RealTime CEO Blog > ROO – Return on Operations 
Financial Forecasting – Introducing a Powerful New Module of the RealTime CEO Software
For many executive teams, financial forecasting is a cumbersome, time-consuming and wildly inaccurate process. It’s so frustrating that some private mid-market companies have given up on it entirely.
With the new forecasting module in our RealTime CEO software, creating a comprehensive forecast is as simple as clicking a button.
Our new forecasting module takes your current and historical financial data trends and projects it 12 months into the future, automatically building comprehensive forecasts for operational P&L and balance sheet items, along with all of your key RealTime CEO metrics.
This eliminates the biggest source of headaches in the forecasting process – building the initial 12-month forecast (including the balance sheet items).
The software delivers your financial forecast without the need for accountants or Excel gurus. It allows business leaders to have a business conversation about the future while adjusting business assumptions with a few clicks or numerical adjustments.
Enabling Financial Forecasting
Access your financial forecast by clicking on the Forecast Assumptions option in the main navigation on the left.
The software will then allow you to select your 12-month revenue target, giving you the options of:
- Using your current trailing 12-month revenue
- Manually entering a target
- Selecting a percentage change from your current trailing 12-month revenue
Once you’ve determined the value of the revenue, you then have the option to set your monthly targets evenly or use the “seasonal shape” of the forecast by replicating the monthly totals from the previous year.
This provides the starting point for your business conversations about the landscape ahead.
Adjusting the Forecasting Assumptions
During your monthly SON communication business discussions, you can adjust your forecast as needed by selecting the category to edit.
Then, adjust specific months either by selecting a percentage change or by typing in a specific number.
Using Forecasting
Once you’ve enabled forecasting, you have the option to view it throughout the software.
Full Demonstration
Here is a complete video demonstration of how to use the financial forecasting module.
To get started, subscribe here.
Getting the Most Out of the SON Communication Process
If you’ve attended one of my workshops, you’ve heard me talk about the value of the SON communication process – a simple exercise that can dramatically improve your business.
(Here’s an introduction to SON communication along with a discussion of how to select your team and lead your SON communication meeting.)
One of the greatest values of your monthly SON communication meeting is that it can remove silo mentality. To do that, you must have a robust monthly leadership conversation. Some of you have asked for more guidance to ensure that your team has a lively discussion, so that’s the focus of this post.
SON communication is built around 3 questions to challenge the strategic, operational and numeric changes happening around your business.
Question 1: “What information has come to light in the last 30 days that changes our view of the future?”
There is no fixed way to answer this question but try and resist going to the numerical too quickly. Keep the conversation at a higher strategic level. (Question 3 will give you plenty of chance to go numerical).
Below I have provided a series of bullet points to assist you in the early implementation of this process. As time goes on, make this list your own. Remove bullets that don’t relate to your business and add others that do. The bullet points are listed under 2 headings: things that impact demand for your goods and services and things that impact your ability to supply.
Demand Factor Questions
- Are opportunities increasing or decreasing? (This facilitates a discussion the size of the pie, or market size.)
- Is our market share changing? (Focuses on your slice of the pie.)
- Has our strategic marketing or tactical sales approach changed?
- Is our product/service mix changing?
- Has our market mix changed and are we considering new markets?
- Are there any opportunity to launch new products or services?
- Has our pricing landscape changed? (An opportunity to increase prices vs. pressure to discount.)
- Have we heard a “quirky” anecdote as to why our business has been preferred/differentiated from the competition?
- Have our existing or new competitors changed their approach?
- Have projects slipped back or come forward?
Supply Factor Questions
- Have there been any changes to our current or potential human resources?
- What is happening in our supply chain – availability / reliability / price?
- Have we changed any internal systems (i.e. has a mistake resulted in an improvement in internal systems to ensure it doesn’t happen again?)
Question 2: “How will our behavior change to create value or mitigate risk?”
Question 3: “What will be the numerical implication of these changes?”
Use the Crystal Ball feature of the RealTime CEO software to challenge possible actions identified during questions 2 and 3 of the SON discussion. This will ensure that you get the most out of your monthly meetings.
Eight Levers That Control the Value of Your Business
If you’re a CEO focused on making an immediate improvement in your performance, which we typically measure by quantifying the amount of value you’re creating in your business (and we call this your ROO%, or Return on Operations percentage), there are eight key actions you can take, or levers that you can “pull,” that will directly affect both your cash flow and your ROO%.
Four of these deal with inputs and the other four deal with outputs.
Inputs
- Revenue Collection (AR)
- Inventory Management
- Supply Chain Management (AP)
- Fixed Asset Utilization
Outputs
- Price Strategy
- Volume Strategy
- Direct Cost Control
- Indirect Cost Control
Shown graphically, they look like this:
The input levers focus on making improvements to balance sheet items while the output levers focus on making improvements to income statement items.
Here are some examples of actions your team can take to increase your ROO%.
Inputs
- Revenue Collection – Tighten your collection procedures to reduce your overall total AR days by at least 1%.
- Inventory Management – Implement a lean approach to inventory holdings.
- Supply Chain Management (AP) – Add extra days to your payables (you know the AP rule – pay as slowly as you can WITHOUT jeopardizing your supply arrangement).
- Fixed Asset Utilization – Consider additional shifts to better utilize existing assets that may be idle for many hours a day.
Outputs
- Price Strategy – Increase your prices 1% across the board.
- Volume Strategy – Introduce a cross-selling campaign to your existing customers by promoting another of your products or services to increase your units sold.
- Direct Cost Control – Renegotiate your buy agreements with suppliers to reduce your direct costs and maybe even extend payment terms.
- Indirect Cost Control – Reduce the scope of work of an external vendor (by shifting some work in-house where it’s completed at a lower cost) or ask for vendors to provide a discount in exchange for a longer term.
When we’re working with clients or educating a Vistage or TEC group, we use a sensitivity analysis to show how a 1% change in each of the above can improve cash flow and operating profit and ultimately ROO% and the value in the business.
For some businesses, it’s significant. Actually it’s a game changer!
If you’re a RealTime CEO Software user, you can model this with your real financial data using the Crystal Ball feature. Once you’ve completed the onboarding process, select the Crystal Ball option from the left hand navigation, click on the arrow next to each level and input your potential change.
The resulting change to your ROO% and operational cash flow will display in the top graphs, with your core data displaying below it, allowing you to quantify the value of your actions on the bottom line with 2 questions: “Should We Do It?” and “Can We Do It?”
If your Vistage group has not yet received an invitation to participate, contact me to schedule, or you can set up individual RealTime CEO Cloud Service accounts here.
How much is invested in your business?
A common question that can cause unnecessary confusion for business owners is “How much is invested in your business?”. The same business owner can typically tell me approximately what their house is worth or how much they have invested in their share portfolio but they struggle to confirm how much is invested in their business. This is a problem, because it is very difficult to understand how much return you are generating if you don’t know how much is invested. So why is this so difficult? The answer lies in the traditional balance sheet which is not presented in a way that is easy to interpret and certainly does not readily tell us how much is invested in the business.
Have a look at this short screen cast for some insight to how the executives of DuPont addressed this issue over 90 years ago. Their insights have become common practice in public companies around the world but are still not understood by most private companies.
Unlocking the Power of Your Balance Sheet
Do you understand the power of the information contained in your balance sheet?
It may sound like a silly question, but your answer depends on your viewpoint. I typically hear midmarket CEOs and CFOs say (or think) one of the following:
- What power? We don’t even use the balance sheet. Cash flow and the P&L are the only statements we need. Cash is king.
- This guy is silly. We run the balance sheet every month and review the assets, liabilities and equity.
- Of course. We create the standard balance sheet because we’re required to, but we follow the DuPont model (just like every other public company in the world) to recast our receivables, inventory, fixed assets and payables to determine how much is invested in our business and how well our managers are performing to produce a return for our ownership.
Which bucket do you fall into?
Cash is king, so most entrepreneurs and small business owners fall into bucket #1. And, most public companies and large private companies fall into bucket #3.
But I see mid-market companies falling into all three buckets.
Sometimes, I even hear their accountants tell me that you can’t forecast the balance sheet into the future. And you shouldn’t change your balance sheet, because you must adhere to GAAP!
I don’t mean to be critical, but if you fall into bucket #1 or bucket #2, and have interest in learning about the more sophisticated methods for unlocking the value in your business, they’re available. Would it be valuable for you to understand, in real time, how much value you’re creating in your business, and how that will change in the future by the decisions you make today?
We’ve been doing this directly with clients for over a decade. And coming in May, we’ll have a new web app that will allow small to midmarket companies to move into bucket #3 by following a few simple procedures.
You can learn more and RSVP here.
(And if you want to explore the DuPont analysis, you can do so here.)
RealTime CEO Cash Flow
Fiscal Focus is the plain English measurement module of RealTimeCEO. In our Fiscal Focus blog we looked at the Fiscal Focus pyramid, which describes the two main business aims: to generate return and to generate cash flow. In this blog we will discuss cash flow, which is the lifeblood of your business. Some people say to me, “Cash flow’s fine, Nick, but what about profit? That’s what really important.” Well, let me put this analogy to you. Profit is like food to business, which is important. But cash flow is like oxygen. You can go without food for a while but how long can you go without oxygen?
So, if we accept that cash flow is vitally important, let’s look at an easy way to measure our cash flow. Each of the eight Fiscal Focus levers [insert link here] is going to either put pressure on your cash flow or take the pressure off. For example, if your suppliers will give you goods today which you don’t have to pay for until later, that will ease the pressure on your cash flow. Alternatively, if you provide goods to your customers today that they don’t pay for until later, that’s going to put pressure on your cash flow.
So, how do we measure the cash flow in our business?
Have a look at this video for more insight into Cash Flow.
Tracking cash flow using this method has two advantages: one, it’s a very easy way to track it; and two, it gives you specific information you will need in conversations with your bank. But this calculation is most powerful when done over a twelve-month period; don’t fall into the trap of tracking it on a year to date or part-year basis.
