“Financial Adrenaline” is a term we love around here because it reflects our commitment to help you turbocharge your business with practical tips and techniques to improve free cash flow, the lifeblood of business. As a further extension of our Financial Adrenaline program, we’re going to share a new Business Finance Tidbit every Wednesday specifically for those business executives who don’t have a finance background. Our current Big River series started with We’re Making Money. Why are we broke? … then No Cash? Can we borrow what we need? and What if our loan collateral doesn’t cut it? Last week, we talked about the need for outside investors.

____________________________________________

“All intelligent investing is value investing — acquiring more than you are paying for. You must value the business in order to value the stock.”

~ Charlie Munger

How important is valuation?

John Wilson, CEO of Ace Business Stuff, spent the last few weeks preparing for his meeting with Lary Blogger. He called a few days ago to follow up on his recent conversation with his attorney, Frank Lee Documents, when they spoke about investors, DilutionA reduction in earning per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities and ValuationThe process of determining the current worth of a company. An analyst valuing a company may look at the company's management, the composition of its capital structure, prospect of future earnings, and market value of assets. Judging the contributions of a company's management would be more subjective, while calculating intrinsic value based on future earnings would be an objective technique..

Valuation is the bedrock for investors

“Hi, Lary. I appreciate your coming by to meet in person to talk further about some of the issues we discussed a few weeks ago. Can we talk about valuation first, since that seems to be the foundation for conversations with prospective investors?

“Sure, John. I think you’ll find from our conversation that while valuation is one of the cornerstones for such discussions, your company’s performance, as well as its promise, is what really underlies any discussion about valuation.”

What you WILL do may be more important that what you’ve DONE

“I’m not sure I follow you, Lary. I understand the performance part – what we’ve done historically will have a lot to do with what the company’s worth, but what does the future have to do with our valuation now?”

“John, let me give you a brief overview of the valuation process, which I hope will make it clearer. As you’ve already figured out, valuation is as much an art as a science, and there are many subjective factors to consider. Certain judgments about future conditions in your industry, for example, and in the economy, can be thought of as ‘subjective’ information since nothing in the future is really ‘objective’.

There are also other factors relevant to the final valuation outcome like the purpose of the valuation, the calculation of “invested capital” and the various discounts that often apply. If we don’t get to those today, we’ll talk about them another time.

How is a company valued?

“In the meantime, let’s cover the two most prominent approaches to value a company’s shares. For each approach, a certified appraiser will select the appropriate method to apply based on the company’s characteristics. Once their work is complete, all of the findings will be taken into account to come up with a fair market value for the company.

The Market Approach looks at sales of comparable companies

“The ‘market approach’ looks for relevant information among public companies, or about the sale of comparable private companies. As you know, there is a gold mine of information available about public companies, but it is more limited for private companies. Appraisers are looking for public companies in your industry with characteristics similar to your company. They will then consider those stock prices and the relevant metrics that may apply to your business.”

“But there aren’t any public companies like ours, at least none we know about. So how is that going to help?”

“That’s only one method, John. An appraiser will also want to look at the sale of comparable private companies from the growing variety of databases available for this data.”

“Can you give me an example, Lary, to illustrate what you mean?”

Study the sale of comparable companies

“Sure. Let’s say that we find a few companies that were sold in the last 12 months or so, with about $20 million annual sales volume. Let’s further assume that they prices at which they were sold translate to something like 1.2 X revenues or 4.5 X EBITDA. We would then try to determine the comparability of your company to those examples.

• Do you use a similar distribution channel to sell comparable products?
• Are the general levels of profitability similar?
• Are the growth rates in the same ballpark?
• Etc.

Then you could apply similar metrics to get one estimate of value for your company.

The Income Method is another valuation approach

“The second approach is the “income approach”, which is usually the most important for private companies. That approach typically looks at the cash flow from future revenues and expenses based on a forecast that you provide, to arrive at a future value.

Then, that stream of cash flows is discounted at a rate that reflects the risk associated with achieving those cash flows. That’s why your company’s future ‘promise’ is so important.”

The importance of forecasting can’t be overlooked

“I see what you mean, now. I don’t think we’ve ever put together a real forecast, I mean we do some budgeting each year, but usually only to get some idea of our expenses. Is a complete forecast that essential?”

“In my experience, it is, John. For one thing, an investor is likely to ask ‘what are your plans for the future’ since they are rightfully looking at how their investment is going to be repaid … sometime in the future … with an appropriate rate of return. Responding ‘I don’t know’ isn’t going to work.”

“I see your point, Lary. Even though we can tell our story, without anything written that illustrates the revenue growth and profitability, it will seem like we haven’t done a very thorough job in evaluating our own future. I’ll sit down with Tom Sampson and hammer something out this afternoon.”

Where does the forecasting process begin?

“John, this is not something you’ll be able to cobble together in a few hours. You need to think carefully about your underlying assumptions for revenue and expenses, and make sure they’re well documented. You’ll also want to get some input from your leadership team about your plans, as well as the related cost structures and investments that might be required to support those plans.

The future investments that may be required to realize your plans will be critical to investors. Access to that funding will be important to the company’s future success and the likelihood that an investor will recoup her investment with an acceptable rate of return.

If you haven’t done it before, you’ll need to set aside some quality time to prepare a thoughtful and thorough forecast.”

Make sure you’re well prepared if you’re courting outside investors

“Getting investors isn’t as simple as I thought, Lary, but I think I understand why it’s important to get it right. I don’t want to give up more equity than absolutely necessary, but I see that the better job we do up front, the better result we’ll get. By the way, does all of this have anything to do with what my attorney mentioned about financial buyers vs. strategic buyers?”

“It all ties together, John. The next time we get together to review your forecast, I’ll show you a useful diagram to explain those principles. In the meantime, you’ve some work to do.”

____________________________________________

TO BE CONTINUED …

This is Part 5 of a 12 part series called the “Big River“. The Big River signifies the growth path that so many companies follow, or are seeking, and the dangers that lurk along the shoreline as the Big River races forward trying to consume everything in its path. Next week, an important valuation framework is included to help you understand the most important concepts that effect company valuation. Make sure you sign up now so you receive every update in this practical series.

Business Finance | What’s the value of my company? is a post from: Sword Tips – the Exkalibur blog

“Financial Adrenaline” is a term we love around here because it reflects our commitment to help you turbocharge your business with practical tips and techniques to improve free cash flow, the lifeblood of business. As a further extension of our Financial Adrenaline program, we’re going to share a new Business Finance Tidbit every Wednesday specifically for those business executives who don’t have a finance background. Last week we began our 12 part Big River series so you can pick up the story there.

____________________________________________

“Creditors have better memories than debtors.”

Benjamin Franklin

What happens if we run out of cash?

