Part I – Protecting the Financial Success of your Company Robert Gittings, CPA Partner B2B® CFO
THE DANGER ZONE B2B CFO® was founded in 1987 by Jerry Mills Firm now has 180 partners in 39 states Shared resources of the firm Indentified distinct patterns in emerging and mid size entrepreneurial companies Wrote book based on actual experiences of our firms many clients
“Unofficial Organization Chart” Finders – future thinkers Minders – historical view Grinders – live for today
GRINDERS Today is all that matters Most Finders start as Grinders Doing the work of the company: Plant employees Construction trades Sales People Engineers Rely on Finders and Minders to provide activities, resources, goals process, etc.
MINDERS Live In the Past Critical to companies success Key People: Bookkeeper, Controller, IT Manager, Contract Administrator, Purchasing Manager, Etc. Deal with past results and the interpretation of data and facts Plan, Forecast, Analyze Finders are not good Minders. Dislike meeting with accountants, attorneys, bankers, etc.
FINDERS Entrepreneurs are Finders The Future is all that matters Spend a significant amount of time and energy pulling people into the future Finders activities: Building relationships with customers Creating relationships with vendors Delegating tasks to employees Causing Sales and Cash to come into companyB2B TRUISM: Finders Spending all of their time on these activities will cause significant increases in Sales in the Future
What is the Danger Zone?“The Danger Zone is created when the cash needs of your company far exceed the cash available to meet those needs”Key word - “Far”B2B TRUISM: A significant increase in sales typically means the company might have a decrease in cash
HOW DO COMPANIES REACH THE DANGER ZONE?There are four periods of transition during the growth phase thatcompanies tend to move through
Period 1 – Infrastructure creation Infrastructure of company may include:Employees VendorsComputer systems BankersOperating Procedures AccountantsMachinery & Equipment AttorneysWebsites Insurance Agents
During Period 1 Finders create this infrastructure Based around “Customer Activities” Finding Customers Closing Sales Delivering goods and services Invoicing Collecting Cash SERVICING CUSTOMER NEEDSFinders experience great joy in creating this customer needs based infrastructure
Period 2 – Infrastructure Peak Occurs when the gap between the company’s cash and cash needs is the greatest It is the result of the infrastructure created to meet customer needs Often causes a false sense of security about the future
Period 2 is the result of the Finder Focusing on the company’s customer based infrastructure, which created: High Level of Customer Service Short Cash collection Cycle Few Customer Complaints Low Overhead Lean & Mean operation
This success (High Customer Satisfaction; Exceptional Cash Flows) often leads to : Less thought given to future needs of the customer More thought given to spending resources on things that do not always lead to customer service Examples could include: Bonuses 401 K’s Vacations More staff Nicer Offices Etc., Etc.,
Period 3 – Outgrowth of Infrastructure Focus on Growth and change in spending has caused the company to out grow their infrastructure Company’s infrastructure cannot support the “weight” of the volume Company ( and Finder) must stop it’s normal process of Sales and Delivery to strengthen the foundation or otherwise risk the entire company Distractions Stresses the Infrastructure of the company
Period 3 – Recognizing Symptoms Customer complaints increase Orders decrease Productivity Decreases – Downtime Increases Overtime Increases Cash collections slow down Computer system problems Vendor issues Finder is spending less time with customers, more time “working in the business”
The Danger ZoneDuring this time, the Finder’stime shifts toward being aMinder
Period 4 – Cash Needs Have Exceeded Cash AvailableConsequences: Finder’s time shifts away from finder activities, more time on Minding activities Finder spends less time on creating relationships with customers, vendors, employees, etc. Less time spent on causing sales and cash to come into company Finders are not good at minding This time shift of Finder normally results in: Loss of Customers Damaged Business relationships Loss of future Customers
Period 4 – Potentially Fatal Consequences of TDZB2B TRUISM: Your competitors are actively planning today to take away your customers tomorrowB2B TRUISM: Someone is spending time with your current and future different customers. If not you, it will be your competition
Options For a Company that enters The Danger ZoneA) The Finder changes habits and grows sales, which might result in an escape from TDZB)The Finder escalates the minding activities, which causes sales to decrease, which has the likelihood of a bad exit strategy for the companyWhen a company enters TDZ, one of two things will happen: Sales will increase or decrease. Sales will not stay flat.
Question The Finder must answer: What comes first in The Danger Zone, Cash or Sales?Answer: The Finder will need to focus on customers and find sales. Other people will need to find cash.B2B TRUISM: During TDZ, the Finder finds sales and the senior- level executives of the company find cash.
Ultimately, The Finder must leave minding to others to escape The Danger Zone.
How Do We Avoid the Danger Zone?B2B TRUISM: The Failure to plan infrastructure will eventually hurt the company and will take away time from finding customers at some point in the futureB2B TRUISM: If you expect to beat your competition, you must have better financial information infrastructure than does your competitionB2B TRUISM: The finder must understand the company’s balance sheet
How Do We Avoid the Danger Zone?B2B TRUISM: A Finder cannot run the risk of not understanding the Statement of Cash Flows, and not having cash flow projections prepared by the senior mindersB2B TRUISM: The less Dependency upon key people, especially the owner, the more value will be assigned to a company upon an arms-length transaction saleB2B TRUISM: The better the infrastructure, the higher the probability an owner has to increase a sales price of a company