Archive for April, 2010

Am I Making Money? What Happened To My Cash?

April 30, 2010

by Doug Smith, President, The Woodhaven Group

Those are the 2 most basic questions every business owner, CEO, or senior manager should be asking.

Things move fast in today’s business world.  The economy, government, competitors and consumer groups are constantly challenging our way of doing business.

We have a plan in place and doing our best to grow our company everyday.  Is it working the way we want?  There are daily KPIs and dashboards in place to help us.  To me there is only one true analytical measurement and that is the monthly financial statement. Yes, I said monthly.  This is a place not to skimp on spending.  Quarterly or year-end reports are way too late.  Also, I suggest using a CPA.  If you cannot afford one full-time then use a reputable one on a part-time basis.

Monthly financial statements should be 2 things:

  • Accurate:  you do not have the management time to go back and correct bad numbers.  Besides, credibility is damaged when outsiders (think lenders) see you revising  results.  It’s a red flag that there may be bigger problems.
  • Timely:  you want to take actions to correct problems.  Getting a late financial statement means you lost another 30 days to improve.  I want to see financials no later than the 10th of the following month.

Still not convinced you need monthly financials?  Here are 11 important reasons you do need them:

  1. Are you getting the results you planned to get?  If so, then good. If not, then you want to know why, where and by how much you are missing your budget.  Was your original budget even accurate?
  2. It helps hold a manager accountable.  The management team deserves to know what areas are performing and not performing. Each of the managers needs to know how they personally are doing.
  3. There is always an area of the company that needs fixed.  This will help to clearly identify what it is and if progress is being made.  If there are multiple problems then the numbers will help you prioritize what to attack.
  4. If you have borrowed money then your lenders will expect financials.  If there are Board of Directors or advisors they will want to see the direction of the company.  Remember, there may be outside audiences wanting to see your financial results.
  5. The obvious will hit you between the eyes—– good or bad.
  6. Is there a 2-3 month trend occurring?  It could be in overall sales, profit or gross margin.  You also may find a clear trend in an important line item that is costing you profit and cash.  An example might be sales dropping while marketing and accounts receivable are increasing. 
  7. Is a branch location or product line not performing?  Without the ability to measure results you may waste valuable cash and management time  trying to grow the wrong part of your business.
  8. If you operate a seasonal business you need to know your off-season financial performance as well as whether the company executed as planned during your best months.  Example:  retail at Christmas, landscaping during the spring/summer.
  9. It can help your tax accountant by showing him/her whether you are making a profit during the year and at year-end.
  10. It helps you manage and plan cash flow needs based upon what is actually happening.  Do your cash flow budgets need to change going forward.
  11. If you are in an industry that blindly shares financial information, it lets you compare how you are doing against the top performers. 

Daily and weekly KPIs are critical to the success of a business but the monthly financial statement is the final scorecard that tells you if the sum of all your actions gave you the results you wanted.  You may discover the KPIs were wrong.

You must know what is happening with your cash and if  the business is profitable.

A timely and accurate financial statement will do that for you.

Pay For Performance Can Increase Productivity And Business Cash Flow

April 27, 2010

by Doug Smith, President, The Woodhaven Group

When a company improves productivity a positive result should be an increase in business cash flow to invest to grow the business.  Pay for performance compensation structured properly can be a driver of productivity.

There has been a trend for some time to reward those individuals who deliver the best results by shifting from straight salary to a lower base pay with some kind of incentive attached.

The intent is to not over pay nonperformers and give the top performers an opportunity to earn more than they were making before.

Many sales forces are used to being paid 100% commission.  That means no sales, no pay.  That also means reduced overhead for the company when sales are slow.  But what about other areas of the company that traditionally are not on pay for performance?  My experience has shown that you can often direct the outcome you desire by compensating an employee on results they can impact.

While 100% pay for performance will not work with all positions, a portion of some of the compensation for certain key people can be based on incentives.  

A few examples:

  • Make 10% of a retail store managers pay tied to reducing shrinkage.  They cannot stop all theft but they can reduce paperwork errors, a contributor to shrinkage.
  • Tie 20% of an accounts receivable manager’s pay to a positive change in days outstanding of accounts receivable.
  • Make a portion of a marketing manager’s pay tied to a reduction in marketing  % against net sales.
  • If customer service has been a problem tie 15% of a fulfillment manager’s pay to a reduction in customer complaints or an increase in repeat purchases.       

You get the idea.  Once you start doing this a next step can be compensating a team of individuals sharing a common goal.

