Knowing the levers

knowing the leversDo you know how much money you make on each of your products or services? Almost everyone I have worked with over the years says unequivocally yes! The only thing is, they really don’t. Over the years, a series of allocations and convoluted processes have been developed to try to understand better where money is being made, only to obscure the real profit drivers. Costs get divided into buckets, then divided again, and again so that the true cost is no longer understandable. As times changes, levers get pulled and the results are not as expected.

To regain control of the business, the first thing that needs to be done is peeling numbers apart and making them understandable. Getting away from allocations that distort the numbers is critical. Income statements should reflect the business with key drivers on separate lines. Most importantly though, is getting to profit by product or service. Getting as close to actuals as possible is important because if there are variances developing, that should be a signal to look at price, or that cost controls need to be put into place. The effort in going through this type of approach will highlight key levers in the business and provide information to make better decisions in how the business is run.

The Definition of Insanity

Definition of insanityIt happens about this time every year. Companies go through an annual planning process. People painstakingly put together their expense budgets. Cost of living and general inflation is factored in. All the numbers get pulled together and the expenses are too high. So, a note goes out that instructs people to cut expenses. Not do things differently. Just cut expenses. In some cases, a reorg is announced and people shuffle seats, sometimes accompanied by headcount reductions. In either of these cases, the people are expected to do the same thing with less. It happens every year. That’s the definition of insanity – doing things the same way and expecting a different result.

The world continues to evolve. To stay effective and competitive, the business needs to evolve as well. Rather than going through and looking at the expenses and revenues in isolation, a better approach is to look at how the business can operate most effectively. This includes how technology is used, whether processes are efficient and effective, and whether the needs of the customer are being met. The financial results are a symptom of how well the organization is working. How do you make sure you aren’t in the insanity trap?

Are you squirreling away nuts for a rainy day?

saving nuts for a rainy dayThe squirrels have been out in force lately pulling acorns down from the trees. They seem busier this year than in past years. And if you believe the news, it is supposed to be colder and wetter in the Northwest than in past years. It makes sense that the instinct is to stock up on an appropriate level of supplies to get through the winter. As these are grey squirrels, they actually remember where they buried their nuts (according to “Grey Squirrels Remember the Locations of Buried Nuts,” published in Princeton University’s journal “Animal Behavior”) and will be able to find them when they need them.

An area that is not always thought through adequately in business is the rainy day fund, the availability of cash when you need it. Depending on the type of business you are in, the seasonal and cyclical nature of the market will cause swings in cash flowing through your business. It is important to understand how deep and wide the downtimes can be. This allows you to know how to minimize cash outflow when times are bad. It also tells you how much cash you need to have available and for how long. When thinking through this, all sources of cash should be considered, including credit lines and the ability to reduce working capital. By going through the exercise ahead of time, you will know if your sources of cash are adequate or not. If not, you have the ability to secure those sources before you need them. How are you making sure you are prepared for a rainy day?

Why buy the Cadillac when the Chevy will do?

why buy the cadillac when the chevy will doTimes have changed since this saying came about, when the Cadillac was the gold standard. The point is still incredibly valid – why pay a lot of money when your needs are satisfied by less. I was reminded of this saying this weekend while looking for a barrier to keep my new dog from running up stairs. The pet stores had pet gates, and I was shocked by the sticker price. So, I looked at baby gates at Target. The price differential between a low end baby gate and a low end pet gate was 2-3 times, and nearly 15 times differential between a low end baby gate and a high end pet gate. I don’t need a bunch of bells and whistles, just a barrier to put on the stairs. So, the baby gate met my needs.

These types of situations arise all the time in business. Whether it is systems, equipment, design, space, or pick your project, too much money is spent regularly because the scope and outcomes are not clearly understood. Money is poured into bells and whistles that aren’t really needed. It is pretty amazing when you start focusing in on the actual scope – your time and money can be dramatically reduced. This is different from wanting a Cadillac, but only willing to pay for a Chevy. The difference is knowing your needs, the scope. How are you ensuring you are clear on your needs and not getting a bunch of bells and whistles that aren’t really needed?

Circling the Drain

circling the drainHave you ever seen this? The economy, lack of desire for a product/service line or some other event causes a dramatic drop in revenue. As a result, staffing is cut. A few of the most talented people depart, leaving a weak team. A theoretical new revenue stream is discussed, but the specifics around how to make that happen never quite get there, making it difficult to attract the people that buy the goods or services. The ostrich approach moves into full gear as people discuss the plan (but don’t execute it), thinking the business has turned the corner, but miss the warning signs that things are not actually getting better. Lots of meetings happen, and people are focused on the activity rather than the results. Emails fly with large numbers of people being copied for no apparent reason and people feel better because there is activity. In the meantime, the business is circling the drain. The only question is, can someone put the plug in before all the water drains?

