Sunday, November 22, 2009

Decisions, decisions... why we are bad at making them and what we can do to make better ones for our businesses. (Part 1)

One of the most important aspects about being a leader in business is making decisions. In the hierarchy of decision types the pinnacle is a strategic decision. These are the decisions that make or break the business. These are the ones that impact the future immediately and often bind substantial resources of the company. The importance of the decision is often palpable and as a result strategic decisions are often the hardest ones for even the most seasoned business people to make.

Considering that no one can 100% accurately predict the future every strategic decision starts out as a 50/50 coin flip. However, there are numerous tomes and pages of research dedicated to the topic of making better strategic decisions. Interestingly, none of the things I have read or any of the research I have seen works in all instances. The main reason for this is that most research is based on case studies and hindsight that prove the researchers point, or on experiments that limit “real world” variables. I don’t know about you, but I have never been able to go back and make a decision, nor have I been able to change the variables surrounding my strategic decisions. So is there anything we can do to make better strategic decisions? Yes there certainly is.

Research shows that the only constant in strategic decision making is the human element. However, as you may figure, it is hard to ever really consider the human element a constant. We all have different experiences, moods, emotions, etc. which research shows impacts our ability to make strategic decisions. Moreover since we are not machines the human condition actually causes us to make bad strategic decisions. Therefore the key to making better strategic decisions is not finding a formula for making strategic decisions but understanding what about us is going to cause us to make a poor decision. In part 2 I will discuss the causes and give the tips you need to make better strategic decisions.

Tuesday, November 17, 2009

Marketing Dollars and Sense: Spending effectively today to market for the future (Part 2)

As can be seen in part 1, neither type of marketer really instills confidence about the future. On the one hand, the all marketer spends a lot of money on marketing and gets no ROI, but is always at the top of the stack when a customer needs something. Conversely the nothing marketer spends no money so there is no ROI to be concerned with, but must spend core business time on direct marketing to replace any lost customers. In both scenarios the lesson learned is that effective marketing should be a balance of current costs and growth.

For the companies that find themselves in the all category of marketers, effective management of marketing dollars will come from instituting metrics to evaluate the success of a particular marketing method. A lot of times what you will find in an all marketer is free spending and no evaluation of the effectiveness of the spending. Even using ROI, which I don’t recommend because marketing costs are rather abstract and revenues from marketing are theoretically untraceable, would be a good start. However considering the abstract and theoretical complications of ROI, other simple metrics are available to gauge marketing effectiveness. One of the most rudimentary but effective metrics is asking the question “how did you hear about us?” to your customers. For my all company this simple procedure of asking our customers “How did you hear about us?” when they called in to place an order generated a ton of useful information for our company. Our procedure had our one inside sales person mark off how customers heard about us in an excel sheet. This helped our company to lock into which methods of marketing were most effective to reach our customers and generate sales. Promotional fliers that were sent out weekly generated almost no sales interest, while small 20-page glossy catalogues sent out quarterly or left by a salesman at a cold call generated the most sales interest. More than this we found that internet marketing on our website and via e-mail generates some interest, but not as much as I.T. experts would lead us to believe it does. Based on the results we were able to save money by cutting the least effective methods. In this way we are now controlling our costs AND staying in front of our customers.

For the companies that fall into the nothing category of marketers, effective management is more about letting marketing do some of the customer contact work. The nothing marketers will have a hard time seeing the correlation between sales and marketing. Even simple firsthand metrics like the “how did you hear about us” questions don’t provide ample evidence to justify spending the money on marketing. Recently I sat down with the owner of my nothing marketing company and talked about the current customer base. We noticed that year on year there is a large level of attrition among our existing customers for various reasons. Fortunately the owner always finds a new customer to replace the lost ones. Typically however, he is only usually able to line up business to replace what he had lost and does not bring additional business to the company. This obviously isn’t a real recipe for growth. I tossed him a little “did you know” that believe it or not the time and effort he puts in pursuing replacement customers IS marketing. I told him however, that if the company was doing more traditional marketing to potential customers with similar interests as existing customers he wouldn’t have to be in two places at once. He wouldn’t have to invest as much of his time and effort looking for new revenues to replace lost ones. Considering that he is the chief new business generator, and his own HR department, and his own legal department, etc., he was better able to appreciate what marketing could do to make his job much easier. As a result we incorporated some marketing dollars in the operating budget for next year. Obviously, we made sure to install metrics to gauge the effectiveness of the new marketing expenses. This way he will be able to see if our marketing is driving new business to the company or not.

