Tag Archives | SWOT analysis

Exploit New Business Opportunities

In this age of technology, it’s time for companies to be willing to exploit new business opportunities. More than ever before, companies are navigating this fast-pace and uncertain terrain. Bankruptcies, mergers, acquisitions, reductions, etc… It’s all changing the business landscape. But if companies do not exploit new business opportunities in fear of failing, then they are sure to fail or fall behind competitors. As financial leaders, how do we enable our leadership to take risks without neglecting the numbers?

Exploit New Business OpportunitiesWhy Exploit New Business Opportunities

The reason why one would exploit new business opportunities is to stay ahead of the ever-competitive marketplace. What needs are not being fulfilled yet? How can you gain more market share? What competencies does your company have that can be expanded into other areas – customers, markets, etc.? Opportunity exploitation is what keeps businesses moving forward. In this day and age, we need to continually reinvent our companies or we will not be around very long. Our competitors are doing this every day.

Have you identified any opportunities yet? If not, then click here to access our External Analysis Whitepaper.

Opportunity Exploitation Definition

According to Wiley Encyclopedia of Management, “opportunity exploitation refers to activities conducted in order to gain economic returns from the discovery of a potential entrepreneurial opportunity“. Typically, entrepreneurs are known to exploit opportunities or identify opportunities because it is in their nature; however, financial leaders know what the numbers say and can identify opportunities that make economical sense for the business while balancing risk and reward.

Example: Planet Fitness and Vacant Malls

E-commerce has been growing significantly while brick-and-mortar stores have been steadily decreasing. Shopping malls are more vacant than ever before. But there is one company that is taking advantage of those vacancies and benefitting from it. In a recent Wall Street Journal article, “Planet Fitness Inc. is the rare mall tenant expanding its share of commercial real estate even as many retailers shrink their physical footprint as more commerce moves online.” This is a great example how to exploit new business opportunities. Furthermore, Planet Fitness is focusing on those that do not already have gym memberships. This combination of target market and location is proving profitable for them as they have reported “revenue increase 31% to $140.6 million compared with the same three-month period last year”.

How Entrepreneurs Identify New Business Opportunities

According to Babson College, “entrepreneurs are often characterized by their ability to recognize opportunities (Bygrave & Hofer, 1991) and the most basic entrepreneurial actions involve the pursuit of opportunity (Stevenson & Jarillo, 1990).”

Steps to Identify Business Opportunities

There are several steps to identify and exploit new business opportunities that Babson has outlined:

  1. Preparation
  2. Incubation
  3. Insight
  4. Evaluation
  5. Elaboration

Preparation

Experience is the prime ground for preparing yourself or your company for opportunities. Identify what experiences your team has and what your company is good at. For example, if your company excels in supply chain and logistics, then an opportunity that needs incredible supply chain and logistics processes will be a good fit.

Incubation

Incubation refers to the brain processing a potential idea or opportunity subconsciously. They are already attempting to solve a problem that they haven’t yet written down. This is an ongoing process.

Insight

Then, in the insight stage, an entrepreneur will have the “eureka” or “ah-ha” moment where it all makes sense. As a financial leader, it’s important to talk with your CEO about their ideas so that you can engage in this insight stage. You may even see how to exploit the opportunity before the CEO does.

Evaluation

This step is where the financial leader truly steps up to the plate. Research and analyze whether this opportunity is worth pursuing. At the end of this stage, it could end up in either one of two ways:

  • The idea is not feasible and they kill it
  • The idea is feasible and you move forward.

Elaboration

Finally, the elaboration stage is where you exploit the new opportunity through business planning and implementation.

