6 Gaps In Business Insurance That Can Destroy Cash Flow

by Doug Smith, President, The Woodhaven Group

Business insurance can be a godsend when something unexpected happens that can cause the daily operation of your business to be interrupted.  It is cash well spent.

Most owners and CEOs do a good job of anticipating what needs to be covered and making sure the company has sufficient insurance.

But we are living in a different time.

What used to be enough insurance coverage may not be sufficient today.  It is more important than ever that your insurance agent understands your business and works closely to protect the company and it’s shareholders.

Here are 6 areas to discuss with your insurance agent and assure yourself that in case of loss the company is covered to the extent it needs to be.  If not, the gap will come out of the cash flow of the business:

Business Income Insurance:  If your business is destroyed by fire, tornado or some other catastrophe you need to cover income and expenses until the company can be fully operational again.  Most businesses have coverage in this area.  The problem may occur if your insurance coverage levels are for the size of the company 5 years ago.  Has the coverage been updated to reflect your growth.  Maybe the policy got switched to a house account at your agency and no one has updated this important coverage.  Also, make sure you are clear what conditions have to exist to get reimbursement.  That may vary by industry and type of company.

Law and Ordinance Coverage:  You have successfully grown the company in an older building to save on overhead.  Now it burns to the ground.  Check now to see if your coverage is for replacement to the level it was before.  If it is then you may have a gap if building codes have been modified.  There may be new construction codes to address hurricane, tornado or other environmental needs.  I have also seen aesthetic codes requiring newly constructed buildings to have brick exteriors.  Ask your agent about law and ordinance coverage and if it is applicable to your business.

Business Personal Property:  Do you have a business that requires taking important tools and equipment offsite?  Some business personal property insurance policies only cover  loss within 1000 feet of your property.  If you put tools in a van and go to another location you may not be covered.  The solution would be “transportation coverage.”  Ask your agent to verify if this is an issue with your policy.  If it is then it needs corrected now.

Electronic Data Processing Insurance:  We are in the age of the computer.  Viruses, power surges and humidity levels could damage your software or hardware and result in loss of important customer data.  This could mean you no longer can access accounts receivable reports or customer databases.  If your company has developed an in-house CRM system you could have a real problem if the data is infected by a virus.  It is called EDP insurance.  Do you have it?  Do you need it?

Cyber Liability Insurance:  This was not necessary years ago.  However, if today your company has a website that captures email addresses and sends enewsletters or sells products over the internet, this may be coverage you need.  Issues can range from computer viruses unknowingly being passed on, identify theft or even copyright violations arising from content on your site.  Ask your agent what coverage is appropriate for your type of business.

Umbrella Liability Insurance:  This is additional liability coverage on top of regular liability coverage.  Do you have enough umbrella liability?  If your company vehicle hits a surgeon and he cannot use his hand to operate again are you sufficiently covered?  Maybe your company is not at fault but many umbrella policies will cover legal fees to defend your position.  If you have high enough liability coverage it gives the carrier all the more reason to mitigate the claim down or defend you against frivolous lawsuits.  Umbrella policies tend not to be expensive so make sure you have enough coverage.

As you can see, insurance has to be managed like everything else in your business.  Do not take for granted that your coverage is sufficient.  

In order to protect your business cash flow take the initiative to make sure your insurance agent is up to date on all aspects of your company.

Save Time And Cash With A Few Good Performance Measurements

by Doug Smith, President, The Woodhaven Group

Next to more sales and more cash most owners and managers would list a desire for more time in their day.

How does an owner keep track of what is happening in the company when he or she is consumed with meetings, addressing emergencies and fulfilling commitments outside the office?

It is a challenge to say the least!

I have found there are a few measures of performance I can access daily and weekly that quickly tells me if things are going as planned.  These measures almost act as early warning signals that a small problem may be about to become an all encompassing issue the whole management team will have to address.  I refer to them as “How are we doing” metrics.

Every manager and every company is different.  I encourage you to identify a few key metrics that will work for you and your business.  My suggestion, however, is to not overdue the number of measurements you are tracking.  If you are having to dedicate staff to just preparing a few indicators for your review then you are probably looking at too many.

The measurements should be easily accessible and help you improve the company.  If they cannot aid in increasing sales or cash flow then maybe you can review that data later.

Over the last 20 years there has been a mini industry created in performance measurements.  Many PhDs and consultants have made a career in marketing  “Balanced Scorecards”, “Strategy Maps” and other indicators of productivity.  I find most of them interesting but often too costly to prepare and sometimes ignored by management teams.  If you use these and they work for your company then by all means you should continue.

The measurements I use appear to be obvious ones but that is OK.  They have worked for me.  Maybe they might work for you:

Cash Report:  This is a daily report that  shows the bank balance, deposits made, payments transmitted and ending balance or float.  I never want to be surprised on cash, whether it’s coming or going.

