Tag Archives | productivity

Maximizing Your Bottom Line In 3 Simple Steps

Sales are great, but wouldn’t they be better if you were actually able to reap the rewards? Many CEOs that were not trained with an accounting/finance background struggle to understand profitability. They think that if sales are great, then the business is great. But when sales increase, inventory and overhead increases. Productivity also decreases – due to exhaustion or overwork. Collections lapse because there isn’t a “pressure” to collect. And unfortunately, that is when companies suffer the most. Sales start to decline, but they don’t change their habits. In this Wiki, you will learn how everything below sales on your income statement is critical to your company’s success and how you should be maximizing your bottom line – net income – at any stage of your company’s life cycle. Let’s look at how maximizing your bottom line in 3 simple steps can happen.

What is the Bottom Line?

First, what is the bottom line we are referring to? It is the net income on your income statement or P&L statement. This is what you have left after all the costs of goods sold, administrative expenses, and overhead have been subtracted from revenue. We look at this number carefully because that is how much you are able to put into retained earnings or reinvest back into your company. In addition, the amount can be used to issue dividends to their shareholders. Maximizing your bottom line should be an integral part of your company’s processes.

Profitability starts at the top of the income statement. If your prices are not set to create profitable environment, then you will be not able to maximize the bottom line. Learn how to price for profit using our Pricing for Profit Inspection Guide.

Maximizing Your Bottom Line In 4 Simple Steps

There a are several ways to maximize your bottom line – some more extensive and time consuming than other. But there are 3 areas to focus on to maximize your bottom line – including productivity, overhead, and collections.

1. Productivity is Key

It’s been a common theme among business blogs and news sources (Entrepreneur, Forbes, WSJ, etc.) to improve productivity. Why? Because productivity is key in maximizing your bottom line. But what really happens when you improve productivity? You have more supply, decrease the cost to produce 1 unit, and increase sales. It speeds up your operations so that you can fulfill more orders for quickly.

2. Manage Overhead

Great revenues have very little meaning if your overhead costs are not properly managed. Look deeper into your overhead expenses and find out if there are any costs you can reduce or completely remove. The problem is often more complex than large expense accounts on the P&L. You must interact with various departments to think critically and solve problems. Ensure that every single overhead cost is necessary to provide the desired service levels. Maximum controllability over costs leads to higher profits for the company to reap.

3. Collect Quicker

Collections are an important part of business. If a company sells $10,000 worth of product but only collects $3,000, then their cash is tied up in inventory, etc. As a result, they experience a cash crunch. We have worked with clients who were in the same situation and they neglected to ever collect the outstanding balance. Their bottom line suffered, but they didn’t think to look at their collections process. There are two metrics that you can look at to monitor collections and use to collect quicker.

The first metric is DSO. Do you know your Days Sales Outstanding (DSO)? This is a great measurement to know where you are currently and how by making slight adjustments, you can increase profitability. Use the following formula to calculate DSO.

 DSO = (Accounts Receivable / Total Credit Sales) * 365

The second metric to look at is Collections Effectiveness Index (CEI). This is a slightly more accurate representation of the time it takes to collect receivables than DSO. Because CEI can be calculated more frequently than DSO, it can be a key performance indicator (KPI) that you track in your company. If the CEI percentage decreases one month, then leadership are alerted that something is going on. The goal here is to be at 100%.

CEI = [(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) ÷ (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables)] * 100

Another method to collect quicker is to tie receivables to the sales person’s commission. This will not only encourage your sales team to be part of the collections process, but it will help keep your company cash positive.

Effective Strategies for Improving Profitability

While we’ve been focused on maximizing your bottom line as your current financials stand, we also wanted to share some effective strategies for improving profitability.

Price for Profit

Are your prices leading to a satisfying net income?  If not, then these are some questions you can inquire:

  • Are additional costs being reflected on the price?
  • Are you using Margin vs Markup interchangeably?
  • Is your overhead being covered?

The solution might be simple: Adjust your price!

Learn how to price for profit using our Pricing for Profit Inspection Guide. This whitepaper will help you identify if you have a pricing problems and how to fix it.

