The Filter of Business Value - Dec 15, 2010
Posted by: Ken Saddler in Articles
My firm, B2B CFO®, currently has 178 partners in 39 states with a combined 5,130 years of experience. One of the benefits of being a partner is it gives me access to many wonderful articles written by my knowledgeable partners to pass along in my newsletter. Due to this benefit, it has been awhile since I’ve written my own article for the newsletter. When the passion for a certain topic motivates me however, I write! With that said…
Before leaving for the office tomorrow, please consider this. The question is: would you like to increase the value of your business so that it’s the most valuable on the day you sell it? If asked the same question, a very high percentage of business owners certainly would emphatically say, YES! So why don’t the same percentage of owners run their businesses with this goal in mind every day, every week, every month and every year until they sell their business? It could be because many owners and CEOs get caught up ‘inside’ their businesses.
What does it mean, to work inside the business? Unfortunately, it means that business leaders are so involved in the short-term decision making of day to day operations that they are unable to make insightful decisions that also bolster the long term value of their company. A side effect of this is also that the business becomes so reliant on their involvement that if they are absent for even a day the operation suffers.
So what is it that drives long term business value? The following are some examples of key value drivers.
· A strong management team who can handle the business in the owner’s absence.
· Good financial controls to guide the business and ensure progress towards goals.
· Diversified customer and vendor bases. If long term contracts are in place with either, this will increase value.
· Well documented systems and processes in ....
Posted by: Ken Saddler in Testimonials Ken has worked for me over 18 months as an independent CFO. Through his attention to detail I have learned to be a better owner and manager of my resources. His style of communication and experience I believe would fit any size of business that would want his expertise. Ken also has connections to other business network Partners that I have used. I consider Ken a valued person and a friend. Posted by: Ken Saddler in Testimonials Ken was lucky enough to get involved with our organization during a time of chaos within our accounting department. Our director of finance had just quit and we were months behind in producing financial statements. Ken was able to step in and provide structure and focus to the department in a short period of time. In addition, he was able to use his networking skills to find a replacement for the finance director's position. Since then he has been able to take a step back and provide guidance on current financial issues while assisting with forecasting and planning for the future. Ken has been a great asset to our company! Posted by: Ken Saddler in Articles Here we are in our second consecutive year of a challenging economic environment that spans almost every industry. Every day we are reminded of this with still high unemployment rates, less than hoped for corporate financial results, bankruptcies and foreclosures, low consumer confidence, etc. With this news constantly put before us, I frequently hear from business colleagues that it isn’t possible to succeed in this environment. However, the one commonality with all of these is that business owners generally cannot control them in the sense of the larger economy. Instead of crawling into a cave and hiding, a better alternative is to focus on the things that we can control in our businesses. There are many things we cannot control, some of the larger macroeconomic issues listed above are among them. What then can we control? To name just a few, we can control new product development, marketing, internal costs, operational efficiency, reliance on debt to run businesses and the amount of time and money we invest in growth (i.e., resource allocation). To illustrate a more positive approach, I provide the example of one of my clients. Their industry was down about 25% in 2009 and the business was definitely feeling the downturn early in the year. During the 1st quarter, a key competitor went out of business and liquidated. Instead of sitting on their heels and letting the poor economic environment hold them back, the owner and his team sprung into action. Together we were able to quickly put together a financial projection for the business. Based on the projection, the client decided to hire the competitor’s top salesperson, a key customer service rep and a technical expert. We also worked with the client’s bank, presented the financial plan, and were able to increase the line of credit to support the several million dollar increase in business. By the end of 2009, instead of being down 25% and having real struggles, the business was up 7% for the year and had increased market share in a very competitive space. Already this year, my client is expanding their warehouse and office space in anticipation of future growth. The lesson here is that prudent risk even in the face of economic uncertainty can provide the impetus for excellent financial performance. Here are some thoughts that come to mind when I think of ways to be more aggressive in this shaky world we are in right now. · Invest in new equipment that will reduce manufacturing cost and increase gross margin. The financial tools to use to help with this decision are a return on investment and discounted cash flow analysis. · Develop or acquire a new produ....
