This is Challenge #22 and it shows up in Stage 5.
Hindsight is 20/20.
The end of 1999 marked the best year we had ever had in the 14-year history at our marketing communications company. Our revenues grew by 53% and our revenue per employee was the highest it had ever been. Three months later we laid off our first 10 employees, and another 20 over the next three months. We hadn’t seen the dotcom implosion of March 2000 coming. Most of our clients were high tech, telecommunications and dotcom startups. We were highly leveraged on receivables. When the companies that owed us money went out of business, the impact on our company was devastating.
Fortunately, we had several Fortune 500 clients, and their revenue stream helped us weather that storm. Could we have foreseen the impact of an economy built on business models that didn’t have to make a profit to garner venture capitalist attention? Was that a problem area we could have forecast and thus avoided negatively impacting 30 people’s lives?
In hindsight, I think so. Because we were growing so quickly, many of our weaknesses were hidden by our success. In essence, we started to believe in our own success a little bit too much. The ability to forecast problem areas before they surface is an art, not a science. So, what could we have done better? We could have managed our cash flow more effectively by insisting on higher upfront deposits, getting our invoices out sooner and being more diligent in overdue receivables. Our leadership team raised red flags but, as business owners, my partner and I had weathered other downturns before and felt we could manage through this one. Shoulda, coulda, woulda isn’t the smartest way to run a company and we learned a hard lesson.
Forecasting is a decision-making tool used by businesses to budget, plan and estimate future growth. In the simplest terms, forecasting is the attempt to predict future outcomes based on past events and management insight. The key to forecasting, then, is information. As long as you review, evaluate, discuss and question that information, (and don’t assume the information is always correct), the better your decisions will be.
In Stage 5, Integration, help your CEOs to transition the day-to-day operations of the company over to his/her leadership team. No doubt, it’s challenging for any CEO to work with a newly formed group of managers and watch them start to make group decisions. It requires patience. It requires trust. It requires setting clear expectations. It requires managing to those expectations. It requires handling conflict. None of these are simple tasks. Many CEOs struggle as their company becomes much more complex. And even though they fundamentally know they have to let their leadership team lead, it’s not as easy as it sounds. To help the new leadership team understand their role better, teach them how to use basic forecasting tools such as:
Profit Planning: This is simply the creation of a budget and it is a key forecasting tool. People tend to have a negative reaction to the concept of budgeting, so I refer to this exercise as planning to be profitable – hence, a profit plan. Whereas budgeting seems restrictive, profit planning seems to open people’s minds to the company’s potential. A company’s profit plan examines in detail how much money it takes to keep the doors open (administrative and overhead expenses), how much money it takes to produce a product or service (cost of sales) and how much revenue/sales the company must generate to create a net profit. A profit plan will help you:
- Forecast when you can afford to hire that next employee, purchase new equipment or provide pay increases
- Forecast downturns in revenue so you can make adjustments before you drive off the cliff
- Forecast changes in gross margins so you can adjust your pricing, re-negotiate vendor supply costs or improve sales
- Forecast net profits so you can make decisions on capital expenditures, profit sharing or facility expansion
The leadership team should be involved in all aspects of the profit planning process. Each division should present their financial plan for the year. They also need to justify their expenses and show how they will support the level of sales needed to meet the revenue goals for the new year. Th is process should be as collaborative as possible.
Sales Forecasting: There is no magic in sales forecasting but the beauty of numbers is they don’t lie. If your CEO is paying attention to all aspects of his/her financials, they are ahead of the game. By Stage 5, it’s likely they have hired a VP of Sales to manage their sales force. The size of your sales force isn’t as much of an issue as understanding what level of sales the company needs to hit for a targeted pre-tax net profit.
Critical sales forecasting questions include:
- Do you know what your pre-tax net profit goal is?
- How many units do you have to sell and at what price to hit your goal? What is the plan to generate those sales?
- Are those sales goals written down with an operating approach on how each sale will be made?
- Do your sales people understand how to fill and manage a pipeline? Do they track their leads, and do they aggressively search out opportunities for new leads daily?
- Are they accountable to reach established targets on a daily basis?
- Do you receive daily reports from your sales team on how they are doing?
It’s not about sales per se; it’s about how to use numbers to ensure profitability. Remember, many companies have gone under despite driving a lot of sales into their company.
Cash Flow Management: As a forecasting tool, cash flow is another critical indicator that helps a company plan for the future, pay taxes, expand facilities and make large capital expenditures when needed. Too often business owners don’t understand where their cash goes. Help your CEOs to know:
- Their cash flow cycle
- How fast cash comes into the business and how fast it goes out
- What their “never go below” cash-in-the-bank dollar amount should be
There is a tendency for companies to rely on a line of credit when they find they aren’t able to make payroll or pay rent. It’s not unusual for accounts expected to land suddenly vanish into thin air. That huge deposit the company was counting on never materializes and they are caught short.
Entrepreneurs are quick to assume they can land that next sale, find that next huge project and weather any downturn. With 58 – 95 employees, generating, tracking and protecting cash should always be a CEOs number one goal. Help your CEOs teach their leadership teams the difference between cash and revenue and have them share this lesson with everyone in the company.
Starting on page 203 in my Stage 5 book, Leadership Integration: How to Cultivate Collaboration from the Top Down with 58 – 95 Employees, you’ll find two more exercises that will help your CEOs address Challenge #22: Difficulty Forecasting Problem Areas Before They Surface. You can get your Stage 5 book at http://gcspecialists.com/products.
Your Success. My Passion.
Laurie Taylor, FlashPoint!