Having problems keeping track of your cash flow? Are you worried about the possibility of liquidity problems? We can provide you with all the information you need to measure your cash flow and show you ways to increase it. For more information, check out our app (coming soon on the home page).
You can also follow RealTimeCEO on Twitter or Facebook for updates on blogs and news items.
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Core Management Principle 3 – the ‘Crystal Ball’
Welcome back to our series of blogs on Core Managment Principles. We have already looked at ‘3W Accountability’ and this one discusses ‘Decision Validation’ or what we call the RealTimeCEO Crystal Ball.
“An expert is somebody who has managed to make decisions and judgements simpler by knowing what to pay attention to and what to ignore.”
– Edward de Bono.
Don’t you wish you had a Crystal Ball?
Making decisions is a vital part of a CEO’s job. By knowing how to separate the important impacts from the other impacts, you will make a better decision. But how can you possibly make a decision about the future using data from the past? There may be other factors, for example, political or emotional considerations. Have you ever found yourself with a decision to make that has outdated, incomplete or inaccurate data, with political and/or emotional overtones? You probably relied on the thing which has got you where you are today – gut feel. We’re not saying gut feel isn’t important, but it does occasionally send you down the wrong path and it can be tough to get back from there. You need a Crystal Ball, right? Our process works with your instincts by helping you to test them.
For every decision, you need to ask two questions:
- Should we do this?
- Can we do this?
The Should We? question can be answered by looking at Return on Operations (ROO). If the result of your decision makes your ROO stronger, then your reason for being will be stronger and you should do it. If the decision will result in your ROO being diminished, then you shouldn’t. For more information about ROO see our blog, RealTime CEO / Fiscal Focus – Return.
The Can We? question depends on what it will do to your business’s cash flow. Do you have enough cash flow to fund this decision without jeopardizing your future cash flow? If the answer is yes, then you can. If the answer is no, then you can’t. For more information on cash flow refer to our blog, RealTime CEO / Fiscal Focus – Cash Flow.
Should we/Can we? brings clarity to decisions that may have been hazy in the past. In other words it gives you a Crystal Ball.
If you would like further clarity on this subject or any of our other tools, check out our app on our home page.
Are You Riding the Wave or Creating Your Market?
In my Vistage workshops, I talk a lot about predicting the future. And in my last post, I outlined the process I use with CEOs to enable them to more accurately predict the future of their business.
I accept that it’s impossible to continually predict the future with 100% accuracy. But I’ve seen a lot of CEOs learn to predict their financial performance for the next 180 days with a high level of accuracy, even up to 90%. That’s not bad.
And it’s always fun to work with a growing business, when revenues are increasing, profits are increasing, and the celebration culture is off the charts! Yet sometimes, that growing revenue can deliver a false signal about your performance or the performance of your business.
How?
It’s important to understand what is causing your profitable growth. To do so, during your monthly SON communication meeting, listen carefully to the answers about your market changes, competitors and marketing and sales performance when you ask the question what information has come to light in the last 30 days that changes our view of the future?
Profitable growth is almost always a good thing for a business. It’s a result of overall demand increasing for your products or services. But dig deeper in each meeting and explore why the demand is increasing. Ask the following question:
Is my growth market driven, or is it due to the performance of our marketing and sales?
In growing markets, I see plenty of businesses that are growing profitable and creating happy owners and executives. But that growth is not always occurring because they are particularly well run businesses; they’re growing because their market is growing, and that opportunity is so big that it is pushing everybody with the market.
To use a surfing analogy, it was more about the wave than the rider.
If you’re riding a wave, life is good, but be careful about getting complacent in the good times; it can mask flaws in your business that could rear their ugly head when the market growth slows. Research your market to see how your growth compares to the overall market and your competitors. If you’re growing faster than both, you’re probably doing the right things. If you’re growing at 20% but the market is growing at 100%, you’re falling behind the competition. When that growth levels off, you could be in trouble.
If your market isn’t growing, or you’re growing faster than your market, then congratulations! You’re generating the growth from your own activities. That means that your slice of overall pie is getting bigger, and you’re taking market share from your competitors.
After you celebrate your success, talk about the reasons why you’re succeeding. Has your strategic marketing or tactical sales process changed? Marketing is planting and watering the tree, sales is picking the fruit – which is driving the growth? What’s happening on your pricing landscape? Do you see opportunity to increase your price because of your brand?
If you can identify the causes of your success, then double down on them to increase your rate of growth over the next 90 days. Your business will be stronger because of it.
And then look for the next wave to ride, and life will get even better.
Predicting the Future of Your Business
During most of my Vistage workshops, I ask the group the following question:
Who in your business is best qualified to predict and influence the future?
What do you think is the most common answer that I hear?
The CEO.
And I agree. I think that the CEO is best qualified to predict and influence the future, and that’s his job. (However, I am also asking CEOs to answer this question…)
What do you think is the second most common answer?
The sales manager.
I agree. The sales manager and sales team typically have the pulse of what orders will be coming in during the rest of the month or quarter.
The third most common answer is the operations team. They are the ones interfacing with the sales team about fulfilling future orders.
Do I ever hear that the CFO or lead accountant is the best qualified person to predict and influence the future?
Rarely.
Yet most CEOs assign control of the budget to the CFO.
If an accountant or a CFO is not the best person to predict the future, why do you make them the custodian of the budget? It’s flawed logic and you’re setting up the forecasting process to fail. (I don’t want to upset any accountants here; they should play a critically important role in this process, but it is unfair to expect them to be the custodians of the process if they are not the best qualified to predict and influence the future.)
Why do so many CEOs continue to support this flawed process?
When I ask this question, I get two answers back: One is that the forecast is about numbers, and they’re the numbers people so if they don’t do this, what will they do? The second answer is that they are the best at Excel!
Which of these answers is worse?
Both are bad; if you’ve selected the custodian of your future based on their Excel skills, you’re in trouble. (Excel skills are great for manipulating numbers that others input and influence, but not for determining key numbers based on future business events.)
And the very first mistake that most businesses make in forecasting is that the CEO assumes it’s solely about numbers and jumps into the numbers too quickly. Isn’t this why so many mid-market companies give up on forecasting altogether? When it’s never accurate, why waste the time?
As you’re reflecting on 2016 and thinking about changes you’ll make in 2017, consider revising your forecasting process. Here’s what I recommend to my Vistage groups and clients:
- Determine your core forecasting team – the people with the pulse of the future of the business
- Follow this monthly forecasting process
- Use SON communication to eliminate SILO mentality
- Work with your CFO or controller to input the numerical results into a 24 month rolling model
I’ve seen this process transform many CEOs’ ability to successfully predict the future of their businesses.
Merry Christmas!
Creating a Culture of Accountability
If I were to ask you the following question, what would your response be?
When something goes wrong in business, does it typically result from poor strategy or poor execution?
From my experience, there’s a ten to one ratio between these two.
And as you probably already know, the answer is poor execution. It’s a serious issue with many companies, so much so that there’s a saying that poor execution eats strategy for lunch; it doesn’t matter how great your strategy is, if your team doesn’t execute, then it all falls apart.
So why is it so common that execution is inevitably compromised?
It’s compromised when you fail to have two things:
- Accountability
- Responsibility
Establishing Accountability
In every turnaround consulting project that I performed earlier in my career, the first thing I focused on was instilling a culture of accountability. Without it, the turnaround was doomed.
As a turn-around consultant, I had a license to change things. Moreover, I had a responsibility to change things. Without change, the company would go broke. So people listened.
To begin creating the culture, I implemented what I call Integrated 3W Accountability. It’s a concept so simple that on the surface, many of you will dismiss it, or worse, you will think that you are currently doing it. And you may well be, but the vast majority of businesses that I have worked with are not.
Integrated 3W Accountability is the concept that every action has to have a what, a who and a when. That’s it.
Not very complicated, right?
As with many of the concepts I’ve implemented, it is not how simple it is, it’s how effectively you implement it.
Creating the Culture
The first action I would take was to bring together the leadership team for an open planning session. I’d kick off the session with a conversation about the positive – what are the things that we do well? What have we got here that’s worth saving? Then I would recognize that there were some things that were not done well, otherwise, we wouldn’t be in this position. But my focus now is about how we could do those things better in the future. It was important that we kept the conversation positive, even when we were talking about business weaknesses.
At the end of that conversation, the walls were always covered with flip-chart paper filled with a surprising number of great ideas!
After the meeting, I introduced the Integrated 3W Accountability concept. It’s easy to explain, but also very easy to fail to execute. Why is that?
- Some people will sandbag
- Some people will say that they’re too busy
Here’s the process I used to prevent this from happening:
- Have the team select five ‘whats’ that are going to be easy for people to commit to.
- Allow each person to define the when. This is important – allow them to own it! Do not override it unless there are extremely unusual circumstances.
- Clearly establish the non-negotiable rule that one of two things must happen by the when: Firstly, and preferably, you complete the action. If for some reason you cannot complete the action by the deadline, contact me beforehand and request an extension. What is not accepted is to sail through the deadline because you are too busy.
- Strictly enforce rule #3!
There will always be some people who will think that the rules don’t apply to them and will allow the deadline pass without completing the task or requesting an extension. Hold them accountable or let them go.
If you do not, the whole thing falls apart.
Enforcing rule #3 is the key. Do this, and you will begin to create the foundation for a “Culture of Accountability.”
Forecasting Fallacy – It’s Not About the Numbers
Financial forecasting is a standard activity at the enterprise level. Big companies create detailed monthly and quarterly projections including revenue, expenses and net profit. Public markets demand it.
So why do so few mid-market executive teams commit to an effective forecasting process? And I’m not talking about the standard back-of-the-napkin annual revenue and profit estimates that take about 5 minutes to create; I’m talking about engaging in the legitimate business process of projecting the numerical values of the business on a monthly basis for the next 12 months into the future.
Here are some of the most common excuses I hear:
- I can’t predict the future
- My accounting system won’t handle this
- Things change too quickly
- We used to forecast, but our forecasts were never accurate
- Our data isn’t ready by month-end
- We don’t have the bandwidth
- Our accountant handles the numbers
- I’m not the numbers person
The last two irk me the most. After working with over 1,000 businesses across the world over the past 15 years, I can unequivocally say this:
If you don’t understand your numbers, then you don’t understand your business.
