Get Clear On Strategic Objectives - To Get Bottom-line Results
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One of the most challenging aspects of running a business of any size is identifying the best strategy for the organization to achieve the desired objectives. Many times we set imprecise objectives such as "increase sales", "make more money", and so on. What we need is to clarity the organization’s intentions.. The ability to set objectives that satisfy the following criteria is vital to aligning an organization for success:
Clear
Measurable
Specific
Achievable (yet challenging)
Executable
Growth-oriented (whether that is revenue, profit, market share, or skills)
Consistent.
Strategic objectives are typically outcomes that require multiple years to achieve and so have a time horizon of three to five years. In order to achieve strategic objectives, the organization needs to set annual or operational objectives that coincide with a calendar year, a fiscal year, or the organization’s operating cycle. . Operational objectives are divided into targets for business units, departments, functional areas, teams, and individuals, and also meet the criteria above. They are often a combination of financial and non-financial measures. This enables the organization to align itself to achieve the strategic and operational objectives.
When objectives are specifically defined, members of the organization can identify with and pursue the sub-goals and targets necessary to achieve the larger objective. Here are a few objectives that convey clearly the desired outcome:
- Increase market share by 10% while maintaining profit margin at 5% by 2009.
- Increase gross margin from 35% to 38% on US client base in 2007.
Using the first example above, the organization understands that increasing market share is to be achieved within the constraint of maintaining profit margin. In other words, if incentives are needed to increase market share, they are balanced with "how low to go" and still achieve the conditional part of the objective – maintaining profit margin.
If market share improvements can’t be made without eroding the profit margin, then the organization must make adjustments to achieve the result. For example, if there is a potential contract with a customer for $1,000,000 and the current company cost structure would leave a 4% profit margin, can the organization do anything to reduce the cost to get back to the 5% profit margin?
Organizations need to examine all aspects of the business equation when attempting to reach strategic and operational objectives. The interconnectivity of the organization’s systems and structures necessitates a thorough understanding of how each action, non-action, or reaction impacts the operational effectiveness and efficiency – what will the numbers look like when results are analyzed.
By properly selecting, setting, and communicating objectives to all levels of the organization, it is possible to align the organization for maximum return on resources and operations. Setting objectives that are clear, measurable, specific, and consistent enables the organization to do the work necessary to make the right choices amongst the opportunities presented.
Every organization has guidelines and boundaries for which activities take priority through the setting and communication of objectives and targets. The organization’s constraints require trade-offs and evaluation of options to determine whether the organization has or can obtain the capability to achieve the specified outcomes.
Here are ten things to consider in setting strategic and operational objectives for an organization:
- What are the core competencies and competitive advantages?
- What are the current and projected influences on the industry and the competitive environment?
- What are the current and future constraints on resources and operations?
- What are the possibilities, probabilities, and capabilities in the organization today?
- What are the previously pursued opportunities that didn’t work?
- What opportunities did work?
- What things are needed in the organization?
- What things should be changed or shed?
- What is the current financial position – debt, equity, cash, etc.?
- What are the current "relationships" with revenue, gross margin, profit margin, etc.?
Every organization has in common the need to set strategic, operational, and other objectives for the company and all of its levels, activities, and people. The ability of the organization to develop strategic objectives must be supported by
- a clear understanding of the capabilities of the organization,
- the ability to grow into the challenges,
- the need to focus on the processes, people and infrastructure necessary to achieve the overall plan, and
- the capability to adapt to changes in environment, competition, and economic factors.
Simply having clear, specific, measurable objectives and communicating them isn’t enough. The strategic (and other) objectives need to be realistic and congruent with what the organization is capable of doing or capable of obtaining to pursue the performance targets.
Understand the Impact of Cash Flow on Growth
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Cash is the life blood of any organization. Without cash to pay vendors, employees and other stakeholders, the organization isn’t viable. Revenue, profit and cash position are intrinsically linked and need to be pursued as interconnected objectives.
