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You do not need to be an accountant or CPA to understand the financial performance of your company. You only need to understand what the financial of your company are telling you, not the debits and credits that went into making them or the accounting regs like GAAP or FASB. You need to be able to easily determine what P&L, balance sheet and cash flow statements are telling you about how well your company is doing and alert you to problems. The P&L should tell you how to manage your company and this is best done on an accrual basis, your balance sheet should tell you about the financial condition of your business and cash flow should convert accrual accounting into actual cash. All three of these things should be done on a regular basis so that you can see trends and compare your results to prior periods and a budget. They should be done on a timely basis so that you can take action as quickly and not as post mortem, so that it is too late for you to take corrective action.

You should never be intimidated by those doing your books where these simple things are confusing and hard to understand. You need to cut through all the accounting jargon to get to the answers you need to run your business effectively. Your financial statement should be clear enough so that you understand if you are making the profit you should be and what the levers are that you can pull to change things. The same goes for the financial health of the company and its ability to through off cash. Your financial statements should be reduced to clearly highlighting major items and not so many minor accounts that you get lost in the detail of what really is happening and important.

Let’s look at some fundamental. Accrual accounting is used to manage your business as opposed to cash accounting that you can get from looking at your checkbook. Accrual accounting matches revenue with the costs that they are related to you can look as cause and affect. If this is done right you can determine things like your margin rates, fixed cost, profit as a percent of sales and return and see how these are trending over time. Cash based accounting may mismatch cost and revenue and give you a misleading picture of what is happening. For example, you may have a large invoice that if booked to the P&L in a given month as opposed to paying it and accruing for in on the balance sheet and the relieving that expense to the P&L over the time frame that that expense was related to it might appear that you were erroneously doing poorly. Let’s say you are having a year and you were going to reward your staff with an expensive perk like a trip or Christmas party this should be accrued each month instead of expensing it all in one month. There are many similar events that come up and one should provide for them whenever possible in your accounting policies and procedures.

We welcome your questions as to the challenges you face in order to grow.

To see all articles in this series please go to http://optimal-mgt.com/blog.

Many people have read Jack Welch’s books such as “Straight from the Gut” and “Winning” But do you know you should apply it to your own company and when it may not be applicable? As with any prescription for success, not every formula is fit for every diet. One must know what works for them and which ones will not be appropriate. I have used his concepts as cover stories in select periodicals, denoting when to apply his ideas for smaller companies, so here are a few thoughts one might consider if you are not a Fortune 500 Corporation.

Jack Welch had the nickname of neutron Jack, which connoted the fact that being intolerant of bureaucracies he often terminated large numbers of people while leaving the business still standing, like a wide swath of people while leaving the building still standing, like the proverbial neutron bomb is supposed to do. This in fact is a typical strategy when doing an acquisition and there are many redundant positions and to make the deal work similar jobs are synergized out of existence to make the economics work, saving money and increasing efficiency. During poor economic times downsizing (now called right sizing) is appropriate and of course every so often the organizational tree must be trimmed as it tends to become overgrown if not watched. This can be overdone however and cutting back may have its disadvantages such as terminating people who have not been given time to learn the system yet, leaving oneself without replacement people (bench strength) and being caught short when unplanned resignations happen, or increasing near term profits at the detriment of long term potential.

Related to this syndrome was Jack’s so called vitality curve used to rank employees. He handsomely rewarded the top 20% of his people, kept the middle 70% with modest increases and mandated the firing of the lowest 10% every year in every department and business unit. In GE’s case this was particularly interesting as they were known to hire the best and brightest, so undoubtedly they lost some good people along the way, but one could not argue with their success. The concept might be even better applied to the average or sub par company where the bottom 10% of their workforce would likely be far below the lower 10% of GE’s employees. Holding people to meeting high standards is not done often enough in most companies and when poor performers are allowed to stay people get the message that there are no consequences for not meeting expectations. We call this the government mentality and is a motivational killer.

There are many other principals that can be explored from his “boundryless” markets concept and span of control to information systems, market domination, et al.

We welcome your questions as to the challenges you face in order to grow.

To see all articles in this series please go to http://optimal-mgt.com/blog.

What is “right pricing”? It is pricing not to maximize your margin but to maximize your profits. Many companies price their products and services to get the highest margin rate. This is great as long as the market will accept you process. As a pricing leader you can very often set prices and that is an enviable position to be in. but how many companies are in a position to do this? The answer is very few. The vast majority of the time one must deal with the realities of dealing in a competitive environment, where you may have some intrinsic advantages but are in no position tom dictate prices. You nay be able to avoid pure price commodity pricing where you do offer the basically the same thing as everyone else, but can offer better payment term, have a sales rep with great connections, are really nice pe3ple to deal with, have a liberal returns policy, etc, but when it come down to it you may be able to get 1 or 2 points in higher prices then your competition.

So what are you alternative? The answer is right pricing. There are various ways to do this, recognizing that what follows is but the simplest of examples.

Case A, is the 3 status quo where ones revenue is 1,000 units of anything, with a $50/unit price and a 20% margin, generating $10,000 in margin.

– Option 1, is to fragment the market into regular clients, selling 800 units at the normal $50/unit price and 20% margin which will generate $8,000 in margin, and discount prices from $50/unit to $47/unit, with a corresponding 15% margin. This will add $1,750 in margin. The total margin generated will be $9,750 or 2.5% less margin then we stated with which would be counter productive and not generally a wise strategy. un less there

– Option 2, would be the same as above as far the 800 units sold, but as is based in greater price-volume flexibility, dropped prices to $46/unit with a 13% margin and selling 400 more units. The total margin would be $10,400 or 4% higher margin then Case A. We assume no increase in fixed cost and not setting pricing precedents that would impact the 800 units sold and might be a good strategy.

