Tag Archives | decision making

How Decision Making Impacts An Organization

In my 28 years of working for different types of organizations – public, private and consulting for companies from $4 million in revenue to $1.5 billion in revenue – I continue to be surprised how decision making impacts an organization. I’m even more surprised how the lack of decision making negatively impacts an organization. In order to accomplish anything in your company, there are two options: to make a decision and control the outcome OR to not make a decision and react to whatever happens. 

What It Takes To Make A Decision

The University of Massachusetts (UMass) Dartmouth publicized a paper that summarizes how to make a decision effectively and successfully.

#1 Identify the Decision

First, a leader must identify the decision. In other words, you need to identify when a decision needs to be made. Clearly define the nature of the decision. 

#2 Gather Information

Then, gather relevant information that will help you make a good decision. 

#3 Identify Alternatives

After you gather internal and external information, identify the alternatives as you are likely to have different paths or choices to make. List those alternatives. 

#4 Weigh the Evidence

Next, you need to weigh the evidence. This is an internal process. It can also be an emotional process. This is what takes the most time in the decision making process. 

#5 Choose an Alternative

After you have weighed the evidence, you need to choose among the alternatives. This is based on the first four items listed above. 

#6 Take Action

Then, you can take action. Only do this when you are ready to take a positive action based on the alternative you chose. 

#7 Review Decision

Finally, review your decision. Remember, this will take some time to accomplish. 

The above 7 steps really apply to business every day. From making a large acquisition of a competitor to hiring your CFO, these rules should be utilized. 

Your CEO needs a trusted advisor. They need you to help guide them through the decision making process. Learn how to get to the trusted advisor level by downloading the free How to be a Wingman whitepaper (and get an invitation to join our SCFO Lab)!
 

Many Business Leaders Are Not Good Decision Makers

Unfortunately, many business leaders are not very good about making decisions.  They either rush through the steps, many times skipping a step, and end up with a bad decision. Or they get stuck on number 4 – weighing the evidence – and never move to step 5, which is making a choice. 

What Happens When You Skip The Steps

But what happens when you skip the decision making steps? The steps mentioned above in the paper from UMass Dartmouth are critical and should not be taken lightly. They are there for a reason. My guess is that some bright minds with real life experience put these together. I mention this because in my 28 years of business experience, I can relate to each one. 

I have seen “decision makers” (oxymoron) skip one or more of these steps.  This can be in a routine day-to-day business matter, or in a strategic major multibillion-dollar decision. The outcome is always the same. The wrong decision was made. The cost of a wrong decision to an enterprise can be catastrophic. Or at the very least, the cost is an expensive one and sets back an entire department/business unit for months. 

How Decision Making Impacts An Organization

How Decision Making Impacts An Organization Case Studies

It is sometimes difficult to see our own faults in decision making until we hear or read about a similar situation. In my 28 years of experience, there have been hundreds or thousands of examples that I could pull from. See below for 2 case study examples. 

Real life Case Study #1 – Regulated Utility

I was once involved with a regulated utility that was installing an ERP system. The company completed Step #1 (Identify the Decision) and that’s about it! Someone with title and power in the organization decided to skip steps 2-7, and the result was a very bad system implementation that cost the company 50% of its revenue. Because of the lack of decision making and follow-though in the decision making process, they ultimately had to shut down a whole division. 

Real Life Case Study #2 – Chemical Company

In another example, a chemical company needed to fire a CFO and hire a new one. The original CFO had a bad track record of poor decision making. Technically, that CFO was good. But he was a bad people person and managed people with a hammer. As a result, a bad culture had developed. People hated working for the CFO and in turn, hated the company. Finally, the Board of Directors insisted that the CEO fire the CFO. 

The CFO was fired, but the company’s moral was terrible. The worst part is that since the CEO was snake bitten, he was gun shy on making a decision to hire the replacement CFO. The CFO position was left open for almost one year. As a result, the company suffered due to the lack of leadership. During that time, the company loosened its internal controls, and the budgeting process became a mess.  The lack of decision making by the CEO caused the Board of Directors to lose confidence in the CEO. There was a lack of leadership in the entire organization.