Example of Identifying a New Business Opportunity

For example, a steel manufacturer primarily sells to commercial developers who require the steel for building and/or roadways. One day, they realized that they were not using any scraps of steel, and the company was just throwing them away. Instead of continuing to throw away those scraps, they inquired whether there was an opportunity to take advantage of it. One day, the entrepreneur stumbles across a custom scrap metal design company where they create home decor out of scrap metal. The entrepreneur goes back to his CFO to discuss this potential idea. The CFO knows of a team member who actually does this in his spare time. They gather a team and start outlining a business plan. Eventually, they decide that it is a profitable idea, and they go forward with it.

If you are not familiar with the petrochemical sector, they are experts at this. Nothing goes to waste in the petrochemical business. A chemical is made or processed, it generates a bi-product or waste, and there is always another business in the petrochemical space that buys it to make yet another product, and on and on and on… Eventually, very little is true “waste”.

Manage New Business Opportunities

So, how do you go about managing new business opportunities? It is so easy for entrepreneurs to get caught up in their ideas and chase “squirrels“. They lose focus and may not capitalize on the opportunity sitting in front of them. As a financial leader, it is crucial for you to manage those new business ideas as part of your strategy to improve profitability.

Exploit New Business OpportunitiesConduct a SWOT Analysis

First, conduct a SWOT Analysis on your company with your team. A SWOT Analysis stands for Strengths, Weaknesses, Opportunities, and Threats. There are two view points in this analysis: internal focused and external focused. This analysis provides a comprehensive look at what your company does well and what it may be lagging in. This also helps the CEO/entrepreneur figure out what opportunities they need to look for to convert those weaknesses to strengths and those threats to opportunities.

If you want to get started on your SWOT Analysis, then click here to access our External Analysis Whitepaper.

Enable Your CEO to Make Calculated Risks

Then, enable your CEO to make calculated risks. Entrepreneurs need to take risks and make moves – that’s part of their nature and gift. But, they do not need to make uncalculated risks or risks that will cause more harm than good. As the financial leader, help them to mitigate risk and enable them to do what they do best – find opportunities and grow the business.

Do you know the opportunities and threats that your company faces? If not, then the time to figure it out is now. Click here to access our External Analysis to gear your business for change.

Exploit New Business Opportunities

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Exploit New Business Opportunities

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Battling Uncertainty in Your Company

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

Battling Uncertainty in Your Company

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

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

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

battling uncertainty in your company

Conduct a SWOT Analysis

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

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

Create Plans for Known Threats And Opportunities

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

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

Battling Uncertainty in Your CompanyAddress Your Company Culture

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

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

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

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

Where Uncertainty Comes From

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

The Certainty of Uncertainty

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

Leading Through Uncertainty

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

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

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

Battling Uncertainty in Your Company

Battling Uncertainty in Your Company

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The Butterfly Effect: Planning with External Analysis

planning with external analysisEvery decision you make as a financial leader affects your business. Looking back on 2016 to now, a lot of events happened and changed the course of business. Often, there are events occurring in the world that either directly or indirectly impact your company. As a financial leader, it’s up to you to decide how to change your business, or if you should keep it the same. But you need to start planning with external analysis.

How External Factors Destroy a Business

Worst-case scenario, a company will collapse due to an event that occurs externally. Here are a few examples of why external factors might actually destroy your business:

Your Company Can’t Keep Up

It’s all about infrastructure. How does your company stay in the game? If you think about it, the core of the company requires a strong group of individuals to keep the company together. Without a strong team, the company will crumble. Analyze your internal situation as well as your external situation: be aware of bitterness, fatigue, and boredom within your staff.

Competitors Fix the Problem Before You Do

“When the going gets tough, the tough gets going.” If we really think about this phrase, it’s true.”The going gets tough” means the situations around you are getting increasingly more difficult. “The tough get going” means that the strongest people work through the problem as fast as possible. If your competitors can solve the problem before you can, then your company becomes irrelevant.

