You have spent time diligently researching your partners, consultants and vendors and you have invested your personal time into your network of your peers. Now the challenge is how to be more profitable and getting a return on the investment in time while maintaining transparency and integrity. My experience as a CFO of a financially successful company is that there is no shortage of vendors asking for time on my calendar to pitch ideas and certainly the existing vendors, bankers and consultant are happy to take me to a favorite sporting event or golf to talk business. My rational question is "If they have money to spend there, how do I reallocate it back to my company so my CEO sees the value?"
The conclusion I have come to is that you can negotiate much more than your companies business to get favorable treatment from the people that have legitimately earned your business. I learned this practice from a VP of Quality/Regulatory at my company who negotiated almost half off software by promising the vendor he would get him additional customers and revenue by recommendation if he lowered our price and extended our payment terms. This got me thinking that if it works on software, capital expenditures then maybe it can work effectively on consultants etc. I have engaged in outsourcing much of my basic information technology infrastructure to a firm that has exceeded my expectations in many ways and as a result I am vocal to my peers when they complain that they are being under served by their internal technology employees but don't have an alternative that they are willing to take a risk on. After lining up more than three new contracts for this firm I am now much more valuable to them then my own companies contract would suggest and find them flexible when asking for additional resources without being charged as I would have several years ago. My consultants related to specific US tax credit are also very worthy of attaching my name and reputation to and I believe I can continue to extend that relationship out several more years without any cost increase by proving my value as a referral.
It is critical that these referrals are done transparent to the benefit I could receive and that they are told that these are negotiation points that my peers can extend to their own network. My change in behavior is the move from advocating for services that I am happy with to sharing that leverage with my own company in the form of something that doesn't benefit me personally. In essence, you too can be a salesperson for your critical vendors and the commission can go to your company!
Tuesday, December 13, 2011
Monday, November 21, 2011
Using valuation models to create value
You have your 2012 budgets set, you have aligned your resources to the key initiatives and objectives in your multi-year strategic plans and you have dashboards set to measure your organization's progress at least monthly. Can you now answer the question- will my company be more valuable to all shareholders, customers and employees? How do you benchmark how aggressive the management team's commitment is to increasing the value of your company? There is one more best practice I recommend senior financial executives put in place and get the entire senior management team fluent in interpreting. That is the appropriate valuation model. While public companies have the stock market to interpret the success of your performance, it is entirely based on the confidence of forward looking statements and projections which by practice need to be somewhat more conservative than internal goals in order to avoid disappointing the market with downward revisions. Private companies have much less pressure outside of banking relationships to quantify financial projections and are less likely to be measured on incremental value added unless a good phantom stock plan or equivalent long term incentive system is in place.
Which valuation model should you use? If you are a privately held company I would argue the best measure is your EBITDA (earnings before interest, tax, depreciation and amortization) with an appropriate industry multiple reflective of your size and the ratio of EBITDA to net sales. The multiple becomes a big variable here because if relies on outside verification of other competitors that are publicly held and past transactions. However, it focuses that management team on not only growing the profit, but maintaining your financial standing relative to your competitors and rewards consistency of profitable growth relative to sales which reduces the risk for outside financiers and merger and acquisition professionals when viewing your company for sale even if you have no intention to sell but may in the future seek "growth capital" that is non-bank funding for your companies growth. Another method that is more simple to track is a discounted cash flow model that allows you to view the last few years of history and project your 5-10 year business plans to arrive at the value of your business. This method is particularly good when replacing your projections each year with actuals and maintaining a consistent level of conservative modeling. The key to each of these methodologies is rewarding the management team for some type of quantifiable risk reduction (bigger balance sheets with more history are lower risk or lower beta than the small companies without a longer term history).
While many valuation firms are excellent at this exercise, I am of course happy to share templates to get you started. Several people on linkedin have already requested these templates and if you like, please send me an email to jevanoff@fona.com. Keep in mind, the exercise is of little value unless you review this for consecutive years and do some analysis on what drives the incremental or decremental value from the prior analysis. Also, don't fool yourself with increasing levels of optimism for future growth or the amount of risk. If an independent professional would not arrive at the same conclusion with an intimate knowledge of your company, you should re-examine your assumptions.
Best of luck creating more valuable companies across the world!
