You Can Count on a Guy in a White Hat

whitehatAs an entire generation who grew up watching Gun Smoke, The Lone Ranger and a long list of other television westerns knows, good guys always wore white hats!

One of the greatest Hollywood clichés of all times, it is deeply ingrained within each of us that you could count on a stranger in a white hat! They were sure to be honest, kind, generous, courageous, moral and chivalrous.

That leaves the other guys, the ones in the black hats. Just as good defines evil, they were the anti-hero of every storyline, the exact opposite of guys in white hats. A man in a black hat was surely dishonest, cruel, self-centered, cowardly, immoral and boorish. Good guys and bad guys were always on opposite sides of an issue. Fortunately, good always triumphed in the end.

So it is not surprising that when it came time to pick names for two broad categories of search engine optimization (SEO) practices, a baby boomer somewhere choose white hat and black hat to describe the opposite ends of a long spectrum of internet marketing techniques and philosophies.

The stakes are high in this modern day gunfight. Fair or not, a potential customer who has never heard of your company has no choice but to equate your search engine results and the quality of your content with the prominence of your company among your peers and the value of your products or services!

A study of December 2010 Google searches for B2B and B2C businesses found the top 3 search engine rankings got 60% of all click throughs, with the first position enjoying a click through rate (CTR) of 36.4%. Page one listings got 8 times more clicks than page 2. CTR differences by ranking were even more dramatic for key words with more than 1,000 searches per month.

What then are the distinguishing characteristics of these opposing marketing camps? They hinge on the answer to a single question. Does the marketer play by the largely unwritten and frequently changing rules of the major search engines (Google, Yahoo and Bing control over 95% of the market) or not?

Just like the old Code of the West, white hats follow the rules. They focus on engaging and informing readers rather than manipulating search engine algorisms. Their procedures include writing key word rich text (without meaningless repetition), link building and paid advertising using pay per click ad words.

Black hats still refuse to play by any rules. Their techniques include email spam, keyword stuffing, article spinning (posting substantially similar content in multiple locations) and using hidden text to trick search engines.

What are the rewards for playing by the rules of this 21st century Code of the Internet? White hat marketing can be expected to produce slower but longer lasting organic search rankings. Black hat techniques will likely eventually be penalized by search engines, reducing rankings or eliminating the listing from their database.

What color is your hat?

© 2013 by Dale R. Schmeltzle

Increasing User Buy-in of Financial Forecasts

Business HandshakeLet me begin with two assumptions: first, your primary modeling tool is Microsoft Excel; second, you share model projections with others. If both these assumptions are correct, I have two secrets of success for those new to financial forecasting.

The first is that everyone who sees your forecast assumes they know more about what the modeled results should be and better understand the impact of changes than you do. That you spent countless hours constructing the model, studying company and industry trends, back-testing formulas and validating every assumption will be quickly lost in their rush to point out what to them appears to be “obvious errors”.

I frequently develop complex models generating quarterly projections of full financial statements for a three to five year horizon. Models usually involve the consolidation of multiple entities and detailed ratio analysis. A typical model has 35 to 60 variables. Every variable is contained in named cells on an assumptions tab (immediately behind the title tab). All formulas utilize the appropriate variable name rather than a cell reference or hard coding.

For those not familiar with the use of named cells in Excel, go to the File Manager icon on the Formulas tab. Additional guidance is available online. One source is http://bit.ly/18tl7OP.

Typically, a client will zero in on one or two variables, insisting (as an example) that sales growth projected in year 3 is clearly wrong! He or she is so confident of their belief that the model has likely lost significant credibility with them.

Invariably, the impact of the user’s change is not as significant as they suppose. Sticking with the sales example, changing the growth rate has no impact on earlier years. Furthermore, the effect on future income is reduced by resultant increases in the cost of goods sold, inventory carrying costs, variable expenses such as commissions and shipping, borrowing costs and so on. Finally, income taxes further reduce the bottom line impact by another 35% to 40%.

Rational discussion and logic serve no purpose in this situation. You cannot change human nature! Your goal is merely to channel it in a productive direction.

I do this by simply asking what they think the number should be. I then take them to the assumptions tab and change the offending variable to their number. The model then recalculates, eliminating any guesswork on the impact of the proposed “correction”.

Seeing is believing.