Certain key points need to be kept in mind:

  1. Clearly define measurable goals when using any pay for performance.  Do not make it subjective.  Make sure the employee agrees the goal is attainable.  If the goal is too far out of reach the employee will give up and morale will go down.
  2. Make it clear you are rewarding measurable results and not effort only.  While everyone’s extra effort is expected and appreciated,  it’s the cash flow from increased results that pays the bills.
  3. Show the employee how much he or she can make if the goal is attained.  Then work with them to identify tactics and action steps to be taken to hit the goal and earn the extra income.
  4. Have  meaningful inital and ongoing  coaching sessions  to help the employee hit their goals.  In the beginning some employees may think the company is using this type of compensation to just reduce pay.  Actually, a well put together  incentive compensation program is a win-win.  The company does better and the employee earns more.
  5. Attempt to pay the incentive compensation each pay period.  If that is not practical then pay at least once per month.  The faster you can pay for the results achieved the more motivated your employee will be. 
  6. If the employee challenges the accuracy of the incentive calculation stop everything and verify that it is correct.  If it is not, then cut a new check immediately.

Well structured pay for performance can drive productivity, increase cash flow and retain top performers.

Employees in successful pay for performance programs never want to go back to only a salary or hourly pay.

Give it a try to see if it works for your company.

Increase Cash Flow With A Unique Value Proposition Strategy

April 27, 2010

by Doug Smith, President, The Woodhaven Group

What makes your company unique from the competition?

Can you ask a higher price and get it?

What is your competitive advantage?  Can you say it in about 10 words?

A unique value proposition is what your company is promising to deliver to a prospect that is better than anyone else can deliver.  A well executed value proposition delivers benefits that will address your customer’s wants or needs in ways that competitors wish they could duplicate but cannot.

If you have no value proposition or have an unclear value proposition then you will not be different from the hundreds or thousands of companies competing in your category.  You will get lost in the crowd.  

Your business will find itself competing on price as the differentiator and we all know there is always someone who is willing to keep dropping the price to get the deal.  This will kill marketshare, gross margin, profit, cash flow, and eventually your company.  Don’t let the competition dictate your pricing, profit strategy, and your future.

Here are a few thoughts to guide you when considering your value proposition:

  1. You must first know who your prospective customer is and what they want.  What is their pain?  What is their want or desire?  Do they think of your company first as a source to address that desire or pain?  Once you have identified your prospective customer, take a sample group and ask them what their biggest need is.  You will soon see a pattern that will give you direction.
  2. Be specific about the benefits you deliver, how they address your prospect’s wants and needs,  and how they differ from the competition.  Also, keep in mind that benefits differ from features.
  3. Show that your company has experience delivering this value proposition to others.  Third party testimonials often close a sale.
  4. Is your company capable of consistently delivering your value proposition at the quality level that you promise and your customer expects.  In otherwards, don’t over promise and under deliver in an attempt to be different.
  5. Can your value proposition be easily duplicated by others?  If  it can then do you really have a unique value proposition?  A $1.00 menu item or free delivery are examples that have quickly become the norm in some industries.  Make it hard for others to copy what you do.
  6. A well thought out value proposition becomes an effective guide for strategic and tactical decisions involving product development, customer communication, marketing, recruitment of talent and overall financial planning.
  7. Can the value proposition evolve over time as your customer’s wants and needs change?  If so, it will allow your business to think strategically and lead your customer forward with game changing innovations.

A unique value proposition gives your company a road map to growth and increased cash flow. It will make you different and allow your business to ask and get a higher price for what you offer.

Don’t try to be all things to all people. 

You just waste cash doing it.

Put Your Employees On The Cash Flow Team

April 26, 2010

by Doug Smith, President, The Woodhaven Group

Employees look to management for guidance or direction on what to focus on, what is important, what direction the company is going…… simply, what is your priority.

If the employee sees that the owner passionately believes in the concept of generating more cash flow then do not be surprised if you start seeing good results throughout the organization.  Employees will find ways to internally generate cash that you have not even thought of.

There are many ways to reinforce this mindset.  Here are just two:

  • As CEO or owner personally have a column in the company newsletter dedicated only to cash flow successes.  Show examples in the last month of additional money freed up as a result of actions by employees or new systems implemented.
  • Post in the employee break room or lounge a certain metric or dashboard related to cash flow that shows positive progress such as reduction in days outstanding of accounts receivable, increase in sales, or an uptick in inventory turnover.  Any of these metrics can have a column of their own in the newsletter.

