THE PITFALL OF WHOLESALE NETWORKING TO RETAIL PROSPECTS

Business DiscussionThe verb “network” means to meet or interact with people for the purpose of making contacts and exchanging ideas. Contrary to popular belief, its primary goal is not to generate sales! It is, quite simply, to get to know people, and to have them get to know you. Sales are just one of the benefits that might result from increased exposure.

I am a strong advocate of networking. I was introduced to several significant vendors and business associates at networking meetings. That includes my insurance agent, social media consultants and two business partners. However, while I have provided leads that resulted in other people closing sales, I can think of only one small client engagement I gained through networking.

Why is that?

It is because my ideal client prospect is unlikely to participate in what I refer to as “retail networking” groups. My best prospects have been established in business for years; are generating annual revenue of several million dollars, have fifty or more employees, are adequately funded and have highly specialized strategic needs beyond their ability to address internally.

Furthermore, they have progressed beyond the usual concerns of new ventures, the greatest of which is simply generating sales. They recognize and value the need for more sophisticated services, and are able to pay to meet those needs.

That profile is not a match to the typical retail networking group. A business targeting start-up operations, solopreneurs, small average sales and/or “main street” business and consumer needs is far more likely to generate sales through networking groups. However, a reality of mining for customers in this environment is high turnover and high marketing costs. Statistics show more than 35% of a typical group’s participants will not be in business in a year, and perhaps as high as 90% within five years.

So if wholesale (or large scale) networking to retail groups is not an alternative for marketing your B2B product or service, what is?

There are probably as many correct answers to that question as there are small businesses. I will share several things that have produced business for me in a future blog.

Eight Secrets from a Serial Blogger

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Have you been thinking about blogging, but are concerned whether your writing skills will translate into effective online communications?

Increase your chances of success in getting your message to the right audience by avoiding the mistakes of others. This article offers eight simple suggestions its authors learned in the preverbal “school of hard knocks”.

Here they are:

1. Stick to a schedule. The correct blogging frequency is whatever connects with your audience. For some blogs that might be daily. For others, once a month is sufficient. The optimal blogging frequency is not critical. What is critical is to decide on a schedule, communicate it to your readers and stick to it! Avoid the temptation to over-commit. While most bloggers enjoy writing, it can be grueling.

2. Expand and enhance. Supplement your usual content by periodically sharing relevant quotes, articles and tips from others. You can also try using guest writers, treating your readers to different areas of expertise and points of view. A generous introduction to your guest author may result in them reciprocating on their blog, further expanding your following.

3. Keep posts short. Readers are looking for tidbits of actionable information, not detailed research. Keep posts short, preferably under 600 words. The average American reads less than 300 words per minute. Studies suggest 65% of visitors spend less than 2 minutes on a website. Therefore, an entry longer than 600 words will not be read in its entirety, if at all.

  • A better alternative to lengthy articles is to split them into multiple parts, posting them in consecutive entries. Begin each post with a review of what was discussed in the previous entry, and end with what to expect in your next post and when it will be shared.

4. Promote your blog. Add your blog’s web address to business cards, print media ads, letterheads, email signatures and so on. Adding a Quick Response Code to business cards and other medium is gaining popularity. A QR code allows Smartphone users to find your blog easily.

5. Use social media. Post summaries of blog posts on Facebook, Twitter, LinkedIn, etc. Exercise care to comply with each platform’s unique character limitations.

  • Since you will always end with a hyperlink to your blog, use a free URL shortener like https://bitly.com/ if pressed for space.
  • Post blog entries on SlideShare or other article marketing sites by uploading a pdf file. The last paragraph should be a brief “About the author” with a hyperlink to your blog.
  • Blog posts can be featured in your monthly newsletter to customers and friends.

6. Support online sharing. Add plug-ins or widgets on your blog to promote article sharing through Facebook, Twitter and other social media vehicles you believe are likely to help capture your target market. Allow readers to bookmark your URL to their list of favorite sites with the click of a button.

7. Encourage feedback. Always thank readers who post comments. Be respectful of opinions and suggestions, even if you disagree with them. While it is perfectly appropriate to delete spam (an inevitable byproduct of successful blogging) or comments with inappropriate language, deleting reader comments simply because you disagree discourages feedback. Periodically end posts by asking readers for comments, suggestions and ideas for future articles.

8. Don’t give up too quickly. Some experts believe it takes about 100 posts before you begin to build a following. Most bloggers become discouraged and give up before reaching that milestone.

© 2013 by Dale R. Schmeltzle

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

“LIKE” IF YOU REMEMBER MYSPACE

MySpaceIs it just me, or has there been an explosion of people posting nostalgic photos on Facebook and asking you to click “Like” if you can remember a black and white picture of some fifties TV icon or a once popular consumer product from your youth? Time has a way of reducing our past to warm, fuzzy memories. Heck, show me a photo of a macho guy enjoying a cigarette on the back of a horse and I might even forget that three of the Marlboro Man actors died of lung cancer!