For example, if a sale is made to a customer for $1,000,000 on net 30 terms (the customer has 30 days from the date of a correct invoice to pay me), then I am essentially extending my cash collection cycle by 30 days. If I purchased the materials to manufacture the product on 30 day terms, and it takes me 30 days to convert the materials to shippable, finished goods, then what is my cash cycle?
The materials cost $300,000 and are received them on January 15 on 30 day terms.
Payment is due to the supplier on February 14.
The materials go into production on January 20. The finished items are completed on February 20 and shipped.
The customer receives the goods on February 23. The invoice is included and has a due date of March 21.
The cash balance on January 15 is $750,000 and monthly expenses (including payroll, etc.) are $250,000 and are paid on the last day of the month. There are no other sales or pending receivables (cash due from customers).
Balance Sheet
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January 15 |
Cash |
$750,000 |
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January 31 |
Pay Expenses |
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($250,000) |
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February 1 |
Cash |
$500,000 |
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February 14 |
Pay Materials Vendor |
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($300,000) |
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February 15 |
Cash |
$200,000 |
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February 28 |
Pay Expenses |
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($250,000) |
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March 1 |
Cash |
($50,000) |
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Income Statement
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January 1 |
Revenues |
$0 |
|
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February 20 |
Revenue |
$1,000,000 |
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Cost of Goods Sold |
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($600,000) |
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Gross Margin |
$400,000 |
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Operating Expenses |
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($200,000) |
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Profit |
$200,000 |
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As you can see from the above example, the company didn’t have enough cash to pay its bills on February 28, yet posted a $200,000 profit as of February 20. Cash and profit in this example differ because of the timing differences in payments being made, conversion of materials, and collection from the customer. Even when there are no complicating factors like customers disputing an invoice or paying late, companies can be cash constrained.
This is a good point to talk about the cash flow statement. This financial report translates activities on the balance sheet and the income statement into the impact they have on cash. The cash flow statement is divided into three sections based on activities: operating, investing, and financing.
Cash from operations is simply that - the cash that is generated through the normal business processes of selling goods and services. Typical transactions in this section are cash sales, credit sales, and changes in accounts receivable and accounts payable balances. This is the cash position (positive or negative) from running your business and is a measure of how well the organization is performing all business functions. It reflects the efficiency of business processes (including production, collection and payment), appropriateness of infrastructure (efficiency and effectiveness) and the ability to produce (and deliver) to a customer a good or service that has a perceived value and that generates revenues in excess of the costs to produce and deliver.
Cash from investing relates to the activities that the business undertakes to increase capacity (capital projects), buy land, buying and selling equipment used in the business, and to utilize short term securities for temporarily "idle" cash. This is a measure of how successful the organization is at pursuing additional opportunities to expand operations and to do so through re-deploying cash from all activities. The goal is to ensure that available cash is "invested" back into the business in a manner that generates additional cash for use in growing the business. The ability to keep cash from all sources generating a return is being measured here.
Cash from financing represents the cash coming in and going out from debt and equity transactions – dividends, distributions, repurchase of stock, and sell of stock. Cash obtained as debt and equity investment is necessary at various points throughout the life cycle of a business. The ability to fund growth beyond levels that can be directly supported by existing operations is vital to most (if not all) businesses. The mix of debt to equity and the ability to generate a return on resources invested in the business by stakeholders (versus "investing" of existing company resources as in cash from investing activities) are reflected in this section of the statement. Debt and equity stakeholders look to see how much cash will be available to make the required periodic payments to them (interest, principal, dividends, owner drawls).
Each section – operating, investing and financing – of activities plays a critical role in the long term viability of business growth and sustainability. Understanding the components of your business that impact your cash position is imperative to your ability to manage the organization and to have the ability to be profitable and cash positive.