Overall, no matter what type of marketer you are or you work for, marketing should be a priority for 2010. For the all marketers in the group, finding a metric that works for you to help control costs and get more bang for your buck is crucial. If you are a nothing marketer, a cost-benefit analysis of your time spent on personal marketing efforts and compare it to what other things you need to be doing with that time may help you see the light. If 2009 was about cutting costs to stay in the game, then 2010 needs to be about getting greater efficiency from your costs. So spend the money on marketing, but remember that if it doesn't make dollars, it will never make sense!

Monday, November 16, 2009

Marketing Dollars and Sense: Spending effectively today to market for the future (Part 1)

In 2009 most companies scaled back on marketing expenses in an effort to control costs. For most companies the decision to cut marketing was a bang-for-the-buck decision, or more formally a return on investment (ROI) decision. When a company goes to cut costs, anything that doesn’t make dollars doesn’t make sense and for most companies without appropriate controls and measurements marketing is a hard, and often high, cost to justify. While cutting marketing expenses is certainly not a bad decision it should not be a permanent decision. Every company should spend some money on marketing, but the key is to find ways that help them spend effectively.

In the world of small businesses marketing as a practice usually falls into two categories: all or nothing. As we all have seen there are those small businesses out there that bombard the marketplace with marketing. These companies are run by owners who feel marketing is a salesman they don’t have to pay commission to. They send out fliers and e-mails and maybe do a radio or TV ad and they maybe buy a billboard or two or ten. This group typically is aiming for mass appeal and follows the adage that it takes 7 pieces of marketing before you can make a sale or generate business. I work for one of these companies. I do not insinuate that this is a bad strategy in any way. Our sales guys tell me all the time that this type of marketing is actually effective in our industry. The main reason is that there are so many competitors in our market that it is important to keep our name on top of the junk mail pile. Repetition leads to familiarity which leads to direct association which leads to picking up the phone and calling our company when their convection oven breaks. Without that constant stream of mail and e-mail and what have you our company name gets forgotten as easily as the name of your waitress at dinner (I mean really how many of us can honestly say you remember the waitresses name from the last time you ate out?) However as the VP of Finance for the company I am only concerned with ROI and when sales are off by… let’s just say they are off, it is hard for me to see how this strategy is truly effective for the long term survival of the company.

On the other side of the spectrum you can find the nothing group. These are the organizations run by owners who think marketing is a waste of money and who feel a stack of business cards and a good reputation in the industry is all you need to succeed in business. In this category marketing is no more likely to bring business into the office than would a casual conversation between a satisfied customer and a friend or colleague looking for the same service. This group typically is aiming to satisfy existing customers and create total loyalty. I also work for one of these companies. I definitely cannot insinuate that this is a bad strategy either. I know that for the particular nothing marketer I work for, marketing expense this year was a whopping $300 (primarily for business cards). In fact even if you add in the holiday gifts being sent to clients (which is but isn’t marketing), the total marketing costs for the year are less than $2500, or less than 0.5% of total costs. Yet despite sales revenues being only off slightly, the operations side of my job makes me wonder how long this strategy can be truly effective.

Seeing both sides of the spectrum leads me to ask the question: “How does an all marketer or a nothing marketer become more effective at managing its marketing habits?”

Sunday, November 8, 2009

Cash Rules Everything Around Me... Make plans for the upcoming year!

At present many of you are getting ready to close the books on what was a horrific year in business. If yours is like the majority of business out there your revenues were off by a double digit percentage, you cut back spending and may have even cut down your workforce, and you certainly lost money this year. If your business is in the minority of businesses, you had to cut back on spending including some work force expenses, your business was off but by single digits or not at all, and you broke even or managed to turn a profit. No matter which group you belong to though, you should congratulate yourself. You survived, you made it, you pass-go and get to keep playing the game. Now bring on the challenges of 2010.

How many of you feel that things are going to turn around in 2010? How many of you actually mean by turn around that you are hoping to see more manageable declines in revenues and a smaller loss than you took in 2009 without having to make any more cuts? With all due respects to the economists who forecast GDP growth and recovery in 2010 I think those of you who answered “I do” to the second question have got it right. But what does getting it right really mean? What can you do in 2010 as a small business owner to protect what you struggled so hard to keep in 2009? The answer is financial planning.