Analysis Paralysis

Step #4 (Weigh the Evidence) requires some analysis. We can all get lost in the weeds during this process. You may have heard the term Analysis Paralysis before. Analysis Paralysis is where someone is overthinking the analysis so much that a decision is never made. 

This is actually very real, and it can happen to any of us – especially people who tend to be more detailed-oriented and analytical.  First, you need to realize that in any decision we make, the perfect alternative does not usually exist. We wish there was, but in reality, there is not. 

Is there the perfect car? 

What about a perfect acquisition target? 

Is there a perfect CFO? 

The answer is probably no on these.  We need to work with what we have and make the most educated selection based on the alternatives before us. 

How Decision Making Impacts An OrganizationTrust the Professionals

As professionals in our respective area, we are confident in what we know, or as they say, know what you don’t know. 

If you hired a trusted advisor to assist you with your decision making and they are a reputable person, then trust your advisor’s opinion. 

When I was growing up, it seemed like my father who was a physician would change his tax CPA what seemed to be every year.  He just did not “feel good” about taxes and did not trust anyone. Not even the trusted advisor he hired!  My dad was very talented and dedicated as a physician, but he knew nothing about business or taxes.  So, his lack of knowledge in this area created a huge “monster effect”. There was no monster nor was there a person trying to screw him out of taxes. He simply did not know what he did not know.  We cannot emphasize enough: trust your advisors. 

How Decision Making Impacts An Organization

Decision making makes a huge impact on an organization. It can either propel it forward and into success. Or it can destroy the company’s value. The worst thing that a leader can do is to not make a decision. There is always a better decision than not making a decision. It reduces the uncertainty because you have already collected evidence, weighed the alternatives, and went through various scenarios of how each decision will potentially turn out. 

Poor or Lack of Decision Making

Remember, poor decision making, skipping necessary steps or simply a lack of decision making is a sign of lack of leadership.  Not only is there a perception problem, but most likely your business enterprise will suffer due to the lack of decision making.  As the business leadertrust your professional advisors and allow them to help you in the difficult decision making process Download our free How to be a Wingman guide and step up into the trusted advisor role. 

How Decision Making Impacts An Organization

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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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Knowing Your Economics: The Discipline of the Financial Leader

knowing your economicsMichael Gerber said it best in his book, E-Myth Mastery, “there is nothing in the creation and operation of a company that so seemingly conspires to confuse, intimidate, overwhelm, complicate, rationalize, and metastasize the plain ignorance of the average business guy, or woman, then money” (172). But why is that so? It’s because as humans, we tend to overcomplicate and twist even the simplest of things… Because it can’t be that easy! As we dig into the discipline of the financial leader and knowing your economics, let’s get on the same page. Money can mean different things to different people, but in the end, money is meaningless without people – just like business is meaningless without people.

The Discipline of the Financial Leader

Over the past 25+ years, The Strategic CFO has made it our mission to convert number crunchers into financial leaders. Anyone (relatively speaking) can account, but it takes someone specific to be a financial leader. The financial leader is simply that, someone how leads the company financially. But it’s often difficult when you have multiple leaders in the company without a focused vision or goal. Thus, Michael Gerber expands that “to the degree the enterprise leader is clear about her vision, the financial leader can build a financial model of that vision…” (174). That being said, you need to be in constant communication with your entrepreneur, CEO, and executive team. Sometimes the best conversation is where the financial leader is listening. That communication will transform you from a financial guru to a leader – where you need to be if you’re going to succeed. Knowing your economics or financial statements is just the first step to becoming a discipline financial leader.

When you discipline yourself to knowing your economics (or financials), knowing your cash position (balance sheet), knowing how every decision impacts the bottom line, you will find yourself leading the company forward. The basics are critical. Often, we find that accountants, Accounting Managers, Controllers, CFOs, etc. are only concerned about the costs. But they also need to be involved in the sales and operations of the business. There shouldn’t be a day that you as the financial leader do not think about the entire business.

A best practice that our leaders have implemented is to walk the plant, go out to the field, and spend time in the manufacturing facility. The key here is to get out of the office.  Having conversations with the field people and shop people can often lead to great ideas the financial leader can implement.