Customers Adapt to the Change

Like we discussed in last week’s blog, the number one reason for startups failing is creating a product that customers don’t need. This can also be applied to businesses that already exist. If a customer doesn’t need a product, they won’t buy it. For example, the hard drive market shrank rapidly after the creation of the cloud. The cloud solved the issue of limited storage. Since then, customers adapted to the change and the hard drive market continues to shrink. Now, it’s up to the hard drive companies to make their change in order to gain new or keep current customers.

Not used to change? Planning with External Analysis helps anticipate obstacles before they affect your business. Download now!

Planning Strategically

As you can see, it takes a lot of adaptation. Over the past year or so, we’ve been getting a lot of traffic from the middle east. Everyone at The Strategic CFO wondered, “Why is this happening?” We caught up on the news and realized that oil prices collapsed.

As a result, the people in the middle east have a renewed interest in all things financial because they wanted to take initiative and start their own companies. To adapt to this change, we shifted our focus and paid more attention to them in our blog and communication.

You, too, can adapt to change. It’s a matter of staying alert, and responding to a pattern. In this case, we took note of our target demographic, and shifted to cater to them.

planning with external analysis

Porter’s 5 Forces

Porter’s 5 forces was created by Harvard Business School Professor, Michael Porter. The model exhibits 5 forces of competition within an industry, affected by multiple aspects of the industry and the environment. The 4 aspects that affect competition include the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products.

Analysis of Porter’s 5 Forces

If you think about it, all four of those aspects affect the competition equally, and are affected by spontaneous events. Bargaining power of buyers means that the consumers create pressure for a business to change its product and overall model.

Supplier power refers to the amount of influence the supplier has over a business’s decisions. An example of supplier power is oil and gas pricing. Due to the events that happen in the oil reserves, the prices fluctuate.

Threat of new entrants is the threat that new competitors present in any given industry. In a profitable industry, competition will be saturated. One of our interns told us about an ice cream owner the other day, and he said he and his partner were going to open their shop in Los Angeles. Unfortunately, they couldn’t enter the market because of the competition. As a result, he moved to Houston, posing as a threat to the Houston ice cream market. His product is common with a unique twist, but he entered a less-saturated market.

Finally, the threat of substitutes is the threat of a new product replacing an existing industry’s product. Let’s use an airline as an example. If a new airline provided a better price and better experience, consumers would most likely choose that airline.

Dealing with competition is always tough. Download this External Analysis to beat your competition to the punch!

planning with external analysis

Planning With External Analysis

SWOT analysis considers Strengths, Weaknesses, Opportunities, and Threats. Opportunities and threats are the focus for external factors. These environmental changes are most likely variable, unpredictable, and out of your control.

Environmental changes are similar to “the butterfly effect” – the concept that small changes have large effects. What happens across the world may have a large impact on your company. Not all change is negative – it is possible that what happens halfway across the world might increase your revenues in some way. In that case, you’ll still have to prepare… even if it’s not for the worst.

“Plug In” as a financial leader

As a financial leader, you have to be plugged in. News isn’t always for entertainment! In a way, it’s an indication of what your next move is. When planning with external analysis, consider more than what is happening today. Consider what might happen 3-6 months in advance, based on what is happening and has been happening lately.

Conclusion

Some say that the flap of a butterfly’s wings control the tides on the other side of the world. This concept, although somewhat overstated, is a great metaphor for environmental changes. What happens in Saudi Arabia may not affect us now, but maybe it might 5-6 months from now. The best part of adapting: always preparing for the worst.

Prepare for the best… and the worst. Download the External Analysis to gear up your business for change.

planning with external analysis

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The Impact of Brexit

Two months ago, Great Britain voted to leave the European Union (EU).  One of the most frequent questions asked was “What does this mean for me and my company?”  While Brexit hasn’t actually happened quite yet, the past two months has given us time to see the impact of Brexit on local economies and world economies as well as assess all the changes that have occurred since the vote.

brexit-referendum-uk-1468255112FBbBrexit

“Brexit” is the term used as a nickname to Great Britain’s exit from the EU. Some speculate that the entire process of Brexiting will take up to 10 years and will need 10,000 people in order to make it happen (The Guardian).

