The CPA as Adviser to Business Managers in Uncertain Times Building Better Business Ric Payne Principa 2010
A Quick Poll Are you an internal CPA advising and/or supporting your company’s management group or are you an external CPA acting as an adviser to your business clients? Internal External © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
What is a recession? The technical definition is two consecutive quarters of negative growth in Gross Domestic Product. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
What is the consequence of a recession? Reduction in consumer spending Decline in business revenue Decline in business profit Reduction in cash flow Falling asset prices (houses) & higher business & financial risk limits credit availability Reduction in capacity - layoffs © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
A Quick Poll How would you rate the current economic environment in terms of its impact on your company if you are an internal CPA or your clients' businesses if you are an external CPA? Very bad Bad Neutral Good Great © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
What is the consequence of a recession? All of this leads to … Business failures Unemployment Lost savings © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recessions are not the reason companies stall Bain & Company study: Only 1 in 7 companies achieve reasonable growth for 5 years straight despite their best efforts to do so. Source: Steve Mc. Kee, When Growth Stalls: How it happens, Why you’re stuck and what to do about it. Jossey-Bass, 2009. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recessions are not the only reason companies stall Characteristics of stalled companies: • • Higher team turnover Lower margins Weaker customer loyalty Tougher cash flow issues BUT!!! Source: Steve Mc. Kee, When Growth Stalls: How it happens, Why you’re stuck and what to do about it. Jossey-Bass, 2009. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recessions are not the only reason companies stall Reasons for stalled growth: • • • Issues involving trust and respect Inability to make lasting decisions Paralyzing lack of confidence Tendency to over think things Propensity to either resist change or switch directions too frequently Source: Steve Mc. Kee, When Growth Stalls: How it happens, Why you’re stuck and what to do about it. Jossey-Bass, 2009. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
How do business people often react in tough times? Cut prices to stimulate demand Cut costs to preserve cash WRONG DECISIONS © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recession is an opportunity in disguise Financial Performance 20% of top quartile firms Top Quartile 20% of bottom quartile firms Bottom Quartile 1990 -1991 Recession Source: Bain & Company (Harvard Management Update, Reprint U 0209 E) © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recessions are “intense crucibles of opportunity” 20% of top quartile firms 20% of bottom quartile firms More than 70% of these companies sustained gains made during the recession Less than 30% of these companies were able to regain their prerecession positions. 1990 -1991 Recession Source: Bain & Company (Harvard Management Update, Reprint U 0209 E) © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net Top Quartile Bottom Quartile
Recessions are “intense crucibles of opportunity” “Twice as many companies made the leap from laggards to leaders during the 1990 -91 recession than in the surrounding periods of economic calm. ” Good times hide the brutal reality of under-performance whereas hard times reveal real strengths and weaknesses. Source: Bain & Company (Harvard Management Update, Reprint U 0209 E) © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recession is an opportunity in disguise “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell” Sir John Templeton © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
State of the economy If you could choose a time to start a business Here ? Or Her e Time © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
State of the economy It’s also important to remember the direction of business cycles Time © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
An overview of your strategy Survival – Cash is King Order of importance: Cash, Profit, Revenue Get your house in order by doing what you should have done in the good times – act decisively and quickly Confront the brutal reality but take advantage of pessimism and weakness Master your emotions – fear or faith (it’s all in your head) Communicate honestly with all of your stakeholders Ensure your business operating model is sound before borrowing money (preferably do © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
An overview of your action plan 1. Assess your vulnerability 2. Stabilize your business 3. Take advantage of any weaknesses revealed by your competitors © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Assess your vulnerability Complete the Management Health Checklist © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
You need to know what your Margin of Safety is MOS = Current Revenue – Break-even Revenue B/E revenue = Fixed Expenses ÷ GP% Margin of Safety MOS = 40% © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
You need to know what your Margin of Safety is When you reduce your fixed costs you increase your MOS Margin of Safety MOS = 53% © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
You need to know what your Margin of Safety is If you have a low MOS your are exposed to higher business risk you therefore should have higher cash reserves to accommodate demand fluctuations. Margin of Safety © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Assess your vulnerability What would happen to you business if sales volume dropped by 20% and average prices dropped by 10%? © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Assess your vulnerability © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Assess your vulnerability © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
First some fundamentals The elements of business strategy Decisions drive outcomes The 4 ways to grow your profit Cash is king © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
The Elements of Business Strategy © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