Create Standard Operating Procedures (SOP)

Also, create Standard Operating Procedures (SOP). SOPs are step by step instructions written by a company to assist employees in completing routine procedures. They are necessary in a company to ensure operations run smoothly. The better your company’s SOPs are, the more efficient it will run. Create operating procedures that are simple, easy to read, and most importantly make them lead to a purpose.

Focus on Profitable Customers

Identifying profitable customers is instrumental to a company’s success. Once you completely identify your most profitable group of customers, focus your attention on them. Use your marketing funds primarily on you most profitable customers. A customer outside of that target market is still a viable customer, but they just shouldn’t receive as much marketing attention since they are not their primary and most profitable customer segment.

When maximizing your bottom line, start with your prices and pricing process. Access the free Pricing for Profit Inspection Guide to learn how to price profitably.

maximizing your bottom line

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Navigating Black Swan Events

Ever seen a black swan? The term was coined by Nassim Nicholas Taleb. A finance professor and former Wall Street Trader, Taleb created the term in his book, “The Black Swan”. It describes a situation that is both unexpected and hard to predict. Events like 9/11, Brexit, and natural events (like an earthquake) have caused people to question if it was a black swan event. Before we look at how companies should be navigating black swan events, let’s identify what black swan events are.

What Are “Black Swan Events”?

The most important question being asked is “what are black swan events?” A black swan event must have following three attributes:

  1. The event is extremely difficult to predict (at least to the observer)
  2. The event carries a major impact
  3. After the event has occurred, people will try to make it explainable and predictable (hindsight bias)

Black swan events might include the Asian Financial Crisis of 1997, Global Financial Crisis 2008, Oil Crisis 2014, to the more recent Brexit in 2016. Taleb states that a black swan event depends on the observer. For example, the Thanksgiving turkey sees his demise as a black swan, but the butcher does not.

Somehow, it’s confusing to call a black swan event a crisis and the other way around. Furthermore, not all black swan events are crises and not all crises are black swan events. 

Origin of a Black Swan

Taleb’s theory started from the Western belief that all swans are white. Until the year 1967, the Dutch explorer discovered the black swans in Australia. It was beyond normal expectation and profoundly changed zoology. Since then, the term “black swan” has been used to describe situations where impossibilities have been disproven and the risk effects when it happens.

Characteristics of Black Swans

In order to determine whether the Brexit event is a black swan, you would want to know the characteristics of black swans. Let’s examine all 3 attributes – unpredictability, widespread effect, and hindsight bias.

If you know the characteristics of Black Swans, start protecting your company by analyzing it internally. Click here to download the Internal Analysis whitepaper to enhance strengths and resolve weaknesses.

Unpredictability

Did the Brexit panic surprise you? What really makes Brexit unpredictable?

Brexit posed a huge challenge to the future of EU in general and specifically, the United Kingdom. Furthermore, Brexit led to a significant increase in power and responsibilities for local institutions. This would only add to the instability of EU.

Widespread Effect

Does it have a domino effect on all EU members states exits? Why is Brexit such a major trigger event?

Brits had been as a dominant country inside the EU, and it was argued that EU couldn’t exist in its current form without London playing a major role in the financial field. Brexit put EU in shock. Within a day, over 10,000 jobs were lost in the banks. Tariffs hikes the prices of automobiles. Inflation spiked. The effects of this event will be felt by everyone. It’s just a matter of when. 

Hindsight Bias

And now that it’s all over, some people have fallen into hindsight bias, known as a know-it-all-along effect. Brexit is widely thought as a natural expression of concern over immigration. So, is the recent Brexit truly a black swan event?  Your answer will likely depend upon your situation, but based upon the criteria set forth by Taleb, one could certainly make the case that it is.

Navigating Black Swan Events

How can we as financial leaders avoid becoming the Thanksgiving turkey? Taleb suggests that when navigating black swan events, you do not attempt to predict the unpredictable. Instead, Taleb iterates that our time would be better spent preparing for the aftermath or impact of negative black swan events and position ourselves to exploit the positive black swan events.

Think about preparing for negative events as just managing your business through the valleys. Since there is no certain way to determine how long the valley or trough will last, design a plan that considers possible durations (3 months, 6 months, 1 year, 2 years, 5 years, etc.). If the crisis resolves in 6 months, then what steps do you need to take? What if it’s longer? What if there is no foreseeable end in sight? How will those durations impact your financials (revenue projections, cash flow projections, etc.)? How much overhead can you have through these stages?