Which valuation model should you use? If you are a privately held company I would argue the best measure is your EBITDA (earnings before interest, tax, depreciation and amortization) with an appropriate industry multiple reflective of your size and the ratio of EBITDA to net sales. The multiple becomes a big variable here because if relies on outside verification of other competitors that are publicly held and past transactions. However, it focuses that management team on not only growing the profit, but maintaining your financial standing relative to your competitors and rewards consistency of profitable growth relative to sales which reduces the risk for outside financiers and merger and acquisition professionals when viewing your company for sale even if you have no intention to sell but may in the future seek "growth capital" that is non-bank funding for your companies growth. Another method that is more simple to track is a discounted cash flow model that allows you to view the last few years of history and project your 5-10 year business plans to arrive at the value of your business. This method is particularly good when replacing your projections each year with actuals and maintaining a consistent level of conservative modeling. The key to each of these methodologies is rewarding the management team for some type of quantifiable risk reduction (bigger balance sheets with more history are lower risk or lower beta than the small companies without a longer term history).
While many valuation firms are excellent at this exercise, I am of course happy to share templates to get you started. Several people on linkedin have already requested these templates and if you like, please send me an email to jevanoff@fona.com. Keep in mind, the exercise is of little value unless you review this for consecutive years and do some analysis on what drives the incremental or decremental value from the prior analysis. Also, don't fool yourself with increasing levels of optimism for future growth or the amount of risk. If an independent professional would not arrive at the same conclusion with an intimate knowledge of your company, you should re-examine your assumptions.
Best of luck creating more valuable companies across the world!
Thursday, November 3, 2011
Initiative Dashboards for CFO's- Revisiting your best work
Dashboards are a great tool. In one page of graphs and ratios a talented finance executive can quickly spot operational inefficiencies that may be hidden in the balance sheet or income statement. Recently I saw my ratios of accounts payable to inventory drop which was surprising since I had moved all my top suppliers to 45-60 day terms from standard 30 day terms in 2009. While this provided great cashflow in the midst of the economic downturn and cover for the customers that were stretching out their receivables to my company, over the past two years all these suppliers quietly moved their terms back to 30 days without a call or letter to purchasing or accounting.
This got me thinking about a new tool for CFO's. Do I have an initiative dashboard to measure the staying power of cash flow initiatives or even profit initiatives? The inherant assumption is that when an initiative is developed it has unique characteristics beyond the ratios it will impact. For instance, increasing vendor payment terms will increase payables and provide short term cash flow but if payables are increasing due to growth and cash flow is shrinking due to other reasons you can spend a lot of time tracking down the multiple variables that impact the ratios before arriving at the conclusion that an initiative reversed itself. In this example, the unique characteristics of this initiative is the percent spend of the vendors that originally agreed to longer payment terms. Some of those vendors were replaced which lowered the importance of their longer terms. The other characteristic is the payment terms themselves. By creating a dashboard of the terms for top 20 vendors and the percent of total spend that they represent, I have a much clearer understanding of how to revisit this initiative with purchasing. Also, the value of iniative is timeliness and trying to cutoff the reversals before a supplier becomes too entrenched in that new business practice is important to your negotiating leverage.
I hope this one example will inspire you to look back at your best ideas and generate a initiative dashboard because it is much easier to maintain good business practices and to generate a great new idea and push your organization and your customer/supplier to implement.
This got me thinking about a new tool for CFO's. Do I have an initiative dashboard to measure the staying power of cash flow initiatives or even profit initiatives? The inherant assumption is that when an initiative is developed it has unique characteristics beyond the ratios it will impact. For instance, increasing vendor payment terms will increase payables and provide short term cash flow but if payables are increasing due to growth and cash flow is shrinking due to other reasons you can spend a lot of time tracking down the multiple variables that impact the ratios before arriving at the conclusion that an initiative reversed itself. In this example, the unique characteristics of this initiative is the percent spend of the vendors that originally agreed to longer payment terms. Some of those vendors were replaced which lowered the importance of their longer terms. The other characteristic is the payment terms themselves. By creating a dashboard of the terms for top 20 vendors and the percent of total spend that they represent, I have a much clearer understanding of how to revisit this initiative with purchasing. Also, the value of iniative is timeliness and trying to cutoff the reversals before a supplier becomes too entrenched in that new business practice is important to your negotiating leverage.
I hope this one example will inspire you to look back at your best ideas and generate a initiative dashboard because it is much easier to maintain good business practices and to generate a great new idea and push your organization and your customer/supplier to implement.