Should you still care about Brexit? Brexit is just an example of an external factor that can have a huge impact on your company. By completing an external analysis, for example, you’ll be better able to assess all likely outcomes and react accordingly.

Change Happens – Impact of Brexit

It’s simplistic to expect that dramatic changes will occur in a single day, but we can expect things to change in 2 months time. And it’s true that lot of adjustments have been made since the referendum.

David Cameron resigned from his position after the vote came in, vacating the leadership role he filled for 6 years. This resignation is similar to presidential elections or any other change in office due to the different agendas, perspectives, and goals.

The new Prime Minister, Theresa May has already created 2 entirely new governmental departments (or ministries): the Department for Exiting the European Union and the Department for International Trade. Although these ministries are still sorting out the details, we can assume that immigration of labor and trade will be impacted (positively or negatively).

As a financial leader, you must act as the wingman to your CEO and look at the horizon for things like this. What do you see that could potentially help or hinder your company?

If you need help completing an External Analysis to avoid the impact of harmful changes (or take advantage of opportunities), click here to access your free guide.

Where Does Everything Stand Now?

During any time of uncertainty, businesses are bound to be cautious (particularly in the Business-to-Consumer arena). As an entrepreneur, I consistently try to stay ahead of the curve in knowing what’s about to happen. An easy tool to use is called PEST Analysis; this tool allows you to take a broad scope of political, economic, socio-cultural, and technological factors that influence your company, customers, or vendors.

Politically

New Prime Minister Theresa May has some major hurdles to overcome due to the Brexit decision. As the first person to actually organize Britain’s exit from the EU, all bets are on the table as to how she is going to react. Earlier, we talked about how May created 2 new governmental departments. Think about what this is going to impact.

TaxesSomeone has to pay for this to happen, and it’s probably going to be the taxpayers – citizens and businesses.

Labor: People are necessary for operations to run smoothly.

Trade: Restriction on trade might hinder companies from conducting business in or with Great Britain.

impact of brexitEconomically

BBC reported that unlike expectations leading up to the referendum vote, retail sales haven’t seen a major downturn. In August, Great Britain experienced their second upturn in retail sales since Brexit. Moreover, credit card sales were higher in July than the previous 6 months.

Consumers and businesses alike are remaining cautious and conservative in their spending habits, but they are continuing to spend.

Interest rates and the value of currency decreased dramatically, which has a major impact on businesses (particularly with international business).

businessman-1071758_960_720

With the value of the pound having been decreased since Brexit, manufacturers are seeing an increased cost of importing. This could be due to interest, trade regulations, and tax laws.

Socio-culturally

The impact of Brexit hasn’t given rise to many socio-cultural changes in the past 2 months other than the obvious – change in consumer purchasing behavior.

Technologically

Brexit may not have a direct impact of advancement or regulatory changes for technology, but the impact of Brexit may adjust the landscape of how companies optimize technology.

Companies may find that telecommuting and telecommunication are solutions to avoid predicted labor restrictions. Another option would be to adjust manufacturing processes to reduce the weight of product for shipping.

How Can I Prepare for These Types of Environmental Factors?

It’s important to understand that external environmental factors are going to impact business confidence, causing uncertainty in businesses and consumers. Similar to Brexit, presidential elections and other events can cause businesses to freeze up.

But how do you know if your company is going to be impacted by external events if you haven’t given it thought?  Take a look at your consumers.  Where do you even start to prepare for these types of environmental factors?

impact of brexitDo Your Research

Nowadays, people are tied to their smart phones, tablets, and computers due to the integration of technology into culture, the workplace, and daily life. Information is readily available, so don’t get left behind like the luddites. Your friend Google is a great resource that you can use to do your research.

Doing research of environmental factors that have the potential to impact your company could save you a lot of time or money in the future.