Where do you start when developing these scenarios and action plans? You need to seriously evaluate your key performance indicators (KPIs) to determine what you should be focusing on. Obviously, know the major KPIs in your industry. If you do not know them already, talk to key customers, investigate what competitors are using, and research benchmarks. After you have identified those KPIs, track and analyze any variance by utilizing trend tools, breakeven analyses, and what-if scenarios.

Take your plan and break it down into steps based on the different durations. You do not want to risk cutting too deeply because you need resources available to take advantage of when things turn around.

Strategies for Managing Black Swan Events

When navigating black swan events, it is important to note that crises provide a unique opportunity to get your house in order. Unfortunately, businesses have a habit of making rash decisions (and bad decisions) because everything is moving so quickly. They don’t identify how bad those decisions were until things start going downhill. As a result, there’s a lot of clean up to do during downturns. Think about Warren Buffett’s famous phrase, “You never know who’s swimming naked until the time goes out.”

What are some steps you can take to manage these downturns? Here are some ideas…

Weed the Garden

Start by weeding the garden or removing those unnecessary costs (i.e. overhead expenses). Overhead costs can easily get out of hand with revenue. Unfortunately, they tend to not decline as quickly when the sales drop off. Analyze your cost structure to convert more cost to variable vs. fixed. This will make sure that costs will stay consistent with volume.

Another method to weed the garden is to fix any hiring mistakes. You have a commitment to continue the business for your employees. Remove the people that don’t fit and don’t add value. When things pick back up, you will be better prepared to take on the right fit.

Look internally at your company. Analyze each part of your company and then make strategic decisions. Use our Internal Analysis to get started.

Finally, analyze your products and services. Compare their profitability. Remove those that are either unprofitable or not as profitable as the other products. Reallocate those resources to the products and services that perform better.

Do More With Less

Your company will always benefit from improving its productivity. However, it’s different for every business. Use the following formula to identify how you can improve your operations:

Productivity = Throughput ÷ Resource

When you discover the throughput and resources for your business, you can discover how to use less resource and generate greater throughput. This will improve productivity and therefore, profitability. With not as many sales, it’s a great time to evaluate your operations.

Reduce Leverage

During times of uncertainty, reducing leverage is especially critical. A few decades ago, a debt to equity ratio greater than 3:1 was considered high risk. Today, a risky investment is a debt to equity ratio greater than 4:1. Because of the speed and availability of information becoming more accessible, company’s comfort level with risk increases. However, this can increase the number of problems when negative surprises or black swans occur.

React Quickly

One of the biggest mistakes the company should avoid is that reacting too slowly. From a business perspective, you would want to react to new opportunities and then make decision quickly. Same thing with threats… Address those threats immediately and don’t delay on reacting.

Have you ever heard of the boiling frog analogy? A chef does not just throw a frog into boiling water. The frog would immediately jump out because it’s hot. To fool the frog, you put the frog in cool water and slowly turn up the heat. This incremental increase in temperature is hard to notice when inside the water. Don’t be the frog.

Have you identified the strengths and weaknesses in your company that you could either enhance or reduce respectively? If not, now’s the time! Access our Internal Analysis to get started.

Prepare

Based on the historical events that people come up with a preparation plan for upcoming disasters. This is what people do when it’s over. Analyze the situation and think of how we can avoid negative impacts or at least assess the risk of losses. If you think a black swan would cause you panic, then assess your attitude toward risks. By understanding that, you would know what type of investment to hold a long-term plan. One of the options for long-term investment can be assets, stocks, etc., even though they’re riskier but they come with high rewards. This is your time to consider what your company can do better when your sales are falling.

Avoid Pessimism

The main idea of a Black Swan is not to attempt to predict black swan event, but rather concentrate on guarding against its unpredicted effects. In an organization, especially risk managers, knowing that you have a plan for it will help you gain confidence to take advantage of any black swan events in the future.

When navigating black swan events, it’s a great opportunity to look under the hood. Take a look internally. Access our Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

Navigating Black Swan Events
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Navigating Black Swan Events

(Adapted from Jim Wilkinson’s article found here.)

