Category Archives for Tips

Managing for Financial Cycles

In September, 2001, after the twin towers fell in New York, the owners of Strauss Homes, a large homebuilder in Colorado, thought they were doomed.  After all, that event could paralyze a market (and it did for several weeks!)  But the CFO had a contingency plan in place for just such an emergency, and the company not only survived, they flourished.

You may not realize it, but 20% of economists are predicting another recession to begin in 2017… and another 30% believe it will begin in 2018!

Whether you believe this or not, the fact remains that all economies – and that means all business – is cyclical.  It might not be this year, or even next, but you can bet your bottom dollar that “what goes up” must eventually come down.  The big question is, will you be ready?

How to manage for economic cycles

         Use the 8 Ps to adjust your offer for each financial cycle.

Successful companies have plans that will allow them to withstand many different types of shocks to their industry and sector. You need to have plans and processes in place withstand an economic downturn (not if, but when that will happen) well before the event happens.  It’s critical to develop a planning matrix that considers implementing different strategies given the following economic environments: Operating at the status quo, operating in boom times and operating in a recession.

Rather than simply reacting to changes in economic conditions you will be far better prepared by taking the time to develop a comprehensive planning document that shows specifically what must be done when the economy takes a turn for the worse – or even a turn for the better. With this done in advance, then even catastrophic events like 9-11 don’t have to create chaos in your business.

Do you have enough acorns stashed away to make it through the next economic cycles? Do you have other sources of income? Can you survive a reduction in sales volume? It’s critical to develop a planning matrix that considers employing different strategies given the following economic environments:

  • Operating at the Status Quo
  • Operating in Boom Times
  • Operating in a Recession.

Entrepreneurial Seizure… Or Clear Purpose?

Michael Gerber in his book E-myth says, “Most businesses are created with an entrepreneurial seizure. One day, you wake up and say, ‘I want to start my own business,’ and off you go.” That ‘seizure’ might motivate you, but your business needs a clearly defined purpose that resonates with your buyers.  Our goal is to avoid the seizure and help you create a successful business that drives wealth.

The desire to run your own business (and achieve the rewards of ownership, i.e. freedom, lifestyle, peace of mind, financial security and wealth-building) is what motivates you, but your business will need a more objective Purpose – a reason for existence that serves your market. Your business should be designed to fill a niche or, more specifically, an evident need. The more clearly you state that purpose and fill that need, the better positioned your company will be to succeed. That Purpose drive every action and decision you make, and will propel your growth.

As an example, let’s say you determine your goal for your company is to be number one in every geographic market you enter. With that goal in mind, your preliminary course of action might be to expand into one to three markets with one or two new products, then leverage your success to continue expanding by duplicating what works.

To do this, you’ll need to give careful attention to developing a marketing plan using four of the 8 Ps: Product, Place, Promotion and Price.

Products must support your Purpose

Your Products must support your Purpose

 

What’s your purpose in 2017?

What is your purpose?

  What’s your mission in 2017?

To be successful, you must understand your purpose – what benefits your business exists to deliver.  That’s the message conveyed in your mission statement.  But it goes much deeper than that.

Every company that wishes to compete and succeed needs to be a well-positioned, well-defined business organization generating cash flow that encourages growth and leads to wealth building. This is a fundamental definition of a business that applies to nearly the entire universe of businesses. That is the purpose of the business.

Being well positioned is an external definition that means the company clearly understands its mission, vision, products, and target market – it lives up to its purpose.. It understands which trends in the competitive environment might be threats and which might be opportunities. It means understanding your price, and targeting the right client with the right message. The business owner leverages these trends to their advantage.

Being well-defined is an internal definition that means the company has well developed, well-implemented methods and systems for production, distribution, pricing, accounting, financial management, and human resources, to name a few. A well-defined business grows in profitability. It has methods and systems in place to produce a consistent customer and employee experience. It consistently produces and sells quality products. The company is well managed. When it makes a mistake, it learns from the experience and not only corrects the mistake but improves the flaws in the system that led to the mistake.

