Finance is the study of funds management. Finance deals with the concepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted.
If your business grew by 5% last year, should this year’s goal be 6%? If your segment of an industry has been shrinking by 8% each of the last 3 years, should you scrap your growth goals and only focus on cost cutting? Or are a series of sub goals related to increased productivity, product improvements, and targeted marketing campaigns behind your growth goal?
Our best results have been achieved when clients have embraced transformative goals.
It is much more rewarding to intentionally create a company that is designed to be profitable than arbitrarily incrementally reactively grow into an awkward less profitable size.
When you truly know what drives the profitability of your business, you know to look for more of that. For example, operational excellence can drive profitability. One service oriented business may have operational excellence when it has a 1/2/6 ratio of account executives/project managers/ associates. That company’s growth goals could be based on maintaining that ratio. The question becomes how do we create a company that attracts gross revenue that fuels 6 account executives, 12 project managers and 36 associates? Operational excellence for a distributor might be realized through a 1/6 ratio of hubs to branches or always hitting a specific return on total assets (ROTA).
One of the many responsibilities of an accounting department is to track key ratios. The best CFOs know how to identify and recommend a few critical key ratios that are closely related to what drives profitability for the specific company. And their choice go much deeper than simple gross profit.
The attributes of the sales people can simultaneously be the optimizing and limiting factor when profitability is driven by consultative selling. The sales department may track average order size, closing rate, gross profit, orders per month, orders per sales professional, etc. They may even track the time from lead to close (buying cycle). I’ve seen powerful transformative growth goals result when the VP Sales and CFO confer and create combined ratios (magic number) like Average Order Size X Closing Rate/Length of Buying Cycle. Maybe the optimum Order X Rate/Cycle value is achieved through a specific combination of experienced and new sales people. Maybe the value of their “magic number” goes up when each sales professional has a book of 50 targets instead of 200.
Do you really know the most critical numbers behind what drives your profitability? Could you generate a transformative goal based on a “magic number” created only for your business?
Maybe your company is within a segment that provides innovation and leading edge products so you can use premium pricing. But far more companies function around mature products and aren’t viewed as “cutting edge”. Their (maybe your?) pricing is under pressure every day.
Two businesses that contacted us recently each need to generate a minimum of 33% gross profit on their projects to cover reasonable operating expenses and produce a modest net profit. But they each keep finding themselves responding to corporate bids that provide a skinny 5-7% gross profit. That’s if everything goes well! If they win the bids, they’ll end up with a net loss of 25 – 27%. In other words, every time they go after those bids, they are unknowingly volunteering to donate huge sums of money to corporate clients.
How can bright executives of midsized companies do that? Gross profit blindness happens when folks are in survival mode for too long. These two companies are both involved with commercial facilities. The recession of 2008 impacted the commercial facility industry hard. That recession was the implosion of the financial and real estate markets. So, yes, in many ways, the cannibalization of the facility management industry is a lagging side effect of the recession of 6 years ago!
Lingering high unemployment within an industry can also fuel gross profit blindness. Purchasing agents and operations managers have increasingly taken vendors for granted. When abusive behavior becomes “the norm,” vendors can actually develop a “victim” mentality. It is a powerful downward spiral. A vendor that has tolerated verbal abuse and below reasonable pricing can also lose objectivity about the value of their products and services. When customers yell, the vendor can have a knee jerk reaction and quickly accept the blame. Increased “write offs” make low gross profit contracts even worse. Every time the vendor does that, the customer is rewarded for negative behavior…so, like a spoiled child who gets what he/she wants when he/she has a temper tantrum, the abusive behavior escalates.
We have recommended different approaches to each of these businesses. No two situations are exactly the same. In one case, we recommended that the executives start targeting their marketing and sales to a completely different industry. We suggested that they do some field trips/site visits to see how people in other industries treat one another. They have tolerated so much blame, last minute changes, screamed demands, and unreasonable pricing they have lost perspective and think everyone is awful everywhere.
The other company has connections with trade association leaders who want to spearhead an initiative addressing culture, behavior, values, ethics, shared responsibility, fairness, etc.
What would you tell a woman who lives in an abusive marriage to do? She has lost her self-esteem. She has come to believe that she doesn’t deserve any better. She has lost objectivity about her skills, abilities, and value. Business owners who become beaten down and think/act like victims also need to go elsewhere to recover!