The example illustrated that sales require investment of cash into inventory, labor, and other resources and activities to produce a product. Sales also require business infrastructure to support the sale – before and after it is made. The faster your business grows, the more "investment" is required to support the infrastructure, to obtain resources, and to produce the good or service. The demands for cash increase and require synchronization of the time to convert inputs into saleable merchandise, the collection of cash in return for the delivered good or service and the payment for resources and materials used.
Every organization has a specific sustainable growth rate that is a function of the cash generated from the three activity categories – operating, investing and financing. The mix of these sources in the equation is often determined by:
- Historical levels of cash from operations versus cash employed in the process
- Return on investment (equity and debt) from operations
- Efficiency of operations (return on assets)
- Historical record of returns to stakeholders
- Projected demand for product/service
- Performance versus competitors
- Historical ability to raise and service debt and equity investment
These elements (and others) influence the internally sustainable growth rate and determine how much external funding you can obtain to fund growth beyond the level supported by existing operations. When you are growing, you seek to expand your business base – equipment, manpower, etc. If it is at a rate in excess of the internally sustainable growth rate, you need to assure the external market that you can be trusted to get an acceptable return for them if they invest.
There is a sustainable rate of growth where the business is properly structured to maximize the return on expanded operations. The activities and sequence of "doing business" are timed and refined to achieve the best results. Anywhere above that point, the organization is failing to meet the demand for cash – payments due will exceed cash available – whether from timing or efficiency issues. Below that point, the business isn’t taking advantage of "full deployment" of resources and the opportunities the business has aren’t fully realized. Identifying and achieving "the" sustainable growth rate for your business isn’t a one time thing or even a periodic one. It requires a continuous, dynamic assessment of your results and the impact of each change in variables and conditions to maintain the balance between falling below the point and speeding past the point.
The sales growth rate of a viable organization is a function of the cash conversion cycle, throughput rate for converting inputs into saleable goods/services, and the ability to obtain external funding for operations as needed. Here are key areas to examine in understanding how to manage cash:
- Operating
- Sales Growth
- Cost Control
- Cost of products and services sold
- Expense/cost of infrastructure and support services
- Cash Cycle
- Accounts Receivable – terms, collections, and aging
- Inventory – levels, conversion time, management
- Accounts Payable – terms, management, negotiations, agreements
- Investing
- Capital Projects to Maintain
- Capital Projects to Expand
- Financing
Each aspect of the cash flow equation requires an understanding of the relationship and impact that activities and actions have on the other variables. The interconnectivity of operating, investing and financing activities becomes apparent when you attempt to influence or change one variable without examining the potential impact on the other activities.
Having cash available to meet known and unexpected demands enables the organization to act on new opportunities and to respond to threats. The companies that have a "cash advantage" are able to sustain through tough economic times and even thrive. Take the time to understand your business results in terms of the impact on cash.
Here are some reports you may want to add to your process, if you don’t already have them:
- Customer payments analysis – do they pay on time, the right amount, etc.
- Accounts Payable terms analysis – what terms do you have with your vendors
- Accounts Receivable terms analysis – what terms do you give to your customers
- Aged Accounts Receivable
- Aged Accounts Payable
- Inventory Composition
- Inventory Days on Hand (by type)
- Throughput Rate – time from dock to dock
- Cash Cycle in days
- Sales and Gross Margin by Customer
The more visibility you have to the financial results of your business, the better your ability to synchronize your business to maintain adequate levels of cash.
Enterprise Risk, Sarbanes-Oxley, Payroll and HR Compliance return to top
F.O.C.U.S Resources, the Raleigh Chapter of the Institute of Management Accountants, and AISIS Performance Advisors will hold two half-day workshops on May 22:
Morning Workshop (8 am to Noon)
Enterprise Risk Management and Sarbanes-Oxley
Lea Strickland, President of F.O.C.U.S Resources will present a two part workshop that provides insights into Enterprise Risk issues and how to begin an Enterprise Risk Management program. The second part of the workshop will focus on the elements of Sarbanes-Oxley and how they impact the business, its leaders, and financial professionals.