Knowing Your Economics

Again, it seems simple… Do you know your numbers? So many times when we come into a company, we find that not the CFO, CEO, COO, CMO, or anyone in leadership truly knows their numbers. The numbers we’re talking about are your unit economics. Unit economics shows your revenues with their direct costs associated with that one unit. Look at the following example for a simple unit economic breakdown:

   Revenue       $10

COGS          $3.5  

   Gross Margin  $6.5

It’s best if you can allocate each cost to a single good. While it may take some work to do that, some companies neglect to address SG&A when they look at their unit economics. That results in false economics or financial results; and eventually, you will find yourself out of cash. While the example above is really simple, it works. If you find that it doesn’t work, then you may not have a good costing system in your manufacturing facility, your margins may be off, and again, you income statement may not be accurate.

If your income statement not profitable or need to be improved, click here to download our free Know Your Economics worksheet. It walks you through how to become more profitable, starting with the basics.

Once you have accurate financial statements, the only way they will be of any value is if and only if they are completed timely.  Getting your financial statements 1 or 2 months later does no good and does not provide decision makers timely information they need.

Improves Decision-Making

Knowing your financial situation helps improve your decision-making. When you know how much you sell a product for, what its associated costs are, you know how much margin you have. If your costs go over a certain threshold, then you will be unprofitable. Knowing your unit economics is a simple test to know if a decision will be a profitable one or not.

Using the same example above: if you want to implement a new software that would automate the sales but it costs an additional $7 per unit, then you would be unprofitable. As a financial leader, express this with your sales team. If they cannot provide evidence or sales projections that increases the number of units sold (thus reducing the software cost per unit), then the decision is no.

Expands View of Business

When you know the economics, margins, and financial position of your business, you are able to see a lot more. It’s the basics of doing business – much like eating and exercising. You need it to remain healthy. Ingrain the economics of your business in your entire team. Marketing, sales, finance, operations, etc. need to know how each decision impacts the profitability of the company. When you do this, each employee is able to think more constructively. In addition, you build a culture of financial leadership. With the basics under your belt, you are able to expand your view of the business.

For example, when we bring on interns in the summer, we drill our unit economics. Then as they get further into their internship, they bring more value because they know how the business works. They may see something that we as long time employees/leaders don’t.

Weather Storms or Sunshine

Unfortunately, recessions roll around occasionally. Economic crisis is a natural cycle. Then sales start booming and you can’t fulfill those orders fast enough. Whether you are weathering storm or sunshine, it’s critical that you know the basics of your business. When you know your economics, you can shape your economics to result in profit – in storm or sunshine. If you need help shaping your economics, click here to download your free Know Your Economics guide.

knowing your economics

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Laying Off Employees | Who stays in the lifeboat?

laying off employeesLet’s go back to 1912… The RMS Titanic set out on her first (and only) voyage from Great Britain to New York City on April 10, 1912. The plans were drawn. The lines were cast.  Some of the wealthiest people in the world were aboard. The well-oiled machine was pumping the turbines below, pressing forth to America. Everyone wanted to be apart of this enormous ship. Nothing could jeopardize something as perfect and indomitable as the Titanic.

Like any successful business, the Titanic relied on its business plans and well-run operations. But what happens when your company hits an unseen iceberg, tearing your business apart?

The “Situation”

Here’s the situation you’re faced with… The iceberg takes your ship out, forcing you as a leader to make radical decisions.

There’s only so much room in the lifeboats.  Your conscience says to put the women and children in the boats, but who will be strong enough to row?  There’s no easy solution.  In the end, someone is going to be left to brave the icy waters.

Let’s put this scenario in business terms.  You’ve hit an economic iceberg and you’re now forced to make the difficult decision of who you want in the lifeboat with you.  This snap judgement will impact either a few, or possibly thousands of livelihoods, depending upon the severity of the crisis and the size of your company.

Making The Decision

Ylaying off employeesour human capital, or employees, are one of the biggest expense items on your financial statements.  Hence companies often struggle with whether they should employ a large pool of people or downsize their company to the bare minimum.