Perform a SWOT Analysis

Performing a SWOT analysis is an important step in preparing for uncertainty. It’s an analysis of your company’s strengths, weaknesses, opportunities, and threats.

Create an External Analysis

An external analysis looks at the opportunities and strengths of a company. This is necessary in order to know what could impact you.

This might be a good time to revisit the notion of the economic dam

 It’s only when the tide goes out that you learn who has been swimming naked. – Warren Buffett

Your external analysis will bring to light factors that may hit you immediately or collide with your company later down the road. By estimating where you are in the river in relation to the dam, you’ll be able to combat uncertainty.

Create Action Plans

Write an action plan or a list of action items that need to be completed upon the occurrence of a particular external event.  This is one of the most important things in order to prepare for any scenario.

The more aware you are of what could impact your company, the better you are able to successfully pull through any situation.

impact of brexit

This emergence of the new CFO is changing the landscape of tomorrow’s financial leader. Financial leadership is no longer simply managing the finances, but rather steering the ship through smooth and choppy waters.

Act Early

One of the biggest mistakes companies make in troubled times is not acting early. Start today and download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

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The Trump Effect | Part 1 Business Confidence & Uncertainty in Elections

Business confidence is low. Uncertainty is high. Candidates are spewing whatever words they think will win that one last vote. Challengers have dropped out left and right, leaving us with 3 major contenders.

business confidence presidential elections

Make America Great Again. | Hillary for America. | A Future to Believe In.

Now what?

business confidence presidential electionsPresidential elections bring all kinds of uncertainty. Voters are choosing from candidates that have opposite policies with little to no middle ground. Businesses aren’t sure what to invest in and when the oil crisis will end. Economists are unsure of where the economy is going.

Business confidence: an economic indicator that measures optimism and pessimism that business managers feel about the outcome of a company.

Uncertainty: state where there is no objective nor are any outcomes or alternatives known.

Talking is one thing, whereas acting could result in something entirely different. If Sanders is preaching for free college, we have to assess how those words are going to work when they are acted upon. Whereas if Trump is pushing for the wall, we have to acknowledge that there is a lot more work that goes into building a wall than words can speak. If Clinton wants to have 33% of all energy sources come from renewable energy by 2020, we have to factor in the feasibility of accomplishing the goal in that time frame.

Talk is just talk. And there’s a lot of talk going on with presidential campaigns! This causes both economists and businesses to be uncertain about what to expect. When you have three strong candidates campaigning in the United States presidential elections, it can be so easy to focus in on the differences (which are many).

Economists Are Stumbling

business confidence presidential elections

Election Angst Hurting US Economy http://www.cnbc.com/2016/06/03/election-angst-hurting-us-economy.html

Economist reckon that because of the vast differences of the candidates, we are about to see the most uncertain election in decades.

If you were to compare Trump and Sanders, it’s rather difficult to draw a direct comparison. Because of their different beliefs, economists have been forced to adjust their economic forecasts. For example, Trump is focusing on enhancing immigration laws whereas Sanders is emphasizing the need to adjust the tax code. Because of these different focuses, economists aren’t sure what to do causing severe uncertainty.

Elections Impacting Businesses

There are several macroeconomic issues that businesses witness during presidential elections: stock market volatility, currency value fluctuations, decrease in business confidence, and increase in uncertainty.

Disclaimer: We acknowledge the possibility that the economy has affected the election process (rather than elections impacting the economy). The issue of elections and business confidence is too complex to make any one assumption.

Stock Market Volatility

As the stock market becomes more volatile, investors become more anxious about making a bad investment and more conscious about making any investments at all. This results in a dip or potentially a collapse in the stock market.

According to Forbes, the Dow Jones Industrial Average is typically higher during the pre-election year out of the 4-year cycle between each election. BUT when a new president is elected, as in the case of 2016, the stock market is at its lowest of the 4 year cycle. Think of Bush in ’89, Bush in ’01, and Obama in ’09.