Afternoon Workshop (1 pm to 5 pm)
Anne R. Harttree, President of AISIS Performance Advisors, will present the perils of payroll and other compliance issues facing businesses and human resource professionals.
To register and for location information, go to:
www.imanctriangle.org
Websites Resources for Marketing Plan Data return to top
For new and emerging businesses one of the most challenging aspects is finding sources for relevant data for the marketing plan. Here are a few websites to checkout:
US Census Bureau - http://www.census.gov
Statistical Abstract of the United States - http://www.census.gov/stat_abstract
Consumer Expenditure Surveys
http://www.bls.gov/cex/
10 Ways to Create Positive Cash Flow return to top
In the above article entitled, "Understanding the Impact of Cash on Growth" the impact of accounts receivable, accounts payable, and inventory were cited as significant factors on how fast any company can grow and how that growth is "funded". Reality is positive cash flow is often the primary differentiation between success, barely hanging on, and failure in businesses. Here are some guidelines which are basic to any successful business and some suggestions which could make an outstanding difference in its financial picture.
1. Set and follow sound credit policies.
By establishing policies and procedures for granting credit, the business will be able to improve its ability to make sales and collect the cash due from those sales. The basis of granting credit should be a combination of the history with the customer and a demonstrated ability by the customer to comply with credit terms.
Recommendation: When checking credit references ask for references not only from the major vendors, but from vendors of similar size and type. Larger vendors tend to have more leverage to enforce payment agreements and may have more generous terms. The payment history with vendors of similar size, type (service or product), terms, and "power" usually provides a more accurate reflection of how accounts will be handled.
2. Set procedures and policies to bill promptly and accurately.
Regardless of business size, there is often a time lag between when the bill can be sent and when it is sent. Every delay in sending the bill is another day that cash isn’t available for use.
Recommendation: Establish procedures for each area of operations to insure that the invoice can be sent same day as shipment is made (or for services according to agreement). Make sure that all necessary documentation is provided to the accounts receivable department so the invoice is accurate. The clock starts ticking only when an accurate invoice is received. Avoid delaying payment by insuring that all necessary information is available, accurate, and reflects the parameters to collect from the customer.
3. Consider "incentive" terms.
Many customers will pay more quickly if they get a discount for early payment. If a decision is made to establish discount terms, make sure the discount is taken ONLY when the terms are met. Some customers may have a policy to automatically take the discount regardless of when they pay. Keep an eye out for discounts taken outside of terms.
RECOMMENDATION: When making a change in credit terms of any kind, including adding a discount, send a separate letter to each customer letting them know what has changed and the conditions that apply to taking the new terms.
4. Deposit checks same day received, preferably before 2 pm (or bank's last daily transaction time).
What a difference a few hours make. With changes to electronic funds transfers and automated clearing house processes, this simple change can add a "day of cash" to the cash balance by getting the checks to the bank the same day. Waiting until the end of the business day to make deposits results in the loss of an entire business day in the account. Holding checks for several days magnifies the impact on the cash balance.
RECOMMENDATION: Establishing a daily deposit time around 1 pm this enables the business to get a significant number of the days receipts to the bank for "same day" processing and gives some flex time for meeting the bank transaction cut off time... it could be considered a "late lunch" activity.
5. Pursue past due and late accounts.
It is one of the most difficult tasks in business - collecting the past due accounts. Add to that task the enforcement of late fees and interest charges and the stress level on the task escalates more than proportionately. By taking prompt action to collect past due accounts, the terms and conditions become "clearer" to customers. There is usually some concern about losing a customer/sale. If customers aren't paying (on time or at all), then enforcing terms or cutting off credit results in the opportunity to sell those goods and services to someone else who will meet the terms.
RECOMMENDATION: If customers go 45 days beyond terms, consider employing a collection agency to act on those accounts.
6. Keep inventory levels under control.
Growing investment in inventory beyond the level necessary to satisfy demand is a quick way to drain cash from the company. The goal is to find the inventory level that doesn't lead to lost sales and doesn't place a strain on cash resources.