Digital media has done more than merely provide a medium to share the recollections of our youth. It has greatly diminished the time span during which products and services move from broad acceptance and popularity to distant memories. Allow me to offer two well-known examples.

Gutenberg’s 1440 invention of the printing press revolutionized communication. It made possible the sharing of ideas and information through the mass production of books. It took another 555 years, until 1995, for an upstart company named Amazon to start selling those same books using something that had been introduced just three years earlier. That something was the Internet.

It took another 12 years to popularize eReaders like their famous Kindle. Within four years, Amazon was selling three times as many eBooks as hard covers. Their success obviously does not include a plethora of competitors including the hugely successful Apple iPad. It seems almost certain the paper book will soon be a candidate for Facebook friends to ask you to “Like” if you can remember owning one.

Still, 600 years from invention to impending obsolescence is not a bad run! Now consider a more recent service life span.

MySpace was introduced in August 2003, six months before Facebook. Just two years later, it was the most visited social networking site on the planet. Rupert Murdock was so excited about its prospects that he paid $580 million for it in 2005. In 2006, it reached 100 million accounts, a level that required 1,600 employees to support.

Facebook over took it in April 2008.

In June 2011, Murdoch’s News Corporation sold MySpace for $35 million, a 94% loss on their six-year investment. With uncharacteristic understatement, Murdoch pronounced the purchase a “huge mistake”.

These examples illustrate three critically important points for all 21st century marketers.

  1. Communication trends change faster than businesses can anticipate. Most lack the resources to manage that change.
  2. Faced with a constantly expanding stream of free choices, your target audience no longer uses communications channels popular just a few years ago.
  3. Neither do your successful competitors.

The cost of failure is high. Even the most carefully designed marketing communiqué, be it a press release, an ad campaign, a newsletter, etc., will fail if it is not transmitted in the optimal channel.

The only way to avoid that mistake is to communicate a consistent message and single brand to over-lapping audiences across multiple channels. That is what successful digital media marketing is all about.

© 2013 by CFO America, LLC

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!

Lessons from Cool Hand Luke: Failures in Business Communications (Part 2)

Last week, I discussed the potentially dire consequences of using the wrong channels when communicating with customers. Paul Newman’s famous line from Cool Hand Luke, “What we have here is a failure to communicate” served as my theme.

I outlined nine milestones in communications, from the printing press to the Internet. Today, I conclude with a follow-up on how each of those communications channels has fared over the years.

More recent developments in the nine communication mediums include the following:

1. The days of printed books and newspapers may be numbered. Consider the following:

  • Although Amazon keeps its sales figures close to its corporate vest, reports by Bloomberg and other sources suggest it likely sold over eight million Kindles in 2010. Amazon’s January 27, 2011 press release reported, “Amazon.com is now selling more Kindle books than paperback books. Since the beginning of the year, for every 100 paperback books Amazon has sold, the Company has sold 115 Kindle books. Additionally, during this same time period the Company has sold three times as many Kindle books as hardcover books.” Those sales were achieved in spite of stiff competition from the Apple iPad and other eReaders.
  • In an industry financed by advertisers, newspapers now cost more to reach a similar audience than radio, magazines, or websites. The Newspaper Association of America expected ad revenue to drop 9.7% in 2009 after falling 16.5% in 2008.

2. In a press release issued November 12, 2010, the U.S. Postal Service reported a loss of $8.5 billion in fiscal year 2010. They delivered 6.1 billion fewer pieces of mail than the previous year. Labeled advertising mail, 273 million pieces of daily junk mail make up 47% of Postal Service volume, but only 25% of its revenue.

3. Struggling from its failure to win a federal contract to deliver mail, the Pony Express announced its closure on October 26, 1861, two days after the transcontinental telegraph connected Omaha to Sacramento. During an 18-month existence, it succeeded in reducing the cost of a 1/2 ounce letter by 80%.

4. Home phones are being replaced by cell phones and other mobile devices. Smartphone users can now perform virtually any function available on a computer. They can also scan product bar codes for instant price comparisons and download directions to local competitors. In October 2010, CTIA-The Wireless Association reported in their 50 Wireless Quick Facts that over 89% of handsets operating on wireless networks are capable of browsing the web.

5. With its market steadily evaporating since the 1975 invention of digital cameras, Kodak ended a 74-year run when it discontinued production of Kodachrome film in 2009. SEC filings reported a $210 million loss that year. Kodak filed for Chapter 11 bankruptcy in January 2012. They will no longer manufacture cameras, and will sell its film division. The digital camera was invented by a Kodak engineer.