John, are you ready for our meeting? We said yesterday that we were going to meet to go over our financial projections and review a possible bank proposal.”

“I’ll be right there, Tom,” John Wilson, company CEO said to his controller. He reflected on their conversation last week about the Company’s expected negative cash flow and the need to borrow from their bank, most of which resulted from giving extended terms to their customers. John learned his lesson and wanted to avoid borrowing, but Tom had been pretty explicit about the need.

First, we need to review our short term cash needs

“John, I’ve gone over our short term cash needs again,” Tom said after they gathered in the conference room and were looking at some numbers on the overhead projector. “I’ve created a simple example on the screen with all the numbers shown in thousands. I’ve assumed a $200K line of credit (shown with a bright blue border). On Line 1 - Net Cash Flow, you can see the expected negative cash flow in the next three periods, of <$161,000>, <$75,000> and <$4,000>, respectively. [See the Sample Chart, below, to refer to these items. Line Numbers and Categories are bold-faced for easier reference. The numbers are shown in thousands.]

How much cash do we need?

If you look on Line 3 – Cash Required, you’ll see how much cash we’ll need in excess of our Opening Cash Balance for each period. Line 3 – Cash Required shows the money we need to pay our payroll and normal operating expenses on time. Line 4 – Line of Credit Used this Period, shows how much we’ll need to borrow in each period so that we have enough cash to cover those bills as well as the $150,000 Minimum Cash Balance we need to support out working capital needs. Below that is the new Line of Credit Balance (Line 5), and below that is our Remaining Availability to borrow against our line of credit.”

“Tom, I’m not following you.”

“Sorry, John. Take a look at Period 1 (marked with a bright red border) on Line 4 where you’ll see the borrowing of $96K, shown as Line of Credit Used This Period. The $96K on Line 3 - Cash Required represents the difference between the negative cash flow from our operations of <$161k> on Line 1 and our Opening Cash Balance of $65K in Period 1.

How much do we need to borrow to meet our needs?

Can we borrow enough at the right time?

“Thanks, Tom, I’m with you. It looks like you’ve set up the financial model to borrow enough money to cover our cash needs and to show what borrowing power we have left.”

“That’s right, John. You can see from Line 3 that we need to borrow $40,000 in Period 3 to meet our cash needs. However, you can see that we’ve maxed out our $200,000 line of credit by then (see Line 5 – Line of Credit Balance) so we can only only borrow $29,000. In theory, we’ll have a negative cash balance of $11,000 (Line 6 – Net Cash Balance), but we can probably manage that by deferring a few payables, but that’s not a sustainable policy.”

When does our cash flow return to positive?

“So, if I’m reading this right, the good news is that we return to positive cash flow in periods 4 & 5, our cash position starts improving again and we can even pay back some of our loan.”

“That’s right, John. It gets pretty close in period 3, but our borrowing capacity starts to grow after that. It improves because we expect to have a large, positive operating cash flow in the 5th period, when our receivables finally get collected.”

Do we qualify for a $200,000 line of credit?

“Tom, are we sure we can get a line of credit of $200,000? That’s your assumption, isn’t it?”

“Yes, I used a target line of credit of $200,000. In reality, our balance sheet is probably not strong enough to justify anything other than an asset-based loan. In that situation, the bank advances money as a percentage of our outstanding receivables and inventory. The line of credit will vary based on those balances each month, but it should be in that general ballpark.”

Do we need an Asset-Based Loan?

“Tom, I think I get the general idea but I do want the specifics. Can we reconvene this afternoon and go over the details? Maybe you could update this table to reflect how the loan availability changes based on inventory and receivables?

You can also teach me a little about an asset-based lending program and educate me about your concerns with our balance sheet. I really need to understand this. Can I check back you sometime after 3:00 p.m?”

“Sure, no problem, John. I’ll be waiting.”

What’s your experience? Do you have borrowing capacity to deal with unexpected cash shortfalls? Do you have an early warning system to let you know about a cash crunch that may be coming?

____________________________________________

TO BE CONTINUED …

This is Part 2 of a 12 part series called the “Big River“. The Big River signifies the growth path that so many companies follow, or are seeking, and the dangers that lurk along the shoreline as the Big River races forward trying to consume everything in its path. Next week you’ll learn how to begin to evaluate your bank borrowing capacity using an asset-based loan program. Make sure you sign up now so you receive every update in this practical series.

Business Finance | No Cash? Can we borrow what we need? is a post from: Sword Tips – the Exkalibur blog

“Financial Adrenaline” is a term we love around here because it reflects our commitment to help you turbocharge your business with practical tips and techniques to improve free cash flow, the lifeblood of business. Every Wednesday, we’re sharing a new Business Finance Tidbit specifically for those business executives who don’t have a finance background. You’ll get a head start by reading Warren Buffett’s letter to shareholders this year, and his comments about depreciation.

____________________________________________

“The importance of knowing accounting can not be underestimated, it’s the language of business. If you don’t know it, it’s like being in a foreign country without knowing the language.”

Warren E. Buffett, CEO of Berkshire Hathaway, Inc.

We’re making money … but we’re broke?

“We’re broke,” Tom mumbled to himself. Tom Sampson is the controller of Ace Business Stuff and was reviewing his latest calculations about their cash flow.

“What do you mean, we’re broke?” Tom looked up sheepishly to see John Wilson standing in his doorway. He fingered his collar and turned to address the company’s CEO. “We can’t be broke because business has never been better,” John said. “Our sales are up over 20% and we’ve even knocked a few percentage points from our costs so our margins are up, too. Our operating expenses are about where we expected, so we should be hitting the ball out of the park.”

How can we be out of cash?

“How can that be, Tom? We just agreed that we’ve having a record year.”

“John, we’ve discussed this before. Profits aren’t the same as cash. Profits are the excess of revenues over costs, measured when we deliver our products. Cash flow is the excess of what we collect from those sales, less what we use to run our business. They don’t always occur at the same time . . . or the right time.”

“But, Tom, if we have more revenue than costs, then we’ve got to have extra cash, particularly if we’re on our way to a great year. Something’s wrong here. Have you double-checked with the bank?”

You’ve probably heard a version of this somewhere

This conversation, in many forms, takes place every day in conference rooms and hallways across America. You may have been in a few. Business is starting to grow again; the company is ready to start investing in people as well as property, plant and equipment. It’s expanding operations, adding product lines and serving customers. Business is prospering . . . but there is a limited understanding of the accounting and cash flow implications of those plans.

Have you double-checked with our bank?

“John, I don’t need to check with our bank. There are no missing deposits and we’ve reconciled all of our accounts. The problem is that we’ve invested all of our cash in the business and we’re not going to be able to meet payroll.”

“Didn’t you see this coming, Tom? You said we’re on top of the bank stuff and our accounts are clean. Why didn’t we see this sooner?”