RECOMMENDATION: Monitor inventory levels, reorder points, and historical/seasonal sales to work toward an "optimum" level. It may not be the same level throughout the year.
7. Pay vendors on terms.
By paying vendors on time the relationship is built for "exceptions" and better terms. The "exceptions" are those instances when the business can't make a payment on time or in-full. Establishing a pattern of reliable payments and communicating with the vendor at the earliest possible time to notify of an issue lays a solid foundation for managing the supply chain.
RECOMMENDATION: Be reliable in meeting payment terms and communicate issues and potential shortfalls, late payments, directly to the vendor. Do not just send a partial or late payment to a vendor – give them a call and let them know what is going on. The vendor may be able to be flexible and, while not happy, prefers not to get a surprise.
8. Manage the supply chain.
Suppliers can be great business partners. Negotiate for better or extended terms. The first step to negotiating better terms is having a solid payment history and relationship.
There are arguments on both sides of having sole source suppliers or multiple sources of supply. One of the pros of sole sourcing is that a different type of relationship results from a "guarantee" of business for a specified period of time. The converse of that is also true - if there is only one source and that source has quality, delivery or other issues - it can be costly to address those issues. Not only is it costly to address with the supplier, it also can have "flow-through" impact to customers.
RECOMMENDATION: Have a few solid suppliers for each critical resource. By having two or three good suppliers that receive orders consistently, the business has alternatives and leverage for favorable terms.
9. Evaluate lease versus buy options.
While leasing equipment may over the length of the agreement be more costly than buying equipment, when the company is short on cash and equipment is needed it may be the right option for the short term. Leases generally reduce the cash outlay at "acquisition" and enable the business to replace or add equipment that is needed to generate revenues and ultimately cash.
RECOMMENDATION: Understand the "cost" of cash. If cash is tight and the alternative is not being able to meet "absolute" cash needs – items that can’t be put on extended terms – then making the decision to trade-off between cash availability today and higher long term expenditures is an acceptable choice. If the business isn’t able to meet cash needs today, the cost of the equipment will be irrelevant, as the business won’t exist.
10. Educate and communicate the cash perspective.
It is important that every person in the company understand their role in the cash cycle. An understanding of budgets, constraints, and how the cash cycle of the business works is important for all levels of the organization to understand, whether working in accounting, purchasing, operations, or maintenance. The entire organization, from the President/CEO to administrative and technical staff, has a role in controlling costs and generating revenues (and ultimately cash).
RECOMMENDATION: Make the cash cycle visible and understood throughout the organization – communicate the time it takes from purchase of inventory to collecting the cash. Clearly communicate where each role fits in the equation – spending, revenue, cost control, collections, and so on. Set performance measures for individuals, teams, and functional areas that include cash performance measures.
Cash is the lifeblood of the organization. Without cash to pay employees, buy inventory, and so on, the business isn’t able to operate. When cash is limited the entire organization needs to understand how to preserve it, conserve it, and make it!
Keep in mind that good vendor relationships can be great marketing tools. Vendors do have other customers and connections. A good relationship may often lead to referrals of the vendor’s other clients to you!
Trendsetters (formerly Capital City Club Executive Women) return to top
The next meeting of Trendsetters will be May 18 from 6 to 7:30 pm at the Capital City Club.
- 6 - 6:30 Networking
- 6:30 - 7:30 Meeting and Dinner Speaker
- The featured Speaker will be Joye Wilcox of HEALTHY DIETS, INC.
SBIR/STTR Workshop return to top
F.O.C.U.S. Resources is sponsoring a number of events for the SBTDC (Small Business and Technology Development Center). The first event will be held on May 18 at NC Biotechnology Center.
The SBTDC provides advice to early stage and emerging companies on how to obtain grant funding through SBIR and STTR programs. For more information on the SBTDC and the May event, go to: www.ncsbir.org
Copyright © 2004 F.O.C.U.S. Resource, Inc.
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