There are just two generic strategies Low Cost Differentiation © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Strategic Options Average Price Profit Cost The Average Firm Profit Average industry profit Cost The Cost Leader The Differentiator Cost The mix © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Differentiator Options Average Price Profit Cost Same price Profit Cost Greater Market Share The Average Firm © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Cost Leader Options Average Price Profit Cost Lower price Profit Cost Greater Market Share The Average Firm © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Decisions drive outcomes Where your business is today is the result of decisions taken in the past. The quality of decisions depends on the quality of information they’re based on. Most people managing SME’s have a very weak MIS © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
A Quick Poll Do you believe the person (or people) you support in your role as a CPA truly understand the financial aspects of their business? Yes No © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
There are just 4 ways to grow profit Profit is a residual that arises as a consequence of decisions taken by management. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
There are just 4 ways to grow profit 1. 2. 3. 4. Increase the number of customers** Increase the frequency with which they deal with you Increase the average transaction value Improve the productivity of your business processes (i. e. reduce relative expenses) © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Where you need to focus on the revenue side • Price & transaction size • Transaction Frequency • Customer Defections • Customer Acquisitions © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Now let’s look at the expense side Revenue less Cost of goods sold – varies with the volume of sales (therefore called a variable cost) = Gross Profit (GP% = COGS/Revenue * 100) Less other operating expenses … = Net Profit © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
The drivers of business profit © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Pricing strategies Skim pricing Neutral Penetration pricing Penetration Skim Neutral pricing © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Price is the dominant driver of success The typical knee-jerk reaction of business people when sales drop is to lower price. This is generally the worst thing you can do! Unless you have a clear costleadership position relative to your competitors and customers are price sensitive © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Price discounting places enormous pressure on profitability and cash flow © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Price discounting places enormous pressure on profitability and cash flow Even if customers were willing to buy an additional 50% from you, do you have that much physical capacity to meet the volume? You can’t price yourself out of a recession! © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
In a recession pursue a neutral pricing strategy Focus on margin not revenue Offer a range of product or service offerings from low to high value – for low priced offerings you must reduce costs Articulate a quantifiable (or defensible) value proposition and price to capture a fair share of that value. Do NOT reduce prices across the © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
In a recession pursue a neutral pricing strategy Unbundle components of your offering Bundle additional components into your offering Turn products into services Turn services into products Don’t pursue unrealistic revenue goals Reduce capacity to lower your breakeven point © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
In a recession you should pursue a neutral pricing strategy If you have fixed capacity (relatively high fixed costs) consider “value” pricing. What can we learn from the pricing process used by airlines that could be implemented in any business? Your customers are not all equally profitable: you need to know which ones are! © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Cumulative Customer or Product Profitability Graph 100% Services or products Insurance business Source: Bob Kaplan and published in the Balanced Scorecard Report (August 2005) called “Add a Customer Profitability Metric to Your Balanced Scorecard" © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Customer profitability analysis Revenue from sales less: Cost of goods sold Discounts given Returns & allowances Post sale support/service costs Finance cost for payment terms given (or taken) Bad debts or write-offs Order taking & fulfillment Etc. . © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Product profitability analysis Revenue from sales less: Cost of goods sold Discounts given Returns & allowances - restocking Post sale support/service costs Finance cost for stock carrying Insurance & storage costs Order placement & stocking costs Etc. . © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Sales Volume – the second part of the revenue equation Transaction size Sales function Number of transactions New customers Repeat transactions Marketing & Sales function It’s all about customer service and creating a WOW experience © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Sales Volume – the second part of the revenue equation You can never make it too easy for a customer to deal with you. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Southwest Airlines We don’t penalize you for changing your mind You don’t pay extra for your bags © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
The key to marketing: your business value proposition Don’t confuse your product or service with what benefit your customer gets from dealing with you and the experience the customer has. Here’s the key: What business are you really in? © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Customer Loyalty is the key to long run profit growth You need to understand the lifetime value of a “good” customer © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