6. A July 2008 report by Borrell Associates titled Say Goodbye to Yellow Pages estimated the industry would lose 39% of its revenue over the next five years as small businesses focus more on online advertising. It was forecast that 2008 print revenue of $12.7 billion would decrease to $7.8 billion by 2013. In an age of instant information, an increasing number of businesses are obviously questioning the wisdom of spending scarce marketing resources on a medium that will not be distributed until months after incurring the expense. Some estimates suggest that up to 20% of small businesses do not survive to see their Yellow Pages ad in print. Meanwhile, concerns over the environmental impact of discarded books are causing cities to explore advanced recovery fee ordinances that will add millions of dollars to industry costs.

7. The marketing impact of satellite radio remains to be seen. Sirius FM Radio reports almost 22 million subscribers in some highly desirable demographics. Yet, the public company has not traded above $3 a share in over four years.

8. A four-decade oligopoly by ABC, CBS and NBC began to crack by the 1980s. Having once controlled 99% of all broadcasts, their market share dropped to 32% by 2005 according to the Journal of Broadcasting & Electronic Media. The Fox Network now produces the highest rated show on TV (American Idol) and the longest running primetime show (The Simpsons). The increased popularity of cable TV, Internet access to programming and digital recording devices threaten to redefine television’s role as the “high end” communications media. Fortunately, the ability to embrace technological changes has allowed television to hold the average American’s attention for 4.7 hours a day (according to a 2008 Nielsen report) over 60 years after its introduction. Finally, NBC’s owner Comcast announced in January 2011 they were dropping the iconic peacock from their corporate logo. This announcement ended a 56-year television tradition that first trumpeted the arrival of color programming to an entire generation of mesmerized children. Curse you, Comcast!

9. Lastly, the traditional model of text dominated static communications on a free World Wide Web navigated via a handful of search engines is being challenged. New paradigms including pay per click advertising, video and yes, social media are quickly redefining it.

As I reflect on this timeline, it occurs to me that few people can anticipate, let alone shape communications in this accelerating stream of consumer driven changes. Names like Gates, Bezos, Zuckerberg and a handful of other young billionaires come to mind.

The rest of us do well just to keep up with it.

The goal of today’s successful small businesses should be to meet customers in whatever communication channels they choose at that moment and to educate and influence (never dictate) consumer behavior as best they can.

There is no “one-size-fits-all” magic formula for success, no one thing that will permanently solve marketing challenges or slow the pace of change. What worked yesterday may not work tomorrow because as Tony Robbins and others have said, “The past does not equal the future!” That much is clear from the timeline. There is simply no substitute for hard work, vision and continuous planning and experimentation.

However, there is also much cause for hope.

Don Bradley and Chris Cowdery’s exhaustive study Small Business: Causes of Bankruptcy had this conclusion: “Evidence suggests that failure rates of small businesses in the United States are related to the nature of a capitalistic market in relying on competition where only the strongest survive. The causes for small business failure and ultimately bankruptcy are many. A successful entrepreneur is, no doubt, the consummate businessperson who must be a jack-of-all-trades. It is evident that nearly all entrepreneurs have the opportunity to control their own destiny. Success is obviously not a guarantee, but nor is failure. A well-rounded businessperson who has carefully planned and prepared with a clear vision of who and what the company is will have an excellent opportunity for success.”

I also point out that many of the marketing ideas discussed in this blog would not have been possible just a few short years ago. Many more have been made easier and more cost efficient by recent technological developments and increased Internet-based competition.

I therefore challenge and encourage you to seize the opportunity to control your own destiny, to embrace change, to experiment with new ideas, and to learn from your triumphs and your disappointments in these exciting times. Your business will grow in the process.

I wish you great success in your efforts and I hope you have fun in your journey.

© 2012 by Dale R. Schmeltzle

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

 

CASH: NOW YOU SEE IT, NOW YOU DON’T – PART 2

Last week I introduced the topic of cash flow management, using the graph below. Cash flows generated or use by any business are the net result of the inter-action of three inter-related cycles. They include the expense and revenue cycles, which I discussed last week.

Today I complete the topic with a review of the capital cycle.

The capital cycle:

If you have been in business any length of time, you know that capital is always a scarce and expensive commodity. Therefore, the capital cycle involves allocating or assigning available cash to its highest and best use. The process analyzes competing alternatives, such as opening a new location, expanding your sales force, product research and development, increasing inventories, debt repayment and so on. Unlike cash, the list seems almost inexhaustible.

Therefore, this cycle requires a quantified prioritization that incorporates a variety of factors including expected returns, time horizons, risk assessment and the cost and availability of required capital. Most business people are familiar with some applications of capital allocation. A simple example is whether to buy or lease company vehicles.