“John, we’re lucky we’re even seeing it now. It was only when I saw our receivables climbing faster than our revenue that I knew something was off. It was Jody who told me that the salesmen got approval to extend our payment terms from N/30 days to N/60 days.”

“We had to do that, Tom. Our customers have expanded their purchases from us because we’re able to offer more generous terms than our competitors. That’s what’s fueling our growth.”

There are lots of ways to run out of cash

“Which is exactly why we’re out of cash, John. We’ve got all of these extra sales but we haven’t collected any cash from them yet because we’ve given the customers longer to pay. Nobody told me, or our purchasing manager, so we didn’t have a chance to reach a similar deal with our own vendors. So, we’re stuck with having to pay them on time, plus with the people we’ve added, our payroll is up and we have to pay that every 2 weeks no matter what.”

We love the Big River … but it consumes everything in its path

What John Wilson, CEO, is painfully discovering in this simplified example is that the flow of profits and the flow of cash are asynchronous, that is, they don’t follow the same pattern. The kind of accelerated growth that ranges at or above 15% per year is what I call the “Big River”, and the bigger the river, the greater its impact on everything in its path. It’s indiscriminate as it absorbs the cash faster than the profits can keep up.

In the conversation between Tom and his CEO, the Big River is consuming all of the company’s liquid assets. Managing the growth rate of your business is critical because the growth rate is the engine that drives so many of the issues critical to our business success. DilutionA reduction in earning per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. … LeverageLeverage can mean several things. 1) The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment, or 2) The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.. … ValuationThe process of determining the current worth of a company. An analyst valuing a company may look at the company's management, the composition of its capital structure, prospect of future earnings, and market value of assets. Judging the contributions of a company's management would be more subjective, while calculating intrinsic value based on future earnings would be an objective technique. … LiquidityThe ability to convert an asset to cash quickly. Also known as 'marketability'. There is no specific liquidity formula, however liquidity is often calculated by using liquidity ratios. . . . . and more.

What’s the best way to evaluate the impact of growth?

“Great, Tom, the sooner the better. I’m thanking my lucky stars that I invested what I did when we started this business. Otherwise, we’d be even further in the hole.”

Where is all that cash going?

“It’s not as bad as all that, John. I think we’ve got a good story to take to the bank. We’ve got solid receivables and inventory, so we should be able to borrow enough working capital to get through this period, collect our receivables and better align our terms with our vendors and our customers.

“You were right, John. This is a good time to call our bank.”

What’s your experience? Have you run out of cash just as you thought your business was picking up?

____________________________________________

What’s next?

This is the first part of a 12 part series called the “Big River”. For me, Big River signifies the growth path that so many companies follow, or are seeking, and the dangers that lurk along the shoreline as the Big River races forward trying to consume everything in its path. Next week you’ll learn how to begin to evaluate your bank borrowing capacity.

Business Finance | We’re Making Money. Why Are We Broke? is a post from: Sword Tips – the Exkalibur blog

“Financial Adrenaline” is a term we love around here because it reflects our commitment to help you turbocharge your business with practical tips and techniques to improve free cash flow, the lifeblood of business. As a further extension of our Financial Adrenaline program, we’re going to share a new Business Finance Tip every Wednesday specifically for those business executives who don’t have a finance background.

____________________________________________

Read Warren Buffett’s Letter to Berkshire Hathaway Shareholders

In most fields of endeavor, the more we learn, the more we realize how much we have to learn. It’s certainly no different in the world of business finance, so for non-finance executives, it’s never easy to know where to start.

So, why not  jump into the deep end right now by reading Warren Buffett’s Letter to Berkshire Hathaway shareholders for 2010. The publication of Berkshire Hathaway’s annual report is closely watched in the national media, as well as in homes and offices across the country … and for good reason.

Business Finance is about much more than finance

I’ve said before that leaders don’t have the luxury of confining their interests to just a few things. Building a Business is not just about strategy, finance and leadership. It’s about much more … and nothing brought that home more clearly than choosing the categories and tags for this article … because it’s about so much more than business finance … and yet, it’s related directly to business finance.

A great example of the Art of Communication

Warren Buffett’s letter is a great example in the art of communication … about complex financial issues as well as organizational development, culture, recruitment, succession planning, ethics, stewardship … it’s a long list that will satiate any appetite for those of you interested in understanding how all of it fits together. On the subject of communication, you may find the Communication Action Plan a valuable tool to jumpstart your own communication plan, which we just published as part of our Nothing but Leadership series.

What do you think?

In his annual letter, Buffett discusses the many financial challenges within the companies and industries under Berkshire Hathaway’s broad umbrella. What’s so engaging is not just his avuncular style but the rich tapestry of issues and challenges that come together in the assessment of business performance.

Is there a particular issue that you’re curious about? Growth? Liquidity? Metrics? Leverage? Valuation? Productivity? It’s all there … with Buffett’s personal interpretations, his issues with analysts, his challenges to accepted valuation and financial metrics standards.

How does Buffett’s letter serve as a communication device for shareholders? Too much information? Not enough? Where should we start to help you with your business finance education?

____________________________________________

How our Weekly Business Finance series will help you

Most non-finance executives have picked up a few tidbits … from a class, from a financial colleague or friend, a banker, an accountant … and have assimilated a variety of random fragments that are probably more like a messy collage than a well-drawn portrait. Is it enough to get by? Maybe … but if you’ll take ownership of your own financial education, we’ll help you. Dig in, challenge what you read, add your comments or questions and we’ll answer them right here … every time … and we’ll get this conversation started. Are you with me?

Business Finance | Why you should read Warren Buffett’s Letter is a post from: Sword Tips – the Exkalibur blog

Every Thursday, I’m sharing a new Personal Productivity Tip to help you get more done. Each Productivity Tip is a remarkably simple tool or concept that can be quickly implemented to make a real difference in your personal productivity. When you apply many of them together, they’ll make a big difference in improving productivity, achieving accountability and staying focused on the things that matter the most in your life.

You may want to check out some of the posts in this Productivity series, including the the value of checklists; the importance of getting rid of the crappy stuff;  the nightmare of the cluttered mind; and the 4 Do-or-Die Principles to Drive your Personal Productivity System.

____________________________________________

Last week, we dusted off the S.M.A.R.T acronym as a reminder that we need to create Specific, Measurable, Agreed Upon, Realistic and Trackable objectives if we want to create a business culture with accountability as its centerpiece. There is simply no shortcut or substitute for the genuine productivity that results when we SET CLEAR EXPECTATIONS.

Today, we’re going to dust off another “oldie but goodie” but one that many of you may have never encountered. I learned it from some old consulting hands and while it’s often used in a formal chart of “who’s supposed to be doing what,” it’s a valuable accountability tool to evaluate the roles and responsibilities of individuals involved in any kind of team effort or project.