The second “secret” complements the first. Without exception, even the most complex models come down to a mere handful of key variables. Since your goal is to redirect rather than change behavior, help users focus on those that drive projected results, rather than getting bogged down in immaterial detail.

You can accomplish this by highlighting which variables have an individually material impact on the cumulative results of your forecast. Begin by deciding what the appropriate base or dependant result is. I find it is most often one of three things depending on the primary use of the model: net income, stockholders equity or the internal rate of return.

I then test every variable in isolation with a 10% unfavorable change. For example, a 20% sales increase is reduced to 18%. I note the impact of each variable on the cumulative base result. I then typically use a materiality threshold of 2% for disclosure. The less attention drawn to non-critical variables the better!

Rarely will a variable have a high correlation to the measured result. A typical scenario might be that a 10% change in each of my 35 to 60 variables produces four to six with an impact greater than 2%, with none exceeding 8%.

This sensitivity analysis is the third tab, immediately behind the variables. By quantifying and clearly presenting the impact of changes in this manner, you are inviting needed input (and therefore user buy-in), without having to debate or justify the majority of variables that will have minimal or no impact on your forecast. Users can then concentrate on achieving a comfort level with a relative handful of model inputs, saving everyone time.

As a closing note, while the focus is on the cumulative impact of variable changes, there are times and circumstances when individual period results are also important, regardless of the dollar impact. For example, loan covenant compliance is a constant requirement. If a change in an otherwise insignificant variable creates an incidence of non-compliance, the change cannot be ignored.

How I handle that situation is the subject of a future article. Here is a hint: conditional formatting!

We Have Meet The Enemy & He Is Us, Dealing with Entrenched Policies & Procedures (Part 2)

On Monday, I introduced the topic of inefficient and outdated policies, processes and procedures using the cartoon character Pogo, and the mid-twentieth inventor and cartoonist Rube Goldberg.

After coining a new acronym (RGP3s) and describing some common characteristics, I ended with the obvious question, what is a manger to do about them?

First, be open to the possibility of their existence in your organization. Every company has some areas that need improvement. You cannot assume that something is “best practices” simply because it worked in the past. If a department is unable to keep up with current workloads, there are only two possible reasons. Either they are understaffed, or they are operating at less than peak efficiency. Adding staff adds costs. Improving efficiencies is likely a cheaper and perhaps faster alternative.

All successful organizations eventually reach a size where managers are not expected to be familiar with the application of every policy, process and procedure. Even if they are, RGP3s can be virtually invisible to the familiar (or complacent) eye. That suggests one of two possible approaches.

The first approach is to constantly challenge and encourage employees to identify efficiency improvement opportunities. Maintain an open and direct line of communication through brief but regular interaction. Actively solicit employee input and implement at least one idea every month. Publicly reward accepted suggestions in ways they value. That may mean an employee of the month plaque in the lobby, a front row parking spot or an AMEX gift card.

Unfortunately, relying solely on employees’ willingness to point out flaws has a major limitation, human nature! People seem to have a tendency to accept most things as they are. Furthermore, asking questions and challenging the status quo may be viewed as career limiting in some corporate cultures. That is not to suggest people are by nature lazy or apathetic. It’s just how things are.

The second approach is to bring in a fresh pair of eyes. A while back, I shared a story about an experience in a new job. On my second day, I was reviewing a lengthy payment report when I spotted something unexpected. About every 20 pages or so, there was an entry with a negative amount. Based on my still limited understanding, there was no reason for negative numbers. To make a long story short, I had stumbled across an internal control weakness that allowed certain items to be paid twice.

The point is that other people who worked with the report every day had undoubtedly noticed negative entries before. Yet they failed to follow through with a few simple questions. If they had, they might have closed the control weakness years earlier.

In closing, let me clarify what constitutes a “fresh pair of eyes”. It may mean a consultant. This outside resource could be an expert in your field, or someone well versed in common business practices and operations. An auditor or independant CPA with other clients in your industry may be a valuable resource, especially if the area of concern is one they review as part of their evaluation of internal controls.

In my example, a fresh pair of eyes merely meant introducing a new employee into the mix.

Either way, the path to improved efficiencies in your business may be as simple as finding someone unburdened by the “But we’ve always done it that way” mentality.