Ivey Business Journal concluded that “downsizing [a company’s employees] has been a pervasive managerial practice for the past three decades.” As a result of downsizing, “layoffs cause firms to lose institutional knowledge about how to get things done, disrupt work relationships and patterns, and increase burdens on those who remain” (Harvard Business Journal). Workplace diversity is one of the many things that are impacted from laying off employees.

Business owners have a fiduciary responsibility to take care of the people in their company. There is nothing worse than letting people go. Is it Becky or John? Lisa or Lauren? Brent or Jackson? Especially for entrepreneurial companies, they are like part of your family.

It’s important to realize that you have to live to fight another day in the harsh waters. Even though it’s tough, the decision needs to be made to prevent your entire team from going under.

laying off employeesTide Rises & Falls

The tide in the oil and gas industry has fallen and is dragging along the ocean floor for an uncertain amount of time. Other industries are doing really well. The economy is constantly rising and falling which often results in layoffs during the low times.

Cisco Systems just recently announced that they had made the decision to lay-off 5,500 employees in their global enterprise. But when you realize that those 5,500 are only 7% of Cisco’s total workforce, it doesn’t seem like a lot – unless you were one of the employees let go.  Microsoft, Lloyds Bank, Intel, Avon and countless other companies have joined the ranks with Cisco in layoffs within the past 9 months.

Layoffs are something that you can expect, just like the tide rising and falling. Make the decision, knowing that everything will balance out.

Weather the Downturns

Start planning for your recovery in the downturns so that you can flourish after the storm passes by. Persevering through those hard decisions like laying off employees will pay off in the long-term.

Pull Yourself Back Into the Tide

Start by evaluating your employees. Use your key performance metrics that you use to measure employee success to determine your employees rankings. It’s not wise to just lay off the top 5% salaries because you’re concerned about cash. Pulling yourself back into the tide requires strength and grit and sheer determination. Make your evaluations based upon performance and skills, rather than compensation.

Who gets in the lifeboat?

Your company has taken a massive hit and the ship is going down.  Who do you want in the lifeboat to help you rebuild? We created three specific metrics that can make the analysis process of who stays and who goes a bit easier.

1.  Someone Who Increases Revenue

Find those employees that are holding themselves accountable as income producers. These employees will be thinking of new, creative ways to improve the sales process, increase revenue, drive new sales. Any position (accountant, supply chain manager, sales executive) needs to be mindful of what is coming into the funnel. If you can, find those entrepreneurial employees. They’ll be equipped with spark and energy to find a way in a dead end to help turn things around.

2.  Someone Who Cuts Costs

Stereotypically, accountants cut costs and only cut costs. But take a look at the bigger picture! Is there someone creating green initiatives that are increasing government funding? Are marketing managers converting from door hangers and mail-outs to digital marketing? Find someone who cuts costs anywhere. Those are the people (like those that increase revenue) that will find a way to make things happen.

3.  Someone Who Adds Value

Finally, you want someone on your lifeboat that can add value. While many can come in and increase revenue or cut costs, it takes a talented person to be able to add value to the company. Think of the bottom line.

Especially relevant in entrepreneurial companies, it is vital to add value. Bankers, investors, and employees will look to you as the owner or financial leader to add value to the company in a life-and-death situation.  You want someone in the lifeboat with you who makes that easier.

(Are you looking for someone that increases revenue, cuts costs, and adds value? Check out our free guide here to learn how to recruit a star-quality team.)

How to Avoid the Iceberg

Instead of consistently laying off employees during economically stressful times, there are 5 things that you need to key in on.

1.  Steer Your Ship

As a leader, financial or otherwise, it is imperative that you look at where you’re going. If you are staring down at your feet, then odds are you will crash. Look up and lead your company forward. Take note of anything changing immediately.

2.  Act Early

Acting as soon as you start see anything changing will prevent or minimize the chances of having a lifeboat situation.

Start by unlocking cash in your business. This is the easiest way to get some breathing room so you don’t need to start handing out pink slips.

3.  Cut Deep & Wide

Cut costs quickly and everywhere. There are several ways to dig deep and wide to prevent a lifeboat situation:

  1. Ask your employees to take a vacation.
  2. Cut back pay for a period of time with the understanding that previous pay will return once the crisis has passed.
  3. Reduce benefits.
  4. Offer part-time work instead of full-time work.
  5. Stop hiring.
  6. Communicate.

