Tag Archives | growth

Economic Reset

I just returned from the Microsoft Worldwide Partner Conference 2009 in New Orleans. At the conference I heard Steve Ballmer discuss the direction of the economy over the next several years. He believes that the world economy is going through an “economic reset”.

Economic Reset

According to Ballmer ,the world economy becomes overheated every twenty-five to thirty years. Credit expands until the economy becomes so heated that risk is priced out of the market. In other words, there is so much money chasing too few good deals. Ballmer pointed out that total debt reached 350% of GDP in the United States at the height of the most recent boom. Prior to the Great Depression, that figure was only 150% of GDP. He believes that the economy won’t resume growing until that figure comes down significantly.

He contends that every 25 to 30 years the economy “resets” itself at a lower level thereby flushing out the high leverage and poor investments. Because this process takes time, he believes that the recovery will not be the quick rebound many predict.

Consequently, companies should be prepared to restructure their businesses to survive at a lower economic level. It will be difficult, if not impossible, to grow revenue in this environment. Instead he suggests that companies should focus on increasing market share.

Economic Growth

Finally, when economic growth does resume it will not be fueled by debt. The growth will need to come from increased productivity. Because IT continues to change and most companies are stretching the life of their IT infrastructure there will be pent up demand once the economy grows.

So what should you or your company do to survive in these tough economic times? First, evaluate the effectiveness of your marketing dollars. For those marketing initiatives that work, you should increase your spending.

Second, invest in processes, tools, and training to improve your productivity, both personally and as a company. Acquire new skills and capabilities to prepare for when the economy does start growing again.

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Economic Reset

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Keys to Profitable Growth

Today I attended a speech by Thomas Ryan, CEO of Service Corporation International (SCI). Though Mr Ryan covered several topics, one topic in particular interested me. He spoke to what he considered the keys to profitable growth.

As you will recall, SCI was one of the original “roll up” firms focusing on the funeral industry. Initially they were extremely successful in growing the business. However, SCI went through some tough times six to eight years ago when their acquisition strategy stopped working. Mr. Ryan was part of a team that changed the growth strategy from “growth for growth’s sake” to “profitable growth”.

Keys to Profitable Growth

According to Ryan there are two questions you must ask yourself. First, What is your strategic advantage? Second, how do we develop the platform to deliver that advantage?

SCI discovered (the hard way I might add) that growing sales does not necessarily translate into long term profits. At first they were able to drive profits through financial engineering. Eventually the profits went away. They have now structured their business along their advantages in the marketplace. For example, they discovered that funeral homes do not operate at 100% capacity. Consequently, they can increase utilization by sharing overhead.

Another strategy involved focusing on urban markets vs rural. They came to the conclusion that sales in rural markets were a function of personal relationships. Since they are a large company it is difficult to manage personal relationship. They now focus on large urban markets where price and economy of scale is important.

Once they honed their strategy, they began to build a platform to deliver that strategy. They designed a tiered product model, improved business processes, new information system, developed standard operating matrix and started an in house university to get the word out.

Having worked in the Roll up Capital of the World (Houston, Texas) I don’t believe they are a good long term business strategy. It does appear that SCI has adapted what worked for them initially to a better follow through strategy.

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Keys to Profitable Growth

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Keys to Profitable Growth

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Don’t Let Tax Strategies Drive Financial Performance

With most young companies cash is king. As a company grows managing the cash available to finance that grow is crucial to sustaining the growth rate. Minimizing the cash expenses of the company is an entrepreneurs and CFO’s primary job. One of the main cash expenses is federal income taxes.

Don’t Let Tax Strategies Drive Financial Performance

During this start up and growth phase (which can last 10 years or more) the entrepreneur is focused on minimizing the cash payments for federal income taxes. He will work closely with his tax CPA to aggressively take financial positions that minimize taxes.

Somewhere along the line this strategy begins to lose its effectiveness. It generally happens when outside bank financing is obtained to fuel the growth of the company. As larger and larger amounts of outside debt is obtained the financial reporting needs of the company changes. The financial statements must now be presented to new users (i.e. the bank). The banks are seeking a clearing picture of the financial position of the company on an accrual basis. Often they want to know the true equity available from the company so they can establish the leverage of the company.

But maximizing the equity value of the company often is at odds with minimizing federal income taxes. To minimize taxes you typically end up either taking deductions sooner, deferring the recognition of income or valuing assets more conservatively. Taking these positions is fine until you want to borrow money.

Most entrepreneurs want to borrow as much as they can to fuel growth. However, by presenting there financial statements on a tax basis they minimize the amount that lenders will advance.

Conclusion on Tax Strategies Driving Financial Performance

The answer is that just as no strategy works in every situation, neither does one strategy work forever. The goal of the CFO should be to educate the owner to the needs of the other users of the financial statements. Often the benefits of paying higher income taxes is offset by the increased growth rate of the company.

Tax Strategies

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