It’s that simple.
Yet I’m consistently shocked at the sheer number of mid-market companies that fail to engage in an acceptable monthly forecasting process.
That’s one of my favorite Churchill quotes, referring to armies, battle and nations. And it’s just as relevant for businesses.
The problem I see with many businesses is that their leadership team thinks that planning is talking about taking a number that’s hard to understand and potentially irrelevant and placing in a graph or chart and voila – forecasting is done!
That’s not enough.
In my 12 years of speaking with Vistage and TEC groups through the world, I’ve had the unfortunate experience of seeing a handful of businesses fail when some of these failures could have been prevented by using an acceptable forecasting process.
But I’ve also had the good fortune of having some CEOs tell me, “Nick, we would have gone out of business if we weren’t using the 12-month rolling forecasting procedure you recommended to prevent a catastrophe.”
That’s rewarding.
But forecasting is difficult for most businesses, and the #1 mistake that businesses make (aside from NOT forecasting) is this:
When implementing a forecasting process, they jump into the numbers too quickly
How is that a problem? Isn’t forecasting about numbers?
Effective forecasting is about the process of discussing the following:
- How the business landscape has changed over the last 30 days
- How that will affect your business
- How your numbers are affected by #2
A few numbers dropped into a spreadsheet on a whim is not an effective forecasting process, but having the above discussions with your core leadership team, on a monthly basis, can be. I call this process SON communication.
The real key to financial forecasting is your monthly communication process. Fix this, and you’ll get incredible value from the process.
SON Communication – A Process That Eliminates Silo Mentality
Every month I get to travel to different parts of the world to talk about a subject I am passionate about: creating value in business.
There are only two things that matter in businesses for creating value – people and cash flow.
Everything else is secondary.
Without a shadow of doubt, the most common mistake that I see in business (that destroys value and compromises so much potential) is silo mentality. You know what I’m talking about, don’t you? The attitude of not sharing information and building barriers to protect your turf?
Silo mentality destroys value in your business. When your people aren’t communicating effectively, your business is failing at one of the most important drivers of value.
Managers and executives commonly create complexity in their business. It’s natural for many. Yet simplicity is what they should be striving for. I talked about that in my last post.
So how do we remove it?
After working with over 1,000 businesses across the globe, I’ve developed a practical process that can eliminate silo mentality.
It’s called SON communication.
SON communication is a process that costs you nothing, but if you do it effectively, you’re instantly going to increase value in your business.
How SON Communication Eliminates Silo Mentality
SON communication is a process to drive a monthly conversation amongst management teams to get them to raise their horizon and address each business issue in strategic first, operations second and numerical third.
It’s about having each and every member of the leadership team participating, understanding and contributing to all three “circles.”
With SON communication, it is not acceptable for anybody on the leadership teams to err in one of those three values. The CFO can’t only focus on numbers. The creative people can’t delegate the numbers conversation to the CFO. (If you don’t understand your numbers then you don’t understand your business.)
You need to be able to engender that conversation amongst the leadership team. And you need to do it in a manner that contributes to the views, in other words, you need to be able to disagree but without being disagreeable.
The most robust leadership conversations that you could have are the ones where you have a variety of opinions, because quite frankly if you want to agree, there is no point in having more than one person in the room. So I want leaders to take different views, but I want them do it in a manner that they are not going to end up punching each other.
This helps to break down the silos in your business. When everybody is trying to make themselves look intelligent, you’ve got fences and silos.
SON communication pushes the circles together.
Now, it’s important to understand you never want the circles to totally overlap. You need these experts in the leadership team to be experts in the field, that’s why they are there. But you also need them to able to talk to each other, so you need a common ground.
With that said, the most frustrating hybrid is the operations and numerical, because not only are these two different languages, but they are now competing to get the attention of the CEO from very different angles. But I never wanted a bilingual, I wanted all three. I want each and every member of the leadership team to participate, understand and contribute to strategic, operational and numerical. That’s what SON communication is.
Selecting Your SON Communication Team
If you have someone in your leadership team who is saying, “I don’t know, I don’t have a crystal ball,” or “these things changed too quickly, I can’t tell,” then that person doesn’t belong on the leadership team.
That person might be an astonishingly effective “today operator,” so let them go and manage “today.” And if that means that your leadership team shrinks to 2 or 3 people for SON communication, that’s fine! So long as these 2 to 3 people are talking to the others before they come to the table to collect information that they might find interesting about tomorrow.
So take the opportunity to go back and challenge whether your leadership team is actually a leadership team, or whether they are just “today operators.” It might influence how effectively you have these conversations in future.
Your best determinant of whether you have silo mentality in your business if is you hear, “It’s complicated, you won’t understand.”
I’ll end with one of my favorite quotes from Albert Einstein:
If you can’t explain it to me simply, you don’t understand.
The Simple Way to Improve Your Business
Good executives and managers are always looking for ways to improve their business and there are plenty of consultants around the world trying to help them.
These consultants invest in training programs, education, research, case studies and in creating their own intellectual property.
You’re probably familiar with many of the ridiculous management fads over the past few decades: six sigma, business process reengineering, matrix management, management by consensus, core competency… and so forth.
These techniques were all developed by intelligent people and implemented by top-level leaders of very successful businesses. On the surface, they should have worked, right? But did they? Often, the companies that implemented these ideas lost value. And (other than the most obvious reason of sucking the productivity out of their workers) there is one common reason.
Complexity.
Each of these ideas added layers of complexity into the business. Consultants and managers created entire new languages that few in the business understood. Precious time was spent on learning how to add complication to the business, instead of simplifying the business.
I first experienced this at age 25 when I was dropped in the deep end and tasked with running a branch of a software company. It was terrifying; every single person that worked for me was older than me, I’d never run a company and I knew nothing about software.
Have you ever noticed what’s unusual about the IT industry?
The vast majority of information that comes out of an IT person’s mouth makes no sense to the rest of the world. They speak in absurd babble and jargon – it’s an industry that’s riddled with TLAs and EFLAs .
TLAs – Three Letter Acronyms
EFLAs – Extended Four Letter Acronyms
Nobody else in the company spoke this language. So I introduced a rule on day one which was critical and possibly the luckiest and smartest thing I have ever done in my career:
The “plain English” rule.
If you wanted to bring an issue to the leadership table, you had to bring it in plain English. You couldn’t bring it in jargon, because quite frankly I had no idea what you were talking about. Also, what I learned very quickly was that it wasn’t just me that didn’t understand; members of my team didn’t always understand each other either.
Complexity creates confusion and silos. It saps productivity.
Simplicity creates understanding and collaboration. It improves productivity.
Plain English communication has now become a central tenet of RealTimeCEO.
Eliminate the jargon in your business and use “plain English” and you’ll be amazed at the results. It’s that simple.
(The cartoon is courtesy of the Plain English Foundation. They provide training and workshops for businesses in Australia for simplifying corporate communications.)
Something New is Coming…
In our last post, we discussed the mechanics of 24 month rolling forecasts. (Ok, we realize that was over a year ago.)
Wait…
Did you think we’d just let that one slide?
The past 12 months have been incredibly busy for us. In addition to our continually expanding client base and Nick’s RealTime CEO workshops throughout the year in the US, Australia and the UK, we’ve been undertaking quite a large project since the end of 2014
What is it? While we’ve been keeping it under wraps during development, we decided to give you a hint since we expect to reveal it soon. In the near future, we’ll be working with select Vistage Chairs, CEO group leaders and CEOs/CFOs to complete the final testing of our new financial modeling software.
Instead of being local software similar to our current and previous versions, our new app will be delivered via software-as-a-service (SaaS). It’s designed for large groups of users to apply the RealTime CEO principles to their existing financial statements, including 24 Month Rolling Forecasting and our Crystal Ball, on their own, in real time.
This won’t fully replace our existing software which we customize for our current client base; it will provide the core features and functionality in the SaaS format to allow more companies to apply the powerful concepts and financial tools to their business. We expect it to be a key driver of our future growth and to allow us to make an impact with businesses anywhere in the world (instead of just with existing client relationships with companies in the US, Canada, Australia and the U.K.).
It’s been quite an undertaking. We’re excited that the journey is nearing completion and we expect to be actively blogging again soon and engaging with our users online.
We’re currently staging the final testing along with a carefully-controlled CEO group rollout, but if you’d like to be involved before we reach out to you, connect with us to request early access.
Cheers,
Nick and the RealTime CEO team
Mechanics of RealTime 24 Month Rolling Forecasts
In our last blog, Forecasting the Future – Alternatives, we discussed the benefits of RealTime 24 Month Rolling forecasts. In this blog, we’ll give you more information about how RealTime 24 Month Rolling works.
The 24 Month view includes the actual figures for the past twelve months and the forecast figures for the next twelve months. For example if the current month is August 2013, we have twelve months of actual figures back to September 2012 and twelve months of projected figures to July 2014. As each month ends, you replace the projected figures for that month with actual ones. At the end of August, replace the August projected figures with the actual ones, drop off September 2013 and add August 2015 with the forecast figures for that month. This way, you’re always looking twelve months ahead.
Here’s an example –
Mechanics of 24 Month Rolling
Our forecasts provide the basis for a monthly conversation about the strategic, then the operational, then finally the numerical business landscape. It’s so easy to focus on the numbers but it’s really important to cover the strategic and operational issues before the numbers. Consider the journey before jumping straight to the solution. You can guide the conversation by asking three questions:
1. What information has come to light in the last 30 days that changes our view of the future?
Some of the issues to consider for this question are:
- What is our proposed market strategy going forward?
- Are we opening up new markets?
- Are there new competitors in the market?
- Are we launching new products or services?
- Is our product/service mix changing?
- Have projects slipped back or come forward?
- What is happening in our supply chain – availability/ reliability/ price?