“Entrepreneurs should raise as little [venture capital] as they can until it works for their business, then raise as much as they can to scale,” says prominent angel investor Gil Penchina. “If you raise too much before the correct formula is achieved, it can mean bad news for the valuation outcomes.”
Exitround (a hub for small tech M&A deals) recently reviewed relevant factors of 200 deals. In their study, the startup companies that had raised $3-10 million in venture capital actually ended up with lower valuations upon exit than startups that had raised $2-3 Mil in venture capital.
That conclusion matches what we have been seeing over the past few years. As specialists in accelerated growth for mid-sized companies (not startups), we have noticed that companies often had to overstate their valuations to attract $5-10 Mil in startup venture capital. They then struggled to actually become the valuation they had promised.
The leaders of those companies tend to be the people who forget that big ticket exits typically require about 10 years to happen. Therefore, those entrepreneurs end up spending an inordinate amount of their time chasing higher and higher levels of venture capital and/or glamorous IPOs…when an acquisition could have been an excellent exit strategy within five years.
What could your existing business do to deserve the infusion of $5 Mil of growth financing? Now that’s a more exciting question to ask.
Remember it? Directed by Robert Redford, the movie was based on Steven Pressfield’s 1995 book with the same name. The actors include luminaries Jack Lemmon, Will Smith, Charlize Theron and Matt Damon. This was Lemmon’s final movie which makes it even more important to many people.
In 1931 (during the depths of the Great Depression), the City of Savannah, GA sponsors an exhibition golf tournament with great golfers Bobby Jones, Walter Hagan and the town’s golf prodigy and hero, Rannulph Junuh.
As he caddies, wise Bagger Vance (played by Will Smith) provides sage advice to help Junuh recapture his “authentic swing.” They talked very little about the fairway, sand traps or greens. They talked about post-traumatic stress, the meaning of life, guilt, regret, a broken heart, giving up, accepting responsibility and hiding. You know…light conversation (lol).
As many golfers of today can tell you, finding one’s authentic swing in golf is not just a matter of repetition. Golf is a mental game as much as it is a physical one. When a golfer’s muscles are tight from being angry at work, his/her slice or hook returns on the golf course. When a golfer’s optimism or confidence is compromised, the short game on the green becomes another nightmare. An executive’s capacity to make great strategic decisions is another version of one’s authentic swing.
Presidents of privately held mid-sized companies often don’t have time to play golf or have another similar outlet that offers feedback on whether the president is still centered. It is impossible to maintain your authentic swing when you aren’t centered. Often the all-important feedback comes in the form of poor business results. The president’s loss of his/her authentic swing is taken out on the business.
Sometimes executives just keep showing up when he/she knows he/she is “just not right with the world”. Continuing to show up is important, but just going through the motions can solidify bad decisions (a hook or a slice). Finding what keeps you centered is worth the effort. An executive coach could be your Bagger Vance.
One of my roles is as a growth financing intermediary. Recently, I have been seeing more and more situations in which owners of mid-sized companies haven’t learned enough about the various types of growth financing and are inadvertently chasing the wrong kind of money.
One of the most common mistakes is the assumption that the company must be able to follow through on its plan ALONE, and the only thing a possible funding source will provide is MONEY. Financing from a commercial bank works that way (loans and lines), but just about every other type of financing involves PARTICIPATION. A venture firm won’t want to stand on the sidelines if/when the decision to invest has been made. They expect to be required to provide an expert “at the table” (on your board) to help growth and success happen. Similarly, growth financing achieved through joint ventures involves an expanded leadership team. Also, corporate sponsorship isn’t about handing over money to just watch your company “do its thing.”
Non-profit organizations have figured this out. Maybe their development officers can only talk about their cause when requesting contributions from foundations, but when corporate sponsorship money is involved, the corporation’s marketing department expects their sponsorship money to fund a partnership, produce something exciting, fit their messaging and accelerate the generation of prospective customers…which after all is the goal of marketing.
The folks at Frito-Lay are intimately involved and visible at the golf tournament they sponsor. The people from Dunkin’ Donuts are involved with the Thanksgiving Day Parade in Philadelphia. They don’t just hand parade managers a check and then stay home. IBM and AT&T have been involved with the National Association of Women Business Owners (NAWBO) for over 30 years.
Over the years, my companies have successfully worked with over 50 repeat corporate sponsors (IBM, SNET, Bell Atlantic, Bell South, Northern Telecom, Wachovia, Entrepreneurial Edge magazine, etc.). That would not have happened if the projects were small or if they weren’t economic development strategic initiatives to help mid-sized companies to continue to grow.