Other applications are not as well recognized. For example, assume two identical businesses earned a $100,000 profit. Company A had $1 million invested in the business, while Company B only had $500,000 of capital. Company B’s 20% return is double that of Company A. Unfortunately, it is not as simple as the math implies. While reducing capital increases returns, it also increases the risk of running short of cash and failing due to unexpected events. Every business requires some level of cash to serve as a buffer against this uncertainty.

Another application of the capital cycle is identifying and quantifying the need for outside funding to meet your needs. Obtaining adequate funding under terms and conditions that make economic sense in light of expected benefits is crucial to the process. This includes short-term needs like financing seasonal fluctuations in receivables and inventories, and long-term needs such as procuring equipment and facilities.

The capital cycle also includes securing “start-up” money, probably the greatest challenge and source of frustration most small businesses encounter. New businesses owners frequently make two critical mistakes in their search for start-up capital. The mistakes are:

  • They significantly underestimate the amount of cash needed to carry the business until it turns cash positive. Again, a clear distinction exists between turning an accounting profit and being cash positive. If you sell something for $100 that cost you $85, and the related operating costs are $10, you have made a $5 profit. However, if you need an additional $30 to expand your inventory and prepay next month’s rent, you are $25 short of cash. Lack of cash is a more immediate and serious problem than lack of profit.
  • The second mistake is assuming a business can borrow 100% of its initial capital needs from a bank or similar source. I cannot begin to count the number of times I have encountered entrepreneurs with an attitude of, “I’m supplying the intellectual capital. It’s my great idea. Surely I can find someone willing to put in all the cash!”

Banks are interested in financing established companies who need capital to expand, not start-ups wanting cash to test their ideas.

Conclusion:

Let me end with two simple statements. First, in business, success is a four-letter word. It is spelled C-A-S-H!

Finally, measuring, monitoring and managing all three cycles is vitally important to optimizing your cash flow, and ultimately to your very survival.

© 2011 by Dale R. Schmeltzle

 CFO America: Your Cash Flow Optimization experts

CASH: NOW YOU SEE IT, NOW YOU DON’T

The first response to a cash crisis is usually to tighten up on expenses, cut back on something, or generally to make do with less. That may be necessary, but it is usually only part of the answer.

As shown in the diagram below, cash flows generated (or consumed) by any business are the net result of the inter-action of three related cycles. They are the expense, revenue and capital cycles. I will discuss the first two today, and conclude next Friday with the capital cycle.

A brief description of each follows, along with what I consider the most common problems within each cycle. All three cycles presuppose that you have the ability to measure and monitor its activities and results.

The expense cycle:

Let’s start with the expense cycle, the assumed “bad guy” for most small business cash problems. This cycle is largely what the name implies. It is also the easiest to fix.

The expense cycle involves the cash used to pay vendors, employees and others for the goods and services they supply. It also includes operating expenses such as rent and utilities.

The biggest obstacle to correcting expense cycle issues is one of attitude. Your goal is not to “pinch every penny” and second-guess past spending decisions. Experience teaches that it is too easy to miss the big picture while focusing only on inconsequential items. Reducing paper clip expenses by 80% will not save your company.

The focus of your expense cycle review should be to ensure that costs are planned and justified by their expected benefits. Ask yourself whether they are consistent with your business goals. If the answer is no, the appropriate action is to eliminate the expense. It is that simple!

Furthermore, expenses must be incurred within an environment of adequate internal controls. This control environment includes management tools such as monthly financial statements, a detailed budget and basic procedures such as a purchase order process with competitive bidding. Without these controls, it is simply not possible to manage expenses.

The revenue cycle:

The revenue cycle deals with money coming into your business. If only it were that simple!

Problems within this cycle are the most difficult to identify and analyze, especially if management lacks a solid grasp of the numbers. Consequently, the root cause of many business failures lies within the revenue cycle. They are unpleasant to address, since they ultimately affect customer relations. Two examples follow.

Money coming into a business always starts with a sale to a customer. However, it does not end there. If your business offers credit to customers, making a sale actually drains cash until you collect the receivable. This creates an inherent conflict between the desire to increase sales through generous credit terms and lenient collection procedures, and the need to maximize cash flow. Success in this area requires adequate internal controls including standardized billing and collection procedures, a balanced customer approval process, and sound treasury management.

One unpleasant aspect of squeezing more cash out of the revenue cycle is the prospect of having to raise prices. Perhaps the single most common mistake is under-pricing products and services relative to your cost structure. Correcting this challenge is even more difficult after you have established unrealistic customer pricing expectations, or if you operate in an especially competitive environment. People who do business with you primarily because you offer the lowest prices are unlikely to exhibit much customer loyalty.

We will finish this topic next Friday with a discussion of the capital cycle and a closing comment on cash flows.

© 2011 by Dale R. Schmeltzle

CFO America: Your Cash Flow Optimization experts

 

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