2. How will we change our behaviour?
3. What will be the numerical implementation of these changes?
As we illustrated in our Sensitivity Analysis, you can use the eight Fiscal Focus levers to determine the impact that small changes in the levers will have on the overall health of your business. The sensitivity analysis tells us which levers have the most dramatic impact and which have the least impact. So it makes sense to have a forecast that puts the most important levers first, to drive the conversation towards the more relevant topics.
When we forecast, what sort of model should we use? There’s the aspiration model, which is what you want to achieve or there’s the reality model, which is what you know you can achieve with the resources you have. The difference depends on which category your revenue belongs to. You can use the marriage/engagement/dating analogy to assess your revenue certainty levels. Marriage revenue – you have a contract or you are absolutely certain of getting the revenue. “Engagement” revenue – also known as pipeline; you can list the amounts but you’re not certain. “Dating” revenue – you can’t list the details and you have no certainty of getting it. The “engagement” and “dating” revenue becomes your sales risk profile.
For more information about how RealTime 24 Month Rolling can benefit your business, contact us. We’d love to help your business.
Forecasting the Future – Alternatives
Forecasting the future relies on an accurate method of measuring past and current performance. As the year progresses, everything is compared back to the figures provided at the beginning of the year. Many businesses operate this way mainly because that’s the way they’ve always done it. This limits your view to the number of months that have passed since the start of the year and may cause trends to be missed. The YTD method does have value when you need to estimate tax but leave that to the accountants; RealTime CEOs need a more effective method of forecasting everything else.
What if you could always have a complete set of data for twelve months or twenty-four months, no matter what time of the year it is? In our blog 24 Month Rolling Forecasts, we discussed the Trailing Twelve Month method of measuring your business’s performance. This method gives a twelve-month view of your business at any given time. As one month drops off, another month adds on. But what if we could look even further ahead?
Imagine you’re driving along the freeway in a shiny, new sports car… Research tells us that we maintain a field of vision of about 120 metres in front of us. What happens in that field of vision helps you make decisions while driving your car. Now, we don’t just keep looking ahead to the same spot, otherwise we’d end up looking at the front of our car, which would be really dangerous. Instead we keep looking ahead in that field of vision. This is what we want to do when we measure business performance. When you look ahead to the end of the year, the distance is shrinking as you get closer to it. What we want to do is maintain your field of vision ahead of your business.
We can better accomplish this with RealTime 24-Month Rolling Forecasts. In our next blog, we’ll examine the mechanics of RealTime 24-Month Rolling forecast. You can also contact us for a plan that’s tailored to your business.
Core Management Principle 5 – RealTime Planning
“He who fails to plan, is planning to fail.” – Winston Churchill.
Winston Churchill was referring to armies, battles and empires when he said this but it’s equally relevant for businesses.
Businesses need to forecast in order to plan but the forecast process for many businesses is weak and unreliable. They use historical data to analyse the past then work out the future later. But it’s not just about forecasting, we want to create a management culture that improves a number of different areas in your business by providing:
- Strategic conversations – we need a forum for strategic conversations across the management team
- Instant & valuable management reporting – the traditional accounting process is too slow at getting the next lot of figures out and is difficult for executives to understand.
- Better sales management mechanism – managing a significant sales team is complicated and anything that helps improve that process is worthwhile.
- Better forecasting – Better forecasting is essential for predicting and influencing the future. In fact, if you improve in the first three areas, it will help to improve your forecasting anyway.
For many businesses the traditional budgeting process is a long and frustrating one. It is driven by the CFO and is only completed once each year, which doesn’t allow for changes in the landscape. The process is based on the income statement, which is not always understood by those who receive the budgets.
In RealTime Planning we ask the following questions:
Q. Who in your business is best qualified to predict and influence the future?
A. The CEO, followed by sales people and operational teams.
Q. How often is the landscape ahead of your business changing?
A. Often enough that you need to measure each month, rather than annually.
Q. Is there a better way to measure the past?
A. Trailing 12-Month or RealTime 24-Month Rolling
Q. Is there a better way to plan & forecast the future?
A. RealTime 24-Month Rolling
For more information take a look at our blog, 24-Month Rolling Forecasts or contact us for more information and assistance.
You can also follow us on Facebook and Twitter.
J Curves – Other Considerations
Welcome back to RealTimeCEO. In our series of blogs on J Curves, we’ve discussed J Curve Management, the Three Phases, and the 5 Management Rules. But there are some other issues to be aware of with J curves that we will cover here.
First of all it’s important to remember that questioning a J curve today doesn’t necessarily mean you are questioning the original decision. If it’s to find a scapegoat you can shout at, it’s going to be a waste of time. Revisiting the original decision is far more productive if you do it as a learning exercise to improve your future performance. It’s quite possible that it was the right decision yesterday to make the J curve investment. But it’s also possible that it’s the right decision today to get out of it because the landscape has changed. So the key issue is to look at your landscape today to determine whether the investment is still going to deliver value and make decisions with that in mind.
Is it possible to slip backwards on a J curve? Yes, it is; these are called W curves. They progress from phase one to phase two but then fall back again. W curves need to be managed as you would manage any other J curve in phase one.
Can a J curve be macro and micro? Yes, executives at different levels through the business can manage J curves. The CEO is responsible for the company-wide macro register, containing investments that will have a profound impact on the business. But we also encourage the establishment of divisional J curves, overseen by divisional managers, for micro investments.
Costs of J Curves
There are two costs associated with J Curves. The first cost is pretty obvious. If they are managed badly you will lose cash flow, return and profit.
The second cost, executive headspace, is less obvious. If you ask your executives to juggle too many at one, some or all of those J curves will hit the ground. Your executives will create more value for your business if they do a fewer number of things well, rather than a number of things badly.
“A weak strategy well executed will inevitably outperform a strong strategy poorly executed”
Nick Setchell
The impact of J Curves
The impact of J curves can be broad. Obviously J curves can impact positively or negatively across your business. If you implement a J curve well, you will build cash reserves and all the benefits associated with that. It will have a positive impact on your business. On the other hand, if you implement or manage J curves poorly you’re likely to lose potential and never get the full reward for your entrepreneurial flair. Things will fall through the cracks. If you implement or manage J curves really badly, you are in real danger of bankruptcy. Review your J curve register regularly to make sure this doesn’t happen to your business.
The Cost and Impact of J Curves
The identification, prioritisation and management of J curves is the single most important determinant of entrepreneurial success. Would you like to manage your J curves better? Contact us; we’d love to hear from you.
J Curves – 5 Management Rules of J Curves
J Curve investments are a strategic decision to spend money today to receive a benefit tomorrow (in the future). We make these investments because we realise that the short-term financial loss is offset by the benefit it brings to your business in the medium to long term. Here at RealTimeCEO we believe in the importance of managing your investments well. To help your business do this we created a framework that we discussed in our last blog, J Curves – 3 Phases. Part of that framework is our list of 5 Management Rules of J Curves.
As the CEO, your role is to manage the macro j curves, investments that have a major impact on the overall business. As we noted in our blog, The Perfect Skill Mix of a CEO (insert link), the two main components of the CEO’s role are to create value and to mitigate risk.
Here are our 5 tips for managing J curves effectively:
1. Minimise the depth and breadth of the valley.
As we illustrated in J Curves – 3 Phases, the valley is the time between your initial outlay and when the project starts making money. It will inevitably end up being deeper and wider than you imagined at the start of the project. This rule is important for mitigating risk. We want our executives to come to us with innovative ideas. The executives naturally want the CEO to adopt their ideas and will place more emphasis on the upside of a project in order to sell the idea. As the CEO you need to be able to assess the costs as well as the benefits and do everything in your power to limit the size of the valley. Twice as long and twice as wide as you originally thought – keep that in mind.
Manage and attempt to limit the depth and breadth of the valley
2. Don’t become emotionally involved.
One of the toughest things about being a CEO is not becoming emotionally connected to your investments. CEOs must have passion and enthusiasm but they also need to understand the implications of each of their decisions. If you hear yourself, or one of your executives referring to it as a pet project, be wary; that’s a classic indicator of an emotional connection to the project. And there’s another part of our business that is filled with emotion – our people. Have you ever hired someone who had a fantastic resume and interviewed really well, only to realise they’re not adding value to your business? This employee could in fact be sucking resources out of your business and become a “flat liner”, continuing to draw the same amount of resources or even worse, a “ski slope” type of J curve that starts to suck even more out of your business. Once a large amount of money has been spent on an investment, it can be hard to let go. But if the investment is a ski slope, you need to recognise that fact and get out of it before you waste any more money on it.
Do not become emotinoally connected to the J Curve
3. Don’t take on too many J curves at once.
While J curves are in phase one, they are sucking resources out of your business. No matter how many brilliant ideas you and your executives have, it makes no difference if the drain on your resources is going to send you broke. When you’re preparing to embark on a new J curve, ask yourself the following questions:
- · Is the investment strategically beneficial to your business?
- · Is now the right time?
And don’t worry about your executives getting offended if you say no. Just be sure to communicate to them that the time just isn’t right for their idea.
Do not take on too many macro J Curves at once
4. Have and manage a plan to move from phase one to phase three as quickly as possible.
Have a plan that enables you to move the J curve from phase one, through phase two and finally to phase three. There are different resources required for the three phases of the J curve. The people required for the investment and the catch up phase are the innovators, people who conceive the ideas and are able to promote them. But you need a different set of skills to drag the project from the bottom of the valley to the blue sky. These people are implementers. Ideally these roles should overlap and they can do this successfully if the issues have been effectively documented, communicated and procedures for them have been written. Be careful of innovators who are reluctant to let go of their “baby” or are ready to drop their J curve while it’s still progressing, in favour of the next big thing.
Have and manage a plan to move from phase 1 to phase 3 as quickly as possible
5. Establish a J Curve register.
Create a list of all the J curves you currently have, with documented updates on their progress. Excel is handy for this but you can do it elsewhere if you prefer. Your J curve register should include the following:
· What the J curve is
· When it started
· The progress on this J curve
· Money in
· Money out
· The net position of the J curve
· 3W action management (insert link)
One of the things we commit to with a J Curve register is to review and update the register regularly, at least once a month. Put it on your agenda for monthly management meetings and discuss each J curve. This will help you identify any issues, such as:
Do we have too many J curves on our register?