Tuesday, September 20, 2011
If you want to be rich... (give it away)
Buried deep in many how to get rich books are two underlying principles of many millionaires. First, it requires discipline not to spend every dollar you make which has been taught to a multitude of lottery winners as well as Forbes Magazine's documentation on how even a billionaires can go broke (Bjorgolfur Gudmundsson). Robert Kiyoski in his book "Rich Dad, Poor Dad" advocated for spending time in the military or a religious order if you need help controlling your urges. The second principle is that very few people get rich by trying to do so. They have a passion for anything from the internet to a new invention and getting rich is a by product of doing what they love and years of practice.
I propose that many bad financial decisions are made out of fear, but giving to charity can help break that destructive cycle of thinking "what if there isn't enough for me after I give, or I will give when I have/make more money". My wife's father learned this lesson early when he accepted cash bonus for some breakthrough work instead of an ownership interest that would have made him millions. Charity not only makes a social difference but helps you as a person break your focus on money so you can focus on your passion which is more likely to make you rich! Some of the best financial advice I ever heard was "somebody you know makes less money than you- live like them".
Charity consists of giving your time, talent and/or treasure (money). I will leave you to decide how you donate your time and money, but I suggest that your CFO talents can make a global impact on rethinking how charity works. The most famous example is probably Mohammad Yunus and his creation of microfinance/microcredit which earned him a Noble Prize in 2006. While encountering many obstacles, I am currently investigating variations on his theme- specifically looking at how profitable corporations can donate their superior credit rating to provide low interest loans at little or no cost to the corporation (much easier to ask a company for some of its available credit than actual money). Another idea I am working on is a charity that serves families with medical insurance but can't afford the deductible or copays. The bulk of the medical treatment would not be paid by the charity, rather the insurance company if only donors helped get the treatment started with as little as $20 for a doctor visit.
I hope you have ideas on how you can accelerate the tired old model of charities asking for money and spending it - many times without the means to measure the impact and decide if they are truly making a permanent difference or just a temporary one. As talented finance professionals, I urge you to apply those talents and I think you will find yourself thinking less about your networth and more about your passions and talents.
I propose that many bad financial decisions are made out of fear, but giving to charity can help break that destructive cycle of thinking "what if there isn't enough for me after I give, or I will give when I have/make more money". My wife's father learned this lesson early when he accepted cash bonus for some breakthrough work instead of an ownership interest that would have made him millions. Charity not only makes a social difference but helps you as a person break your focus on money so you can focus on your passion which is more likely to make you rich! Some of the best financial advice I ever heard was "somebody you know makes less money than you- live like them".
Charity consists of giving your time, talent and/or treasure (money). I will leave you to decide how you donate your time and money, but I suggest that your CFO talents can make a global impact on rethinking how charity works. The most famous example is probably Mohammad Yunus and his creation of microfinance/microcredit which earned him a Noble Prize in 2006. While encountering many obstacles, I am currently investigating variations on his theme- specifically looking at how profitable corporations can donate their superior credit rating to provide low interest loans at little or no cost to the corporation (much easier to ask a company for some of its available credit than actual money). Another idea I am working on is a charity that serves families with medical insurance but can't afford the deductible or copays. The bulk of the medical treatment would not be paid by the charity, rather the insurance company if only donors helped get the treatment started with as little as $20 for a doctor visit.
I hope you have ideas on how you can accelerate the tired old model of charities asking for money and spending it - many times without the means to measure the impact and decide if they are truly making a permanent difference or just a temporary one. As talented finance professionals, I urge you to apply those talents and I think you will find yourself thinking less about your networth and more about your passions and talents.
Wednesday, September 7, 2011
Becoming a more valuable CFO (outsource yourself)
Resumes/CV's are often a historical rendering of where you have been and what positions and responsibilities you were accountable for. Unfortunately, the part that makes you most valuable to a future employer and your current employer is not what you were accountable for, but the impact you made with quantifiable achievements and often your skills may not always match the business need. Worse yet, there may be little opportunity to practice your decision making on a new initiative without putting your job on the line resulting in many overly cautious, conservative and less impactful decisions being made by CFO's. Training does no good if the exposure to new best practices comes with considerable risk of failure. So how do you polish your skills without the stigma of the inevitable bumps and bruises of sticking of radically new ways of doing things?