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Flash Reports Are a Game Changer

Flash Reports

When we talk to people who have sales or operations backgrounds, we quickly pick up on their hatred/dislike/disdain/etc. for accounting. We get it. Accounting can be boring, especially if it’s not used for management purposes. But when we talk with the management team either in our coaching workshops or our consulting practice, we always implement a flash report in their company. Why? Because it’s a management tool that should be used by every leader in an organization! Flash reports are a game changer when it comes to leading a company financially. In fact, I will be bold enough to say every company should be using a flash report to make any decision in the company. (Keep in mind, we are not recommending that this is the only tool you should use to make decisions.)

What is a Flash Report?

First, what is a flash report? We have defined Flash Reports (or financial dashboard report) as “periodic snapshot(s) of key financial and operational data.” It measures three factors in your company, that include liquidity, productivity, and profitability. Unlike what sales and operational leaders typically think about accounting, this tool is supposed to guide them with the numbers. In addition, the numbers from flash reports aren’t going to be a 100% accurate. But if they are 80-90% accurate, then they are accurate enough for the management to make decisions.

Flash reports have changed how financial leaders lead the rest of their team. It’s just one of the ways that you could be more effective in your role. If you want to learn more, click here to access our free 7 Habits of Highly Effective CFOs.

Flash ReportsHow a Flash Report Changes the Role of the Financial Leader

Stereotypically, an accountant or someone with accounting/finance background is a numbers cruncher. They want to look at all of the numbers and want the management team to also get excited about every number. In reality, there is not enough time to focus on every number. Instead, you should be looking specifically at 6-8 numbers that drive your business. We call them your key performance indicators or KPIs. Anyone in your company should be able to look at your flash report (a one-page report) to assess what the KPIs are doing.

Not just anyone in accounting cannot create a flash report… It would quickly get out of control because there are so many angles, numbers, and perspectives that you could interpret the data from. Unfortunately, there is not enough time in the day to look at all the data. It would take forever for management to look at all the information and make a decision. We know there is an art to be a financial leader. There is also an art to creating flash reports or dashboard reports. The goal is for the flash report to be prepared and completed within 30 minutes. It should cover a week’s data for the company to quickly pivot or adjust if need be.

How to Prepare a Flash Report

For a flash report to be a game changer, you have to set it up correctly the first time. Prepare a flash report by producing the following sections in consecutive order.

Productivity

First, the financial leader (CFO/Controller) needs to meet the owner or executive leaders to come up with some metrics for the productivity section. Both finance and operations need to be involved in this conversation because this section is what sets up the next two sections. You will know you have succeed when you have an indication of the key performance metrics of your company. These metrics also connect operations to the financial performance of the company. It’s an accountability partner. If you are looking to improve productivity in your company, then click here to read about our insights on how to do it.

Remove some of the barriers between departments in your company to increase your value to the company. To learn more how you can be effective, click here to download our 7 Habits of Highly Effective CFOs.

Liquidity

When you prepare a flash report, this section is where your CEO is going to look at first. It’s the pulse of the company because it tells them how much the company is generating cash (or not generating cash). The cash situation is often the first issue we discuss with consulting clients. Unfortunately, we find a lot of companies are not able to tell you if they have enough money to pay the bills and keep the lights on. Remember, cash is king.

Profitability

This is going to be accounting’s favorite section because it deals with what they focus on! The reason why you need to produce it last is because it needs to connect with the rest of the business. It should give management a rough idea of how much money they made during a given period. You will need to have a good understanding of your accruals if you are going to provide profitability in as part of the flash report.

Remember, timeliness is more important than accuracy in this flash report. There’s a reason why it’s called a flash report! Furthermore, management needs to focus on how the trends change over time.

Flash Reports Are a Game Changer

Flash reports are a game changer in the business world because it pushes companies to break down barriers in the business. We frequently say that CFOs and the financial leader of a company should walk around the office/warehouse and talk with sales managers, warehouse workers, operations managers, etc. Financial leaders need to get out of accounting so that they can lead financially. But the same goes for operations and sales persons. It may not be exciting, but they need to visit accounting.

