’t have lunch with a potential hire, do not hire them. When you take an employee out of an office and into the real world, you see how they really perform. Are they rude to the waiter? Or are they patient and kind? Do they hold the door open for people or let it fall in their faces?

For example, the CFO position should have discretion, responsibility, and confidence. If they show up to the wrong coffee shop for a meeting due to assumptions or carelessness or if they are indecisive in choosing a meal, then you need to assess whether they are capable for the position of CFO.

Personality Over Credentials

We once had a client that emphasized that trust was by far the most important quality for their CFO to have. It didn’t matter if they had X, Y, and Z qualifications. In fact, the CEO would rather hire someone who maybe wasn’t as qualified but he could trust over someone who was both qualified and untrustworthy. Especially when considering those high level positions, chose personality over credentials. Obviously, we are not saying to hire someone that cannot do their job. But if you had to decide between two candidates with similar credentials, chose the one that will fit your culture the best.

Be Slow to Hire & Quick to Fire

Bad employees can be a huge drain on resources and can potentially cause more damage than anticipated. That’s why the best corporate cultures are slow to hire and quick to fire. Those entities are protecting their most valuable intangible assets. In order to determine which candidates are the right fit for your company, download and access your free 5 Guiding Principles For Recruiting a Star-Quality Team whitepaper.

millennial generation

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Budgeting: It’s About Achieving Success

budgeting

Ron Rael, author of 13 ½ Strategic Ways of Winning the Budgeting Wars, once said that, “To achieve success in anything, you need two ingredients: a target to aim for and a way to measure your progress towards it.” Budgeting is all about achieving success in business. When you improve the budget process, you are able to foster both empowerment and accountability. Eventually, it will lead to a better company. Although initiating change in your budgeting process will be challenging, it will further demonstrate your financial leadership.

The Most Common Budgeting Problems

The reason why you may have not seen much success come from your budget is because of the following common budgeting problems. First, the goals that are established before the budget is created are either too easy to reach or are simply unachievable.

If you know your economics, then you can avoid potential unrealistic goals or assumptions. Click here to download the Know Your Economics Worksheet to shape your economics to result in profit.

Then the budget is built on faulty or unrealistic assumptions. If the assumptions are correct, then maybe not everyone agrees on the assumptions or principles. This disagreement of what to build the budget on results in a dysfunctional team.

After the budget is built, there is often little to no feedback from management about the budget. We have seen this time and time again in companies. Those not involved in the budgeting process simply don’t care about the budget. They think that because they are not the CFO or Controller, it’s not their job. But everyone in an organization should care about the budget.

Additionally, when the budget is completed (usually after weeks of non-stop focus), it is filed away. It is rarely taken out and use in the daily strategy of the company. There is a lack of follow up.

When leadership has to meet with shareholders, stakeholders, etc. regarding the budget, they realize that they haven’t used the budget at all. Then they go to any means to achieve their budget. This manipulation defeats the purpose of having a budget. We suggest to design a budget that cannot be manipulated.

If you are thinking that the most common budgeting problems are more like cultural issues, then you’re correct!

Top 2 Budgeting Problems

Everything we have already said concerns the entire company. But the majority of our audience consist of CFOs and Controllers. The two problems that impact CFOs, Controllers, and budget directors the most include hidden agendas executives may have, the lack of commitment from executives for having a budget, and executives seen budgets as the CFO’s job. The responsibility of the budget is not solely reliant on the accounting department or CFO.

How Businesses Can Prepare for Natural DisastersHow to Budget Successfully

Budgeting successfully requires you to transform how you think about budgeting overall.

Use It As Decision-Making Tool

If you want to budget successfully, then you need to use your budget as a tool for decision making. It is not some disconnected document that has little to do with the company’s actual business. Instead, it should be a living and breathing part of your decision making. Plus, it is more effective when you use it to make decisions. When people ignore it or play games with it, your budget becomes ineffective.

Additionally, understanding the need to improve the quality of decision making and making it happen are two different animals. What you get all depends on the leaders’ commitment and attitude.

Use It As Management Tool

Budgeting is a very important management tool for achieving lasting success. A budget should establish the discipline to set up a plan. But you must also adhere to the plan. Furthermore, this management tool always you to measure your progress, and ultimately, your success.

“Without a yardstick, there is no measurement.  And, without measurement, there is no control”
– Pravin Shah

Issues Are a Result of Culture

We said it earlier, and we’re saying it again because it’s that important. Most budgeting issues are a result of an organization’s culture. Issues that lead to a poor quality budget process mean that these problems already exist within the organization ALL THE TIME!

Cost Associated

Everything has its cost! The budget is no exception. Budgets take work! They are not easy to implement nor are they easy to manage. Some of these costs include the following:

In addition, there are other costs associated with budgeting that could impact the bottom line. If employees are not conserving costs and making the most of opportunities, the bottom line will suffer. If leaders are not investing in their tangible and intangible assets equally while employing them to their fullest potential, the future bottom line will suffer.

Require Specificity

The budget and the plan it drives from is only effective when it leads to specific actionable and measurable activities and generate stakeholder value. Therefore, a budget must require specificity.

Assumptions Drive Everything

Also, your assumptions drive everything. Therefore, it is crucial that everyone be on the same page regarding assumptions in relation to decisions on what is important in your budget.

Governance of Budgeting Process

When your leadership team establishes governance in your organization, they are deciding how to best use all their resources to accomplish the purpose or mission.

Governance Principles

Use the following governance principles in your budgeting process. A reality based budget and planning system that enhances accountability is necessary for the good governance because it increases transparency. Furthermore, the key factor in a realistic and honest budget is people and their accountability. A well conceived and thoughtful budget improves the governance demanded by all stakeholders. In addition, the budget is a reflection of the importance that your executives place on governance and ethical conduct. Every game played with the budget is actually a breach of the organizations Code of Ethics.

CFO’s Role in Making the Bottom Line Commitment

 The CFO is essentially the CEO’s cheerleader! The CFO inspires higher level of performance.  The greatest challenge is to ensure that the strategic objectives and operational plans are adequate and inspirational enough to achieve the leaders’ desired financial objectives. The leader’s three plans, when combined into a cohesive strategy, will generally lead to success; however you define it. Furthermore, the CFO and executive team are the guardians of all assets – physical, financial and human ones. Use these assets to implement the plan and achieve the goals!

 CFO’s Discipline

Having the discipline to build a healthy budget, and having the budget instill discipline across your firm has many benefits. Not only will your budget properly serve as a management tool, but the benefits of discipline will filter over to other areas of your operation which will lead to efficiency and profitability. The next step in achieving success through your budgeting is knowing your financials or economics. If you want to shape your economics to result in profit, then click here to download the Know Your Economics Worksheet.

budgeting

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