What is an ARCI chart?

In short, it qualifies team members based on their expected level of contribution to a project. Different parties play different roles to get things done, and this tool provides a simple, effective and consistent way to achieve project accountability by evaluating who’s doing what.

By spending just a little time to establish these roles, you will once again, SET CLEAR EXPECTATIONS. It will also help your team members understand their roles and what’s expected of them in a particular project. Read on to learn about each of these four roles.

Accountable

In short, the buck stops here. This team member has ultimate accountability for accomplishing the objective. Since “if you have two bosses, you have none”, this approach ensures that there is a single individual ultimately accountable for the project or task. You’ll note that this is the only category where there can be only one person with that designation.

Users of this construct will often use shorthand … ”you have the A” … to signify that you’re accountable for getting something done. Be sure, too, that Ms. Accountability also has the authority to drive the project to conclusion.

Responsible

This one is a little trickier, since there can be more than one person who is responsible for the project’s success. The “R” category includes all of those who are responsible to get the work done.

In the example on the right, you’ll see one way to define the roles and responsibilities within a team. In an open book environment, you will share this simple chart with everyone on your team. If you spend time to clearly identify the roles and responsibilities of each team member, the ARCI chart becomes the very able partner of the S.M.A.R.T. approach to accountability. Together, they provide a clean, crisp and powerful approach to project management.

BTW, you could also identify departments or other teams in the columns instead of specific individuals.

Consulted

This category represents someone that needs to be consulted as the project goes forward. It could be a thought leader in another department who has no direct involvement but who has a lot of knowledge to contribute to your project. It might also be someone who owns many of the resources you’ll need to implement the plan. It might also be someone who’s too busy to be responsible for a particular project, but whose expertise and experience are essential to a successful outcome.

Informed

This is a person who needs to be kept “in the loop” about the progress of the project but doesn’t have direct involvement in it. This could be a department head, even the CEO, who wants to be kept informed throughout the project’s life. You’ll note that they are informed AFTER the fact, often after milestones are achieved along the timeline. They have no other role.

Examine the assignments for each person

If you’ve prepared a chart similar to the one I’ve shown here, start by taking a vertical look to see if any individuals (or team or other entities) have too many A’s or R’s. If so, they’ve probably been assigned too much to reasonably get done. Contrarily, if you see someone without any A’s or R’s, they’re just a bystander and could probably do more. Look for empty spaces, too, to make sure everyone is carrying their share of the work.

Examine each task or project

Likewise, when you look horizontally across the chart, look for a project with too many R’s … if too many people are responsible, probably no one’s responsible. If there lots of C’s, make sure that all of those people really need to be consulted for the project to move forward. Too many I’s can also mean there’s too much communication after the fact, which also tends to slow things down. You might want to minimize the C’s and I’s to make sure you’ve got a clear road ahead. Also, make sure that authority and accountability are available in the same measure.

Do you use any tools like this to help define roles and responsibilities in a team effort? What has worked for you in the past? Does this help?

Productivity Tip: Still struggling with Accountability? Who’s on first? is a post from: Sword Tips – the Exkalibur blog

‘Always ask why.  Dig deeper.  Get the facts.’ Avoid crowd mentality

“Ask Why” was their motto. “Wheel Out,” “Fat Boy” “Death Star” and “Get Shorty” were some of the nicknames applied to their strategies. Confirmation letters of successful trades were addressed to names like “Mr. M. Yass and “Mr. M. Smart” … and I think you can parse the underlying contempt. “Rank & Yank” described their people performance system, “Pump and Dump” their trading strategy. About $70 billion of market value was destroyed, more than 20,000 employees lost their jobs and pension funds worth $3.2 billion were destroyed, more than two thirds of which belonged to retirees with little chance to rebuild.

I had always intended to watch “The Smartest Guys in the Room,” the 2005 movie based on a book by the same name from co-authors Peter Elking and Bethany McLean, but it got lost in the shuffle until last week. It chronicles the Enron cataclysm, whose meteoric ascent was violently terminated with its bankruptcy on Dec. 3, 2001.

“Be like Enron” is still an ignominious curse

It’s hard to believe this happened almost 10 years ago since to be “like Enron” still reverberates as an ignominious curse. It’s really more like a viral infection, though, because so many of the forces that drove its destruction have cleaved similar fissures in scandals from the Ponzi schemes of Bernie Madoff to the financial meltdown that brought our economy to its knees in 2008.

We won’t recount the history of Enron’s demise except as it relates to the flaws that still besmirch corners of our financial system. In summary, Enron took 16 years to grow from $10 billion to $65 billion in assets and only 24 days to become what was then the largest bankruptcy in American history. It rose to a $70 billion valuation before its stock tanked at 40¢ a share. California lost $30 billion playing in its energy casino, and Gov. Schwarzenegger rode into office as a result.

Enron is instructive on so many levels that it’s too much for one column. The lessons are both fundamental and monumental, and like most scandals, born of the character flaws and human failings that have been chronicled from Homer to Shakespeare. Businesses remain susceptible to some of these insidious “Smartest Guy” forces, so heed these warning signs to keep these varmints from burrowing into your organization.

Due diligence may be boring … but skip it at your peril

In What’s the Difference between a Lightning Bolt and a Bright Idea, we explored the bedrock value of doing your due diligence. It’s pretty clear from the Enron debacle that banks and regulators, as well as law and accounting firms … and analysts and journalists … were sucking on the Enron popsicles and ended up as facilitators instead of independent parties.

Fortune magazine listed Enron for six years running as one of the Most Admired companies in the country. According to the authors, Enron was spending $1 million/week with Arthur Andersen, and nearly as much with their law firm, extraordinary largesse that frequently spawns conflicts of interest. In Watchdogs … Or Lapdogs, I referred to the unusual arrangement that allows companies to hire their own “independent auditors.” It’s not much different for the security ratings agencies, either, which became apparent in the Wall Street meltdown I described in Is Anyone Really Independent. Were these organizations, as the movie described them, what Lenin meant by the term “useful idiots”?

In short? Always ask why. Dig deeper. Get the facts. Do your due diligence with even greater fervor when you’re offered the last seat on the bandwagon.

Get a full set of financial statements EVERY TIME

I’m constantly reminding clients to make sure they get a full set of financial statements every month, including an income, balance sheet and cash flow statement. Without all of them, the information presented is misleading and open to errors of omission as well as commission. More importantly, you can’t understand cash flow, the lifeblood of business, without all of them.

For inexplicable reasons, Enron was the only financial institution that only published an income statement. They didn’t provide a balance sheet or cash flow statement … to shareholders or analysts … and got away with it until the end.