Practice...Practice...Practice. One of the few opportunities that CFO's at successful companies overlook in their own career development is volunteering their expertise to small or middle market companies that are often staffed with a low level general accountant or bookkeeper. When we as CFO's examine our busy work and family schedule's we sometimes find a way to volunteer to be the voice of financial reason at our church or favorite not for profit charity. That devotion of your time is often just that- charity. I am advocating CFO's review their time spent in peer forums, industry training and technical training and examine if some real life experience wouldn't give you better feedback on the skills you need to keep sharp.
Recently I had a business contact tell me a member of his young professionals organization was in need of help negotiating with his current bank and reviewing his forecast and budget. In less than 20 hours of my personal time I was able to help him develop a marketing document that reflected his current business initiatives, spot flaws in the budget process and challenge spending patterns and unprofitable business lines. My organization has none of these same struggles and the sharpness of my analysis would wane if not for the opportunity to test my skills in an environment where change is necessary. My only caveat is that your help is not charity- it may well be the life or death to an organization so make firm commitments to what your deliverables will be and be on time. Be the same professional for them as your full time job. When you reach a milestone of achievement with this experience, it will also be worthy of your resume/CV and when they say "Thank You", don't forget to thank them for making you a better CFO (and person).
Practice...Practice...Practice. One of the few opportunities that CFO's at successful companies overlook in their own career development is volunteering their expertise to small or middle market companies that are often staffed with a low level general accountant or bookkeeper. When we as CFO's examine our busy work and family schedule's we sometimes find a way to volunteer to be the voice of financial reason at our church or favorite not for profit charity. That devotion of your time is often just that- charity. I am advocating CFO's review their time spent in peer forums, industry training and technical training and examine if some real life experience wouldn't give you better feedback on the skills you need to keep sharp.
Recently I had a business contact tell me a member of his young professionals organization was in need of help negotiating with his current bank and reviewing his forecast and budget. In less than 20 hours of my personal time I was able to help him develop a marketing document that reflected his current business initiatives, spot flaws in the budget process and challenge spending patterns and unprofitable business lines. My organization has none of these same struggles and the sharpness of my analysis would wane if not for the opportunity to test my skills in an environment where change is necessary. My only caveat is that your help is not charity- it may well be the life or death to an organization so make firm commitments to what your deliverables will be and be on time. Be the same professional for them as your full time job. When you reach a milestone of achievement with this experience, it will also be worthy of your resume/CV and when they say "Thank You", don't forget to thank them for making you a better CFO (and person).
Thursday, July 28, 2011
CFO Contribution to Revenue- CEO Triangle and Lean Consumption
CFO's see their role in the organization as care takers of responsible investment of operating expense, capital expenditures and working capital with typical performance metrics around profitability and cash flow. In the words of my CEO, " you can't save your way to prosperity" and in these turbulent economic times, it is worth stepping back and seeing the CFO role as a partner in growing the top line.
CEO Triangle:
When thinking about the value of an initiative, the most important question I ask myself is "will the customer care?" However, what is good for the customer, like a price decrease, can be at odds with shareholder interests and even the future benefit to the employees. The CEO triangle is a great visual model our company preaches to help the average employee understand how it must balance and looks like this:
work, and work together.
Initiatives that I see work under these principles in my business include measured response times vs. customer expectations on lead times, authority to resolve issues up to a dollar amount by customer service reps, technology and communication initiatives that make it easy for your customers to voice complaints and 24 hour resolutions. Data gathering is also extremely important such as leveraging your contact points outside of sales such as purchasing or customer service or accounting, to understand where your competitors cause frustration so you can have established benchmarks of differentiation. My company also uses customer surveys. With the advent of blogs and twitter within CRM systems like salesforce.com, their is much more opportunity to for an open dialogue, not just a transactional dialogue with all levels of the organization and the customers organization.
In summary, customers are not organizations, they are individuals that want their day to go smoothly and to have meaningful cordial relationships and these principles create more connections that are less financially motivated from the customers point of view which creates the opportunity for a premium based relationship and incremental profitability and revenue.
Next Blog Post: Practicing your CFO role outside your Organization
CEO Triangle:
When thinking about the value of an initiative, the most important question I ask myself is "will the customer care?" However, what is good for the customer, like a price decrease, can be at odds with shareholder interests and even the future benefit to the employees. The CEO triangle is a great visual model our company preaches to help the average employee understand how it must balance and looks like this:
-
Our Customers - - Our Employees
- - -
Our Business
Over investment in any one side of the triangle makes the business lopsided and the ideal investment grows the whole triangle in a balanced way.