While it is difficult to turn a business around when it has gone too far down a path, the key is to have a flexible approach and ability to refocus as the markets change. Things to watch for include: dramatic changes in revenue, dramatic changes in the goods purchased or services provided, strength of the team in place, and a trajectory that is different than competitors or the market in general. To have forward momentum in a business, it is critical to have the right people in the right place focused on the right things. How are you having honest dialogue in your business to make sure that changes creeping in the business don’t cause you to circle the drain?

Are your metrics misleading?

time for factsA recent article in the paper was based on research published by a university. It was an interesting article that had a significant number of statistics. The results were counterintuitive to both the researcher and the writer of the article, both having indicated they expected the opposite of what actually happened. The results were listed in a table off to the side, showing the absolute occurrences in two different groups, along with the population size. The numbers became very small very quickly in the percentage of occurrences. The percentages in most cases between the groups were very close because there were few occurrences. But the article focused on the percentage change between the two groups, which became a big percentage and misleading as to how often the occurrence happened between the groups.

For example, in group one there is an occurrence 1 time in 10,000. In group 2, there is an occurrence 2 times in 10,000. In group one, the occurrence happens 0.01% of the time, and 0.02% of the time in group 2. In either case, it is negligible. But framed another way, it could be stated that occurrences happen twice as frequently in group 2. That seems like a lot more!

How information is presented can have a significant impact on perceptions and form the basis of how decisions are made. How are you making sure the data presented in your organization is fairly representing what is actually going on so appropriate decisions can be made?

The market always turns

the market turnsThere aren’t too many industries that have no market cycles. Some are more significant than others. Over time, as business grows and changes, some companies lose sight of the market, how they are positioned and their cost structure. As a result, erosion starts to occur in the profitability of the business.

This is the point when many companies are bought. But even if a sales transaction doesn’t take place, it’s time to put some tension back into the business. Why? Because the market always turns at some point and if not addressed, the business may go out of business due to high fixed costs and lack of market insight.

What does this mean? With lack of market insight, the company will miss the market signals that indicate it is time to adjust the business as the market demand starts to drop. With a high cost structure, the company may not have enough time to adjust before it runs out of cash. Thus becoming another company that doesn’t make it through a market cycle.

This is where it is critical to have a focused management team that has a strong sense of urgency. You never know when the market is going to turn, so acting with a sense of urgency as if the market turn is today or tomorrow, will position the company well for when it actually does turn. How are you positioning your company for market turns?

The Snapshot

snapshotIt’s another gorgeous day and the volcanoes with their snow-covered peaks are magnificent against the blue sky. Who wouldn’t want to capture the sight with a snapshot? The thing is, many attempts over time never seem to capture what I’m actually seeing. Even with zooming in, the perspective is off. The slight haze makes the sky seem not quite as brilliant and a bit grainy. The snapshot doesn’t capture the splendor of nature in front of me.

The days I want to take pictures of the scenery are the one or two days out of weeks where the weather is nice – not indicative of the trends in the weather. Capturing the right snapshot of a business is tough too. Many times KPIs or reports are developed that don’t reflect what is actually going on in the company, and can be at a point in time rather than a trend. How are you making sure you capture what is really going on in your company?

The Plan

Business PlanIts that time of the year. For some, it is wrapped up. For others, it is still in the works. The Plan. It is the thing that consumes enormous amounts of time in many organizations, with no real return for the effort put in. In others, there is absolutely no thought at all. In too few, it is a thoughtful, efficient process that gives the organization the right level of focus on achieving key objectives in the coming year.

Over the years, my thinking on the most effective approach to planning has shifted away from the annual plan in favor of a five-quarter rolling forecast. By keeping an eye on the markets and continuing to evolve based on new information, the organization is utilizing the best forward looking information (and history) to achieve objectives. That doesn’t mean flopping around in the wind. It means executing against long range objectives based on current market conditions. How does your organization approach planning? Are you as effective as you can be?

Is finance to blame when a business struggles?

finance problemsWalking around a business can tell you a lot. Are people focused and moving with a sense of urgency? How is the safety record? Are a lot of people getting hurt? Are there clear goals and objectives posted on the walls? Do the operations look efficient or are there a lot of extra steps that don’t seem value added? You don’t have to have a sheet of paper with numbers to know. A strong management team will know if the business is operating at its potential or not.

So, when you hear that the reason a company is doing poorly is because the finance team isn’t functioning properly, it’s time to take out the BS detector and start challenging the excuses.

Yes, finance has a critical role in the success or failure of a company. If it is not functioning well, there are certainly a number of issues being missed in the company. But a poorly run finance department is not the root cause of a business’ problems. Rather, it is a symptom. So when you hear this commentary, dig deeper and find out what is really going on. Bigger problems lie underneath.