Need I say more?

There’s no room for extreme personalities

Mr. Skilling was known as someone who liked “men on bikes” and burnished the company’s affection for extreme personalities. The trading desks, in particular, favored these leadership styles and as they began to dominate the company’s business, their extreme personalities convulsed into brilliant gamblers run amuck.

One of the division presidents was infamous for his love of “money and strippers.” He later left the company, sold his stock before the fall for over $250 million to settle his divorce … and then ran away with his stripper girlfriend who was carrying his child.

His division showed losses in excess of $1 billion.

Extreme personalities rarely excel in an organization whose leadership style emphasizes a collaborative environment. If you’ve got any, make sure you’re enforcing adequate safeguards … or better yet, get rid of them.

Hubris is the root of most evil

Hubris is defined as excessive arrogance, and has a nefarious classical history. It was considered a crime in classical Athens and thought to be the greatest crime of the ancient Greek world. According to Wikipedia, the ancient Greek Word, Atë, describes the action leading to the protagonist’s downfall as “ruin, folly or delusion”, a matched set that nicely covers the misconduct of many Enron executives.

When hubris is inflamed by greed, any spark can start a conflagration. Enron may be a distant memory … until we think Madoff, Lehman Brothers, AIG … and then these inglorious strains of humanity are resurrected like characters in a Shakespeare tragedy.

In many ways, it comes down to the simplest of propositions. If it’s too good to be true, it probably is.

•••

Lary Kirchenbauer is the president of Exkalibur Advisors, providing practical business strategies for family and other privately owned businesses in the middle market. Exkalibur works closely with senior executives and their businesses in the wine and other industries, and hosts the Exkalibur Leadership Forum for leaders of middle market companies in the North Bay. Please visit Exkalibur.com for a library of valuable resources, articles and insights or connect on Twitter, LinkedIN or the Exkalibur fan page on Facebook.

**********************************************************************************

The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which I have served as a regular columnist for over three years. The Business Journal covers the North Bay area of San Francisco – from the Golden Gate bridge north, including the Wine Country of Sonoma and Napa counties.

**********************************************************************************

Article published as Vol. 82 on February 14, 2010: The electronic version of this article, as published by the North Bay Business Journal, may be found here. ******************************

Any related materials or articles referenced in the published column, or otherwise applicable, are referenced in this digital version of the article.

Leadership Styles: The Smartest Guys in the Room can kill you! is a post from: Sword Tips – the Exkalibur blog

~ Thomas Carlyle

A lady walked into a neighborhood market one day and spoke loudly over the counter to the head butcher.

“Your prices these days are atrocious, Sal. Joe’s Deli across the street is selling your $10 chuck roast for only $5!”

“I know, Mrs. Haggle. I saw the sign. The thing is . . . Joe doesn’t have any chuck roast.”

The law of supply and demand still rules

So, the law of supply and demand rears its head again, some days a beautiful vision, other days an ugly hag. We’re surrounded by her mystique everywhere we go. Traffic is tied up because there are more cars than highway space. Starbuck’s is backed up because people want coffee faster than it can be made. There are no paper clips in the supply room but there’s plenty of fruitcake left in the kitchen.

Even for tickets to a free concert?

Supply and demand drove markets long before economists appeared … and its jarring prevalence is unavoidable. One of my favorite examples is the controversy several years ago when scalpers were selling Bon Jovi tickets for as much as $750 each … for a free concert in New York’s Central Park.

Don’t use economic pain as your excuse

While a lot of palaver continues about the persisting economic downturn, our mission is to turn from cost-cutting to demand-stimulating. Yes, it’s alluring to just damn the darkness of the lingering economic turmoil, but it’s time to turn on the lights.

I can’t count how often I hear businessmen say that “the economy is weak” or “the recession just won’t seem to go away” or “our industry is in the doldrums” to explain flatline revenue when it’s really just an excuse for underperformance. Maybe if you’re a large industrial company like GM, the economy is a measurable force … but haven’t we learned that many of their problems were of their own making anyway?

Are the macro-economic forces really our greatest enemy?

These macro-economic forces are only bit players in the travails of small and middle market businesses. Harmonizing with the recession chorus will sap your energy and infect your organization. If your employees hear you blaming the economy as an explanation for lackluster sales, they will soon adopt that perspective and come to believe that they can’t do anything to avoid its impact. It will dull their enthusiasm and create a victim’s mentality that is both demoralizing and enervating.

For us, it’s time to dropkick the “recession” term to the dumpster as an excuse for underperformance.

Discounting? Bad. Value Creation? Good!

In Keep Your Prices Strong, I described the slow descent into oblivion when price-cutting is the mantra. You can’t get off that path fast enough because it leads to a treacherous slope that’s much harder to climb than to slide down.

Start by treating your customers as guests. Focus on value creation and what steps you can take to make your customers forget all about your competitors. Empower your employees to find ways to make your customers love you. Still in doubt? Read about the Meineke Syndrome for more examples about the death spiral of price discounting.

What can you do to stimulate demand?

So, let’s cowboy up! Talk to your customers and focus on stimulating demand. Think …

• “How can I encourage hesitant customers not to postpone their purchases?”
• “Is there a way I can show my most important customers why our relationship is a partnership and why we need to lay out a purchase plan together to maximize the return for both parties?”
• “Can I offer an incentive by reducing costs without forfeiting my margins?”
• “How can I enhance our value proposition to keep our customers buying?” Check out paycheck marketing to see if it makes sense for your business. Try ideas others have used to persuade the frugal to shop.

Turn the talk about recession in your favor

Use all of the talk about “recession” as a positive force. While others remain on their heels, think about what you can be doing to fill the void created by defeatist competitors. Remind your customers that …

• … business is about the long term,
• … most recessions are short term, and
• … since prices tend to rise following a recession, maybe there’s a way to create a plan that works for both parties.

Be aggressive … be innovative … be consistent as you continue to fight hard and press for the advantage everywhere you can.

Flush the recession Kool-Aid!

So, stop drinking the recession Kool-Aid. Make sure you’re doing what you can to stimulate your own demand … create value … delight your customers with overwhelming customer service. Don’t allow the economy to take you out of your game.

What programs have you implemented recently to create value for your customers? Share some specific … concrete … creative ideas that puts you in the driver’s seat and puts the wind in the face of your competitors.

Flush the recession Kool-Aid! Create your own demand! is a post from: Sword Tips – the Exkalibur blog

Not that there’s anything wrong with a basket of assorted swans, geese, French hens and turtle doves … I’d prefer a beef tenderloin myself … but who expected that in 2010, the  ”Christmas Price Index”, which has closely tracked the Consumer Price Index (CPI) for most of its 27 years, would rise by 9.2%, the 2nd largest increase over that period (2nd only to a 16% jump in 2003), according to the NY Times report?