Daily Sales:  I know my sales plan and this tells me if we are tracking to hit it.  If it is a company that issues leads daily I will want to know conversion rate.  If there are multiple locations, product lines, or divisions I will want to know if all of them are tracking to hit their monthly sales goals.

Accounts Receivable Aging:  I want to see this weekly and determine who owes us money and if the  amount is increasing.  In my opinion, we deserve to be paid for the quality work we did and I am very aggressive in wanting to be paid on time.  I will also do a mental calculation of days of sales outstanding.

Accounts Payable Report:  I want to see this weekly and compare the balance owed against cash on hand, jobs moving through the system and new sales being generated.  In the event I get a call from the CEO of my top supplier, I always want to know what we owe and if we are current.

Marketing Percent to Net Sales:  This is normally a monthly report that tells me if we are overspending to create sales.  Many companies have gone out of business from spending too much in this area.  If sales are trailing the plan dramatically during the month I may cut back some area of marketing before the month is over.

These are the key performance measurements I stay on top of.  There are many other reports that I will review from time to time such as Revenue per Employee, Revenue per Visitor on a website and, of course, monthly financials.  But these 5 performance measures are important to me.  You may have different ones that work for your business.

Regardless what metric you use there are 3 important elements to keep in mind with each report:

1. Establish a beginning baseline from which to measure results.  All measurements need a starting point.
2. Always look at  trend over time of any performance measurement.  Are the current results just a blip or is there a pattern occurring?  Some management teams like to illustrate trends with a graph for impact.
3. Take action.  Unless the results were a blip then, at a minimum, you need to ask more questions or look at additional data.  Is there a problem with pricing, a promotion, or a key account?  Are there quality issues preventing collection of money due?  Information is only good if you do something with it.

A few good performance measurements can save time, increase your personal productivity and improve cash flow and profit.

Make sure they exist in your company and are used.

Use The Lifetime Value Of A Customer To Increase Cash Flow And Profit

by Doug Smith, President, The Woodhaven Group  

To grow your business you need to retain your most profitable customers.  By keeping a customer who is profitable for the company it adds stability to the organization while increasing all important cash flow.

Lose customers and your business will find itself spending expensive upfront marketing dollars always acquiring new customers to replace ones that went to the competition.  Marketshare does not increase, profit becomes stagnant at best and cash flow suffers.  Consider it lost opportunity.

Some owners and CEOs say that they are satisfied to always be prospecting for the next new customer.  Losing customers, in their opinion, is just a cost of doing business.

These owners would not think this way if they took the time to calculate the lifetime value of a customer.  What is a customer worth?  Knowing this number gives the owner information that helps in developing and executing sales, marketing and operational strategies.  This knowledge becomes a competitive weapon allowing your company to utilize unique promotions or incentives since it becomes easier to identify your true return on investment per customer.

The lifetime value of a customer is really the profit generated from the sales of a customer over the liftime of buying from your company.  It is best to calculate using  group averages broken down by product category.  This allows you to then decide where to spend the most dollars to retain a specific group of existing customers.  Also, based upon the lifetime value of certain groups it shows marketing and sales where to invest the most dollars to acquire new customers.

The best example of explaining  the lifetime value of a customer calculation was in a Harvard study years ago. Read the Harvard customer study here.

As a CEO of a department store I not only knew the lifetime value of the lady shopping but also the lifetime value of her husband and 3 children as a family group.  I knew that if I satisfied the 3 children growing up shopping in the store I would have their 3 families as lifetime customers when each of them got married and had kids.  You can imagine how I calculated the lifetime value of a multigenerational family.  In some cases I had 3 generations of the same family as loyal customers.  It made an easy decision to happily accept that returned gift after Christmas.

The takeaway:  Know the lifetime value of your customer and never take that customer for granted. Now when you lose an upset customer because of poor customer service you know exactly how many dollars just walked out the door.

Consider Early Pay Discount To Increase Cash Flow

by Doug Smith, President, The Woodhaven Group

Many industries have a traditional preset discount off the invoice for paying early.  As the customer I used to take advantage of an 8% discount if I paid my supplier by the 10th of the following month.  The invoice was due, otherwise, at the end of 30 days.

As a provider of a product or service your business may want to consider implementing an early pay discount. The discount may only be 1-2% but will be enough to entice some customers to pay early.

The key decision for your company is balancing the bottom line profit impact against the potential for increased cash flow from your customers.

