Look Inside, Outside and Across

Try to run your car while neglecting the engine’s oil and the results are predictable. The same is true for running your business without proper attention to managing cash. Where should you focus your attention? Three areas: Inside. Outside. Across.

#1 Inside. Start with the “inside” of your company when managing cash.  First, you want to have a firm grasp of all revenue and cash assumptions in the forecast. Do this by going right to the source: the sales organization. With tools like salesforce.com and other CRM-related software, there’s really no excuse for surprises or gaps between revenue forecasts and cash. The CFO and VP – Sales should be talking weekly about incoming orders and forecast realization. Consider too, moving to rolling forecasts as opposed to only annual plans. Weekly, monthly, quarterly rolling forecasts will give you a closer, more dynamic look at the organization. Don’t, however, discard your in depth 12-month look at the organization.

This is the third of a four-part series from TechCXO focused on Managing Cash and Optimizing Profits. See Part 1: Math Behind Growth. See Part 2: Should CFOs Advise Sales?

Second, in tough sales seasons, the sales organization might be more inclined to create special terms. That may be OK, but the CFO should be on top of all of the financial and credit terms the sales team extends to prospects, and should have the power to approve or reject exceptions to standard terms.

Third, manage commissions wisely. A good rule of thumb is to hold back the last third of sales commissions until the money is in hand and not just housed in accounts receivable.

#2 Outside. Your second area of focus is “outside”, meaning tight management of receivables and vendors. When receivables go outside of your Net 30 Day terms, start calling customers on day 31, not day 40. Call consistent payment laggards even a little earlier.  You will be setting expectations for how you expect to be paid.  You also want to be prepared to be tough with stopping shipments and services for customers who are slow to pay. This is particularly important with newer customers.

While you may not be granting much grace in your receivables, you may want some grace extended to you from your vendors. Depending on your relationships with key vendors, you may need to stretch typical Net 30 days to more like Net 60 days. Be warned, however, staying under Net 60 in your accounts payable will keep you off your vendors’ radar, but you don’t want to go out to 75 days. Your reputation runs a major risk of getting dinged, and there could be pricing implications… word spreads fast.

#3 Across. By “across”, we mean that you leverage every tool possible across available financial vehicles. For example, we
always recommend to any company with cash balances of six figures and above to have sweep accounts, as in “sweep” your cash into an interest-bearing overnight account.

Another caveat: while it’s good for your cash to be working for you, don’t keep your primary cash accounts too close to zero.  Banks need to make money and they are always watching. Have a chat with your banker, to make certain that you are in sync. They may be more than glad to execute a sweep account if they manage your “available” cash for you . You’ll need a track record of a healthy cash account just for aesthetics and if the need arises to get some additional capital. Investors and creditors like to see healthy cash amounts.

If you think your CFO’s contribution to increased profitability is only from cutting costs, think again — you may be looking past your biggest pro-growth asset.

A New Attitude: CFO as “Growth Strategist”

A CFO’s job is to spend money. That’s right… spend money. The association with finance executives and cutting costs has twisted the true function of your top finance executive. The CFO pays employee wages, pays vendors, pays taxes, pays rent, pays benefits, pays utilities. They are constantly spending money. And yet the association with CFOs as an agent for growth and profitability is almost non-existent. That’s a mistake.

Since the CFO is the biggest spender in your company they also know where the money is best spent. Here are three ways to leverage a CFO or finance executive’s capabilities to increase margins:

1. Understanding the Math behind Growth – In a typical company a 1% improvement (increase) in your price will generally create an 11% increase in operating profit. Let’s repeat that: a 1% improvement in price will create an 11% increase in profit.
By contrast, a 1% improvement in variable costs gives you a 7% increase in profitability and a 1% improvement in fixed costs gives you only a 3% profitability bump. We naturally turn to CFOs to help improve costs but do we bend their ear about pricing? What
about discount incentives or pricing inventory for clearance, promotions, or incentives?

An experienced and strategically-minded CFO should have a seat atthe table when setting prices, discounts and contract-terms for your company.

2. Add Value First, Reduce Costs Second -This dovetails with the math of point #1. Instead of just seeking to take costs down by 10% (you shouldn’t stop trying to do that), also look to add value that will justify a sales price increase of 10%. What services an features can be added inexpensively? Added value equals higher margin gain. Customers will expect you to pass costs savings onto them anyway so look first at adding value, benefits, margins, such as more expensive warrantees before reducing costs.

3. Looking Under the Right Rocks (for Costs) – Most organizations will look to attack costs where they “feel” things are the most wasteful. Bad idea. You need to prioritize the search for cost improvements by tackling the largest dollar chunks in the product/service production and delivery stream. For example, if you produce a $100 product that costs $10 for assembly and $50 for key components, but you know your assembly has excess costs in it, don’t waste time in the $10 assembly system – go immediately to key components. Maybe you can shop for new component vendors or change the contract structure.

You can engineer-out more dollars attacking big items than you can in sweating out more efficient operations.