It’s PNC Wealth Management that has tracked the cost of the fanciful mix of gifts heralded in the classic carol “The 12 Days of Christmas” for more than a quarter century. This year, they’ve included a popup book on their web site about this index.

Of course, this basket of good is much narrower than the CPI, but there’s one other interesting “nugget” in here … namely that the price of “Five Golden Rings” is up 30% to $650 this year, although a lower increase than last year’s 43%. Should have bought a bunch of gold a few years ago, huh? (I’m such a great rear-view investor, it’s actually scary.)

BTW, if you want to give all of the gifts featured in the song … repeats included … it’s 364 gifts for a total of a mere $96,824, up 10.8% from last year. It only costs $23,439.28 for just the 1-12 gifts. Oh, that’s all? Feeling better already ….

At least there’s one piece of good news in here. If inflation rears it’s ugly head, we can put it on a plate and serve it for dinner!

Happy Holidays!

The 12 Days of Christmas – Prices UP! is a post from: Sword Tips – the Exkalibur blog

Then, to provide more graphic and visual insights about the principles of business finance, we’ve created  a Financial Adrenaline video library … all of it free to everyone … to help you advance your own understanding of business finance principles.

Now, we’ve come up with an easy-to-understand postcard-style PDF to summarize the features and benefits of our Financial Advisory services using the proven tools of the Business Ferret™.

So, why not download our Financial Adrenaline postcard to keep as a handy summary of the features and benefits of these powerful business finance tools, and how they can help you help you integrate business finance into your everyday business decision making?

The hidden treasures in your financial statements is a post from: Sword Tips – the Exkalibur blog

That’s why we’re inaugurating a new podcast series to help middle market companies achieve “excellence at the intersection of strategy, finance and leadership“. Our Building a Business podcast series is organized to give you short but powerful bursts … about 5 minutes each … of practical strategies that you can immediately put to work.

The introductory podcast explains this series and what we’re trying to do to help middle market business executives become better leaders and managers. We’ll cover a broad range of issues, from leadership skills and techniques … to corporate governance, communication, innovation, planning, pricing, the works.

As always, I welcome your feedback. Let us know if this series is helpful and what more you’d like to hear. Don’t hesitate to offer your comments. We welcome a vigorous dialogue … so, with a wink and a term borrowed from my talk radio days … “we fully respect your right to be dead wrong”. So, fire away and let’s keep the conversation going!

What do you say?

Building a Business: A new podcast series for YOU! is a post from: Sword Tips – the Exkalibur blog

His presentation, The Supply/Demand Balance in the Global Market and California Bulk Market, thoughtfully described these challenges, using the demonstrated insights of the Wine Business Wheel of Fortune pioneered by Turrentine to describe cyclical and long-germ patterns in the wine business.

Steve covered the California and global bulk market, tonnage and acreage forecasts and outlooks for the global supply of key varietals: Cabernet Sauvignon, Chardonnay, Merlot, Pinot Noir and Pinot Grigio. You’ll find his presentation here.

Way to go, Steve. Great job!

Ignore the Wine Supply/Demand Cycle at your peril is a post from: Sword Tips – the Exkalibur blog

———————

Why is this so hard? We find ourselves entrenched in the quagmire of a lingering and painful recession … more companies than ever need stronger financial management … and yet so many of them remain painfully slow to recognize it. Sure, many have trimmed costs and are paying closer attention to nickels and dimes, but few of them have a comprehensive financial strategy.

Business Finance? Meet the Wine Industry!

So, in some misguided way, I guess it feels good to have some company … because the need for financial discipline was a common refrain among wine industry cognoscenti at this year’s Symposium, Competing in a Rapidly Changing Global Wine Market. The economic shock waves of the last 24 months have rocked the wine industry, dragging many of its members, in some cases kicking and screaming … into an era where professional management and greater financial discipline are demanding front row seats alongside the entrepreneurs and artisans that have reigned over the California wine industry

Building a bridge between the financial community and the wine industry is one of the founding precepts of the Wine Industry Financial Symposium formed in 1992. Last Monday, I was privileged to lead a 90 minute workshop devoted to Practical Strategies to Improve Cash Flow, in which I shared a few “diamonds in the rough” about how to get more juice into your bank account … and how the California wine businesses can integrate Strategic Finance into their everyday business decision making.

Wine, Wisdom and Stronger Finance. Drink up!

During the preceding From Survival to Prosperity – Strategies for Transition session, Jeff Gutsch, a partner who leads the Wine Industry practice at Moss Adams, LLP, moderated a panel of experienced wine industry professionals who got the afternoon workshops off to a great start. The panel discussed a variety of strategies for success in the wine industry, and while extolling the entrepreneurial spirit that spawned the wine industry in Northern California, frequently returned to the need for more professional management … explaining that the industry needed to “grow up” to succeed in the increasingly competitive global wine market.

Tim Allen, an industry veteran who served in senior finance capacities for 4 wineries that were sold during his career, and now runs his own boutique accounting service in Napa, emphasized many of the same themes that I discussed in my workshop … that sound financial principles are a critical component of success in the wine industry. Keith Wesselchmidt of Bacchus Capital Management and Mark Brody of Umpqua Bank echoed those observations, calling for business owners to develop stronger financial controls and rely upon strong professional relationships to build their businesses.

Do you think your business needs a stronger financial foundation … and if so, what are you doing about it?

Warning: Sell Wine? Ignore Cash? Adios! is a post from: Sword Tips – the Exkalibur blog

A recent WSJ opinion piece nicely summarizes the quagmire of uncertainty that plagues American business. I’m pretty tired of all of the “credit-starved businesses” stories presented like medieval alchemy … fix this and you’ve found gold … because most of them based on a few unproven anecdotes. The real issue is UNCERTAINTY … so I’m forced to resurrect my own design that tells the story that really underlies the lack of job growth and investment … the Double V – my expression for the deadly duo of Big Volatility and Little Visibility.

Here’s the WSJ verbatim quote that underlies much of the UNCERTAINTY that plagues American business:

Do you think the lack of customers … or the lack of credit … is killing American business? What’s affecting you the most?

Uncertainty is killing business – NOT credit! is a post from: Sword Tips – the Exkalibur blog

There are many ways to get creative … so don’t hesitate to think about what you can offer that would be appealing to your ideal investor and test it out on a few of them. The worst that can happen is that they reject the idea and you try something else.

What’s the most creative financing idea that’s worked for you? Have you seen other innovative financing ideas that work?

Yummy for the money is a post from: Sword Tips – the Exkalibur blog

Who should decide how much to pay whom for oil spill claims?

What I wonder is whether BP … in most cases, any corporation … shouldn’t have some rights and control over the claims paid from funds ultimately belonging to their shareholders? Take special note that in BPs case, a powerful example of the global economy in which we live, 18 million British citizens own stock in BP, many of them retirees.