Posted by: Ken Saddler in Testimonials I have had the pleasure to work with Ken on multiple clients, each time in our respective areas of expertise. It’s a pleasure to work with Ken because of his client focus, attention to detail, short and long range thinking, excellent communication style and team participation. His focus on service delivery is unmatched by any other CFO I’ve worked with. Ken brings leadership strength to every project and an enthusiasm for success that resonates throughout the team. No matter the challenge or timeline, Ken exceeds his clients’ expectations. I highly recommend Ken as a trusted professional within my network. Posted by: Ken Saddler in Articles How much debt financing is right for a business? In today’s low cost money environment, the ‘easy’ answer might be “as much as you need” because it is inexpensive (depending on a company’s financial situation). However, the credit environment has tightened significantly during the past two years due to the stress that has been placed on the financial markets. Low cost money really isn’t that easy to come by. Possibly the more important question may be, what would it take to run the business without any debt? As the B2B CFO for a number of small and mid-sized businesses, I can attest to the fact that operating a business on the cash flow generated from operations is easier and lower stress than being saddled with a lot of debt. It also increases control over the company. With a good focus on cash flow and a deliberate plan to reduce debt, it is possible to achieve the objective of being debt free. The elements of a robust cash flow plan will likely include a sound understanding of the classic elements of the sources and uses of cash. In simple terms, you want to increase the sources of cash and reduce the uses of cash to the extent possible. Sources of Cash · Improve the efficiency of revenue generating processes · Collect customer receivables faster · Turn inventory faster and reduce the inventory balance · Lengthen supplier payment terms, request early pay discounts, or take full use of existing terms · Reduce operating expenses Ken has been working with our company for the past 6 months. We view Ken as an employee that only works 1 day per week. Ken's involvement has been to improve our financial reporting accuracy, mentor and educate our accounting supervisor, and improve the accuracy of our inventory valuation. He has impacted all of those areas. I would highly recommend Ken. Posted by: Ken Saddler in Articles It actually doesn’t start on the bottom. The ‘bottom line’ starts up higher on the income statement with a healthy gross profit margin (GM). Simply stated, GM is the value of sales less the total cost of the product or service sold. It is a critical measure in any business. An expanding GM line is the result of good decision making about the price and cost of your products or services. These decisions are significant in becoming and staying profitable. So, what is the definition of ‘healthy’ when it comes to GM? As a starting point, GM must be sufficient to cover all operating expenses such as selling, marketing, distribution / warehousing, and administrative costs. GM must also adequately allow the business to realize the desired amount of net income or ‘bottom line’ profit. If both are true, then GM is healthy. GM percentages can vary widely depending on the industry served. In the distribution industry 30% GM can be attractive. In manufacturing there is often more internal control over costs and margins above 50% are a reasonable goal. Service firms adding real value to client companies can also enjoy a high GM. No matter the industry, it’s important to know the industry average and seek to be at or above it. If the business has below industry average margin then the customer value equation is likely out of balance. So what can be done to increase gross margin? Many levers exist to make this happen. The most obvious ones are increasing prices and reducing costs. Less obvious are managing the mix of products or services you sell to customers, taking advantage of early pay discounts if cash flow is sufficient, negotiating volume discounts, asking for volume rebates or other trade rebates on purchases, and periodically introducing profitable new products or services. Many times uncovering opportunities to increase GM requires more in depth data mining and analysis. For example, a review of all items being sold at an average price generating less than breakeven GM is necessary. This analysis can reveal opportunities with certain customers or even help decide to exit or deemphasize unprofitable lines of business. As a CFO, helping clients improve gross margin is a role I play frequently and one that I enjoy. Having a healthy GM enables company leaders to focus on growing, not simply surviving. Even though one specific fix does not fit all companies, one or more of the possible actions discussed above can make an immediate impact on GM. I encourage anyone reading this to work with your CFO to ensure your business is at or above the industry average in GM and clear the path to reaching your targeted bottom line Posted by: Ken Saddler in Articles C Corp, S Corp, LLC, ESOP...Section 179, form 1120, schedule A, B, C...all of these are tax terms with which as business owners you are probably familiar. We are now in reality time when it comes to your taxes for 2008. By now you likely know what you owe to the government or you have confirmed the tax liability you already knew at the end of 2008. Each year the taxes you pay drain valuable cash from your business; therefore they are an important consideration for your company. While the drain due to taxes is a fact, this should not be your only concern or even your primary concern as a business owner. Frequently I encounter business owners who spend more time worrying about taxes than they do their sales, profitability, cash flow, future business, product costs or new business development. More money can be made acquiring a new customer or product line, making an investment to pursue top line growth or reduce costs, or refinancing lending agreements than by focusing all efforts on minimizing taxes. The best advice I can give about managing your taxes is to build a sound tax plan and stick to it. It is important to have your CFO and / or