Value of Currency

The value of currency adjusts as a response to the change in interest rates. Each party (Republican or Democrat) has an influence on the value the US Dollar (USD). Different economic and political policies enacted by the President, among other external economic or international governmental factors, either increase or decrease the value of a dollar.

Over the past 30 years, we’ve seen inflation rates fluctuate so severely due to political elections that entire countries or regions find themselves in economic distress, a debt crisis, restricted resources, and terrible conditions for those living in the countries.

Especially during the months leading up the election and those following after the election, expect changes in value of currency.

Changes in value of currency do occur in other times than change of political command.

Business Confidence

Thomas Costerg, Senior Economist of the Standard Chartered, said that “the issue is that many candidates are ‘talking down’ the economy, affecting confidence.”

AICPA_web-logo_1C_PMS293_rThe American Institute of CPAs puts out a quarterly report that surveys businesses, CPAs, and the economy.  The 2nd Quarter of 2016 Report was released recently and showed surprising results. While this report does not compare the economy/businesses to the election period, AICPA found that optimism improved from 28% to 37% in Q2 and pessimism from 34% to 21%. Inflation is becoming more of a concern now as we progress closer to election day.

(Are you confident about your company’s unit economics? If not, download our free guide, Know Your Economics, to calculate your economics.)

Uncertainty

logo-2As an entrepreneur, I am part of many business organizations including the Turnaround Management Association. Financial advisors, credit advisors, bankruptcy attorneys, business owners, CFOs, and many others comprise this organization. At a recent meeting, the topic under discussion was how long we can expect the oil crisis to continue. Very quickly, the conversation turned towards the election currently taking place in the United States. The following ideas were raised during this conversation:

The oil crisis all depends on who wins… Who is elected as the president of the United States determines whether the oil crisis will continue beyond 2017 or will taper off mid-2017. 

Business aren’t sure what to do right now because that could all change come November 8th.

 Everything could change. Nobody really knows what to expect from any of the candidates at this point. 

Consumers and businesses are wary about investing and spending during this time of uncertainty. In addition, new tax codes, economic policies, health insurance regulations, etc face businesses. Even adjustments to the Federal Income Tax (FIT) impacts the sustainable growth rate of a business. There is a lot of uncertainty that business owners and financial leaders face.

SWOT Analysis

These issues could have severe consequences for some companies. See these as threats. This is why during a SWOT Analysis, you complete a PEST Analysis where the first letter of the acronym is P for political.

Because of this uncertainty, bankers and economists find that companies avoid hiring or investing in large projects during the second half of an election year due to the sheer unpredictability of the situation.

Arleen R. Thomas, CPA, CGMA, American Institute of CPAs (AICPA) senior vice president for management accounting and global markets, concluded after the first quarter poll hosted by the AICPA that “company executives are clearly monitoring the potential business impact of the presidential election. But overall economic conditions and challenges for their particular industries are weighing more heavily in their calculations right now…” Additionally, Thomas claimed that more weight being placed elsewhere is “likely why [they’re] seeing little election-cycle impact on such key categories as hiring or capital spending.”

During this uncertain time, it’s useful to find economic indicators that impact your business.

What does all this mean?

Typically, we find that business owners or financial leaders stick their head in the sand during times of uncertainty. Remove your head from the sand. Know that this is happening. And prepare for anything. It will be okay. This too shall pass. business confidence presidential elections

What can you do now?

First things first… Make sure that before you analyze external factors that could impact your company, you know the basics of your company. More specifically, know your unit economics. This is one simple step that you can do to ensure that you, your management, and your company know where you stand.

If your economics are out of whack, then regardless of who gets elected, your business will suffer. If you’ve checked that your economics are sound and you’re still finding issues, you might have a company that is in trouble. This could be an issue with internal factors.

If your company is still bleeding, then check out next week’s blog for the Trump Effect | Part 2.