This past week, we hosted a live webinar for those operations employees that were promoted to a P&L Leader. They were great at their job, but now they manage an entire department/division/etc. So, we touched on how they should be using flash reports as they manage their operation. Anyone in your company can be a financial leader. You just have to have the right tools, and flash reports are a great way to start.

Tips for Monitoring Your Business

Your flash report should be a living, breathing document that your business uses. As a result, we wanted to share some time for monitoring your business as you move forward with your flash report. Include the 3 most recent historical periods in addition to the current period in the flash report. This allows you to analyze trends in the same document. Have your entire management team agree to commit to the document. You may need to adjust it as time goes on, and that’s okay. Review weekly with your management. During these meetings, it may be useful to convert the sections into graphs so that the non-accountants can see what the numbers are communicating.

Producing a flash report is just one of many ways to be highly effective as a financial leader. Download the free 7 Habits of Highly Effective CFOs to find out how you can become a more valuable financial leader. Let your flash reports be a game changer in your business!

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Culture Drives Financial Results

culture drives financial results

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

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

How Company Culture Drives Financial Results

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

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

Increased Performance

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

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

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

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

culture drives financial results

Increased Productivity

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

Increased Retention

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

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

Examples of Company Culture Driving Financial Results

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

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

It’s Start With Who You Hire

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

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

Personality Over Credentials

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

Be Slow to Hire & Quick to Fire

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

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Demystifying the 80/20 Rule

Whether you are working with a client, putting together a reporting package, networking with potentialtheory, or closing the books, there’s a rule you can apply to make your life easier. This rule is probably one that you’re very familiar with – regardless of whether you practice it. When you are completing a job, there always seems to be a few things that push the needle further than anything else. This is the 80/20 rule.

Using the 80/20 rule is a great way to be a more effective financial leader. Click here to read more about how you can be a highly effective CFO.

What is the 80/20 Rule?

Simply put, the 80/20 rule is where 20% of the work results in 80% of the outcome. Likewise, 80% of the work only results in 20% of the outcome. While the numbers may not be spot on, the theory holds true in pretty much everything you do.

In the early 20th century, Vilfredo Pareto, an Italian economist, introduced this concept to explain the distribution of wealth in his home country – Italy. It first came about when roughly 20% of his pea pods made 80% of the total number of peas grown. As he continued to test this theory, he expanded it into other areas of macroeconomics (wealth distribution). Then roughly 30 years later, Joseph Juran applied the 80/20 rule to business production methods. He explained this rule “the vital few and the trivial many.”

Demystifying the 80/20 Rule

Many may argue that it’s not exactly 80/20, and you would be correct. It may even be 99/1 if you look at a particular situation. But as we demystify the 80/20 rule, we need to be thinking from a macro viewpoint. What is the minimal amount of work you can do to result in the most work.

How It Applies to Financial Leadership

As the financial leader of your company, it’s so important to know what pushes the proverbial needle forward the most. Look at your team, your fulfillment, your customers, your vendors. Then look at your role in the company. What work can you do that will result in bigger and better outcomes? Identify the work that takes up the most time without providing much. You may consider having a lower level employee work on those tasks. If that 80% work is too sensitive, then restructure your day to allow for the most time sensitive issues to be front and center.

80/20 Rule

Customer vs Revenue Relationship

Because there is no business without its customers, let’s look at the relationship between customers and revenue.

Who are your best customers? They are the ones who pay their invoices on time, don’t require extra time from your team, and never complain. They are also your most profitable customers. These customers are your 20%ers, and they make up 80% of your revenue!

But then, there are those customers who you dread receiving a call from because you know it’s going to be yet another complaint. These unprofitable customers suck your time, resources, and money. They make up 80% of your customer support/implementation/sales. Yet, because they take advantage of you, they only result in 20% of the company’s revenue (and less in profit). If you are overrun by profitable customers, you may want to think about firing that customer.

An effective financial leader is able to guide their CEO through the numbers and demystifying what may be unclear to them. If you want to more effective, click here to download the 7 Habits of Highly Effective CFOs to become a more valuable leader.

Improve Your Productivity by Applying the 80/20 Rule

If you desire for your team to be more productive, then you need to start with yourself. A fish rots from the head down. Start by analyzing your to do list. Are there a few things that will make a big difference? If so, prioritize those over everything else. Remember, not everything on your to do list will have the same impact or risk. A great way to assess the weight of each task is to use “tags” labeled: non-essential, essential, and critical. Are you chasing administrative tasks or completing the same tasks over and over? Ask yourself whether those can be automated or if a less expensive employee can complete them.