Tip – Getting paid from a business: If the purposel of a business is to encourage growth and wealth-building, then there are three corollaries to how you get paid during these stages. As a business owner, you should plan on getting paid in three different ways:

  • First, you should budget your fixed costs to include a yearly salary that, at a minimum, would equal the amount you’d receive doing the same work for someone else.
  • Second, you should budget a profit goal to compensate you for the risk, the sweat, and the stress you endure as a business owner.
  • Finally, you should get paid for the value you created when you reach your long term goals. At that point, you can either sell it, go public or double down to build an even bigger business.

What’s your game plan for the new year?

Every coach goes into each challenge with a game plan and a playbook. At least, every coach that ever expects to score points has their plays. Likewise, every athlete has their key plays memorized so that they can pull the one that best suits their immediate situation and apply it at the drop of the hat.

As business owners or sales professionals, we take the field every day with the goal of moving the ball forward, scoring points, and winning the day’s plays. And it’s a competitive field – every other business is vying for the same outcome.

Create your game plan with the 7 Numbers and 8 PsRegardless of the time of year that you are reading this, if you don’t have the next quarter completely planned out and your plays ready to initiate, then you’ve lost that quarter – the best you can hope for is to get your planning done for the remainder of the year and hope you can make up the difference.

Identifying the most important goals and creating a game plan to address them isn’t difficult. Your goals should be based on the 7 Key Numbers that drive revenue and cash flow. And the strategies, tactics and actions should then follow the 8 Ps. Plan as follows: Objectives > Strategies > Tactics > Tools > Implementation (8Ps – see diagram above).

From the 7 Key Numbers, decide which area of business you need to address. For each of the areas listed, you should have a projected goal. And if you’re monitoring those goals, then you’ll be able to compare your actual numbers with your projections and quickly see if your results are “thumbs up” or “thumbs down”.

I just recorded a live webinar on the subject of how to formulate your game plan, build a playbook and decide on the right plays.  You can view the video at http://cashflowengineering.com/playbook/.  At the end of the video you’ll be able to download 15-page a sample playbook, complete with instructions, to get you started.

 

Are You Pricing Your Products Correctly?

pricingOne of the most important decisions your company will ever make is the establishment of its pricing policy. The price of a product must be “right” to enable a company to penetrate a market, maintain its market position and produce profits. The price charged may be based on quite a few different factors, many of which will be peculiar to a particular industry. For example, consumer perception plays a critical role in the marketing of ice cream sandwiches versus Dove Bars. Both products are frozen ice cream snacks, but consumers view them quite differently, and are willing to pay considerably more for a Dove Bar than for an ice cream sandwich.

Effective pricing of goods and services depends upon realistically comparing your company’s pricing policy with those of major competitors. The gross profit margin between manufacturing and ultimate sales costs must also be evaluated.

The margin must be large enough to allow for:

  • Distribution and sales
  • Warranty
  • Service
  • Amortization of development and equipment costs
  • Price Competition–and, most importantly,
  • Profit

As an example, let’s say you’re about to complete your second year as the owner of a home building company. It’s been going okay, but just okay; you’ve got an office, a truck, and a coffee mug with the words World’s Greatest Boss printed on it. But where’s your sports car? Where’s your vacation home? Where’s your profit? It’s time to look critically at your pricing.

When I contemplate a price change in my company, I don’t just update our website with some new numbers. Instead, I gather my staff in a room and spend half of a day thinking through the ramifications of the change. The sales guys will have great insight into how the customers will react to change, while the marketing folks will understand how our message needs to change to communicate greater value. Our production staff will inform us of the cost of the materials or labor necessary to meet higher customer expectations, and the financial staff will supply insight as to how our cost structure will change to accommodate these new inputs.