To help you deal with this uncertainty, we want to give you a free guide, Know Your Economics, that will help you analyze the building blocks of profitability in your company. By knowing your economics, you’ll be better equipped to project the future more accurately and deal with the economic uncertainty to come.

Know Your Economics (on blog)-2

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PEST Analysis

See Also:
SWOT Analysis
Porter’s 5 Forces of Competition

PEST Analysis

Certain changes to the business environment can either help you or hurt you. Using the PEST Analysis, you can anticipate factors that can be used to your advantage or that you can solve before they affect your company negatively.

Political Factors: Government policies regulate trade markets and other business environments. Political factors such as trade and safety regulations, taxes, and employment all affect a business.

Economic Factors: Factors such as interest rates, stability, taxes, and inflation affect a company’s activity. Following economic trends is important for the company because without preparation, a company may be unprepared for the sudden changes.

Socio-Cultural Factors: By examining the socio-cultural aspects of the environment, you can study the market’s customer demographic, lifestyle choices, disputes or limitations, and general knowledge. Use this to model campaigns and strategies to appeal to the customers within that environment. Education is also a major socio-cultural factor because it molds the mindset of attitude of millennials.

Technological Factors: Changes in technology provide windows of opportunity. With updated technological processes, a company is more prone to innovation, growth of a company, and may even be able to re-target to the younger generation. Technology is always changing, and therefore a company should project how and when to adapt to the change.

PEST Analysis

PEST vs. PESTEL

Some may encourage that the additional “-EL” is necessary to include in this analysis. For this wiki, we will use the term “PEST.” However, if you were curious, the “E” in “PESTEL” stands for Environment and how a company affects it. This means climate, pollution/recycling, and laws surrounding energy usage.  The “L” stands for Legal, which deals with factors such as the laws pertaining to business (employment and safety, patents, discrimination, etc).

How to do a PEST Analysis

Similar to the SWOT Analysis, you should gather all related data pertaining to your environment (political, economic, socio-cultural, and technological). Then, you determine which of the factors serve as an opportunity and which factors are a threat to the company. Keep in mind that this analysis is a decision-making approach, and do not take any action until you have completed the planning. Once you’ve gathered all relevant data and determine the opportunities/threats, the company is then ready to make a change or decision. Download the free External Analysis whitepaper to overcome obstacles and be prepared to react to external forces.

PEST Analysis

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Why do most sales projections fail?

One common perception is if most sales projections fail, why do it? As you probably know, sales forecasts are used to predict a certain amount of revenue over a given period of time. Whether this is based on a gut feeling or on historical data, the worst thing you can do is over-promise and/or under-deliver.

Remember: “What gets measured gets managed.”

Why Do Most Sales Projections Fail?

Projecting revenue is essential. Two weeks ago in our blog, How does a CFO add value?, I mentioned the three legged stool analogy. If your sales fall short of projections, you’re going to run into some issues with respect to cash flow, inventory, or a lack of resources. Whether you are releasing a new product or are continuing to project growth in your sales, it’s imperative that your sales projections are accurate.

Sales Manager vs. CFO

Sales managers and CFOs normally have different perspectives, mainly because their roles contrast greatly. The sales manager is often more concerned about his or her team and maintaining customer relationships. They’re also generally fairly optimistic (sometimes overly so) in their projections.

The CFO looks at the bigger picture. They move 3-5 months faster than sales people or accountants, because they’re forward-thinking and continuously making plans on how to improve the company as a whole. This often leads to conflicting predictions with the sales force.

For example, Bill (the CEO of ABC Company) asks Steve (the CFO of ABC Company) what he projects sales to be in the next quarter. Based on previous performance, Steve predicts about $3.8 million, because last quarter they generated $3.7 million. That’s about 2% higher than the actual revenue generated, which is reasonable considering their historical record.

