Tag Archives | decision making

The Importance of Using GAAP Financial Statements

Use GAAP Financials, Using GAAP Financial Statements, GAAP Financial StatementsI have written about this in the past, yet it is an ongoing subject that we deal with business owners day after day. A client recently asked me why we (The Strategic CFO) were insisting on generating the clients financial statements on an accrual basis and per GAAP. He insisted that cash basis was fine and that we were just creating a lot of busy work. He also stated that he did not care or need the balance sheet, just the income statement. Today, we’re talking about the importance of using GAAP financial statements.

GAAP Financial Statements

Our firm did not invent GAAP financial statements. GAAP means Generally Accepted Accounting Principles. These principles have evolved over time as we get smarter and more advanced. The main principle behind GAAP financials is to generate a set of financial statements that represent the most accurate picture about your company. They should be comparable, not misleading and clear so a third party can understand. So the uniform application of GAAP to business transactions would most clearly represent a true picture of your business.

The Importance of Using GAAP Financial Statements

There are several reasons companies should be using GAAP financial statements. First, public companies and certain loan documents require GAAP financial statements. We recommend that all private businesses also use GAAP financials as a best practice so you can have the best information to run your business. By not having your financial statements per GAAP (which uses accrual based accounting), you are basically 60-90 days behind your business.

Use GAAP Financials, Using GAAP Financial Statements, GAAP Financial Statements

Running Behind Your Business without GAAP

Let’s look at an example of a manufacturing facility. Someone in the manufacturing facility orders $50,000 worth of raw material, but you have not yet received an invoice from the vendor. The vendor takes 30 days to generate an invoice because they have an inefficient accounting department. The invoice gets mailed, taking 1 week to get to you. Your staff person got the mail and did not enter the invoice in the system for a week. Then because you did not review your aged payables until the end of the month, you are likely to be 60 days behind your business. You will not have the liability section reflecting the payable for this example until much later. That means your balance sheet is not accurate. Plus, you ay not have that payable in your cash forecast for payment.

This example is one transaction, but it adds up when you consider all the transactions in your business. You will be 60 to 90 days behind your business by not keeping your books on accrual basis.


Don’t let something as simple as not having your financial statements per GAAP take value from you! Learn about 10 other destroyers that could be taking value away from your company.

Download the Top 10 Destroyers of Value


Accurate Reports on Your Business

As a business leader, you want the most accurate reports on your business on a timely basis so you can make business decisions.  Your income statement, balance sheet, and statement of cash flow paints the picture of the recent historical performance of your business. You need to monitor the trends so that you can make business decisions timely.

Critical for Growth

We see it over and over again… A good business is mismanaged because the CEO or entrepreneur does not want to spend the money or take the time to understand his financials or keep them per GAAP. Eventually, they are upside down on working capital and run out of cash. This is especially true in a high growth environment.

Reasons for Using GAAP Financial Statements

If you have a small business of 3 employees with one legal entity and have sales of $800,000 per year with no plans for growth, no debt, no outside investors, then you can certainly keep your books on cash basis and ignore GAAP.  But if you grew beyond that and have a substantial business that you want to grow, or you have debt, our outside investors, then you seriously need to consider keeping your books and records on an accrual basis and per GAAP. In short, why should you keep your books and records on an accrual basis and per GAAP.

  • Working Capital – Not having them per GAAP can lead to operational disaster
  • Outside Investors and Lenders will require them
  • Growth – If you are beyond a mom and pop shop, then these financials will be your key tool for growth
  • Value – From a valuation standpoint, GAAP financials add value

Why Use GAAP Financials

So to answer the question we started this blog with why use GAAP financials? First, using these principles allow your business to be presented correctly to third parties. Then, you need accrual based financials to properly run your business. Otherwise, you are 60-90 days behind running your business. It may be required by your lender. Having your books kept per GAAP actually adds value to your business from a valuation perspective. While you are working on adding value, make sure there aren’t “destroyers” taking value from you. Download our Top 10 Destroyers of Value whitepaper and protect your company’s value.

Use GAAP Financials, Using GAAP Financial Statements, GAAP Financial Statements

Use GAAP Financials, Using GAAP Financial Statements, GAAP Financial Statements

4

Becoming a Smart CEO

While larger companies typically employ an in-house CFO to measure and manage the organization’s financial risk as well as financial planning and allocation, most small businesses do not share the same luxuries. As a result, many growing businesses choose to outsource their financial processes such as bookkeeping, billing, and financial reporting. The CEO then becomes is the company’s only financial leaderWithout having a CFO on staff, the CEO makes major financial decisions. They are also responsible for reporting, growth, and business strategy. Becoming a smart CEO starts with becoming a financial leader.

Becoming a Smart CEO: Learn From 4 Types of CFOs

By looking at the 4 types of CFOs (once outlined by McKinsey & Company), we will narrow down how CEOs can adopt traits from each CFO to becoming a smart CEO.


Download The CEO's Guide to Keeping Score


The 4 Types of CFOs

There are 4 types of CFOs that CEOs need to know about.

1. The Numbers Expert

The numbers expert type of CFO traditionally has experience with multiple positions within the finance department, including controllership, treasury, auditing, and financial planning. They are usually an internal hire. Because of this, they tend to hold a great understanding of the inner workings of the company.

2. The Strategist

The strategist is a CFO that a company usually hires from outside of the finance department. They typically have experience working in other verticals, such as operations, marketing, and general management. These folks focus on tightly run operations and the allocation of business resources. They also often have a major influence on their colleagues regarding major business decisions.

3. The KPI Advocate

The KPI advocate type of CFO love their scorecards. Many are hired from outside of the organization because they provide a non-biased look at performance metrics, cost reports, and standardized data. To them, everything is measurable. They often have a strong focus on meeting or exceeding established goals.

4. The Growth and Development Wizard

Although the least common among CFOs, the growth and development wizard type is becoming more popular. Growth and development wizards are usually hired externally. They generally have years of experience in mergers, acquisitions, private equity, and venture capitalism. They keep their eye on the prize of expanding the current business operations of the company.

The Smart CEO

Just because there are four established types of CFOs doesn’t mean that every CFO fits into one singular category. Consider the same for CEOs who operate without an on-staff CFO.

A smart CEO will embody multiple attributes of each type of CFO. With the help of their outsourced financial services firm, a smart CEO will pay close attention to bookkeeping and financial management while using KPIs and reports to make data-driven decisions and build better business strategies.

Smart CEOs then use their existing financial data to identify opportunities for growth and can start to make plans for expansion, product line extensions, partnerships, or even mergers and acquisitions.

Becoming a Smart CEO


Stephen King, President and CEO at GrowthForce, is a guest blogger at The Strategic CFO. Interested in outsourcing your accounting and bookkeeping? Learn how GrowthForce can help.


Becoming a Smart CEO

1

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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How Decision Making Impacts An Organization

 

1

Budgeting: It’s About Achieving Success

Budgeting is All About Achieving Success, common budgeting problems

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.

Budgeting is All About Achieving Success, common budgeting problemsHow 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 is All About Achieving Success, common budgeting problems

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Budgeting is All About Achieving Success, common budgeting problems

1

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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knowing your economics

1

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.

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 To Do For Each Case Of The Business Advisory System

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!

business advisory system

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