That mindset, Mr. Pogo, is the real enemy.

© 2012 by Dale R. Schmeltzle

The Fractional CFO Concept (Part 2)

Earlier this week I introduced what may have been a new concept for some small business owners and managers; the idea of fractional or part time CFO. A vacation timeshare is a useful analogy to understand how and why a part-time financial expert may be the perfect solution for your needs.

I conclude this topic with a few frequently asked questions.

  • What exactly does a CFO do, and how does that change if I use a fractional CFO?

The chief financial officer or CFO is the person primarily responsible for managing the overall financial operations of an organization. This position is responsible for planning, cash flow management, record keeping, financial reporting, etc. The only difference between a traditional CFO and a fractional CFO is the nature of their relationship to the business. While a CFO is full time officer and employee, a fractional CFO is a part-time, independent contractor. However, their duties and responsibilities are virtually identical.

  • Will I retain a fractional CFO for a one-time assignment, or will they continue to provide on-going services?

Occasionally, a client will request that that their fractional CFO provides services for a one-time, special project. The CFO will likely endeavor to accommodate all client needs. However, their primary focus will be on providing on-going fractional CFO services, including the development, implementation and monitoring of a long-term business plan. While the time allotted to this process can be adjusted and even reduced as initial objectives are met over time, it is a continuous process that typically requires some effort at least monthly and probably weekly.

  • How much should I expect to pay for my fractional CFO?

The cost of fractional CFO services are primarily determined by only two things, the number of hours spent on an account, and the billing rate of individual providing client services. Barring temporary or emergency situations, a reputable fractional CFO firm will endeavor to staff assignments using associates with skill sets and experience levels appropriate to your needs. Ultimately, they will provide the level of service you determine based on your needs and within a budget determined by you. Your schedule can vary from just a few hours per month to several days per week, and can be adjusted as future needs require. Typical clients should expect to spend from $500 to $10,000 per month, depending on the two factors.

  © 2012 by Dale R. Schmeltzle

 

The Fractional CFO Concept

The idea of fractional or part time use of a valuable resource has been around for many years. A perfect example of this concept was pioneered by the vacation real estate industry. In the 1960s, a French ski resort owner recognized few people could afford, let alone needed a resort condominium for all 52 weeks of the year.

He addressed this challenge by dividing every room into 52 separate units of time. Using the slogan “stop renting a room, buy the hotel” he launched a worldwide marketing phenomenon we now know as the time-share industry. Units were sold to different owners, each of whom purchased the full use and enjoyment of the week that best suited their schedule, and at an affordable price. If a buyer needed more than one week a year, they bought as many units as they wanted.

Other “bells and whistles” have been added through the years. Today, over 4 million American families own at least one vacation timeshare.

The concept of a fractional CFO is no different.

Most business leaders recognize the need for trained, experienced financial expertise on their management team. Many simply do not need a full time CFO. Therefore, they cannot cost justify the investment of a full time salary. Even if an owner or manager has the required skill sets, a professional CFO can likely generate a superior work product in less time.

This in turn frees up the most valuable and scarcest resource of all, TIME!

No successful entrepreneur ever launched a business with the intent of spending all day analyzing balance sheets, determining marginal profit contribution, dealing with bankers and tax accountants or addressing regulatory inquires. They launch businesses to exploit competitive advantages in their chosen field by servicing customer needs. Any time spent “working on the books” is time away from their real mission and a costly distraction from their value proposition.

Retaining a fractional or part-time CFO presents a cost effective solution customized to a business’ exact needs, budget and life cycle. The key to a successful fractional CFO relationship is to design and staff that engagement with a professional who will understand your business and address your financial needs. They must also become an integral (if part-time) member of your management team. Your fractional CFO should meet with you to tailor an affordable program to address your specific business needs. Together, you will establish a regular schedule of dedicated time to service those needs. That schedule can vary from just a few hours per month to several days per week, and can be adjusted as future needs require. The client can typically terminate a fractional CFO at any time and for any reason without incurring additional costs, just as you would if you had hired a full time employee.

On Friday, I will conclude this subject with a few frequently asked questions. Until then, please enjoy a safe and joyous 4th of July, and let us all remember the true meaning of the holiday, and the sacrifices of those who made it possible.

© 2012 by Dale R. Schmeltzle

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