Have any of our J curves stalled?
Are any of your J curves turning into ski slopes?
Can we help you with managing J curves in your business? Contact us at RealTimeCEO for some specialist advice.
J Curves – 3 Phases of J Curve Management
In our previous blog J Curve Management, we discussed how important it is to your business to manage J curves well. On your journey through time you look out over the horizon and you come up with an idea that you know is going to make your business stronger in the future. But you also understand that to implement and get value out of that idea, you need to take a step back before you can take any steps forwards.
The 3 Phases of a J Curve
This diagram shows why it’s called a J curve. The black curve represents the investment; it sucks the cash out of your business for an amount of time we call the risk zone, before coming back up to its starting point and eventually surpassing it. The diagram also shows you the three phases in the life of a J curve:
J Curve Phase 1, the Investment phase –
This phase starts at the beginning of the project and ends at the bottom of the valley. This phase has two main characteristics. Most investors understand the first one because it’s the most painful. This is where you write out the significant cheque to make the investment. The second characteristic is sometimes hidden and often ignored. But ignoring this issue can be dangerous. We call it cash flow bleeding when, even after you’ve paid the initial investment amount, the project is losing more money than it is making. This causes a drain on your cash flow. At some point the money coming in will equal the money going out. This point starts at the bottom of the valley and marks the transition to Phase 2.
J Curve Phase 2, the Catch Up phase –
In phase 2, the project is still cash flow negative over the life of the project but it’s beginning to catch up. It’s now bringing in more money than it’s paying out. Our ultimate objective is for the project to reach a point where you’ve made more money over the life of the investment than you have paid out. This point brings us to Phase 3.
J Curve Phase 3, the Blue Sky phase –
When your project has delivered more to your business than it has cost, you have achieved the future benefit you originally invested for. You have become stronger today than you were yesterday as a result of that j curve investment.
The yellow arrow represents a calculation done by many businesses, which is to assess the length of time it will take before you are paid back for the amount invested. But there is much more to the investment than a single payback timeframe. It’s more important to understand how much cash is going to be sucked out of your business by this investment. This is why we refer to it as the risk zone. There are lots of things that can happen in your business while your J curve is in the risk zone. Any number of these can cause the project to stall, leaving you with nothing but wasted time and money.
Don’t let your J curves stall. Contact us to find out how we can help you manage your J curves to create the most value for your business.
J Curve Management Framework
In a previous blog, What are J Curve Investments?, we introduced the concept of a strategic decision to spend money today in order to gain a benefit in the future. In today’s blog we discuss how we can manage J Curves to drive business growth.
So, why do you need to manage J Curves?
J Curves for midmarket companies (larger than $1m and smaller than $100m) are broadly defined as any decision to spend money today where the benefit will not accrue until tomorrow or the future. You recognize that the short-term financial loss from these strategic investments is offset by the medium to long-term benefits to your business. At RealTimeCEO, we’ve analysed and worked with over a thousand businesses around the world and every single business in every single industry has J Curves in it. This makes the management of J Curves absolutely critical.
“The identification, prioritisation and management of J curves is the single most important determinant of entrepreneurial success.”
– Nick Setchell
Some J Curves that you need to identify in your business could be decisions such as:
- new product line
- new access to market strategy
- new equipment purchase
- new staff hire
- new business premises / opening other premises
- moving manufacturing overseas
- acquiring competitors.
We have designed a framework to help CEOs identify, prioritise and manage their J Curves. This framework is made up of:
- Three phases of a J Curve
- Measurement of J Curves
- 5 Rules for management of J Curves
- Other issues to consider
- Broad impact of J Curves
Stay tuned for our next three blogs where we provide more details on each of these aspects of the framework. Or for a personalised plan tailored to your business, contact us. We’d love to hear from you.
Mathematics of Pricing – The Impact of Price Increase or Price Discount
What would be the impact of price increase or price discount on your business? In this blog we’re going to look at your pricing strategy.
A lot of people tell me their businesses don’t set their own pricing; the market does that for them. This is not true in most cases. It is true to say that there are a small percentage of businesses that don’t have any control over their pricing. If you’re selling a product that is regulated by law, you have no control. If you’re selling homogenous commodities like gasoline/milk/wool, the world markets will set the price. Sometimes you may be selling to an 800-pound gorilla. Do you know where an 800-pound gorilla sits in the room? The answer is anywhere it wants to. If you’re selling to an 800-pound gorilla you get told what the price is, take it or leave it. But for the other 99 percent of businesses, you have control over your pricing.
Your contribution margin is how much of each dollar of sales is remaining after all variable costs are covered. It called a contribution margin because it is the component of the sales dollars that contributes to covering fixed costs and profit.
For example, if your contribution margin is 30% and you increase your price by 10%, if you lose exactly 25% of your volume margin you will generate exactly the same contribution margin in dollars. However if you discount your price by 10% you will need to increase your volume by 50% to generate the same contribution margin in dollars.
The Impact of Price Increase
After a Price Increase, what percentage drop in unit sales will result in the same $ Contribution Margin?
The impact of a Price Increase
The Impact of Price Discount
After a Price Decrease, what percentage increase in unit sales will be necessary to result in the same $ Contribution Margin?
The Impact of a Price Discount
As you can see from this example, you need a bigger change in volume following a price discount. You have to work so much harder to catch up after a price decrease that it’s not worthwhile for the amount of return.
In our experience a price increase will benefit the business whereas a price discount will not. This is the opposite of conventional sales wisdom. The sales people are likely to be the ones in your business most vocally opposed to a price increase, in particular, your weakest sales people. Here’s a piece of advice –
“Don’t set your business strategies based on feedback from your weakest staff members.” – Nick Setchell.
If you want any more information on this or any of our other tools, just contact us!
Sensitivity Analysis
Sensitivity Analysis helps you decide which action will have the biggest impact on your business
In our blog 3W Accountability we discussed how we hold people accountable for actions being completed. It’s all very well to decide what action you’re going to take but how do you ensure that you’re allocating your scarce resources in the most effective way? In this blog, we’re going to look at sensitivity analysis as a way of helping you decide which action will have the biggest impact. Sensitivity analysis enables you to determine which one percent change to any of those levers will have the most profound impact on the business’s strengths and weaknesses.
– Sensitivity analysis calculates the impact of changes to each RealTime lever
– Highlights areas of high impact – inevitably price
– Also highlights areas of low impact – inevitably variable indirect costs.
In the diagram above we demonstrate how a one percent change to each of eight Fiscal Focus levers will impact your profit. Fiscal Focus levers are things that executives can change in order to influence the performance of the business. As you can see, the lever that has the biggest impact is price. But it’s interesting to note that variable indirect costs has a lower impact than many other levers, something to think about if cost-cutting is one of your main strategies.
Sensitivity analysis shows you how to allocate your resources
Sensitivity analysis shows you how to allocate your scarce resources to where they’re going to have the biggest impact. An analysis of your business will clearly show what is most effective at creating value and improving your performance. How much easier would it be to make business decisions if you knew how effective the changes would be before you made the decision?
Contact us on how to get specific information on a sensitivity analysis for your business.
Join us again next time as we look at the Mathematics of Pricing. (This one may surprise you! 😯 )
Core Management Principle 1 – 3W Accountability
Welcome to our series of blogs looking at the Core Management Principles. The first of which covers what I call 3W Accountability
“The price of greatness is responsibility”
– Winston Churchill.
I like this quote, not because of the words that are in it but because of the words that are not in it. Churchill did not say the price of greatness is intellect or hard work or turning up to work on time or being a nice guy. It’s about taking responsibility. When I was 25 years old I was asked to take over and turn around a software company that was doing badly. I was terrified. Nearly everybody in the company was older than I was. My first major action was to gather all the key executives together. These days we would call it a “strategic planning” session. But back then I just called it a “what the hell am I going to do?” session.
I found the executives had plenty of knowledge in their own areas and we came up with some excellent ideas that we made into a plan. We needed to formulate those ideas into actions and everyone needed to play their part.
How do we make people accountable?
The answer is by using a process that is very simple. It’s called the 3 Ws. Each time you define an action, attach the 3 Ws to it – What, Who and When. Pretty simple, isn’t it? What is the action? Who is responsible for completing that action? When will the action be completed? The group defines the What and the Who and the Who defines the When. You as the CEO set an expectation that one of two things will happen by the When. One, the action will be complete; or two, if the person cannot complete the action by the deadline, they come back to group and ask for an extension, prior to the deadline.
So, we come back together for the next meeting and go through the actions we agreed on last time. Most people have completed their actions. But one person hasn’t. What happens next is critical. I stop the meeting. I say in a quiet but firm voice, “That is not an acceptable answer. That answer has disrespected this group. We made an agreement a week ago that one of two things was going to happen by the When. It’s not acceptable.” Suddenly the room is deathly silent. Everyone will anxious to complete action items next time. And you can be sure that ten minutes before your next meeting you’ll have a flood of people coming to your office and asking for an extension.
And that’s ok. Because what you’ve now learnt is who in your business is overwhelmed, who in your business is not able to meet deadlines, who in your business is taking you for a ride, and those who are the valid contributors in your business who will help dig us out of this hole. And believe me, those things are really handy to know. I did turn that company around and I’ve used the 3Ws technique for every turnaround that I’ve done since. It works.
Now that you have got your people to be accountable, how about knowing which of the actions will have the most impact on your business. Come back next time to find out when we look at Sensitivity Analysis.
The next in the series of Core Management Principles looks at an introduction to Fiscal Focus.
Want to know more about the 3Ws or any of our other tools, just contact us – it’s easy!
The 4 Business Quadrants – Your Operations
Your operations are the engine of your business.
This includes equipment, systems, procedures and supplies. All of these enable your business to produce its product or service.
The next two years will bring rapid change, which creates opportunity and potential growth. Traveling around the US, we consistently hear growth forecasts of up to thirty percent in the next twelve months. How exciting! But consider this question first – how well equipped is your business engine to seize these opportunities?