The last point is key, you must communicate.   Most employees will be willing to work with you if your expectations are reasonable and clearly communicated.  After all, they have a vested interest in the company remaining afloat as well.

4.  Have Enough Life Boats

Trees don’t grow to the sky and downturns don’t last forever.  Once you get back on dry land, make a plan for how to avoid the next iceberg, or at least minimize its impact.

What do wars and hurricanes have in common?  Once they’re over, smart people start planning for the next one.

5.  Start With A Star-Quality Team

Hiring is an important task. But so often, people take the approach of hiring fast and firing fast.  It’s no surprise that the #2 reason why businesses fail is because of employee turnover. Rather than trying to decide who to save, focus on hiring the right people in the first place so you don’t have to kick anyone out of the boat.

Interested in learning how to build a team you can’t live without?  Check out our free whitepaper 5 Guiding Principles for Recruiting a Star-Quality Team by clicking here.

Lead Magnet - 5 Guiding Principles for Recruiting a Star-Quality Team

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Business Advisory System

DHS warning systemYou may be familiar with the advisory system (pictured at right) formerly used by the Department of Homeland Security to disseminate information regarding the risk of terrorist acts.  Despite its being replaced by a new system in 2011, most of us remember the color-coded warning system that came in the wake of September 11.

SCFO advisory systemBut, in the midst of a financial crisis (or when planning for a downturn), businesses need to be aware of their surroundings as well. To help companies analyze their environment to determine when action is necessary, we translated the Department of Homeland Security advisory system into the Strategic CFO Business Advisory System.

Best Case

Under the Best Case scenario, you’ve probably projected the crisis to resolve in less than 6 months. In this case, simple frugality might be enough to weather the storm. Generally, no systemic changes are needed to get through the trouble.

Probable Case

As Mr. Murphy would have it, generally Best Case scenario isn’t probable. More likely than not, it will take 6-12 months for the crisis to resolve. The bad news, you’re going to have to make some changes in your processes other than keeping a lid on costs to ride things out.  The good news, this is the most likely situation that you will find yourself in and you can manage it.  At least it’s not the Worst Case scenario…

Worst Case

Under the Worst Case scenario, you probably don’t expect the crisis to resolve within the next year. In fact, you may have no idea how long it will take for things to return to normal. In this case, you’re going to have to make some tough decisions to survive.

What can you do?

You need to create a plan for each of the cases above. What will each case look like with regards to your financials – revenue projections, cash flow projections, etc. How much overhead can you carry in these stages?

How do you know which stage of the Business Advisory System you’re in? This will require some serious evaluation of Key Performance Indicators (KPIs). You’ll need to know major KPIs in your industry.

(NOTE: Need help finding your company’s KPIs? Check out our KPI Discovery Cheatsheet!)

Once you have identified some KPIs, it’s time to track them. Track KPIs and analyze variances. Then you may use trend tools, what-if scenarios, and breakeven analyses.

Monitor where you are on the Business Advisory System month-by-month and be prepared to take necessary steps to ensure that your business is profitable and cash-positive.

Use KPIs to identify what stage of the Business Advisory System you are in.  Create a plan for each stage so that you are ready to act if your KPIs indicate it’s time.

Download our free KPI Discovery Cheatsheet and start tracking your KPIs today!

KPI Discovery Cheatsheet

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SWAG Technique

SWAG Technique

During the Vietnam War era, the military coined the term SWAG – Scientific Wild-Ass Guess.

CBS released “The Uncounted Enemy: a Vietnam Deception” in 1982 which highlighted the US Army and their “manipulation” of facts and figures during the Vietnam conflict. CBS claimed that  General William Westmoreland and other military officers were conspiring to misrepresent information, resulting in America being convinced that we were losing the war.

After the news program was released, General Westmoreland filed a$120 million libel suit.

SWAG: Scientific Wild-Ass Guess

In the heat of battle, the military did not have access to facts, figures, graphs, or wifi connection to research what the actual answers were to questions posed by journalists – i.e. the tactics that the Vietnamese were using, the strength of the Vietnamese, how many Americans were down, or when the next shipment of goods was coming in. Because of this lack of hard information, the military gave estimates based upon what they thought was correct at the time.