The employee will take great personal pride in being knowledgeable about what is important to the success of the company.

Make sure the employees are the MVP of your cash flow team!  Do it by making sure you as management have open ongoing communication on this most important part of your business success.

Look Up! Look Down! An Inventory Secret to Save Cash

April 24, 2010

by Doug Smith, President, The Woodhaven Group

The ability of a company to successfully manage levels of inventory of everything from raw materials to key component parts to everyday supplies can be the difference between a profitable and positive cash flow business versus a cash strapped company on the brink of going under.

There are many inventory management software packages and inventory management models to buy and keep inventories in alignment.

One of the oldest forms of inventory control is the Economic Order Quantity developed in the early 20th century.  Many other successful forms are in use today like ABC analysis and Vendor Managed Inventory.  The latter is often used by big box stores like Wal-Mart.  The automotive companies have been particularly successful over the years with Just In Time inventory management.  In my opinion, effective supply chain management has been one of the most important drivers of productivity and growth in America over the last 20 years.

The smaller business, however, has historically not been as sophisticated in assuring proper inventory levels are maintained regardless of the type of business. 

Most small and medium sized companies either have a home grown system or no system at all.  As a result I have seen a tendency for purchasing agents, buyers, and even owners to purchase a little extra of most inventory items so they are never out.  This mistake costs the business tremendous amounts of cash that should be used instead to drive sales or reduce debt.  On top of that many smaller businesses fail to calculate inventory turnover nor age their inventory.  As a result no action is taken on old obsolete inventory.

Will owners invest in some sort of inventory management software to free up valuable cash?  Often times the answer is no because the owner is satisfied with the “system” currently in use to buy inventory.

This tip is for these companies.

Most smaller companies I visit have stock rooms and inventory shelving filled with inventory ready to be used.  On the surface everything looks great.  However, when you look at top shelves and the lowest shelves and ask questions you will invariably find very old or even dead inventory.  The fast turning inventory is at eye level where it can be easily accessed.  The old and dead inventory is never touched.  In fact, sometimes there will be an inventory tag on this merchandise so if a physical inventory is taken in the future the count is already done!  All I see on these shelves is money not being used. 

Here is the solution for these companies.  Eliminate the top and bottom shelves.  Take them out.  Sounds crazy but it will work because now the purchasing agent will be forced to have a model inventory to fit the reduced space.  The luxury of overstocking is over.  Could the company error by having too little inventory.  I have not seen that occur. 

What does the business do with the old inventory?  Convert it to useable cash by returning it to vendors, having a Saturday garage sale, or selling to other companies.

Is this approach drastic and crazy?  Probably is, but I have seen it free up much needed cash.

Businesses run on cash.  Not on dead inventory.

Network Upfront To Increase Cash Flow From Accounts Receivable

April 23, 2010

by Doug Smith, President, The Woodhaven Group

Great news!  Your company just landed that big account everyone had been pursuing for over a year.  You took it away from a major competitor.  Sales and marketing is talking about the importance of networking and relationship marketing.  The sales manager has visions of bonuses yet to come.  The head of the company (is that you?) holds an all company meeting to announce the victory.  Someone puts the new client’s CEO on a Christmas list to receive that special cheesecake that goes to top customers only.  Well, good for you.

I’m sure everyone throughout the company will make sure the product or  service is delivered as promised and on time.

There is one important point to keep in mind.  The new relationship is not truly culminated until you are paid for all the things you are going to do for this new client.

Here is where a bit of networking and relationship building needs to occur that usually never happens.  I suggest that before the ink is dry on the new agreement that your company’s accounts receivable manager has a friendly one on one kick off conversation with the accounts payable manager of your new client.  If possible a personal meeting would  be better.  At this meeting it is important to identify all the key points for both sides that will assure that  invoices will be processed and paid as expected. 

 Topics that should be addressed:

  1. When will the invoice be sent.
  2. How will the invoice be delivered.
  3. Who the invoice should be sent to.
  4. What is on the invoice:  Example:  purchase order number, invoice number, date of invoice, quantity, individual pricing or progress payments, terms including due date, late fees, discounts for early payment.
  5. Review the monthly statement you will send and encourage them to reconcile it.
  6. How the payment will be made:  by check, ACH, wire, credit card, other.
  7. Who to call when there are questions or mistakes on the invoice or payment.
  8. What is the internal process for getting an invoice approved and paid at your client.  Is there a time lag?  Who has to approve payment? Are there any documents that need to be included? How can the process be expedited?
  9. Expectations of on time payment.