When the financial crisis happened, the operations of businesses changed. The first indicator was the increase in the number of days for Accounts Receivable. It was an early warning sign of tough times ahead. Next, there were pricing pressures, initially called downsizing, later changed to rightsizing as the operations became leaner. The engine you now find has lean capacity, tight pricing and with Accounts Receivable higher than they should be. And this is the engine you’re going to ask to grow by thirty percent?
“Now, let me introduce another concept, the second wave of bankruptcy.
It’s a sad fact that many businesses went under during the financial crisis. As sad as that is, maybe it needed to happen. The poor performers are weeded out and the strong ones remain to grab the opportunities in the improving economy. But not all businesses that survived the first wave of bankruptcy will survive the next two years.” – Nick Setchell
Consider the capacity of your engine when making your growth forecasts. It’s much better to grow by twelve to fifteen percent with a sensible pricing strategy, than by thirty to forty percent with a foolish pricing strategy. A business with the latter is a candidate for bankruptcy. It’s going to happen to many businesses, so be sure it doesn’t happen to yours.
‘Your Operations’ is the final of the 4 Business Quadrants. Feel free to go back and read about the other quadrants – Your Foundation, Your Market and Your People
Join us for our next series of blogs on Core Management Principles. The first one will look at what I call ‘3W Accountability’. If you want to more, contact us to have a chat with Nick Setchell.
Celebration Culture
Welcome back to our readers! In our last blog Your People, we discussed the important role your staff play in your business. Today we will be looking at ways to boost morale among your staff by creating a celebration culture.
Create a Celebration Culture in your business
Why have a Celebration Culture
It’s important to celebrate regularly in your business. People respond well to positive stimulation. But when times are tough, it’s easy to get caught up in negativity and forget about celebrations. This mood filters through to all your people.
“But the tougher it gets out there, the more you have an opportunity to win. Let’s turn around that negative outlook and think about what we have to celebrate. What are we doing well? What are we proud of? What about the fact that we’re still here? You know who isn’t celebrating that? The people who are no longer in business. Well, we’re here and that’s worth celebrating.” – Nick Setchell
How to create a Celebration Culture
Find something you can celebrate each week. If someone wins an award or delivers an outstanding customer experience, there’s a great reason to call it out and generate pride in the business. Celebrations don’t have to be expensive or on a large scale. Ideas can include recognizing achievements in meetings, providing morning tea, issuing small mementos such as pens or coffee mugs with positive messages or hosting a lunchtime/after work BBQ. Not only does this give your people an opportunity to gather in a more relaxed setting, it gives you as the CEO an opportunity to tell your people in person what a good job they’re doing.
If you’re the type of boss who doesn’t often praise your people for their achievements, creating reasons to celebrate will have a powerful positive effect on morale. And if you’re the type who constantly hammers your people to do better, it can have an even greater impact. If you just push your staff all the time, they will get used to it and will just stop listening. So it’s important to keep the right balance of encouraging your people to do better and celebrating their achievements.
Come back and join us for our next blog where we will be focusing on Your Operations and how well equipped your business engine is to seize growth opportunities.
Want to hear more about RealTime CEO and how it can help your business? Get in touch with us and organise a chat with Nick Setchell.
The 4 Business Quadrants – Your People
Your people are the people who work in your business. Their input allows your business to produce its product or service. ‘Your People’ is also the 3rd quadrant in the 4 Business Quadrants.
How do you know what kind of people you have working for your business? Do you have validated way of assessing whether your people are doing what you’ve asked them to do? I’m sure each of you has uttered those immortal words, “People are our greatest asset.” You may be right. If you are, then one of the most critical parts of your job, whether you like it or not, is to be a part time psychologist for your people. CEOs have many qualifications but a degree in psychology isn’t usually one of them. Most CEOs are not qualified to do one of the most important parts of their job. So, how do we manage the different skills and challenges of our staff members? The good news is that people assessment tools are more powerful and more readily available today.
How do we communicate with people in other areas of the business? People come together from different areas of the business but everyone has different skills & different areas or expertise. It helps if we can create a common vocabulary that enables everyone to participate. For example – in terms of plain English measurement of business performance, check out our blog on Fiscal Focus.
Unlike other business assets, it’s much harder to predict what is going to happen with people because human beings have free will and different people will respond to different management styles. Try to establish what makes your people tick and think about how you could vary your management style to get the best out of your people.
If people are our greatest asset then it’s important to keep them people happy. And it’s especially vital during tough times. In our next blog we will discuss Celebration Culture and how you can improve morale in your business.
Think you need some more advice in this area? Reach out to us and we can help you.
Dominant Competitive Advantage (DCA)
What is DCA
Those of our readers with sales experience will know about unique selling propositions (USP). They are the reason that one product or service is different from and better than that of the competition. Dominant Competitive Advantage (DCA) is to the whole of business what a USP is to a product or service. What is it about your business that is superior to your competition? Why should a potential customer deal with you above any other business?
Most midmarket companies don’t have a DCA. It’s surprising that when we ask this question more than fifty percent of the respondents think their DCA is customer service. This sounds good until we test it through the most stringent filter – is this something YOU can say that your competitors cannot? Are your competitors saying they provide good service? Probably! Whether they are or not is not really important – if you keep pushing your case on “customer service” your prospect will not be able to distinguish you from everyone else saying the same thing and then you will be forced to compete on price . Very few businesses want to end up here – only the biggest, deepest pocket player in the market will win this battle.
Does your DCA pass the test?
Your DCA is a powerful simple reason why your prospect should deal with you and not your competitor. Yes it is a strength of yours but it is more than that. Good DCA also pass these tests:
- Focused and simple
- Objective
- Quantifiable
- Self-centered
- Supported by stories
- And most importantly, not stated by competitors
Once you’ve found your DCA, build your business communications around that distinguishing factor. Every component of your communications should relate back to your DCA. Your website, advertising, proposals, bids, elevator speech and anything else that represents your business should all emphasise what makes YOUR business the best.
Finding your DCA is not easy but it is worth the investment. How do you find your DCA? Ask us. We are can help you distinguish your business from all of your competitors.
The 4 Business Quadrants – Your Market
In our previous blog “The 4 Business Quadrants”, the second quadrant is called “Your Market” and is defined by the relatively simple question “Who are your Customers?”.
Defining Your Market
Defining your customers is often easier than deciding how you will identify, attract and interact with them. There are many components to these questions but 2 key elements are
(i) the definition of your market and your marketing strategy and
(ii) the definition of your sales tactics.
The terms sales and marketing are often grouped together, so often that we can hear them as one word, salesandmarketing. They are actually two very different functions. One is tactical; one is strategic. The sales function is tactical, where you identify a prospect, qualify that prospect and close the deal. The marketing function is strategic; it raises awareness and increases the possibility of people wanting to do business with you.
Successful companies have learned that it is logical and productive to put the strategic before the tactical, in other words, have your strategy in place before implementing the tactics to achieve that strategy. Large companies spend millions of dollars on marketing strategies to evaluate their market BEFORE they try to sell their product.
In contrast, most midmarket companies have a tiny marketing division tucked at the bottom of the sales team. These companies have put the tactical before the strategic and often pay a handsome price for this mistake.
Once you have defined your marketing strategy and sales tactics, challenge yourself – are they complimentary? In tough times, sales teams often resort to the predictable conclusion “If I don’t drop my price I will lose the sale”. This behavior may not be consistent with your market reputation or your marketing strategy.
Sales people who don’t have a clear understanding of the marketing strategy or are not able to differentiate their offering from the competitors predictably find it easier to drop the price than to work hard at the real skills of selling. As will be identified in future blogs dropping prices can often be the quickest way to destroy value in your business.
Make sure you come back to read about the other areas of the 4 Business Quadrants – Your Foundation, Your Operations and Your People.
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The 4 Business Quadrants – Your Foundation
In our introduction to The 4 Business Quadrants, you will see that the first quadrant is “Your Foundation”. The foundation of your business is your business’s reason for being.
Also, when we discussed Business Differences and Similarities , we noted that one of the things linking businesses around the world is that they all have a business foundation. Why does your business exist?
This sounds an easy question to answer until we establish the rule that you cannot answer it numerically. You do not exist to make profit, cash flow or money. These are the results of you doing what you do well.
Your business’s reason for being (or business foundation) is a deeper issue providing you with a compass to determine all other business strategies. If it is not well defined in your business, then all other strategies will be compromised.
How do you assess your business foundation?
One of the easiest ways to assess your business foundation is to ask a number of your staff members, “Why do we exist?” Once they have answered in a predictably numerical fashion, ask the question again explaining that you are seeking a non-numerical reason. If the next set of answers all follow a common theme, you have a strong foundation. However, if, as in most cases we have experienced, there is a huge variety, then your foundation is weak. Presented with this situation, I am sometimes tempted to ask if all the attendees who answered the questions work for the same business!
You may be surprised how powerful this simple exercise is. It can generate passionate and valuable conversations amongst your key employees as well as give you a clear understanding of their views of your business.
Once you’ve established your foundation, you need to communicate it clearly to your team. Everyone needs to know your foundation to be able to move forward together. The foundation needs to be the basis of your business culture. Make it an integral part of all your business disciplines: interaction with your market, interaction with your people (internal and external) and a guide for your procedures and operations.
To be able to steer your business in the right direction, you need to have an accurate compass and that compass is your foundation.
Is your business foundation able to support your future vision for for the business? Come back next time to hear about how your foundation plays into the interaction with your market.
Make sure you come back to read about the other areas of the 4 Business Quadrants – Your Market, Your Operations and Your People.
To find out more about how we can help your business, check out some of the tools available through RealTimeCEO.
The 4 Business Quadrants
How is your Business Balance?
In our blog The Perfect Skill Mix of a CEO, we discussed the ideal attributes for business leaders. In this blog, we will look at the ideal skill mix for your whole business by looking at the 4 Business Quadrants.