– Option 3, gives us the same results as the prior case but at the same overall volume, selling the additional 200 units at $52/units at a 23% margin.

Whatever one does should be based on current conditions as to price and volume sensitivity and setting prices based on the most profitable course of action. Time change and what worked best yesterday might not be the option best today. Test marketing new policies allows one to check out “right pricing” on a small scale first before making global changes.

We welcome your questions as to the challenges you face in order to grow.

To see all articles in this series please go to http://optimal-mgt.com/blog.

Do you have an exit plan? Most companies have an idea of starting a company to serve some need they are equipped to do. They create a detailed business plan to convert that idea into a reality. If they are successful they build a company that grows and is profitable. As time passes at some point they should consider an exit plan; whether that is passing on the company to their heirs, selling out to an external party, going public, having a staff capably of doing an internal buyout, etc. Doing this is responsible vs. not doing so when the founder passes away having a fiduciary do their best to salvage what they can.

So what are ones exit planning options?

The first step is to have a game plan of where you want to take the company in terms of maximizing its market value. This depends on the time frame the owner has in mind before they want to cash out in one form or another. Either way, exit planning starts with an end in mind and choosing a path to wind up there. It should not be trying to find a way out after you have wound up somewhere and are looking for an exit. This does not mean that one picks the right path and sticks with it, but rather changes it as the situation warrants. Markets change, new ways of doing business arise, customers and employees come and go, so one needs a dynamic game plan. They monitor the outside world, their competitors and their own performance and make changes as needed.

The younger the owner the longer the time frame is. If there are family members’ who are to take over and competent, this presents another option. Excluding that latter situation there are primarily three ways to exit. The first is the default option and least desirable and is done when there are no other choices. It is to wind down the business and go through a phased liquidation, collecting your receivables and maximizing profit as you wind down operations. The next is selling the company to an outside buyer who is looking at future earnings potential, which is primarily reflected in prior year’s adjusted profits (EBITDA) in order to forecast how much money the company will earn under their ownership going forward, where the valuation is a multiple of the EBITDA. The healthier the company in the buyers eyes the higher the multiple and the more potential buyers the more competitive the offer. Finding a good deal is easier said then done. There is another option; it is the internal buyout where management buys the company at fair market value through the internal cash flow generated over a period of time. This is often the best alternative if you hire intelligently. If the company is worth $X this can then be paid out over Y years and is transferred to the key management, but like in a mortgage the equity is yours until the last payment is made, reducing your risk. But there are many complications and tax ramifications for all strategies that must be carefully thought out.

We welcome your questions as to the challenges you face in order to grow.

To see all articles in this series please go to http://optimal-mgt.com/blog.

If you are losing money, are you looking at your options before you run out of cash? If you are in this situation, do you proactively deal with a crisis and try to turn things around before it’s too late? Do you look at your cash reserves, assets and borrowing capacity early enough to make changes while you still have time to do so? Do you know how much time you have left before you will face bankruptcy?

Hopefully you are looking at your performance on a regular basis to make sure you are not I or close to a crisis mode, but if you are there you must recognize reality, then act quickly and decisively to keep your company going.

How one gets into such a situation varies:it may be losing a major law suit, having write off a large receivable, a continuous string of losing months that add up, theft or embezzlement, a bank calling your loan, or it may be simply inattention to the slow erosion of the business over a period of time. Regardless of the cause, the sooner the situation is identified the more time you have to correct it before you run out of time and money. Then you are dealing with a crisis that requires emergency business triage to save the company from going under.

Assuming you have waited too long to take corrective action and now need emergency intervention to save your business here are a few things to consider doing ASAP.

• The first one is obvious; get your staff to produce like their jobs depended upon it, then reduce your costs by getting rid of non performing assets and expenses from people to facilities that don’t contribute to your overhead immediately.
• Next get more cash as quickly by providing a prompt payment discount and cutting prices if the incremental volume that will generate a lot more margin $.
• Next try to get a loan or gift from whoever can tide you over.
• After that you may have to make some really tough choices from non-traditional sources such as selling hard assets such as your home, liquidating pension plans, investments, selling off book of business, a facility or receivable, or liquidating the company. But if your operation is so depressed you may not have time to sell and are in a poor bargaining position anyway.

Assuming that you are in the process of turned the corner you have the option to rebuild your company, but the longer ones waits to make changes the lower the probability of rescue. For example if you are burning through $15,000 a month and have $60,000 in cash reserves, every week you wait reduces your chance of success by 25%, then 50%, etc. Making a decent triage type of decision now is better then making a really good decision 3 weeks later.

We welcome your questions as to the challenges you face in order to grow.

To see all articles in this series please go to http://optimal-mgt.com/blog.

Optimal Management is the premier management consulting company to the staffing industry. We act as mentors to owners and managers to maximize their sales, profits and value of their company. We become an extension of our clients operations and are there for all of their staffing and business needs, from sales, marketing and compensation plans, to finance, M&A, general management and everything in between.

Do you attempt to look out for risk situations before they become severe and result in a crisis? If you are only looking at opportunities to grow your business and not weighing potential areas of risk you are probably a candidate for a crisis sooner or later. This is the area of risk management.

Good management takes calculated risks in growing, but always weighs the potential risk vs. reward of things that they do or have done in the past that may one day catch up with them. Lets take the current example of General Motors which is recalling some 6 million vehicles for cars built from 2004-2010. This is estimated to cost them some $2-5 billion. To put that into perspective their average earning over the last 4 years (since the bailout and returning to profitability) averaged $5