CBS did not realize that the information they were given was based upon assumptions and reported it to the American public as fact.  Once they realized their mistake, they apologized to General Westmoreland. The libel suit was eventually dropped in 1985.

The lesson… Sometimes, you gotta use SWAG.  But, you better make sure your audience knows it’s SWAG.

So what does the US Army’s term, SWAG, have to do with being a financial leader?

Often, in business, we’re in the tough spot of needing to make a decision quickly without enough information.

“Tom, I need a flux analysis. Can you have it on my desk by the end of the day?”

“Uh…”

Sound familiar?

SWAG vs. WAG

WAG = Wild-Ass Guess. It has absolutley no thought behind it and can cause a multitude of issues down the line because it was simply something you pulled out of thin air.

“Sure, I can have it to you by the end of the day.”

What’s wrong with that statement?

  1. You didn’t think about the time required for the analysis
  2. You’ve already promised to have X, Y, and Z by to Bob by the end of the day as well

Avoid WAG at all costs!

As seen in the the libel suit, even SWAG can have negative consequences if not communicated that that’s what it is (a guesstimate). SWAG might sound like this:

“It’s possible that I can get you the Flux Analysis by the end of business day tomorrow. However, the likelihood is that it will take 3 days to complete, but no more than 5.”

There is never enough information available to make the right decision, but you can make a smart decision using the information you do have.

Offer a Range

People tend to understand that when a range is given, it is a best guess. There are so many factors that play into any estimate, including impressions, experience, and rough calculations among other things. A SWAG is not the best estimate, but rather the estimate with the most information at a given point in time.

Houston, TX is known for its traffic. If your friend wanted to know how long it would take for you to go to the other side of town, what would your response be? (Notice the differences below.)

WAG: “It’ll take me 30 minutes because that’s a good estimate.”

SWAG: “Since it’s 4:00 and I’ve had experience with Houston traffic at rush hour, it will take me anywhere from 30-50 minutes for me to get to the other side of town. If there are any accidents on the freeway, it may push me to over 60 minutes.”

Estimate: “According to my GPS, it will take me 41 minutes to get to the other side of town.”

By offering a range, you now have some wiggle room if things don’t go as planned. Figure out the low and high end and provide an explanation with your answer. Explain some assumptions as they could affect the different points in the range.

One area where SWAG is particularly important is with projections.  You will never have perfect information to make spot-on forecasts. Knowing your basic unit economics is one tool that you can use in conjunction with the SWAG technique.

(Do you know your economics in order to make a SWAG? Download the free worksheet here.)

Check Assumptions

Update your SWAG as soon as you get more information that would result in a more clear picture. If you are producing projections for the next 5 years, what assumptions are you making as you create the forecast?

SWAG TechniqueEconomy, customer demand, and international trade are three of the more volatile factors in a projection. Is the economy going to boom or is it going to continue to decline for 6 more months? Look at how that’s going to affect your customers. Keep an eye out for factors that are impacting your customer in a way that might have an effect on your company. Read the news. Embargoes, strikes, and natural disasters could have a massive impact on what your assumptions.

Check them and recheck them as more information comes in. Remember, it is okay to adjust your previous range and assumptions.

Manage Expectations

Think of ways you can validate your assumptions and form a more firm estimate. Not only will this give you more information to impact your company’s financials, but it will allow you to think through all the possibilities in order to give a range under certain assumptions.

Utilizing the SWAG technique has its risks. General Westmoreland didn’t expect that giving a statement to a reporter would eventually result in a libel suit.  But some information is almost always better than no information.  SWAG can be a powerful tool if expectations are managed.

Know Your Economics (on blog)-2

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Sources:

No Uncertain Terms by William Safire

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Why Prepare a Budget?

Do you need to take an umbrella to work today?

Without a trusty weather app or friendly meteorologist, it would be difficult to know the answer. Fortunately, you probably have one of these tools to help you make an informed decision.

The CFO/Controller is the meteorologist for the business.  It’s your job to help the company decide when, and if, you’ll need an umbrella.  How do you do this? Prepare a budget.

prepare a budgetWhat is a budget?