Does your organization have a big bold project in mind that is not happening only because you have convinced yourself that you must go it alone and you lack sufficient funds to execute on a large scale? Why stop? Why ask for a loan or a line when you can do something that could really make a difference with corporate partners?
IEG is an excellent resource for information about corporate sponsorship. I agree with their promotional description: IEG is the global authority on sponsorship and the leading provider of sponsorship consulting, analytics, measurement, valuation, research and publications. Visit IEG at www.SPONSORSHIP.com.
Read health industry or business publications, and you’ll soon notice the name Amy Mansue. She’s the CEO of Children’s Specialized Hospital. NJSPOTLIGHT.com recently recognized Mansue as a “Top Healthcare Policy Analyst.” Plus NJBIZ includes CHILDREN’s SPECIALIZED Hospital on its list of “best places to work.” With an ever expanding geographic reach and 12 locations, CHILDREN’s SPECIALIZED Hospital’s services now include inpatient, outpatient, rehabilitation, long term care, medical day-care, early intervention, etc.
Mansue clearly leads the process of identifying opportunities for CHILDREN’s SPECIALIZED Hospital but is the first to point out that CFO Joseph Dobosh plays “an important role in the expansion.” Mansue particularly values that Dobosh is a “visionary.” 17% of the 1,200 fte report to CFO Dobosh.
TRINITAS CEO Gary Horan also speaks highly of their CFO, Karen Lumpp. “In this ever changing healthcare environment, a CEO needs a CFO with the background and expertise Karen brings to the table,” says Horan. TRINITAS is the result of combining Elizabeth, NJ’s three previously struggling hospitals. 10% of TRINITAS’s 2,000 FTE report to CFO Lumpp.
John Sheridan is the CEO, and Doug Shirley is the CFO of COOPER University Health Care in southern New Jersey. 400 of COOPER employees in this $900 Mil/yr entity report to CFO Shirley. Well known for its trauma center, COOPER has expanded dramatically over the past several years. “We recognized the need to increase our access to clinical trials,” said CFO Shirley. COOPER had already looked at 4-5 leading cancer hospitals when MD Anderson contacted COOPER. CFO Shirley played a key role in deal structure and making sure managed care rates were in place during the creation of the recently opened $100 Mil MD Anderson COOPER Cancer Center. “The two-way due diligence process spanned about a year,” said CFO Shirley.
These CEOs and CFOs agree that today’s hospital-based CFO must have extensive experience handling major projects. The CFO doesn’t just “crunch numbers” any more. Dobosh, Lumpp and Shirley all view their CFO role as predominantly focused on major strategic initiatives. It is very telling that these hospital CFOs view ICD 10 compliance as a “short term project.” CFO Lumpp shared that hospitals complying with ICD 10 coding by October 1, 2014 involves “quadruple the information, a big learning curve and dual coding.” CFO Dobosh shared that the project to transform hospital records to a MediTech paperless system involved “a few years and less than $6 Mil.” Clearly, changes in coding and going paperless would have been viewed as major projects for a CFO not very long ago. When CFO Shirley isn’t structuring a joint venture with the #1 hospital in the country, he is leading COOPER’s Lean Six Sigma initiative or teaching niche surgeons about supply costs. When CFO Dobosh isn’t structuring the financing for a new service and/or location, he is “retiring debt, refinancing to direct placement or thinking about Triple-B bonds.”
Clearly, today’s hospital-based CFO must have strong communication skills. No longer do CEOs and board executive committees consider strategic options and then consult the CFO. The CFO is “at the table.” Hospital CFOs are expected to make frequent presentations at executive team and board meetings. It can take as long as five years for a CFO to earn trust in a hospital setting, so the CFO must demonstrate that he/she is motivated to help find ways to help other professionals use state of the art technology, treatment techniques, etc. Today’s CFO cannot sound like a negative bean counter.
Perhaps more than in any other industry, health care-based CFOs must be level headed and accept that the rules will constantly change. CFO Lumpp says that hospital CFOs must “replace the word hospital with health care systems.” The reality is “by the time a brick-and-mortar project is built, it will already be out of date. Even insurance could collapse into a new system,” predicted CFO Lumpp. Apparently, she is correct given the recent headlines about Saint Barnabas’ plan to introduce its own health insurance plan.
