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.

The Perfect Storm or the Last Straw

perfect storm or last strawI was recently in conversation with a group of folks talking about a business that was struggling financially. One of the folks commented that the company was experiencing a perfect storm of events, the last of which was a downturn in the market. And while the comment seemed to resonate with people in the moment, it wasn’t actually the case. There weren’t several events happening at the same time that caused the issue, rather the market downturn was the last straw.

It is important to understand the difference between a perfect storm and the last straw. In business planning, it is difficult to plan for a perfect storm- it is an unexpected and difficult to predict scenario of multiple independent events that happen at the same time, so developing a response in advance is nearly impossible. The last straw, on the other hand, is possible to plan for if management is actively looking at the company’s risk profile, cost structure and market presence. How are you doing at looking at the risk in your business and avoiding the last straw?

The Double Whammy

double whammy resultsAbout once a week, if not more, I find myself in conversations that revolve around some combination of earnings and multiples of earnings to get to a valuation. The most recent conversation revolved around a dramatic increase in valuation. How did the valuation increase so quickly? Early on, the company was underperforming relative to peers. When companies underperform, they are typically valued with a lower multiple. This is what I call the double whammy because the low earnings and the low multiple results in a low valuation. In the example under discussion, the company dramatically increased its EBITDA and was able to demonstrate that it was sustainable. So, the multiple went up as well. Here’s an example of what I mean:

Let’s say EBITDA is $10 million, low by industry standards, and the EBITDA multiple is 4x reflective of low performers in the industry. For simplicity sake, no other adjustments come into play, so the valuation is $40 million.

The company undergoes a transformation and is able to get EBITDA up to $40 million and can demonstrate it is sustainable, now a top performer with more upside. The EBIDA multiple may be more like 8x, which yields a valuation of $320 million. That’s a big difference!

While EBITDA multiples aren’t the only way to value a business, it is a very common approach. You can see the double whammy in play in the example above and the dramatic difference it has on a business. How are you avoiding the double whammy in your business?

Where do you fall on the cash management spectrum?

cash managementI was on a call recently and the focus was cash, my favorite topic! We were talking about how much is the right amount to have on hand, looking forward at investments in the business, etc. Then, one person said: cash is either focused on in businesses that are in dire straights or high performing businesses. It was a great comment! Companies tend to focus on how much cash is on hand when they are about to run out and manage receipts and disbursements closely. On the other end of the spectrum for a very different reason, cash is managed daily to maximize the cash flow in the business.

I’ve favored the daily cash flow report. If distributed to key managers and key personnel, people become engaged in increasing how much cash is generated in the business. Conversations arise about significant expenditures and how much inventory is needed. I’ve seen people in different parts of the business work more closely together because they understand the interconnections in the business. At the end of the day, everything turns into cash. Where do you fall on the cash management spectrum?

What is the real problem?

what is the real problemIt is a common challenge in the business world and in life. Providing a solution without knowing the real problem. That was the topic of conversation yesterday with a colleague. We were discussing some recent challenges and the striking and consistent thing about the conversation was – in each point of discussion, the problem being “solved” was not the real problem.

Let me be more specific by using an example that I often run across. The solution – we need a new ERP system because we don’t understand our financials. Many times the issue isn’t that the system is a problem, the issue is that no one ever spent the time to design reporting that helps people understand what is going on in the company and provides information (not data) for decision making.

When I run across this type of situation, I typically ask a number of questions designed to get at the real problem. In the case above, it may be that the only real solution needed is a reporting tool (generally, a much less expensive and many times a faster and more flexible solution). The key is to understand what the real problem is. How are you getting to the real problems in your world?

Risk Can Be A Good Thing

risk measurement and managementMany years ago, I worked with a man who said that people misunderstand risk. His perspective was risk is a variable – it can be a differentiator that creates tremendous value, or if not managed, can make things go very wrong in your business.

I’ve adopted his perspective over the years. And he is right. The critical factors are deeply understanding the nature of the risk, how it can be managed and if you have the capabilities to manage it or someone else is better off doing with that role. If you can’t or don’t have a perspective on what the entirety of the risk is, don’t take it on.

Successful businesses and people understand this. They take on risks that they have the ability to manage, but carefully evaluate those they don’t so as to not risk the entire ship if it doesn’t go the way they expect. Do you have a good grasp of the risks in your business and how to manage them?

Are you missing sales opportunities?

missed salesI love Starbucks. Yes, I’ve fallen into the wide swath of followers that pop in on a regular basis. The product is always consistent and I know that anywhere in the world, I can count on it. But, I’ve been surprised lately by how early in the day they run out of food. I regularly frequent five different locations and have found at each location the salads (as well as all fresh items) ran out starting at 2:00 and over a period of weeks worked down to stock outs by 9:00 am. I’ve inquired at each store about this and all tell me they regularly run out of food early in the day, leaving many like me to search for lunch (or other food options) elsewhere. Wow! What a missed opportunity.

That got me to thinking about why this is happening. Is it lack of understanding of the true demand of the product? Does anyone look at what time of day food runs out? Surely, the cost of goods potentially not sold is so minor in comparison to the number of sales they are missing. Is there a supply chain problem somewhere (the situation became a supplier issue with no fresh food for a week)? I don’t really know, but as a customer, I’m frequently disappointed. So, how are you making sure you aren’t missing opportunities to satisfy the demand for your product? Do you have mechanisms in place to understand what your customers want and when? Do you have a supply chain that works and can seamlessly address any supplier failures? How do you not miss that sale?

There’s Money Everywhere

coinsA colleague and I were having coffee and brainstorming about business writing.  Having clarity of voice, keeping posts current, being relevant.  As we got up to leave, a shiny dime fell out of his pocket and sat brightly by itself on the black leather couch.  As he reached down to pick it up, he said:

 “There’s money everywhere!”

 And he was right.  Money can be found everywhere – you just have to keep your eyes peeled to find it.