Lean Consumptions:
How does the adherance to the CEO triangle grow revenue? First, if you look at the three key strategic options every company has (technology/innovation leader, service leader, low cost leader) they all benefit from the goal of making it easier to do business with your company as a differentiator from your competitors. James Womack and Daniel Jones published a great article in the Harvard Business Review called Lean consumption (link here) http://www.mindmappingworld.com/files/LEAN%20consumption.pdf which touts the principles to making the principles of lean manufacturing part of your revenue generation mindset. The key 5 principles from the article are:
1. Solve the customer’s problem completely
by insuring that all the goods and serviceswork, and work together.
2. Don’t waste the customer’s time.
3. Provide exactly what the customer wants.
4. Provide what’s wanted exactly where it’s wanted.
5. Provide what’s wanted where it’s wanted exactly
When it’s wanted.Initiatives that I see work under these principles in my business include measured response times vs. customer expectations on lead times, authority to resolve issues up to a dollar amount by customer service reps, technology and communication initiatives that make it easy for your customers to voice complaints and 24 hour resolutions. Data gathering is also extremely important such as leveraging your contact points outside of sales such as purchasing or customer service or accounting, to understand where your competitors cause frustration so you can have established benchmarks of differentiation. My company also uses customer surveys. With the advent of blogs and twitter within CRM systems like salesforce.com, their is much more opportunity to for an open dialogue, not just a transactional dialogue with all levels of the organization and the customers organization.
In summary, customers are not organizations, they are individuals that want their day to go smoothly and to have meaningful cordial relationships and these principles create more connections that are less financially motivated from the customers point of view which creates the opportunity for a premium based relationship and incremental profitability and revenue.
Next Blog Post: Practicing your CFO role outside your Organization
Thursday, July 7, 2011
How to Fail Successfully (Working Capital Initiatives)
Many of us have been through strategy seminars or executive education and heard the phrase "diversification equals risk". This is certainly true when it comes to investing in new lines of business away from the core and acquisitions that aren't strategically market positioned where the parent company adds value to the acquisition. When it comes to objectives for CFO's, there is plenty of research that supports rapid prototyping several solutions quickly and separating the solutions that can be modified to be more successful from the ones that have very little impact or promise for success. For those familiar with the company IDEO, it is their business model to deliver a service that does this often in less than a week with diverse teams yielding many novel insights and new products to market. In this era where cash is king more than any time in our global history, I suggest we can apply this to our annual objectives. In my industry that relies on R&D to win every piece of new business and certainly in the service industry, win rates are well below 50% due to stiff competition (unless you are lucky enough to be a monopoly) so let's examine options in working capital improvement:
Accounts Payable:
1. The traditional mindless approach is to pay suppliers later than the agreed upon terms and hope you don't get assessed late fees. In my past I worked for a public company that only paid employees and specifically approved vendors in June and December to hit their cash flow numbers. This strategy has short term benefits but damages vendor relationships and future negotiations. My experience is the safest use of this strategy is to reduce the number of check runs per month- communicate it broadly to suppliers and if their invoice misses the cut off by one day- they get pushed to the next check run. Even ACH or Wires could be communicated clearly as a Monday or Friday only activity to leverage a few days.
2. Negotiate your size and growth. As one of the few companies that was lucky enough to be growing through 2008 and 2009 both accounting and purchasing departments teamed up to identify our largest vendors and how much our purchases have increased while their other customers were likely decreasing. To the extent that we had alternatives to pit against each other, we were able to take our top 20 vendors from 30 days to either 45 or 60 days making a substantial impact. Some only granted a one year reprieve on new terms but it was significant in 2009. The procurement side internally always want the CFO to commit to setting goals on price or terms but I don't think they are entirely exclusive. Once you have terms extended, there is always room to negotiate pricing at least to market competitive points.
3. Financing- All of us learned in college that the 2/10 net 30 day terms is a ridiculously high rate of return for the buyer so take discounts if they are no brainers, but there are negotiable ways of extending through financing that is cheaper. First, if vendors called to get their payments the second it hit their terms, we offer up amex payments which is interest free to us and they pay the financing cost on the corporate card. P-Cards or splitting the Amex fee is a way to cut the cost of financing the extension of terms. More complex methods like reverse factoring (supply chain financing- see http://en.wikipedia.org/wiki/Reverse_factoring for explanation) are rare but have value for large suppliers if the banking partner is strong.