It is a challenge given the limited time available, but health care-based CFOs must commit to continuous learning. CFO Shirley reads industry publications like Healthcare Financial Management (HFM) Magazine, Healthcare Executive, Modern Healthcare and HealthLeaders Magazine. CFO Lumpp warns that a health care CFO’s time can “too easily be chewed up by simplistic popular ideas that don’t consider the 40+ variables involved.” CFO Dobosh is convinced that his auditing background, experience as a referee for high school basketball and leadership level participation in the Healthcare Financial Management Association (HFMA) have helped him. He suggests that someone who is interested in becoming a health care-based CFO should “look for mentors and get experience handling major projects within the industry.”
Clearly one of the most important decisions made by a hospital CEO is the selection of the CFO.
You have been considering your options, running scenarios, and have come up with what you think is a great idea. But your idea can’t possibly be in another person’s budget or plan. You just came up with it. Both parties usually don’t think of a possible deal or new working relationship at the same time. It’s human nature (and more so these days) for a person to be inclined to say “no” if a deal wasn’t his/her idea. So, the first step in deal negotiation is to help other people open up, get caught up, and not feel rushed. If you push to sell your conclusion, you are very likely to prompt a negative response.
It can help to alternate between divergent and convergent thinking when discussing new working relationships or deals. Once you think you have discovered a good option take a step back and start your discussion with the other party with the premise that there could well be ways that the two of you could work together that would be mutually beneficial. That way, the first discussion is exploratory and expansive (divergent). Together, you generate multiple ideas and approaches.
The operative word here is “together.”
The second time you meet, you can shrink the options down to 3-4 that have merit, which is convergent thinking. Together, you can divide up the “homework” to be done. One of you may research the joint venture option. The other may spell out how money would flow if it should be a strategic alliance instead. Or, one of you might clarify how a partnership might work while the other thinks through how a loan could be executed without a partnership involved.
The operative word here again is “together.”
Deals often fall apart in the early stages because one person was too focused on a single conclusion or only one side is doing due diligence. Deals also fall apart when one participant reveals worries or focuses on possible problems way too early in the process.
If there is consensus on a possible mutually beneficial approach, the third meeting can be dedicated to how to prevent problems, minimize barriers to success, address worries, etc. Aired before concept consensus, those concerns just sound like fretting. Divergent thinking is involved when listing what could go wrong and what might be needed to address issues.
The fourth meeting is the most important in most deals. What will each entity actually commit to doing? Who else will be needed in order for the concept to pay off? What is the best timeframe? What ROI is reasonable for both? Is there a fallback or contingency plan?
In my opinion, lawyers should not be involved in deal discussions until the fifth meeting. Their role is adversarial by definition and certainly feels divergent. Business leaders need to know what they want and be centered, so they can provide clear directions to the attorneys. Life is good when attorneys are asked to explore a concept’s viability versus identifying all the ways it may not work.
The sixth meeting is sometimes referred to as the “champagne meeting”. Together, agreements are signed. The launch is rehearsed. Key people who will make the concept pay off are present.
Again, the operative word is “together.”
When companies approach us at The Service Industry Fund™, our first step in due diligence is about scalability. If it doesn’t seem to us that the key players in the business have what it takes to resolve over-dependence on an individual, detailed analysis of market potential, product viability, or cash flow is a waste of their and our time.
A business Is STILL too dependent on an individual IF:
This list could become much longer… and is very important.
What does it say about entrepreneurs who need growth financing but turn away from honest, direct, successful entrepreneurs (who want to invest in a few enterprises other than their own) to look for money from secretive, game playing sharks?
That may all be true. But my observation recently is that lots of entrepreneurs don’t recognize that their business could benefit from an infusion of capital until it is almost too late. They keep trying to prove they can do it themselves. At the same time they may not recognize that obtaining some outside guidance does not diminish them as leaders. Ironically, the most valuable element of involving angels, private investors or venture capitalists in a business is the advice that comes with the money.
When the question about “could our business benefit from capital infusion” comes into an entrepreneur’s mind, I often recommend that they look for nice non-celebrity wealthy people. They can talk and get to know one another. The entrepreneur can lower his/her guard. And if a pleasant person who has recently had a “nice liquidity event” from his/her business, hear them out. Maybe you both can enjoy the journey of taking your business to the next level. After all, he/she just did that for his/her business.
Important subjects like growth financing do not always have to start as a fight or contest!