Why You Need to Be More Productive

There are so many squirrels that you could chase! There’s a million ideas that are all million-dollar ideas. But what do you need to do to meet your goals? If you continue to get bogged down by things in the 80% pile, then you risk never reaching your or your company’s goals. You need to be more productive, more streamlined. Although many see automation as a risk, we see it as an opportunity to force ourselves to be more productive.

How It Impacts How Effective You Are

When you apply the 80/20 rule to your leadership and workspace, you become more productive. You are then able to see clearly what is going to push the needle further. In our experience, our client’s experience, and our vendor’s experience, there are just a few indicators that hold much more weight. Think about it this way… If you listed everything you need to improve, you would never get it all done. You simply don’t have enough time to do everything! But you do have enough time to focus on the 20% and reap the 80%.

Lead From the 40,000 Foot Level

An effective financial leader leads from the 40,000 foot level. If you only look at an issue 2 inches away, then you are going to miss what’s causing it, what it’s impacting, etc. A good leader needs the entire picture before they make a decision for the company. This also helps you guide your CEO. Click here to download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.

80/20 Rule

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Turnover in Collections is Destroying Your DSO

One of our clients called us up because his DSO went from 34 days to over 72 days within a couple months. He couldn’t figure out what was causing his daily sales outstanding (DSO) to increase so dramatically in such a short time. When we came in the office to investigate, we found that there was significant turnover in the A/R and A/P staff. As a result, collections were not being consistently collected on. Turnover in collections is destroying your DSO. But how does turnover impact your DSO?

Turnover in Collections is Destroying Your DSO

What happens when there is high turnover in a company? Decreased productivity, bad communication, reduced training, lost processes, and so much more. When we started working with our client mentioned above, they were turning over A/R personnel very quickly. At first, the management didn’t think about their DSO. Sales were going great! But no cash was being collected. What they originally thought was a cash flow problem became more of a management issue.

How are you managing your cash? After 25+ years of working with clients in cash crunches, we designed the A/R Checklist AND you can access for free here. Enjoy!

maintaining accurate records

What Happens When Turnover Is High The Collections Departments

Think about what happens when turnover is high in the collections department. Communication is not clear on who has been contacted, what to charge, if an invoice has been sent out, etc. It can easily get out of hand if communication is not seamless during the transition. There simply is no continuation and follow up.

You also need to address why turnover is high. Are you firing your employees? Are many employees retiring? Is morale down due to an upcoming transition? Are you not compensating them enough to stay? There is typically a reason for high turnover. But it may take some investigating. Do you have a good idea for what is an acceptable turnover rate?

Consider calculating the transaction turnover per A/R employee. If your number is low, you need to start improving the collections process.

      Number of Transactions Processed      
Number of Accounts Receivable Employees

Collections Cannot Be Automated

There’s a lot of things you can automate, but collections are not one of them. You cannot automate human behavior and nothing can replace a live call or meeting between two parties. While we may see some sort of automation built into this process, we don’t foresee it taking the humans out of this role. For example, if a client needs to explain that they need to extend their payment another week, they need a speak to a person, someone authorized to extend payment terms. Furthermore, if their contact person in A/R keeps changing, then those receivables will not be collected timely.  Management often underestimates the importance of having someone in receivables developing a relationship with the customer.

[HINT: Turnover may be high for a myriad of reasons, but your company still needs cash. Consider offering a discount to the client for paying in a certain number of days. Read more about discounting receivables here.]

 

How to Save Your DSO When Turnover is High

Your DSO is a key indicator for management to look at. But like other indicators, you need to know what impacts those variables and why. Employee turnover in A/R can directly impact DSO as those employees are the people responsible for collecting. When turnover is high, communications and processes don’t always get passed down properly or effectively. Let’s learn how to save your DSO when turnover is high.

Know the Cycle

First, you need to know the cycle. Companies (and economies) going through cycles where cash is tight, turnover is high, and credit becomes tight. .  Look at the recent oil & gas crisis. Oil price hit record highs, companies began to spend more, they took on more debt. Then the price of oil drops, companies find themselves paying for debt service based on a bigger size and larger revenue, cash gets tight.  The bank and other creditors tighten up until things get better down the road.