There are four business disciplines as detailed in the following graphic:
- Key Functions – Busines Quadrants
Your Foundation:
This is the reason your business exists. It provides motivation to combine your people and processes to create your products and services ready for delivery to your market.
Your Market:
This refers to your strategies to interact with your market, clients and customers that buy your product or service.
Your Operations:
The engine of your business, which includes the equipment, systems, procedures and supplies that enables your business to produce its product or service.
Your People:
The people who work in your business and help to create and deliver your product or service.
We will provide more information about each of these quadrants in future blogs.
Business Balance:
In Fortune 500 companies, these quadrants are equally important and have huge resourcing levels. This is the ideal scenario because all four quadrants are vitally important. Sadly, this is not usually the case in midmarket companies, where the balance is heavily weighted towards operations and to a lesser extent, people. While you may be focused on sales, often your wider “market” strategies are thin. Unfortunately, little focus is applied to your business foundation.
Business Balance – Ideal vs Typical
Does your business need to invest more time and energy into your foundation and your market? Probably.
If your business has weaknesses in any of these areas, it puts you at risk of business failure. These areas even have their own methods of decline. Your business can collapse if your foundation isn’t strong enough. Your business can starve if your market strategies are ineffective. Your business can choke if your engine is not able to accelerate at the required rate. And if you have the wrong people, who are sucking the energy out of your business, it can suffocate.
But on a happier note, you now have the opportunity to avoid that by ensuring your business is solid all the way through. Come back and visit us again and we will elaborate more on each of the business quadrants and show you how to keep your business strong and healthy.
Want to know more? Check out all our simple tools for improving your business.
Business Differences & Similarities
In our last blog, The Perfect Skill Mix of a CEO, we talked about differences among business leaders and the ideal mix of skills. As people are different, so too are businesses. At RealTime CEO we’ve assisted businesses all around the world. These businesses differ in:
- Industry – the type of industry in which the business is involved e.g. manufacturing, engineering, financial, hospitality, consultancy etc.
- Resources usage – some businesses are reliant on machinery; others rely more on people; others rely on technology.
- Commercial versus charity motivation – some businesses have a commercial, profit motivation; others have a charitable or not-for-profit motivation. (Note: Don’t get them mixed up and become a commercial, not-for-profit business. It’s not a good combination!)
- Capacity and constraints – some businesses have greater resources and can buy the best machinery or attract the best people.
But there are other things that all businesses have in common. They all:
- Use INPUT to create OUTPUT – businesses add value (either through production or people) to resources to create a product or service.
- Have foundation principles – your business foundation is the reason your business exists, why you do what you do (more about this in our next blog, Business Foundation).
- Utilise people – where would any business be without its people?
- Have operational functionality – including procedures that govern how to do something and standards against which the business is measured.
- Are seeking access to a market – obviously there needs to be a market for your particular product or service. Some business leaders are also able to influence their markets. RealTime CEO can help you do this.
At RealTime CEO we accept that businesses are different and we can accommodate the needs of your business. We also know the people in your business have different skills and backgrounds and don’t always understand the financial impact of their decisions.
If you’d like some information on teaching your people to speak the same “financial language”, check out our Fiscal Focus blog.
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What is the Perfect Skill Mix of a RealTime CEO?
Previously we have discussed J Curve Management and 24 Month Rolling but what makes a great RealTime CEO?
We encounter lots of exciting opportunities in our executive journey, which we can harness to great value in our business. But for all the opportunities we seize, we also face hurdles, challenges and frustrations, things that could hold us up – if we let them hold us up. How you choose to deal with those frustrations will define how successful you are as a CEO. Frustrations cause many people to lose sight of their goals, become negative and complain that it’s not fair. But if you’re one of those rare people who can look at almost any storm cloud and turn it into a positive, then you’re going to win in any scenario.
Being a successful CEO requires the ability to lift your eyes and look out over the horizon, as frequently as possible. This will enable you to define the journey and then plan the strategy and vision for your business. There will be a hundred good reasons why you can’t do this, the eighty things you have to do today and the twenty things you still haven’t done from yesterday. But if you don’t do this, you won’t succeed. Once you have your vision (and it will change every day because your landscape changes every day), you need to be able to share that vision with your people. You need to be good at what you do and you need to have a strong understanding of numbers and finance. The following graphic depicts the perfect skill mix of a RealTime CEO.
In most mid market companies, the CEO’s skills are not quite so balanced.
CEOs of midmarket companies are usually leaders because they’re good at what they do e.g. good architects, good builders, good technicians or sales people. The business builds up around them and one day, the founder becomes the CEO. So while the CEO is operationally very skilled, he or she is unlikely to have had any formal training in running a business. Businesses don’t usually fail because the CEO is not skilled at the original job, more often because there is a lack of understanding of the other key components: Strategy and Vision, Leadership and Motivation and Understanding of Finance.
Come back and visit RealTimeCEO again to see how you can learn from the past to influence the future.
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J Curves – The Risks
In our last posting on J Curves, we discussed ownership of J Curve investments and the problems involved if ownership is not managed effectively. Now I am sure you all realize that there are other risks associated with J Curves, so what are they?
No J Curves
Whenever I come across a company with no J Curve investments, I know I’m seeing a company that isn’t going to stay in business for the long haul. How can you adapt to the constant changes in the market (opportunities and threats) without J Curves?
Failed J Curves
When a company has a J Curve that fails, the financial losses and/or negative publicity can damage the business, sometimes fatally.
Too many J Curves
Even forward-thinking companies, seeking to innovate and stay ahead of the market, can have difficulties with too many J Curve investments. Having too many J Curves at once can sink a booming company.
When Rolls Royce, a company known for engineering and quality, declared bankruptcy in 1971, most of the blame was attributed to the technical problems of the RB-211 jet engine. Using lightweight carbon fibers in the fan blades to reduce engine weight caused the blades to shatter when hail or birds were sucked into the seven-foot fans. Deadlines were missed and production costs skyrocketed – common occurrences with J Curve investments. Despite the issues with this one engine (which, in the next ten years became one of the world’s most popular jet engines), the biggest problem was the company having too many costly developments running simultaneously. At the time of Rolls Royce’s bankruptcy, almost forty percent of its employees were working in engines that were not yet profitable.
Too many J Curves was a major factor in the company’s bankruptcy.
J Curves are vitally important to a company, however too many, too few or failed J curves can be fatal.
By properly managing your J curve investments, you can eliminate much of this risk.
Come back for my next post, when I’ll start to share my rules for managing J Curves. In the mean time, you can find out more by contacting us. It is easy.
24 Month Rolling – Resistance to 24 Month Rolling
In my last blog on 24 Month Rolling I introduced you to the concepts of Trailing 12 Month Measurement (TTM) and 24 Month Rolling Forecasts. Today we will be looking at areas of resistance to 24 Month Rolling.
I’ve implemented my 24 Month Rolling system on numerous occasions to businesses all around the world. Each time I’ve met with resistance from someone in the company.
24 Month Rolling forecasting is a different approach to predicting and influencing the future. Our 24 Month Rolling software provides you with trailing twelve months (TTM) figures plus projections for the next twelve months, in the one statement. This gives you the best possible picture of your business performance, incorporating past, present and future. It’s not just a forecast mechanism; if adopted properly, this process can have a profound impact on your management culture and effectiveness. But because it’s so different, people are going to resist it because they don’t like change.
Some of the more common areas of resistance are:
1. We don’t have a crystal ball to determine the future. What if our forecast is wrong?
I can deal with this quickly and take the pressure off them by saying that all forecasts are going to be wrong. Nobody has a crystal ball; nobody has a perfect view of the future. This process has never been about the forecast being right or wrong. It’s about the forecast being as accurate as it can be, given all of the information you have at your disposal. And then assessing what our risk profile is if reality is different from the forecast.
2. The idea that we’re moving the goalposts. If each month, we go in and change the numbers on our forecast, how will we ever know where we are?
There’s significant difference between forecasting your perception of the road ahead for the business and changing the targets that you want to achieve. 24 Month Rolling doesn’t change the targets, it simply tracks, as more information comes to light, whether or not you are above or below a target on a 12 month rolling basis.
3. Budgets take time to prepare and then they need to be signed off by the Board. The preparation and approval process takes more than a month so to try to do this each month would be impossible.
Let me address that very clearly. 24 Month Rolling does not replace the necessity, if the necessity exists, to report to external parties on an annual basis, whether that party is a board, a bank or any other external party. 24 Month Rolling is the internal management mechanism, which not only predicts but also influences the future ahead of the business. The real value here is that everything you’re doing in your once a year set period can be done using a rolling 12-month period. Once a year a rolling 12-month period will be identical to a fixed annual period. So everything you’re doing in your fixed annual period, you can do with 24 Month Rolling. The only difference is that 24 Month Rolling will be useful twelve times a year. The fixed annual period will only be useful once a year. But there’s no reason why you can’t take a copy of the forecast from 24 Month Rolling, lock it down for twelve months and send it to the Board for signoff. That can happen as an adjunct to the 24 Month Rolling process.
4. Some transactions are only processed once a year e.g. depreciation.
As long as those transactions are processed in the same month each year then every 24 Month Rolling period will have one of those months. For example, if depreciation is processed in June (as it typically is in Australia) or December (as it typically is in the US) each year, then every rolling 12-month period has one June or one December. So you will always have those once a year transactions included.
5. This takes too much time and will cause more work than we’re currently doing.
The reality is that once the process is set up, 24 Month Rolling will be less work, not more. In fact, it will share the workload of predicting and influencing the future across all executives, not just the finance team.
6. People don’t like the word budgeting.
Quite right. Everywhere I go, people hate the word budgeting so we don’t use that word, we talk about forecasting or planning.
7. My accounting system will not handle this process.
Any limitations the accounting system may create are irrelevant because it’s not within the accounting system that we’re going to manage this process. In our next blog we’ll be talking about the some of the common pitfalls of 24 Month Rolling however, one of the more common pitfalls is to set up your forecast the same as your accounting system chart of accounts. If you do this your forecasting process will not be as effective as it should be.
