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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).
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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.
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.
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
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.
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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