But if you’re experiencing high turnover that doesn’t reflect what the macro economy is doing, then you need to look internally.

Start by tracking your DSO at regular intervals. Make this part of your normal monthly reporting process.  This will give you a basis to predict cash flow and indicates when things are going south. When you create a DSO trend, it is easier to spot irregularity.

Identify Areas With Low Turnover

What areas in your company have low turnover? Is it sales, operations, upper level management, etc.? Identify the areas with low turnover. Regardless of their role in the company, someone needs to collect the cash or the company will be in trouble. For example, you have 5 sales people that have been there for an average of 15 years. Your A/R department has turned over 5 employees in the last 2 years. Choose one of your sales persons to manage the transition between A/R employees. Your sales people often have the relationship with the customer.

Write Down Your DSO Improvement Strategies

This is probably the most important step to saving your DSO when turnover is high. Write it down! A strategy isn’t a good strategy if you don’t write it down. Have written processes for collections as well as notes of what has been done for the entire accounting department will help everyone know where you are at.

Write the collections process down with all your DSO improvement strategies.

Then, write down notes from client conversations, steps in the collections processes. Have frequent internal meetings about collections.  Assign tasks to individuals and write down the progress or lack of progress.  The CFO should be made aware of collections, DSO and trouble accounts.

Improve Your DSO

Whether you are experiencing high turnover in your A/R staff or not, it’s important to continually improve your DSO. For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

Turnover in Collections is Destroying Your DSO

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Corporate Zombies: Combat the Rise of Unengaged Employees

Recently, we have seen a new term emerging regarding the type of employees some companies have: corporate zombies. Why should you as a financial leader care about the type of employees your company has? It all lies in your income statement. One of the largest (if not the largest) expense item is your human capital. If some of your employees are corporate zombies, that cannot be good for the financial future of your company and we’ll explain below.

What are Corporate Zombies?

So what are corporate zombies? Let’s break it down by starting with the word zombie. Zombies are depicted by popular culture to be reanimated corpses with a focused hunger for flesh (namely brains). But you put these zombies in a corporate setting, you find that they are hyper-focused on reaching a title or level within the company. They are speedy and efficient. But like general zombies, corporate zombies neglect to look left or right for any other solution to a problem. They lack creativity and instead, corporate zombies have an unquenchable hunger for power and influence. These employees neglect to innovate, go out of their way to serve customers, or solve problems. And they are rising up…

corporate zombiesWhy are Corporate Zombies rising up?

Corporate zombies are rising up for three potential reasons. They are:

  1. Unengaged in their current work
  2. Laser-focused on reaching management level
  3. No interests outside of work because they spend all their time in the office

In addition, we are seeing that corporate zombies in recruiting are hiring the same type of person. This person is on the fast track to management, are unengaged with doing the job that they currently have, and are spending all their time at work. While it may seem good to have those that want to be promoted and will work for that promotion, you must address whether they are putting in the work for the job they were hired to do. The army of corporate zombies are rising up as those in charge of hiring are adding more and more of the same type of person into their company.

Is your company overwhelmed by corporate zombies? If so, it’s time to start revamping how your company hires. Click here to download our free 5 Guiding Principles for Recruiting a Star-Quality Team whitepaper.

Why are Corporate Zombies destroying companies?

The 2AM emails, rolling into the office late, staying late, accommodating everyone, and living for the gold stars. When you add all these factors up, you will see an unproductive, uncreative, and exhausted employee that are wasting your time and money. Not good. These employees are destroying your company before your eyes, and they need to be stopped.

Unengaged Employees

According to the most recent Gallup poll on employee engagement, 67% of employees in companies located in the United States are unengaged. Most of the time, you will not be able to walk into a company and see this. But after spending a little with employees in different departments, there will be a couple things that stick out to you. People are watching the clock, trying to prove how much work they are doing (and completely disregard the quality of the work completed), and are sucking up to their superiors. While they may be engaged with their position, they are not engaged with the work needing to be done.