A budget is an estimate of income and expenses within a given amount of time. It contains economic goals, boundaries, and limits on expenditures of the organization.

Why Prepare a Budget?

So, why prepare a budget? By creating a budget, you’ll be able to hold the company accountable for its expenditures, reduce costs, and prepare for a worst case scenario. It serves as a measurement tool that can visually illustrate if you have enough cash to operate or to grow.

The steps in the budgeting process are:

  • Prepare the budget
  • Negotiate and agree on the budget
  • Monitor the budget

Prepare a Budget

First, you as the financial leader must choose what type of budgeting method you want to use. There are two main types of budgets: zero-based budgets and traditional budgets. While zero-based budgeting allows you to re-examine all of your costs, traditional budgeting is more user-friendly.

Feel free to use this image, just link to www.SeniorLiving.Org

Typically, prepare the annual budgets before the fiscal year begins. This window of preparation helps facilitate execution.  Early decision-making will provide boundaries within which the company must abide. Oftentimes, if you don’t prepare budget ahead of time and create it on the spot, then arguments and internal issues begin to arise. You can avoid disputes when executing a budget by preparing early.

During preparation, it’s important to focus on fiscal targets. Fiscal targets are are goals for specific financial categories. These could include profit, debt payback schedule, operating expenses, projected borrowing requirements, etc. By laying out these goals, you’ll be better equipped to prepare a budget that will allow negotiating and finalizing of the budget to go smoothly.

Optimistic Budgets

prepare a budget

As a reminder, an overoptimistic budget can result in late payments and disorderliness in regards to keeping in compliance with the bank. There are several ways you could be overoptimistic in your budget, the major one being you are not projecting your sales correctly. If you’re a couple cents off, it’s okay.  A budget should be seen as a “set of guidelines, not rules, based on the best forecasts at the time but always open to amendment as circumstances warrant” (Accounting at Your Fingertips, p. 332).

To reduce the chances of creating an overoptimistic budget, it’s important to go back to the basics. By focusing on the economics of your business, you’ll not only create a realistic budget, but you’ll be better able to project future growth.

(NOTE: Want an easy tool to analyze your company’s economics? Download the Know Your Economics Worksheet to make sure you’re pricing for profit!)

Negotiate and Agree on the Budget

As with most things in business, negotiation comes into play.  The purpose of negotiation is to allocate resources according to your targets and policies with everyone’s best interest in mind.  However, fiscal policies should provide the framework for budget formulation. Make sure that you consider your company’s economics when structuring the budget.

During this negotiation process, it is vital for you as the financial leader to maintain the meeting as a negotiation rather than let the meeting turn into a bargaining session. Bargaining results in a win-lose situation where the goal is to get as many of your points on paper over another person or department. It may drive the process, but it is not effective. Often, the outcome of bargaining is inefficient resource allocation.

By comparison, negotiation is all about a group of people working towards one goal. Part of this goal should be to comply with fiscal policies and targets.

Monitor the Budget

So much time and hard work goes into creating a budget, yet so many companies fail to utilize the budget. The purpose of a budget is to measure operational efficiency and performance issues.

The efforts of budgeting should be focused on improving revenue forecasting or projecting. A budget is useless unless utilized in a dynamic manner. While budgeting provides the short-term execution plan, forecasting allows you to take historical data to measure the reality of success in executing your budget. You’ll be better able to allocate resources to the right departments.

(Check out the 5 tools that you might not be using but should be implementing along side your budget.)

When you link the budget and the forecast, you’ll be more equipped to monitor the budget.  Contrast this with a static budget that is often useless after the first month. It all starts by knowing your unit economics and then assessing your economics to judge whether they are working for your company.

To ensure that your budget is built to achieve your business goals, make sure to start with the basics. Find out more about how you could utilize your unit economics to add more value to your organization by clicking the link below.

prepare a budget, Why Prepare a Budget

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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

Click here to learn more about SCFO Labs

prepare a budget, Why Prepare a Budget

There are many methods you can use to improve productivity in your company. Click here to download a PDF of 10 Ways a CFO Can Improve Productivity.

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