d e ed e xc O U T C O M E et m tm et no AT RISK LOYAL ADVOCATE SEARCHING AT RISK LOYAL GONE SEARCHING AT RISK dissatisfied e satisfied dazzled PROCESS Source: Ron Zemke © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Are your customers loyal advocates? The Ultimate Question Net Promoter Score = P% - D% Fred Reichheld, The Ultimate Question © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Now to your Expenses With a 30% GP, a $1 saving in represents sales revenue of $3. 33 not required. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
The Expense Paradox Expenses are normally the things we look to cut to improve profit …but …. They represent the cost of resources used to generate revenue so we need to take care in what we cut © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Return on Expense Analysis What are we getting for what we’re investing? and Is there a better way to deploy these resources? © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Discretionary Versus Nondiscretionary © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Expense control – the 8 sources of waste from: Eliminate Overproduction Waiting Unnecessary transport Over-processing (poor design) Excess inventory Unnecessary movement Defects Unused creative capacity It is generally accepted that work flow improvements can increase productivity by 15% or more. Get your team members involved in the process © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Eliminate Waste The BIG question: How can we do it better, faster, cheaper? © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
The management of Working Capital is a key to Cash Flow management As your business grows its revenue, and increases the level of activity needed to drive that revenue growth, it increases the need for working capital. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Say … You need an extra 200, 000 Revenue to finance Working Capital but your 1, 000 after tax net profit is only profit % so unless Net 120, 000 10% you inject more funds into Net profit 100, 000 the business its cash Tax (40%) 40, 000 position will decline by NPAT 60, 000 80, 000 Working Capital 200, 000 WC turn (days/year) 73 Suppose everything doubles 2, 000 10% 200, 000 80, 000 120, 000 400, 000 73 days © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
What can you do? Improve operating efficiency and/or Improve asset utilization efficiency © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Immediate actions to improve working capital management Avoid discounting so you can maintain margin Eliminate unprofitable or low profit contributing product lines and customers Get bills out quickly and accurately (send a pre-paid postcard with your invoice asking to respond it there is any question with the bill) Do not show ageing, just show amount due. Shorten payment terms Follow-up overdue accounts with a phone call asap © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Immediate actions to improve working capital management Thank customers for prompt payment Undertake thorough credit check for all new customers Place credit limit on new customers and review as required for all customers Review your suppliers and deal with the most reliable ones only Seek to extend your payment terms in return for something e. g. minimum purchase commitment, exclusive supplier agrt. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Immediate actions to improve working capital management Implement a robust financial management monitoring system Reforecast sales, profit and cashflow monthly Work with a Daily Cash Report – actuals daily, forecast weekly Involve your team in the process of working capital management and keep them informed (but not alarmed) © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Leadership and management are critical in tough times Keep your people informed, aligned and accountable Prioritize your time to keep focused on the areas you can control Establish 4 -6 specific goals you plan to achieve each quarter Cascade these down in to specific monthly & weekly goals and activities Conduct daily briefing sessions with your key people © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Leadership and management are critical in tough times What gets measured gets done …establish a suite of Key Performance Indicators for your business e. g. # transactions & average transaction value, NPS, sales pipeline, conversion rate etc. If you have any weak (incompetent or indifferent) team members on your roster, let them go now and replace them with better talent. If you have to contract your business do it deeply and quickly. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Leadership and management are critical in tough times Keep your banker informed about where you are – always be honest and always deliver on your promises. Reliable and timely numbers are the food of champion managers – make sure your accounting system is working properly. You will need financials within 7 days of month end. This is a key element of your management Control Plan. Appoint your accountant as your external Chief Profitability Officer s/he will help you develop your 1 –page business plan and will hold you © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recap Recessions are necessary They sort out the strong and the weak They are a window of opportunity to grab a competitive advantage To take advantage of this time you need to think and act counterintuitively © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recap Recession solutions should focus on: Customer & product profitability analysis Pricing & margin management Strengthening the Balance Sheet Working capital management Customer service initiatives Management control plan © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
Recap The big decision is to know where you should allocate your resources & this requires that you understand where you create value and your costs Growth and long term profitability is not driven by the state of the economy, it’s driven but by the state of your mind. © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
A Quick Poll What do you think economic conditions in the next 12 months will be like? Worse than the past year About the same Marginally better A lot better © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
At the end of the day it’s up to you! www. principa. net 775 -826 -7771 © 2009 -2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of © 2008 -2009 Principa. rights reserved. Principa. www. principa. net
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