Financial planning on some level is what got you through 2009, I am sure of it. It is what made you cut back on spending, decrease marketing dollars or switch to a 4 day work week, but if you were like most businesses in 2009, you made or adjusted your financial plans in May or June. I know that is what we did in at least one of my organizations and that is fine. 2009 was the kind of year that reduced everyone’s expectations and couldn’t be predicted by anyone. However the results of this year allow you to be proactive as opposed to reactive in your financial planning for 2010.

Many of you typically sit down with your finance officer, accountant, or maybe just by yourself around this time of year and create pro-forma financial statements for the next year as a matter of practice. That is good practice for your organizations success so if you don’t do this, please start. In the past though I imagine for many of you this was a going through the motions exercise where predictions about expense growth and revenue growth were picked out of thin air or with sort of an ad-hoc guesstimation technique. I think as the results of 2009 bear out, this cannot be the case going into next year. Organization and detail should be the order of the day for any financial planning in 2010.

For me operating budgets are a great rudimentary planning tool. As a matter of fact an operating budget is what has consumed all my work time over the last few weeks and I am happy about that. It shows me that my employers care about the financial health of the company and it allows me to take control of any expenses I might have missed while putting out the bigger fires during the year. It allows me to strip out the accounting and technical elements of the things on our income statement and reorganize them based on related expense groupings. Payroll is more than just salaries, its salaries and insurance contributions, its car allowances, its federal taxes and processing fees for using an outside company. I don’t have to guess at what happens if we add back an employee or we bring back 5 day weeks, I could see all of the real costs increasing on the paper. All of our expenses being reorganized allowed me to see we spent almost $10,000 in computer and technology related expenses, and $5,000 in office supplies. I went back and pulled contracts and invoices to understand what we did to generate our costs. Were they necessary? Will the money need to be spent again next year? Will the costs be going up next year? I laid the operating expenses out monthly. I know that one of my organizations needs to make around $50,000 a month in net profit just to break even with its current spending habits.

Then once I was done with the operating budget, I sat down and went the extra mile as they say. I took a look at our work-in-process expectations to end 2009. I looked at the business we have pre-booked for 2010 and what we will have to pay our vendors based on what is pre-booked. I even went so far as to look at not only how much we will have to pay our vendors but when we will have to pay them. Based on that investigation I found out that we can expect to get paid by our customers in March at the earliest. I know now, halfway through November of 2009 that I need at least $450,000 in real cash to survive the first 2 months of 2010 and keep all of our payables under 30 days. I know today that due to rebate dollars at stake I can only afford to “float” about one-third of the $450,000 dollars. I know now what my contingencies are to obtain the cash my organization needs to survive and keep its reputation as a timely payment customer. I also know now that the repercussions of not paying on time will be delays in production, which in turn will postpone our jobs being done, which will postpone us receiving payment for satisfactory work, which will extend our cash shortage another 30 days… and so on and so on until we have no business left and all my problems are solved because we don’t have a business and so I have no cash to manage. I know that sounds like a silly scenario, but that is probably closer to a reality that we would all face if just one thing goes wrong with our cash flows and is a real example of what could happen if I did not do financial planning.

Now that the lesson is over so to speak I would like to point out that nowhere in the above description of financial planning did I do anything extraordinary that only a Finance MBA would have the skills to do. I simply took the time to organize the finances into understandable expense groups and utilize the information at my disposal to make our financial plans and predict our cash needs for the coming year. You don’t need advanced degrees to organize data and you certainly don’t need advanced degrees to form an opinion about the future.

In summary, if you haven’t done your 2010 planning yet, you should certainly start. If you don’t have this kind of information at your disposal, you should try to obtain it. If you don’t have the luxury of knowing you have pre-booked business for the coming year, simply do a best-worst-and base case scenario plan of your organizations financial needs based on your expectations. If you can’t do that because you don’t know how, ask someone, use the internet (I have an MBA and I use Google to clarify things for me all the time) or e-mail me your question and I can try and help.

In any event, as a result of my planning I know what I need to know about the future of my organization today, while I still have time do something about it. I understand that 2010 is not 2009 and the worst should be over but the best won’t soon be here. I also know that because I took the time to do proper financial planning my company should still be here when the good times do come back around. If you take the time, I am sure yours will be as well!