Emotions are running high and many people would prefer to see BP hanging from the nearest rafter. At the same time, shouldn’t a company be allowed to settle claims in a fair and reasonable manner? There are plenty of ways in which individuals and organizations can seek redress if they disagree on the results, either through appeal or in claims or civil courts if a reasonable settlement cannot be made.

What paperwork?

Many examples have already been reported … and I’m certain there will be thousands more … of Gulf businesses claiming unsubstantiated damages … with limited or poor accounting records, and little proven evidence of the earnings they seek to recover based on the  years prior to the oil spill. It’s no surprise that many fisherman and other small businesses don’t keep great accounting records, and in cash businesses, may have “forgotten” to record some of their transactions? But now that they have to demonstrate the level of earnings that have been lost … and I think we’d agree that it’s a fair expectation that they be able to demonstrate that history … it seems reasonable that BP should have some rights to adjudicate those claims like most US corporations do in disputed matters.

What do you think? Would you think differently if you were a shareholder, like so many Britons, with a stock so critical to their retirement? If it was your company, would you insist on certain rights to protect your shareholders?

Let’s talk about it.

Do we need a Federal Escrow Fund? is a post from: Sword Tips – the Exkalibur blog

Researchers have found that when test subjects are even subliminally exposed to the name of a person they believe is “controlling”, they unconsciously do the OPPOSITE of hard work. It seems that people value their freedom “so much so that even an unconscious memory of a controlling person stimulates a behavioral reaction.”

Combine this with The Productivity Paradox and the work done at Sony Pictures to focus more on employee energy management rather than time management, and a theme begins to emerge about the critical importance of how we treat individuals in the workplace and how a leader’s behavior effects performance in so many ways. You should also consider the comments made by Stephen I. Sadove, CEO of Saks, Inc. and his emphasis on the overriding importance of a relationship culture to drive business performance.

What new or innovative ways have you found to deal with people and unleash the power and energy in your organization?

Any control freaks out there? is a post from: Sword Tips – the Exkalibur blog

“I have enough money to last me the rest of my life … unless I buy something.”–         Jackie Mason

Does this sound like you?

Someone recently told me that they’re bored by finance. “Don’t distract me with strategic finance stuff, just let me run my business the way I know how.”

“No problem,” I said, “if you’ll just answer one question. What if the way you’re running it is causing increasing strain on your financial resources, cash flow is dwindling and you’re destroying market value every year. Do you care about any of that?”

“Of course, I do, but when sales start picking up again, all of that will go away and my EBITDA will return to normal levels.”

“Really?” I said. “How do you know that?”

“That’s the way it’s always worked.”

“Have you had any problems with your banking relationship?”

“A little, no different than anyone else, but they’ll get over it. Business will eventually return to normal and all will be well.”

Why do we care about Strategic Finance?

Our conversation continued but my friend was undaunted. “I’m going to do a free analysis of the last five years of your company,” I told him, “and I’ll report the results back in a few days. Let’s see if that approach is working for you.”

So, why are we talking about strategic finance at all? First, while we already know that “cash is king,” many executives still wonder why the profits they earn are not reflected in their cash balance. We’ll uncover some of those hiding places on this journey.

Do you think you’re creating value EVERY DAY?

Second, most business owners assume they’re creating value in their business every day. Wouldn’t it be a good thing to monitor whether that’s working as you intend and be able to periodically evaluate how the market values your company?

Third, there is a powerful educational component to this process. In an era of growing transparency, we can communicate our strategic and financial progress – in language everyone can understand – so that these principles can be applied throughout our business.

The Beast of EBITDA Must Die

So, it is with great anguish among financial reporters, and many of you, that the beast of EBITDA needs to be slain. It’s no surprise that our favorite cash flow champion, Warren Buffett, has been a long-time opponent of EBITDA. Just one example: since EBITDA is reported before interest expense, the growing interest costs that accompany mounting debt loads become invisible.

EBITDA is a TERRIBLE Placeholder for Cash Flow

Most importantly, EBITDA invariably overstates real cash flow. In the picture shown in Exhibit 1, you’ll notice that the EBITDA measure has absolutely no connection to cash flow before financing. While the measure of EBITDA is positive and has grown over the last few years, cash flow before financing is a negative number.

Is this a fluke? Is this a real company you ask? Not exactly … it’s worse because it measures a composite of the 5.5 million U.S. companies that report their results to the IRS, including all 17,000 public companies in this country. While it accurately serves our dramatic purpose, it also illustrates how much EBITDA can vary from cash flow … and the relatively poor state of American industry.

The moral of the story is simple. Don’t use EBITDA as a placeholder for cash flow. It will mislead you far more than it will help you. So what is the cash flow that really counts? Stay tuned.

KBO

**********************************************************************************

Lary Kirchenbauer is the president of Exkalibur Advisors, Inc., providing practical business strategies for family and other privately owned businesses in the middle market. Exkalibur works closely with senior executives and their businesses at the intersection of leadership and business strategy and uses the Business Ferret™ framework to help companies use strategic finance to drive improved business performance. Lary also hosts the Exkalibur Leadership Forum for leaders of middle market companies in the North Bay. Please visit www.Exkalibur.com for a library of valuable resources, articles and insights or join the Exkalibur fan page on Facebook.

**********************************************************************************

The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which I have served as a regular columnist for more than two years. The Business Journal covers the North Bay area of San Francisco – from the Golden Gate bridge north, including the Wine Country of Sonoma and Napa counties.

******************************

Article published – April 26, 2010: The electronic version of this article, as published by the North Bay Business Journal, is identical to this post and may be found here.

******************************

Any related materials or articles referenced in the published column, or otherwise applicable, are referenced in this digital version of the article.

Business Finance | Does EBITDA Bury Its Own Dead? is a post from: Sword Tips – the Exkalibur blog

**********************************************************************************

Article published – December 14 2009: The electronic version of the article, as published, may be found here.

Think cost control, flexibility, urgency and innovation

These are the four pillars of any firm’s long-term success

“Talent is cheaper than table salt. What separates the talented individual from the successful one is a lot of hard work.”        – Stephen King

“Lary, give this customer a call. We’ve just received an unauthorized return, and I want these shoes sent back. Funny how the green shoes don’t fit and the red ones fit perfectly.”

It wasn’t uncommon for the chairman of company North (remember, “N” for “Nasty”?) to stop by my office with a message like this. His remarks were actually a code: “The red shoes sold well but the green ones the customer bought aren’t selling … so now they’re claiming they don’t fit so they can return them. We’ve had no other such complaints. Tell them we won’t accept them and ship them back.”