All of the above creates discipline between the two companies in the invoicing and payment process.  More importantly, a personal “real person” relationship has been developed early in the engagement before any problems occur.  This will make it much easier to remedy any glitches or situations that may come up since there is now a face with a name on the other end.

It would not hurt to periodically call the accounts payable manager and thank them for being an easy customer to do business with.  Nurture and maintain the relationship at this level as business grows  between the two companies.

There is one other benefit that will come out of this.  If your client finds themselves struggling sometime in the future, payments to their vendors may slow up.  Don’t be surprised if due to your close relationship that your company is kept current while others find payments being delayed.

All of this helps assure that cash keeps flowing into your company so more money can be invested in marketing to bring in other big clients like this one.

And about that  cheesecake for their CEO.  It might be nice to send the accounts payable manager at least a box of cookies.

Add-on Sales: An Easy Way To Increase Sales and Cash Flow

April 22, 2010

by Doug Smith, President, The Woodhaven Group

Would you like fries with that?  We have all been asked that at the drive up window.  If you said yes then you just participated in an add-on sale.

This is one of the easiest and best ways to increase sales and so many businesses do not have a strategy in place to capitalize on this  easy path to more cash flow.

Why isn’t it used more often?  Some sales people and sales managers believe that attempting to add-on may upset the prospect and kill the original sale.

My experience is that rarely occurs.  Why?  You have either just solved a real problem for your prospect or addressed a need, or fulfilled a desire.  Either way the prospect turned buyer now feels good about you, your company and your product or service.

You have persuaded them to cross an important psychological barrier and make a buying decision.  In the buyer’s mind the hard work is completed and the stress of decision-making is over.

Some tips to maximize the potential of add-on sales:

  1. Don’t attempt an add-on sale until you have a commitment on the core product or service the prospect was wanting or needing.
  2. Make sure the add-on directly relates to the product or service you sold them.  Example:  It makes sense to sell tennis balls with a new tennis racket.
  3. An add-on is still a sale so make sure you explain how the customer will benefit from this extra service.
  4. Track what the most successful conversions of add ons are when offered to a customer.  Don ‘t assume you know.  Test different add ons and let the consumer tell you which is most often preferred.
  5. Train the sales staff how and when to offer add ons.  This training should include scripting, role-playing, and recording on video.  When done correctly, an add-on is a natural extension of the existing sale.
  6. Often when executed well an add-on sale will be sold at full price resulting in increased margin.
  7. Add on sales do not always have to be sold at the point of sale.  They can be as a result of a follow-up contact when thanking the customer for making the purchase.  Internet marketers often do this on the thank you page. Some companies sell the add-on at the time of installation or delivery.  An example might be extended warranty or a maintenance contract.  You should be catching the customer at their highest point of satisfaction.   

A properly executed add-on sales strategy delivers added value for your customer.  For your company it can deliver increased sales, more cash flow, lower marketing costs and more profit.

As an owner or senior manager make sure you commit to this important business strategy.

Someone is going to make that add-on sale to your customer.  

Make sure it is your business and not your competitor.

Take Aggresive Retail Clearance Markdowns To Increase Cash Flow

April 20, 2010

by Doug Smith, President, The Woodhaven Group

Retailers every year take big risks and invest huge sums of cash in inventories in the hopes they have identified this season’s “hot” style wanted by consumers.  These “hot” styles may be in fashion apparel, home furnishings, accessories, electronics, or even shoes.

Regardless of product, all types of merchandise share a few common traits.  The inventory setting on the floor is usually paid for and at that point it is only worth what someone will pay the retailer for it.  The goal is to have fast inventory turnover and put the cash back to work with a flow of new fresh exciting styles for the next season.  The buyers who can correctly identify these trends are worth their weight in gold.  However, in spite of how good the buyers are, a fact of life is that most merchandise is marked down and not sold at full price.

If an item does not move at full price the goal is to find the “right” price point and convert the merchandise into cash.  The faster a retailer can do this the better will be their cash flow and overall return on investment.

There are 3 types of markdowns:

  1. Preseason promotions to beat competitors and, in some cases, to identify what the hot items will be.
  2. Promotional markdowns taken in season to support traditional store wide events or annual events like Christmas Sales.
  3. Clearance markdowns to liquidate remaining inventory  

This last type of markdown, the clearance markdown, is where many retailers hurt their cash flow the most.

The reasons for clearance markdowns can range from simply buying the wrong styles to buying too much of a good item to buying a hot trend as it is ending.

