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:

                                               -                          

   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 services
work, 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

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.

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!