tax professional stay close to changes in tax legislation. Changes in tax law, particularly with the recent change in philosophy of the new administration, can have a profound impact on your tax planning. Once you have a plan in place to help minimize taxes, the best thing to do is to instruct your CFO to follow it and you can then focus on growing and moving your business toward the future. Posted by: Ken Saddler in Testimonials Posted by: Ken Saddler in Articles The holidays are upon us. This is a good time to reflect on the year which is now nearly passed. By almost anyone's definition, this has been a challenging business year. For me, the challenges of 2008 make me think about risk and reward. Nearly every day in our business lives we face decisions that cause us to assess the amount of risk we are willing to take and balance that against the potential returns or rewards we may realize as a result of taking risks. In my opinion, the best way to minimize risk and still achieve a desirable return is to be thorough in your planning and research. Let me give you an example that is near and dear to my heart. Posted by: Ken Saddler in Articles Attached is an article that was published yesterday in the Minneapolis Star Tribune about a local client that Rich Foster (Sr. Partner) and I share here in the Twin Cities. We already knew they were a fantastic, growing company, but now they are getting famous for their superior product. We are very proud to have a client like NetSPI! http://www.startribune.com/business/34717539.html NetSPI Business: Security consulting firm that specializes in breaching clients' IT and infrastructure security systems and offering recommendations for changes needed to plug any holes they find. Founded: 2001 Headquarters: Minneapolis Website: http://www.netspi.com/ Executives: Founders Deke George, CEO, and Seth Peter, chief technology officer Employees: 30 2007 revenue: $3 million, headed for $5 million in 2008 Posted by: Ken Saddler in Articles In these very tenuous and difficult economic times, the importance of profitability becomes tantamount. Without profit, positive cash flow, which is the life blood of business, can quickly dry up and cause significant difficulty even in basic operations. This is especially true when the availability of credit seems to be evaporating before our eyes. Profitability is critical in the short term and in the long run. When times are challenging as they are today, we must do everything we can to try to remain profitable as a business. Some of the things we must do to stay profitable are not very pleasant. However, if we are taking a long term view of business even during the challenging days, weeks and months ahead, we must not forget that at the top of the list of what make our businesses profitable are our people. This statement may sound strange coming from a long time CFO. Every day for the past twenty plus years I have worked in a world that consistently measures itself by the operating profit, net income, or EBITDA line on the profit and loss statement. This is interesting because in my observation companies that spend less time focusing specifically and exclusively on profit are the very same ones that have the highest return on the profit line. Should that be considered blaspheme? No, not really. The difference in the organizations that seek first to maximize the bottom line at all costs, human and other included, are the very same ones who ultimately fail in many cases. Long term, sustainable, healthy growth in a company, both on the top and bottom lines, cannot be built by focusing exclusively on a bottom line profit target. A healthy bottom line is the result of a well run company. It is not in and of itself a goal, although it is almost exclusively what the business community focuses on today. I have found that companies with good leadership believe that profit is the outcome of good vision and a sound strategy that is well translated into understandable, executable plans for employees. When properly communicated by leadership the strategy creates a clear direction for minders and grinders to follow. With sufficient and well guided resource allocation, training, and a singular focus on adding value to customers above all else, the company becomes profitable. This is truly the secret sauce of a healthy bottom line. Potential employees are knocking down the doors of companies like these to join them and these very same companies are extraordinarily profitable. In short, these successful companies are putting people ahead of profit. Please do not misunderstand the intent of this article. In these first class organizations they also have excellent CFOs who ensure the company is measuring and managing key performance metrics, sales growth, profitability, cash flow, loan covenants and many other financial indicators. Without this diligent financial approach, for-profit entities cannot remain healthy. However, without productive people in the organization who feel they are part of a winning team, for-profit companies cannot remain healthy either. The point is that we can run companies that are wildly profitable AND have happy, productive people in the company. The mix of two creates a truly powerful combination. I have personally worked in and as CFO helped lead an organization like this and I can, without hesitation, say that it was the best time period in my career to date. Balance is the key. A beneficial balance between the drive to meet financial results and a top notch, people-oriented environment is truly a recipe for phenomenal success in business. Posted by: Ken Saddler in Testimonials I had the opportunity to work with Ken Saddler for several years while with Newell Rubbermaid Corp. For two of those years Ken functioned as CFO of Anchor Hocking Specialty Glass Company while I was President of that business unit. Ken was a key ingredient to the team that turned AHSG into a growing, profitable division for the corporation. Ken's strengths include his technical skills in Finance, but more importantly he is a well rounded business person. Our Sales and Marketing teams, our Operations professionals all looked to Ken to be an important part of their respective teams. He sees the "whole picture". For me Ken played a key "right hand" role. No decisions were made without Ken's input and