But then Steve the CFO asks Ben, the Sales Manager, what he thinks. Ben’s top salesperson, Lillian, performed over 40% better this quarter compared to the previous quarter, and he expects her to positively influence the sales team with her success over the next quarter. Ben optimistically projects $4 million, which is almost 8% higher than last quarter’s revenue, and 6% more than Steve’s projection.

When you increase revenue by just 2%, the bottom line also increases by a substantial amount. When comparing the bottom lines of a 2% increase in revenue versus an 8% increase in revenue, which would you think is more realistic? And which number would you accept as a CFO?

Let’s look at a more recent example.

Case Study: The Apple Watch Dilemma

Let’s refer to the Apple Watch situation last year… Apple optimistically projected to sell 41 million watches. Shortly after releasing the product, analysts altered that projection down to 31 million. Pretty soon, Apple decided to be a little more realistic in their projection. Thus, they reduced it yet another 10 million. Why do you think that is?

1. Their “gut” feeling was poisonous.

It’s natural for a company to be excited about the release of a new product.  They were absolutely ecstatic that this product was finally going to launch. This positivity created a bias for future projections because they were the only ones formulating this prediction, not an outside group of differing opinions.

2. The idea that a new product equals new data.

“We don’t need to check our historical figures because this product never existed in our company before, right?” Wrong. True, this is a new product. However, there are other ways of comparing and predicting your sales.

For example, if I was the CFO of Apple, and Apple Watch decided to launch a new app, I would look at similar, previous apps that cost the same for marketing, production, and other direct costs associated with the app. It’s common sense – how much can you usually afford to produce?

projections fail

Apple quickly saw that their projections were wrong and just as quickly adapted. But companies that are worth $10-100 million can’t necessarily afford to be 20 million units off of their projections. A projection that wrong could have easily put a company without the resources of Apple into the grave.

How to Prevent Your Sales Projections from Failing

projections failNate Silver, author of  The Signal and The Noise (pg. 19-20), generally spoke to the failure of projections…

“The most calamitous failures of prediction usually have a lot in common. We focus on those signals that tell a story about the world as we would like it to be, not how it really is. [Then] we ignore the risks that are hardest to measure, even when they pose the greatest threats to our well-being. [Thus] we make approximations and assumptions about the world that are much cruder than we realize. We abhor uncertainty, even when it is an irreducible part of the problem we are trying to solve. If we want to get at the heart of the financial crisis, [then] we should begin by identifying the greatest predictive failure of all, a prediction that committed all these mistakes.”

Although Silver is analyzing financial crises, the same analysis applies when we look at sales projections of a mid-size business. The most important factors you have to calculate are risk and uncertainty. If you neglect to consider risk and uncertainty, you are most likely over-shooting your projections.

Risk & Uncertainty

People often overlook risk and uncertainty when projecting revenue. However, life happens every single day, leaving you with failed projections.

Most projections fail due to inability to calculate these two factors: risk and uncertainty. So where do you start in assessing risk and uncertainty?

For risk:

  1. Identify any risks that could occur (events, etc.)
  2. Calculate the probability of each risky event occurring
  3. Create alternatives and figure the cost/benefit analysis of each response
  4. Choose a response that would best allow you to reach your sales projections
  5.  Reassess after your company responds
  6. Continue to monitor those risky events

For uncertainty, identify those events or situations that you are not sure of. Acknowledging your ignorance is key in this situation. It allows you to put focus on places where you are not sure. Uncertainty is not the same thing as inaction as many business or financial leaders like to define it. That’s an important distinction that you must continue to remind yourself of when analyzing what risks and uncertainties your company is facing.

By completing a SWOT analysis, you’ll be better equipped to understand where risk and uncertainty is found within your company.

Conclusion

If the problem is either over-shooting or under-delivering sales in their projections, then the answer is relatively simple but is often overlooked. The Goldilocks Sales Method will help you project revenue that is not only more accurate, but will help you utilize your projections.

projections fail

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See Also:

Projecting Revenue

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