Accounts Receivable:
1. Traditional approach is of course opening a line of credit with your bank and accepting prime rate lending with A/R as collateral around 85% loan to value (minus aging and cross aging and international balances in some instances). Financially I haven't found a deal as good as this other than an investment in a collections person who keeps your DSO within a few days of best possible DSO.
2. Factoring- unless you can't meet payroll, I don't recommend factoring which is selling your A/R outright with a healthy margin to the factor unless you accept recourse. A more novel approach gaining some market share is a receivable exchange market (www.receivablesxchange.com is one in the US) where you sell your receivables (about 85-90%) for a minimal fee compared to the factoring market and pay interest until the receivable is paid by your customer. There are cons to setting it up like having particular customers send all payments through a new lockbox for this purpose only regardless of whether you sell the invoices or not but definitely a more efficient receivable financing option when banks are less of an option.
Inventory:
1. Often the biggest retailers lead innovation in this area including concepts like scan based trading, vendor managed inventory and variations like seller owned inventory. I more often find myself fighting these off from my customers than implementing them with our vendors. The one that is gaining traction is vendor managed inventory program where I can partner with a large distributor of most of my critical raw materials and for a fee they maintain that inventory in less than a day transport. Carrying much less raw materials increases my turns and if reliable shortens my lead time to customers thus decreasing finished goods.
In summary- I have tried each of these methods with varying success or are currently working through them and in some cases they were successful only for a period of time, but the try-fail-try something else model gets me to these and hopefully more innovative solutions in the future.
Next up:
Lean Consumption and the CEO triangle- how CFO's impact the top line.
Accounts Payable:
1. The traditional mindless approach is to pay suppliers later than the agreed upon terms and hope you don't get assessed late fees. In my past I worked for a public company that only paid employees and specifically approved vendors in June and December to hit their cash flow numbers. This strategy has short term benefits but damages vendor relationships and future negotiations. My experience is the safest use of this strategy is to reduce the number of check runs per month- communicate it broadly to suppliers and if their invoice misses the cut off by one day- they get pushed to the next check run. Even ACH or Wires could be communicated clearly as a Monday or Friday only activity to leverage a few days.
2. Negotiate your size and growth. As one of the few companies that was lucky enough to be growing through 2008 and 2009 both accounting and purchasing departments teamed up to identify our largest vendors and how much our purchases have increased while their other customers were likely decreasing. To the extent that we had alternatives to pit against each other, we were able to take our top 20 vendors from 30 days to either 45 or 60 days making a substantial impact. Some only granted a one year reprieve on new terms but it was significant in 2009. The procurement side internally always want the CFO to commit to setting goals on price or terms but I don't think they are entirely exclusive. Once you have terms extended, there is always room to negotiate pricing at least to market competitive points.
3. Financing- All of us learned in college that the 2/10 net 30 day terms is a ridiculously high rate of return for the buyer so take discounts if they are no brainers, but there are negotiable ways of extending through financing that is cheaper. First, if vendors called to get their payments the second it hit their terms, we offer up amex payments which is interest free to us and they pay the financing cost on the corporate card. P-Cards or splitting the Amex fee is a way to cut the cost of financing the extension of terms. More complex methods like reverse factoring (supply chain financing- see http://en.wikipedia.org/wiki/Reverse_factoring for explanation) are rare but have value for large suppliers if the banking partner is strong.
Accounts Receivable:
1. Traditional approach is of course opening a line of credit with your bank and accepting prime rate lending with A/R as collateral around 85% loan to value (minus aging and cross aging and international balances in some instances). Financially I haven't found a deal as good as this other than an investment in a collections person who keeps your DSO within a few days of best possible DSO.
2. Factoring- unless you can't meet payroll, I don't recommend factoring which is selling your A/R outright with a healthy margin to the factor unless you accept recourse. A more novel approach gaining some market share is a receivable exchange market (www.receivablesxchange.com is one in the US) where you sell your receivables (about 85-90%) for a minimal fee compared to the factoring market and pay interest until the receivable is paid by your customer. There are cons to setting it up like having particular customers send all payments through a new lockbox for this purpose only regardless of whether you sell the invoices or not but definitely a more efficient receivable financing option when banks are less of an option.
Inventory:
1. Often the biggest retailers lead innovation in this area including concepts like scan based trading, vendor managed inventory and variations like seller owned inventory. I more often find myself fighting these off from my customers than implementing them with our vendors. The one that is gaining traction is vendor managed inventory program where I can partner with a large distributor of most of my critical raw materials and for a fee they maintain that inventory in less than a day transport. Carrying much less raw materials increases my turns and if reliable shortens my lead time to customers thus decreasing finished goods.