guidance. Posted by: Ken Saddler in Testimonials Ken is great at turning business strategies into clear objectives and tactics. He got the organization at Eaton Hydraulics aligned with the strategic direction and worked to inspire buy-in and commitment to a shared vision and purpose. Ken has high energy and passion for results. He is very supportive of change to get results. He challenges the status quo. He also sets aggressive goals, measures performance and drives improvement. He is one of the best at establishing an environment of mutual respect and trust with his people, peers, customers and me. I have the highest respect for Ken - his character and ability. He created, promoted and sustained a performance culture. Ken is the poster child for managerial courage. He calls it like he sees it. There was never a question about what he was thinking or where he stood on a subject. It's what endears him to such a broad audience. He loves to confront difficult issues and take charge in tough times. He takes steps to get the job done while minimizing resistance. Supports others when they make unpopular decisions. He truly relishes leading. Ken was truly a steward of the business at Eaton and inspired others to positive action. Posted by: Ken Saddler in Testimonials I've had the pleasure of working directly with Ken on two separate occasions. He not only brought a very strong technical knowledge to the business but more importantly a broad based understanding of the general business and it's strategy. Ken had a unique ability to make the tough calls from a financial point of view without compromising our division's growth and strategic initiatives. Former boss with Newell Rubbermaid
Testimonial from Washburn Computer Group - Allen Wentland, Owner - Aug 18, 2010
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Testimonial from Internal Control and Anti-Fraud Experts, LLC - Feb 5, 2010
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Testimonial from Dave Kirsch, Owner, Shippers Supply, Inc. - Feb 25, 2009
How to Laugh in the Face of Risk - Dec 28, 2008
This year, I personally took a very big risk. After twenty years I decided to leave the comfort of a big company, a good salary and numerous benefits to join a partnership of permanent, part-time CFOs with a robust business model and strong support structure but no guarantee of income. Why did I take this risk? First, I thoroughly researched B2B CFO® from all angles and repeatedly weighed the possible rewards against the risk of no longer receiving a guaranteed paycheck every two weeks. Next was to build a detailed monthly cash flow plan for my business with realistic goals. The goals I set were based on information obtained from the firm and its partners. After my meetings with the people in the firm, it was clear I wouldn't be alone in this endeavor and that I was backed by a very strong and values based organization. Only after careful examination of all of this information and ensuring that my values and goals were in alignment with those of B2B CFO® did I make the decision to take the risk, join the partnership, and start my own business.
The approach I applied when I decided to join B2B CFO® is no different than the one business owners take when they evaluate different alternatives for their businesses. I chose to be aggressive, but in conjunction with that I set challenging but reachable goals, I had a clear plan to help me achieve those goals, and a desirable return for my risk. The same can apply for any business and now is a time when almost every decision you take may appear risky in a challenging economic environment. One option could be to crawl in a hole somewhere and avoid risk at all costs. We continue to read about a long recession coming and difficult times ahead. Despite this, I believe that smart risk-taking backed by good research and planning now will pay dividends in the future. We need only look at the enormous success Warren Buffett has enjoyed in his professional life and to link that with his consistent track record of being aggressive when all those around him were scared to inaction. Do not forget, it is critical to financially analyze opportunities and plan for the successful execution of your opportunities, another trait consistently demonstrated by Buffett. Without the analysis, you will face an inordinate amount of risk, similar to driving down an icy road at night at high speeds with your lights off. A good financial partner for your business will help you navigate this road by giving you a financial roadmap that shines light on the path ahead toward your destination.
After several months building my business with B2B CFO®, I am happy to report that I have met the financial goals I laid out in my cash flow plan. I also very much enjoy the opportunities I have to help my clients achieve their cash flow and other financial goals. The independence to do what is right for my clients all the time and see them succeed is very gratifying.
With a new year comes a new government with new policies and the hope of new opportunities for every business owner. This particular wave of change will undoubtedly be dramatic. For what it's worth, my advice is to stay strong and alert of the changes, but do not stop taking prudent risks for your business. Stay alert of changes that will impact your business, do your research, understand the financial implications of your decisions and plan for solid execution. If we take this approach, 2009 and beyond will result in success for all of us.
In some way, everyone in receipt of this newsletter has helped me to have a successful start of my new business this year. For that I am very appreciative. I thank you and I wish you all a happy and relaxing holiday season.
NetSPI - B2B CFO® Twin Cities Client - Nov 20, 2008
DICK YOUNGBLOOD, Star Tribune
People Before Profit - Oct 14, 2008
Note from Tim Jahnke of Elkay Manufacturing (former boss) - Oct 13, 2008
Note from Bill VanArsdale of Eaton (former boss) - Oct 8, 2008
Note from Greg Stoner of MasterBrand Cabinets - Sep 15, 2008
I routinely used Ken in the role of advisor and confidant. He approached a broad range of subjects with fresh views and complete confidentiality.
Gregory J. Stoner
President, MasterBrand Cabinets
A division of Fortune Brands Corporation
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