Here are some thoughts to guide you in your decision making:

1. Does your industry currently offer a discount for early pay?  If not, then this could be a way for your company to differentiate itself from the competition.  The result could be added sales as the early pay discount is perceived as added value by your company and you can steal marketshare. The fact that the customers you acquire would have strong cash flow (evidenced by the ability to take the discount) would be a plus. 
2. An ongoing argument against early discounts is its potential negative impact on profits.  Can the discount be passed on as a price increase?  Your customer may not balk at a 1-2% increase in prices if it has been some time since the last increase and you provide a high quality dependable product.  If you are concerned about implementing a price increase at this time  then wait and piggyback the increase on top of an increase in price in the future.
3. What is the interest cost to your company to currently fund  accounts receivable?  This should be factored into the profit computation.
4. Also, determine if there is operational savings realized by having less accounts receivable to collect due to accelerated payments.
5. Not everyone will take advantage of the early payment discount.  For those who do not, if a price increase is in place to support the discount, then your company just realized more gross margin dollars and percent.
6. You cannot let a customer pay late and take advantage of the early pay discount.  An aggressive accounts payable manager will attempt this if you do not catch it and cut it off.  Assume this will happen.  
7. Invoices need to be received at the same time the product is delivered so that your customer has time to process the early pay discount. You do not want to give your customer an excuse for taking the discount late.  
8. Your best creditworthy customers will take advantage of the discount.  Prior to your company offering a discount your customer was most likely aggressive in delaying payment as long as possible to preserve their own cash.  The trade-off, as discussed earlier, is faster availability of cash for your company back against the discount cost. 

Which is the best way?

In my opinion, I want to find a way to make an early pay discount program work with a minimal cost to my profit.  I believe the quicker I can get use of cash the faster I can put it to work and  the greater potential there is to increase my overall return on investment.

I would be interested to know what your experience has been.

Am I Making Money? What Happened To My Cash?

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

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

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.

Have You Listened to Your Customer Today?

by Doug Smith, President, The Woodhaven Group

We live in a day and age where we can instant message  what just happened in our life, twitter about the last play in a ball game, and let our facebook friends know who our new friends are.

I feel like we are spending a lot of time talking at people and we call it communication.  I call a lot of it noise.

I truly believe social media can be a game changer in the future, but when it comes to business, listening to your customer is critical to making sure your company is delivering the kind  of value you hope your customer wants.  Tracking comments about your company on twitter can be revealing but not always accurate.

As an owner, CEO or senior manager I am going to suggest including something radical into your communication strategy.  Pick up the phone and call random customers 1 or 2 times per week.  Do you want to differentiate?  That will do it.  Have marketing give you a list of customers and call one on the way home.  Make it a random list.  If you call 2 per week that is 100 unfiltered personal conversations you will have in a year.

I guarantee you there will be patterns in the feedback you receive that will surprise you.  Your company may be stronger in some areas than you think, weaker in areas you thought was a core strength.

Listen to what the customer says, how they say it and the inflection in their voice.  Google analytics can’t give this to you.

What are you going to say?  How about this…..

Hi, I’m Bob Jones, CEO of Acme Products and I personally wanted to call to thank you for being a customer of our company.  Do you have a moment I could get some feedback.

Great!  I just want to get a little information to help us improve:

• In your opinion, how are we doing?
• What is the one thing you have liked most about your experience with us?
• What is the one area you feel we could improve upon?
• If we were to add one product or service that would help you, what would that be?
• If the opportunity arose, would you feel comfortable referring us to someone else?
• Have you referred us already?
• Are we easy to communicate with?
• How could we improve in that area?

The key to all these questions is to:

1. Listen to what they are saying
2. Ask relevant follow up questions
3. Don’t make it an interrogation
4. And, you want top of mind answers which will most express their true feelings

At the end, thank them, give them your cell phone number and tell them again on behalf of all the employees how much you appreciate them as a customer.

Talk about something going viral. The word will spread about the CEO who personally calls his customers.

The statisticians will complain that the sample is not large enough to do a linear regression. That’s OK.

You will have just gotten much closer to your customer base and learned what’s working and not working in your company.  I have found customers to be brutally honest.

Listening can be a beautiful thing.  Done effectively,  listening will increase sales and cash flow in your company.

If  I can help in this area feel free to contact me.

Knowing Your Target Customer Will Save Cash

by Doug Smith, President, The Woodhaven Group

It drives me crazy the amount of cash that is wasted from poor marketing strategy or just dumb advertising.  John Wanamaker, the department store owner in Philadelphia, once said that “50% of my advertising is wasted. I just don’t know which 50%.”  I can help here.

Lets go back to marketing 101 to learn how to save cash.  It’s really very simple. Know who your customer is and know who is not your customer.

Once you have figured that out then determine what their urgent needs and wants are.  Then make sure your product or service delivers value at a reasonable price to fulfill that want or need.  Also, make sure that value delivered surpasses anything a competitor to that target group is offering.  After that,  stand behind the sale and develop your target customer into a raging advocate for your company.  How do you do that?  By showing you care about their opinion by listening to what they have to say and quickly solving any problems that may come up.  

Channel all of your marketing efforts into owning that target niche.  Focus your media advertising, public relations dollars, event advertising and Internet investment towards your target market.  Google can help you on that last part. You will see a higher return on  investment from your cash spent.

Put away your shotgun and get out the rifle. Or, another way of putting it…. don’t sell bikinis to Eskimos and don’t market down parkas at the equator.  Got it?  Good!!