In summary- I have tried each of these methods with varying success or are currently working through them and in some cases they were successful only for a period of time, but the try-fail-try something else model gets me to these and hopefully more innovative solutions in the future.
Next up:
Lean Consumption and the CEO triangle- how CFO's impact the top line.
Wednesday, July 6, 2011
The CFO Role- How to manage Diverse Responsibilities and Win
Welcome Finance/Accounting/HR/IT/Legal/Insurance/Risk Management Professionals!
This blog is my response to the difficulties CFO's or other Financial Executives at middle market ($50MM-$1B) and even smaller organizations face with diverse responsibilities and a myriad of intiatives that cross all parts of the organizations. This frustration led one of my fellow CFO's at a CFO forum to say "I feel like I have to be 5 miles wide in the scope of my work but I can only be 1 inch deep in my expertise". So that is the genesis of this blog, how to be an effective CFO over multiple responsibilities and choose strategic initiatives to spend your time on while not requiring the investment of your personal time to be an expert (after all, some of us have been known to have families that occassionally enjoy our company, or at least our presence).
What will you get by reading this weekly blog? Each of you are undoubtedly inundated with sales calls from banks, consultants, insurance brokers and vendors of all sorts. I will share my experience of cutting through the clutter of emails and voicemails to spend time on partnerships that work and how to monitor and use those relationships to be your experts and drive results. Also, when to cut ties and upgrade. I look forward to sharing some insights on the initiatives I am working on including global expansion, M&A, treasury management, supply chain enhancements, ERP upgrades, outsourcing and automation and using HR to build a culture of high engagement. Some posts will be status updates on initiatives, some will be learnings with links to learn more. This blog is commercial free but feel free to send links if you had particular success and great learnings.
Please use this forum to multiply the learnings, disagree with me and show that there is more than one way to achieve the goal of building profitable business models. Give me any feedback to make this blog better and this will grow with your help.
Where to start? How about effective leadership? If there is one thing I want for you to be an expert in (5 miles deep), it is how to get the most from your team(s). I picked up some great learnings from University of Chicago/IE Business School's Global Senior Management Program this past May/June and here is the action plan/excercises I think are critical to getting to be the type of Leader that your staff will remember as worth of following with their hearts and minds.
1. Leaders need to be authentic and care about their staff like family. A great first exercise is write your name in the middle of a blank piece of paper and draw lines out (like spokes of a bicycle) with the names of the 8 people most critical to your performance at work (not including your spouse). To care about your staff in an authentic way, you must know a lot about them. For each of the people you listed- Do you know if they are married, have kids (what are their names and ages), where they are going on holiday this year? We often choose to invest time getting to know our peers and our CEO/President and perhaps your staff knows all these things about you, but if you haven't spent time listening to who they are beyond work, how can lead them as individuals with strengths and weakness? For those people you feel a little less aware of but are critical to your performance, commit on your calendar for at least 15 minutes to learn something new about them or patterns in their behavior. Learn something about them by listening and observing first, sharing yourself personally before you ask them to.
2. Know your strengths and your team(s)- diversity is good. While many analysis of personalities and working styles exist (FIRO-B, Myers Briggs, etc). I like the strength finders http://www.strengthsfinder.com/home.aspx which gives you a top 5 that you can focus on what will make you a great leader (your top 2 probably) and if you have your staff take the same survey, you will find the complementary strengths to effective teams like Ideation/Maximizer with Activator and Relator. This goes beyond the roles we have on our teams as job descriptions and allows you to think about which staff is good at building concensus, which will write the plan to get it done on time on budget, who will generate ideas, who will refine them and who will find the downside of doing something new (risk management). If those traits aren't on your team- get them from the outside vendors like lawyers, consultants, interns, etc. The one thing you need internally is the someone to generate ideas and build excitement. This doesn't always have to be you- but rarely can that be done from outside the organization.
3. Motivation drives behavior, learn what drives you and your team.
How:
a. listen and observe using (closed question, open ended question then probe)
b. what is their job history?
c. family background
d. free time pursuits
e. observe what excites them and what bores them
Types of Motivation:
1. Lifestyle
2. Structure and predictability
3. Satisfying relationships
4. Recognition
5. Power
6. Autonomy and growth
People move in and out of these 6 at different levels but the highest performers are heavier on 4-6 and your leadership should not only respond to types of motivation, but can influence it - low feedback on the meeting the needs of someone high on 4-6 results in them quitting or falling back into low effort and more emphasis on 1-3.