In addition, these unengaged employees are looking to step up into a more superior management position. But another interesting thing to note is that not everyone should be a manager. Gallup also reports that “only 10% of human beings are naturally wired to be great managers — and some others, while not naturally gifted, are teachable. But companies choose candidates with the right talent for the job only 18% of the time.” By putting employees that may “work hard” but do not produce quality work into management roles, leaders will continue this cycle of building a zombie-like company.

Reduced Productivity

If you told an eight-year-old to clear the dinner table and put things in the dishwasher, you may find that although the task will get done but it may be done not correctly. Employees in your company do each task and move onto the next so quickly that there is no check of the work done. Down the line, those or other employees will have to redo those tasks – wasting the company’s money. Their hyper-focused attention on reaching the end goal skips over the full scope of a project.

Although millennials are most often blamed for this, all employees that leave late, stay up late, and are on the clock essentially 24/7 are destroying their own productivity. 24/7 work creates exhaustion, tension between the employer and employee, decreased productivity, and reduced loyalty. An employee starts out exhausted. They think that to get to the next level, they need to be on the clock always. Then if they don’t see progress on getting that promotion, they begin to resent the company. That resentment quickly morphs into decreased productivity. If more work doesn’t move the needle, then they start producing less work. Eventually, they leave the firm. Everyone knows this: employee turnover is a killer for companies.

Response Not Initiative

Have you noticed that your company is more responsive than proactive? After a customer, vendor, or employee brings up a complaint, your company then begins to find a solution. But there is no initiative to find a solution beforehand. It can be frustrating when you hear the same complaints repeatedly. You start to question whether there is something that can be done to prevent these situations from arising. Sound like your company? Corporate zombies may have overrun your company.

The best companies in the world attempt to predict potential issues in advance and work to find a solution to those issues before they become a problem. They think about how they could improve the current product or service. They don’t just move onto the next project because they finished the previous. This lack of initiative in companies is destroying any chances of gaining real value.

How to Combat Corporate Zombies

A general does not go into battle without a game plan, so why would you? To take down the army of corporate zombies that have been building up for years, you need a firm strategy to combat them. Some of the strategy needs to include changing the culture of your company and taking control over the hiring process. You cannot allow that army of zombies to continue to build.

Build a team that defies the norm. Click here to download our free 5 Guiding Principles for Recruiting a Star-Quality Team whitepaper and start combatting those corporate zombies.

corporate zombiesThink Critically

The best way to combat those cash-sucking employees is to encourage critical thinking. Try not to just settle for the easiest and quickest solution. Instead, create teams to provide the best solution for your company and for your customers. If you do not encourage and demand that your employees think beyond what they have been taught to do, the cycle of producing the same type of person will continue. Hire each person for a very specific purpose. As one of your largest expense items, it is your role as a financial leader to cultivate the best employees.

Challenge your management to do better instead of letting them do their jobs like they have been for years. Corporate zombies do not like to be attacked. Defy the norm and think critically about how you can go against the grain.

corporate zombiesTransform Your Culture – Reengagement

If you are a company full of the same type of employees, step up and reengage the management with the reality of what is going on. The culture of the company needs to shift before it inevitably falls. Create a culture of accountability by implementing teams, improving leadership philosophies, and building on the strengths of individual employees. Harvard Business School Professor of Leadership, Leslie Perlow, describes transformation of company culture this way: “If you try to do things differently, you will find it incredibly valuable. It’s rallying together to recognize that if we continue to work in this way, it’s undermining our productivity, our sustainability, our creativity.” (Entrepreneur)

Address quality in your company. Create quality controls in your company to push your employees to do better than they did yesterday. Your company, customers, and shareholders will be thankful that you did that (and your competitors will be cursing you).

Take Control of Recruiting

As the financial leader of your company (CFO, CEO, controller, entrepreneur, etc.), take control of your recruiting. If you are looking to be successful and grow substantially, you must have the right employees. They must challenge you like you challenge them. Although it may feel nice to have a yes-man, a yes-man is only looking to get your job or to get on your level. A star-quality team requires different people to contribute to the overall success. Start assessing your current team and transform your hiring process by learning what it takes to have a star-quality team. Download our free 5 Guiding Principles for Recruiting a Star-Quality Team to stop the rise up of corporate zombies in your company.

corporate zombies

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