There are strategies that can minimize the cash flow and profit impact of clearance markdowns:

  1. Don’t fall in love with the item.  If you personally made the selection it is hard to admit you made a mistake and you possibly might be the only one who likes it.  Take the markdown and forget about your pride.
  2. Don’t wait until some pre-ordained period to take the markdown.  If you bought 10 of an item and not one sold after a reasonable period you need to get it marked down.  The customer has spoken.  The item will not get better.
  3. The first markdown is critical.  Get the item to a price that will likely move it out the door.  Some retailers have a fixed markdown pricing chart they follow.  I don’t agree with that.  Some items need to be priced deeper than what is on some chart.
  4. It is likely you have identified “magic” price points that move clearance items.  Group various original price point items into these clearance price points and you will see inventory sell quicker.
  5. Many retailers refuse to markdown an item below what they paid for it.  Forget that strategy.  Even if the amount you receive is small you will be able to take those dollars and immediately invest it in fresh new merchandise that may sell at full price. You can then reinvest these new dollars in even more merchandise that could again sell at full price.   However, none of this can happen if you stubbornly hold onto an item because you refuse to lower the price below cost.
  6. Remember this.  Even an item marked down that sells adds to your total sales column. Until that happens it is just inventory….. that is probably overstated in value on your financial statement.
  7. Finally, a clearance markdown sale is a chance to reward your loyal customers who pay full price with an opportunity to get a bargain from your mistakes.  It helps you and its a good deal for your customer.  It’s another reason to keep them coming back into your store.    

Don’t forget that buying mistakes will happen.  The only sin is not acting quickly enough to convert those mistakes back into cash to continue to grow your business.

Video Training Is A Great Cash Flow Strategy

April 19, 2010

by Doug Smith, President, The Woodhaven Group

I was on the debate team at Purdue University and thought I was really good.  That is until they decided to videotape a practice debate prior to the National Championship.  It was ugly.  No one had to say anything to me.  My introduction was bad, my counter arguments were bad, my conclusion wasn’t much of a conclusion.  My debate partner was not much better.  To make a long story short, we immersed ourselves into  practicing and changing our approach.  More video taping followed.  In the end we finished as National runner-up.

What did I learn from that experience?  Two important things:  1.) training is critical to achieving your goals, and 2.) using video can be the difference between success and failure.

As CEOs, owners, and senior managers we must drive more productivity into the selling process.

With video training sales people can critique themselves in role-playing situations.  You can be there to coach them.  They can make mistakes in practice without losing a sale.  I have successfully used video to train sales associates selling furs in department stores as well as in home salesmen pitching replacement windows.  In every case the employee was their own worst critic.  In every case they appreciated the opportunity to use technology to improve their performance.

There are many benefits to effectively using video training.  Here are just a few:

  1. The sales person can make more money and become more self-confident.  Having seen what they look like in a presentation removes a great deal of doubt in their mind.
  2. If you have successful people then you have less turnover in your sales force.  That translates into less cash spent on recruiting replacements.  More time can be invested taking the sales staff to the next level instead of training new candidates.
  3. When you do hire new sales staff (as you grow) personalized video training can be an added value that differentiates your company from the competition.  Top performers are always wanting to improve.  Finding a company with the tools in place to do that for them gives you a hiring advantage.
  4. Consistency in the execution of a successful selling methodology is important to closing sales.  You can put your #1 sales person on video, the trainee can watch and then record themselves and compare.  It will be obvious to them where they need extra work.
  5. You can have a more motivated sales team as a group since more members will be successful, sales will be increasing, and they feel good that the company is committed to their success as a team.
  6. Video training can identify a potential underperformer early on.  You don’t have to waste valuable leads to find out that maybe you made a bad hire.
  7. When a top sales person goes into a slump, they can record their presentation and compare against an earlier video of themselves. It will be apparent to them what needs worked on.
  8. Video training can be used in customer service for those employees who come face to face with upset customers.  Different situations can be role played on video.
  9. Training and, in my opinion, video training separates top companies from those who can’t succeed.  You can end up taking their marketshare.
  10. This type of training is not only effective but also inexpensive.  No need to invest big dollars in elaborate systems. Take a video camera and just start recording.  Put the results on CD or a thumb drive and play it back.
  11. Finally,  properly executed video training can increase sales, decrease % marketing cost,  increase gross margin, and increase average sale. 

What does video training have to do with cash?

All of the above combined improves the cash flow of the business.

Cash is a competitive weapon!

When it is invested in video training it becomes a great business strategy.