I made a note to contact the customer, figuring I’d call them after lunch when I would be more likely to catch them three time zones away. No e-mail back then. Unexpectedly, the chairman returned to my office 20 minutes later to ask, “What did they say?” The first few times this happened I asked, “Who?” … failing to make the connection he expected. While I learned the nuances of merchandising economics with these examples, what I finally realized was that the chairman expected me to drop everything and call them immediately. He wasn’t happy — “What else are you doing?” — and after a few unpleasant encounters, I finally caught on.

In the last few columns, we’ve been talking about equally successful financial results that can be produced from radically different cultures like those of companies North and South. We’ve seen the difference between loyalty and fealty and the cultural differences that distinguish conscientious cost management and contentious cost reduction. Until now, however, we haven’t discussed the common business principles that underlie their success.

Simple hard work is one of them, although as I’ve illustrated, company North fused that notion with the sense of urgency that is missing in so many organizations and employees. I’m not sure that this sense of urgency is easily taught, but I do know that it’s a powerful performance driver whose absence is equally enervating to otherwise vital organizations.

Flexibility is one of the cornerstones of business success. Both of these companies championed the power of flexibility that a low fixed-cost structure offers.

I know of no business, particularly in a punishing economy like the one we’re in, where the future is certain and their value proposition is unchallenged. While we’d like to think the future is predictable and that our product and service offerings are indispensable, the business landscape is always changing and what worked yesterday is probably old news today. Low overhead, cross training of employees, outsourcing, diverse vendor sources and minimal customer concentrations that handcuff pricing and product changes are some of the features of this fundamental concept.

Innovation is another powerful engine, one which middle market businesses often think is a fancy term best deployed by large companies with vast resources and deep talent pools. Wrong.

Innovation doesn’t require a lavish think tank or a formal R&D department. Simple changes to product features and service offerings, particularly when enhanced by vibrant pricing and refreshing marketing, qualify as innovation.

You must be eternally vigilant about changes demanded in the market and constantly update your value proposition. If you accept the premise that the principal focus of business strategy is to gain a competitive advantage, you understand that differentiating your company’s product and service offerings through innovation is one valuable way this can be accomplished.

Accelerated revenue growth is another hallmark of most successful companies, usually demarcated as something above 15 percent compounded annual growth. It’s true that unharnessed growth without the proper foundation and capital energy to propel it can be a treacherous path.

Yet, there’s no question that in the long term, the absence of meaningful growth will not create opportunities to build an organization of high performers because they won’t stay. Stagnation also stifles innovation and reduces the financial rewards expected by shareholders and other stakeholders to achieve the ROI commensurate with the risk they have assumed.

There is no single path to business success, and there are many less traveled roads that successful companies have traversed. Few of them have been achieved, however, without the integration of most of these core principles: 1] a sustained cost-containment culture, 2] a flexible organization built on low fixed costs, 3] a sense of urgency coupled with hard work and 4] innovation.

Check yourself and make sure these qualities are embedded in your organization’s DNA.

KBO.

******************************

This page provides the Print-Friendly Version of the article, as published in the North Bay Business Journal.

Any related materials or articles referenced in the published column, or otherwise applicable, are  referenced in this digital version of the article.

Vol. 55: The 4 Pillars of Long Term Success is a post from: Sword Tips – the Exkalibur blog

This page provides the Print-Friendly Version of the article, as published.

Any related materials or articles referenced in the column, or otherwise applicable, will also be referenced below:

The electronic version of the article, as published, may be found here.

**********************************************************************************

Article published -November 30 2009

Is fear or kindness the road to cost control? You decide

“Strive not to be a success, but rather to be of value.”

– Albert Einstein

Last time I presented the dichotomy of two opposing cultures and posed the question: If measured by financial performance, how can dramatically different organizations be equally successful? In this continuing series, we’ll explore some of the combinations and permutations of sound business principles and cultural patterns that often collide within an organization’s walls.

In many ways, it doesn’t seem fair that both charitable and churlish cultures can thrive. It’s easy to embrace the benevolent culture created by Sid Rich (we’ll call it Company South, “S” for Sid) as profiled in my last column.

That company deserves to be successful. Wouldn’t it be great if that was the company I worked for? Contrarily, when you look across the aisle at the rough and tumble world of Company North (“N” for Nasty), highlighted by temper tantrums, public floggings and a petulant devotion to spending a dime on anything, we’re either glad we’re not working there … or wishing we didn’t.

Some powerful lessons are evident as we compare and contrast these companies, their styles and culture, although some lessons are not very inviting. Some of you might be thinking, “whatever works,” that a few core principles like product differentiation, low cost and aggressive pricing offer a pretty simple recipe for financial success. If those concepts are working, why worry about the culture. It’s just whining, isn’t it? We’ll see as we go along.

One troubling lesson is clear: Loyalty, or at least fealty, can be bought. Company North was a revolving door of executives. The president left the company and returned twice, the EVP once, the CFO twice, all for a much higher salary, more accurately, combat pay. The psychic income came from the marketplace, which was gaga over the products that were flying off the shelves at top department and specialty stores across the country. Sales were booming so the opportunity to travel frequently to meet with retail executives was both alluring and satisfying – and a good excuse to get out of the workplace dungeon that served as the company’s headquarters.

At Company South, I don’t remember any senior executive leaving during the almost six years that I was there. Some probably should have, but the company was patient, if not indulgent, with certain executives that had “earned their spurs.” The company made these decisions consciously and continued its march to revenue and profit enhancement to support those investments.

Company South drew an important distinction between conscientious cost management and contentious cost reduction. It was vigilant about cost control but not at the expense of a strong culture that embraced hard work and spawned unwavering commitment. Its employees were engaged in the cost containment process and didn’t feel threatened by its intelligent application.

Contrarily, at Company North, no one was safe, and everyone knew that cost reduction, at all costs, was the presiding model. You could be in the line of fire yourself and not know it until the bullet hit. As a result, employees were defensive about their cost centers but eager to implicate other departments.

The economy in which we’re mired reminds us that cost management is a laudable goal. Frugality has been resurrected as the patron saint of a recovering economy.

In this environment, it’s easy to forget that people are the cornerstones of our businesses. Yes, there are difficult decisions to be made about people in a suffocating economy. But it can be done with dignity and honor, and employees can be engaged in the process as companies seek to survive and rebuild into 2010.

Some executives seem to believe that fear is a stronger motivator than love. A lot of management treatises conclude that such is the reality of the human condition.

We’ll continue to explore some of these business tenets when we’re together again and learn more about the ingredients that fostered the success of Company North despite its detestable culture. We’ll also see how essential principles can be applied like emery paper rather than a switchblade as we evaluate the success of Company South.

KBO.

Vol. 54: The road to cost control is a post from: Sword Tips – the Exkalibur blog