8. I already have a crowded management agenda, how am I going to fit an extra item into it?
We state and now have strong evidence from my experiences around the world, that the conversations coming out of 24 Month Rolling are some of the most valuable monthly conversations that executive teams can have. Our response is that one of the agenda items currently in your meeting is probably wasting time. Remove that item and put this one right at the top.
My final comment is not so much an area of resistance but an anecdote. At one of my presentations in the UK I was confronted by a somewhat angry Englishman who said (you’ll have to imagine the upper-class English accent), ‘This is blindingly obvious. Why haven’t my financial resources told me about this before?’ He was quite angry that he hadn’t been told something so powerful and something so obvious. I’m very glad that in the end he didn’t shoot the messenger but was able to benefit from our process when he saw how much it could do for his business.
Come back and join us next time when we’ll discuss the common pitfalls associated with implementing 24 Month Rolling. Also, feel free to contact us to find out how we could help in your business.
J Curve Investment Ownership
In our previous blog, we looked at “What are J-Curve Investments?”. Today we would like you to think about your own J Curve investments and consider the following:
- Are you able to name the person in charge of each one?
- Is a single person responsible for managing and tracking their progress, and for measuring results and ensuring they don’t drastically damage the company?
- Do you have one person who is responsible for overseeing ALL of the J Curve investments?
In many mid-market companies (companies between $1 MM and $100 MM in revenue), rarely does a single person own this responsibility. Sometimes the responsibility is shared by a group of executives. This can work because mid-market CEOs and their leadership teams intuitively understand when they’re taking on J Curves.
But most mid-market companies don’t have a formal process for evaluating and managing strategic investments. Nor do they usually measure and track either the performance of the J Curve as an independent entity, or its impact on the business as a whole.
Should they? Absolutely!
Mid-market CEOs need to understand firstly, how many J Curves the company has, and secondly, the current status of each one. As well as the impact the investments have on cash flow, return and profit. They also need to appreciate the hidden cost of J Curves which is the amount of “executive head-space” that is absorbed. This cost is of course the opportunity cost of the other valuable tasks the executive could be completing.
Tune in next time when we’ll look at the risks involved in J Curve investments.
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Core Management Principle 2 – Fiscal Focus
Do you and your executives truly understand all the numerical information provided by your accountant? In my experience, most don’t. But with Fiscal Focus, you can!
Having a background in accounting, I’m lucky enough to understand double entry bookkeeping. Traditional accounting methods such as this are handy for reporting business data to agencies like the tax authorities. But the way the information is presented to reporting agencies is not always the most useful format for business leaders.
One of the issues I see everywhere is that business people who rely on financial data for decision–making have no prior exposure to these kinds of reports. Or if they have, they don’t understand them. Accountants provide reports such as Profit and Loss Statements (P&L) and Balance Sheets. The P&L doesn’t require a lot of training to understand it. That said, most managers tend to rely on the two numbers at the top and bottom of the report being revenue and profit. The Balance Sheet, containing asset, liability and equity figures, is harder to decipher for managers who aren’t trained in accounting.
After moving into management, I realised that executives were highly capable of their particular tasks but often didn’t understand the wider ramifications of their actions. This resulted in people acting as silos with all the problems that entails. By introducing a plain English measurement, which could be understood by managers without a financial background, I was able to demonstrate the impact of my team’s actions on the entire performance of the business.
This morphed into Fiscal Focus – a plain English set of numbers that will help any business, of any size, anywhere in the world, in any industry, to understand their true performance as well as actions impacting the business’s performance.
The diagram below depicts the Fiscal Focus Pyramid. At the top are two main indicators of the health of the business. These indicators are born from two fundamental questions that all entrepreneurs should ask:
- Is the return on investment commensurate with risk?
- Have we generated enough cash flow to continue being an entrepreneur?
Underneath are four mathematical equations that enable us to determine the strengths and weaknesses of any size or kind of business.
On the next level we have eight fiscal focus levers – things that executives can change to influence the performance of the business.
Fiscal Focus Pyramid
Not only does fiscal focus provide a clear insight into the strengths and weaknesses of a business, it also uses a mathematical process called sensitivity analysis. This enables you to determine which one percent change to any of those levers will have the most profound impact on the business’s strengths and weaknesses. Moreover, it will clearly show what is most effective at creating value and improving the cash flow performance of the business.
How much easier would it be to make business decisions if you knew how effective the changes would be before you made the decision?
Our next blog on Fiscal Focus will discuss how this thinking can be used to validate decisions using the simple yet powerful “Should We? Can We?” decision validation technique. You can view our Scenario Builder here!
Want to know more? Then contact us – its easy
24 Month Rolling Forecasts
Do your company’s reporting methods guide you into the future or force you to look backwards? 24 Month Rolling Forecasts provide a powerful management technique that helps you predict and influence the future.
For over a decade I’ve had the privilege of working with businesses in the US, Australia, Canada, the UK and New Zealand, across a wide range of industries. Many of them have been very successful companies, led by shrewd CEOs.
However, when analyzing their financial statements and methods of budgeting, I am constantly surprised that so many companies continue to rely on Year-to-date measurement and annual budgeting.
While Year-To-Date (YTD) is the most common method of financial measurement, it is also the least effective. Likewise, even though annual budgeting is the most common format it is fundamentally flawed.
Today I’m going to introduce the concept of Trailing 12 Month Measurement (TTM) and 24 Month Rolling Forecasts.
Limitations of Year-to-date (YTD) measurement and traditional budgeting
YTD only measures performance over a full year once every year (at the end of the fiscal year). For the other 11 months it is measuring an incomplete year thereby exposing the user to seasonal variation.
Traditional budgeting is also flawed for many reasons:
- Only done once per year
- Focuses only on the income statement,
- Often driven by the CFO who is not necessarily the best qualified person in the business to predict and influence the future.
- Each month hours are wasted comparing variances between actual and budget. These variances may be simply that changes that have arisen during the year that weren’t visible when the budget was made. Even the best CEOs probably don’t have real psychic ability!
Consider this analogy:
Companies that budget their future for the next twelve months, without updating it each month, are like a car driver who stares at a spot 120 metres in front of them and continues to stare at the same spot until they reach it. Safe drivers know to keep their field of vision consistently forward.
Are you staring at a spot on the road and putting your business at risk? Or do you believe that business conditions are constantly changing and each month we learn new and valuable information about the road ahead?
Why is Trailing Twelve Month (TTM) and 24 Month Rolling more effective?
TTM is underpinned by the internal recognition that each month is the conclusion of a 12 month period. No month end is any more important than any other. By viewing the business this way, we remove the impact of seasonality. This is important because seasonality can create a veil that disguises trend changes.
24 Month Rolling forecasts have numerous advantages over traditional budgeting, not least is the ability to accommodate a rapidly changing landscape. If a business could confidently say their landscape only changed once a year, traditional budgeting would be fine, however, I have never met a business that could say that!
24 Month Rolling forecast provides you with trailing twelve months (TTM) figures plus projections for the next twelve months, in the one model. This gives you the best possible picture of your business performance, incorporating past, present and future.
Imagine if you could get inside a time machine to go forward in time 12 months… You could see where your company is at that point of time and look back to the “current date” with all the benefits of hindsight. And if you weren’t happy with your hindsight view of the current date, you could jump back in the time machine and return to the current data and do something about it in RealTime. 24 Month Rolling Forecasts provide that time machine!
RealTime CEOs learn from the past so they can influence the future by acting now, in RealTime.
In the next 24 Month Rolling post, I will expand on how to overcome predictable yet meaningless resistance to 24 Month Rolling forecasts.
If you would like to find out more, you can always contact us. We’d love to hear from you.
What are J Curve Investments?
The old adage tells us that you have to spend money to make money.
J Curve investments are strategic decisions to spend money today to receive a benefit tomorrow. J Curve investments result from decisions to incur a short-term financial loss, which will be recovered in the future. The long-term benefits should outweigh the cost of the initial investment.
As I have indicated on the J Curve Management introductory page, every business has J Curves; some examples include:
- Adding a new product line
- Accessing a new market
- Hiring new staff
- Purchasing new equipment
- Opening a new location
- Moving manufacturing overseas
- Investing in R&D
- Acquiring competitors
J Curve investments can be classed as ‘macro’ – having an impact on the entire business, or ‘micro’ – having an impact on part of the business.
How important is it to properly undertake and manage J Curves? As I see it, the key to entrepreneurial success lies in identifying, prioritizing and managing J Curves.
In my next post on J-Curves, I will discuss the importance ‘Ownership of J-Curve Investments’
If you would like to find out more, you can always contact us. We’d love to hear from you.
Should We? / Can We? Scenario Builder
After many requests for a demonstration of the ‘Should We? / Can We? Scenario Builder’, we have now published a screencast for you to view.
Should We? Can We? Scenario Builder
To learn more about this powerful tool, start the Subscription process …. (don’t worry – it’s free to start!)
The new RealTime CEO website
Welcome to the new RealTime CEO website!
After 10 years of delivering Vistage and TEC workshops and providing tools and services under the Fiscal Focus brand, we decided to rebrand to better communicate the essence of what we represent to our market.
Our offering isn’t just a set of numbers for financially-minded CEOs of mid-market companies; it’s a set of software tools and support to allow you see what’s happening in your business right now, in real time, and in the future.
Though our brand is new, our software, support and tools have been validated in over 1,000 companies worldwide. They work for any company, in any industry, of any size, anywhere in the world.
If you like what you’re seeing, keep in touch. We’d love to hear from you.
The New RealTime CEO Website
Welcome to the new RealTime CEO website!
After 10 years of delivering Vistage and TEC workshops and providing tools and services under the Fiscal Focus brand, we decided to rebrand to better communicate the essence of what we represent to our market.
Our offering isn’t just a set of numbers for financially-minded CEOs of mid-market companies; it’s a set of software tools and support to allow you see what’s happening in your business right now, in real time, and in the future.
Though our brand is new, our software, support and tools have been validated in over 1,000 companies worldwide. They work for any company, in any industry, of any size, anywhere in the world.
If you like what you’re seeing, keep in touch. We’d love to hear from you.
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Recent Posts
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