That's enough background on knowing more about your team before you embark on truly challenging initiatives- next week I will tackle some of the initiatives on my plate. Thanks for reading!
This blog is my response to the difficulties CFO's or other Financial Executives at middle market ($50MM-$1B) and even smaller organizations face with diverse responsibilities and a myriad of intiatives that cross all parts of the organizations. This frustration led one of my fellow CFO's at a CFO forum to say "I feel like I have to be 5 miles wide in the scope of my work but I can only be 1 inch deep in my expertise". So that is the genesis of this blog, how to be an effective CFO over multiple responsibilities and choose strategic initiatives to spend your time on while not requiring the investment of your personal time to be an expert (after all, some of us have been known to have families that occassionally enjoy our company, or at least our presence).
What will you get by reading this weekly blog? Each of you are undoubtedly inundated with sales calls from banks, consultants, insurance brokers and vendors of all sorts. I will share my experience of cutting through the clutter of emails and voicemails to spend time on partnerships that work and how to monitor and use those relationships to be your experts and drive results. Also, when to cut ties and upgrade. I look forward to sharing some insights on the initiatives I am working on including global expansion, M&A, treasury management, supply chain enhancements, ERP upgrades, outsourcing and automation and using HR to build a culture of high engagement. Some posts will be status updates on initiatives, some will be learnings with links to learn more. This blog is commercial free but feel free to send links if you had particular success and great learnings.
Please use this forum to multiply the learnings, disagree with me and show that there is more than one way to achieve the goal of building profitable business models. Give me any feedback to make this blog better and this will grow with your help.
Where to start? How about effective leadership? If there is one thing I want for you to be an expert in (5 miles deep), it is how to get the most from your team(s). I picked up some great learnings from University of Chicago/IE Business School's Global Senior Management Program this past May/June and here is the action plan/excercises I think are critical to getting to be the type of Leader that your staff will remember as worth of following with their hearts and minds.
1. Leaders need to be authentic and care about their staff like family. A great first exercise is write your name in the middle of a blank piece of paper and draw lines out (like spokes of a bicycle) with the names of the 8 people most critical to your performance at work (not including your spouse). To care about your staff in an authentic way, you must know a lot about them. For each of the people you listed- Do you know if they are married, have kids (what are their names and ages), where they are going on holiday this year? We often choose to invest time getting to know our peers and our CEO/President and perhaps your staff knows all these things about you, but if you haven't spent time listening to who they are beyond work, how can lead them as individuals with strengths and weakness? For those people you feel a little less aware of but are critical to your performance, commit on your calendar for at least 15 minutes to learn something new about them or patterns in their behavior. Learn something about them by listening and observing first, sharing yourself personally before you ask them to.
2. Know your strengths and your team(s)- diversity is good. While many analysis of personalities and working styles exist (FIRO-B, Myers Briggs, etc). I like the strength finders http://www.strengthsfinder.com/home.aspx which gives you a top 5 that you can focus on what will make you a great leader (your top 2 probably) and if you have your staff take the same survey, you will find the complementary strengths to effective teams like Ideation/Maximizer with Activator and Relator. This goes beyond the roles we have on our teams as job descriptions and allows you to think about which staff is good at building concensus, which will write the plan to get it done on time on budget, who will generate ideas, who will refine them and who will find the downside of doing something new (risk management). If those traits aren't on your team- get them from the outside vendors like lawyers, consultants, interns, etc. The one thing you need internally is the someone to generate ideas and build excitement. This doesn't always have to be you- but rarely can that be done from outside the organization.
3. Motivation drives behavior, learn what drives you and your team.
How:
a. listen and observe using (closed question, open ended question then probe)
b. what is their job history?
c. family background
d. free time pursuits
e. observe what excites them and what bores them
Types of Motivation:
1. Lifestyle
2. Structure and predictability
3. Satisfying relationships
4. Recognition
5. Power
6. Autonomy and growth
People move in and out of these 6 at different levels but the highest performers are heavier on 4-6 and your leadership should not only respond to types of motivation, but can influence it - low feedback on the meeting the needs of someone high on 4-6 results in them quitting or falling back into low effort and more emphasis on 1-3.
That's enough background on knowing more about your team before you embark on truly challenging initiatives- next week I will tackle some of the initiatives on my plate. Thanks for reading!
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