A ShareVault blog post today quoted a statistic that supports what we’ve been saying about the abundance of money looking for good companies to buy. Their quote:
“According to data provider Preqin, private-equity funds currently have over $1.46 trillion in uninvested capital. That’s up from $1.39 trillion at the end of 2015. And with large public companies looking to grow through acquisitions, many companies have decided that the best exit plan might be a sale.”
A sale today of a company in top notch shape will likely yield a premium price for the seller. Buyers need to put all that money to work or give it back to their investors. The operative words are “in top notch shape” and the trick is getting there and staying there long enough that it’s perceived as part of the culture of the company, i.e. not an accident or momentary event. That means building an infrastructure that supports best-of-breed operating practices and attracting employees who are themselves comfortable in that kind of environment. Our specialty is producing a finance department that matches that description, and helping CEOs learn how to use their financial resources most effectively.
You should call us. We can help. 888.788.6534.
For CEOs of those companies large enough – or wise enough – to have a board of directors or even an advisory board, and for all the nonprofit organizations whose governance requires a board of directors, this question is for you. How have you chosen your directors/advisers? Friends of the organization or the CEO? Friends of other board members? Members of the investor family? Champions of the cause?
All those reasons may be good or bad, depending on the far more important reason: because they bring to your board a level of expertise or knowledge or influence or business contacts that your company needs to achieve its goals. You already know that you can’t have on your payroll every resource that you might need down the road, so you (hopefully) keep contact lists, you network, you listen to webinars and speeches, and more, just to try to keep up on what you don’t know that you might need. Your board is a key resource in that preparedness for what’s ahead, and that means your board should be, as fully as possible, your go-to resource for the needs you already know you have. In order to satisfy that top priority requirement you need to do one thing (or perhaps two) :
- Identify what kinds of expertise/knowledge/influence you need at the board level. Then go down your director list and check off which of your existing directors satisfies each critical need. If a need is not satisfied by anyone on your current board, that’s a red flag – an unfilled need that should be on your shopping list. If your rules allow the expansion of your board beyond its current number, time to go shopping. Find the best people you can who possess that critical expertise and who might be willing to serve on your board and invite one of them to join. Contact CEO acquaintances, consultants, search firms, anyone who is well connected enough to perhaps know a valuable resource in your area of need. However, if your board cannot be expanded, or you don’t want it to be larger, proceed to step 2.
- Take a second look at your existing director list, and this time focus on those directors who didn’t satisfy any of your critical needs based on your Step 1 analysis. If they didn’t get a check mark it may mean they are not providing any of the things your board really needs, and being liked by everyone or the good friend or relative of someone doesn’t count. This is the hard part – one or more of them needs to leave the board to make way for someone who can truly contribute to the organization’s mission. Whether it’s finance, strategy, industry knowledge or regulatory visibility, or fundraising, if you don’t have enough strength within the ranks of your employee base, or if you need someone to raise the tough questions or open the close doors, don’t let friendships get in the way of making progress toward those goals that you value most. Remember, good friends will continue to be good friends, especially if you both realize they are holding your organization back. Find another way for them to contribute, and create that board opening you need. Then go back to step 1.
Anyway, that’s how I feel about it. I welcome your feedback and questions, even if you don’t agree.
Are you sure your shop rate calculation provides adequate margin for your company to be profitable?
Here are 3 tips that may help you ensure your bidding process delivers a profit every time!
|Do you wonder why some of your best work doesn’t produce a profit worthy of the quality that you deliver? Could it be a flawed shop rate? Here are three tips that can help you get the profit your work deserves!
Shop rate is a really important piece of arithmetic. Lay out a template to make sure you recalculate yours the same way every time. That way you will know you’ve covered everything that should be included, and you can compare your newest calculation with the prior ones for variances that may indicate a boost in costs that could hurt your margins if not included in your next bid. And of course if you’re not closely tracking labor costs for everything you produce, the result will be largely meaningless.
2. Don’t forget your non-manufacturing costs
When you use your shop rate for bidding new work, the rate you bid has to cover everything. So your calculation process should include everything as a part of your shop rate. That means not only direct costs of manufacturing, but also overhead, marketing, selling, general and administrative expenses. AND your profit margin! Think of it this way: your shop rate is the price tag on your products, and your customer is going to pay what’s on the price tag. No add-ons or extras. If you don’t build a profit into your price tag, you’re subsidizing your customer’s profits instead of yours.
3. Keep it current
Because costs change and employee productivity goes up and down, you should keep on top of your shop rate to ensure that it’s as current as it can be. I strongly recommend a quarterly review against your actual costs and labor productivity. When your financial books are closed and reports done, this calculation takes only a few minutes to do, and the peace of mind it provides is priceless.
For further assistance with your dynamic business needs, call us today. The number is 888.788.6534.
Gene Siciliano is Your CFO for Rent
– For a few weeks, a few months, or a few years
Just a brief reminder that we have a great 1-hour webinar on budget development and management at Illumeo.com, formerly Proformative.com. Our course has been taken lots of time over the past year, and has rated an overall 4.5 out of 5 stars from those who’ve taken the course. It’s clear, complete, and includes tools for getting operating managers involved in the process and accountable for the results. As the year end approaches, it’s too late to have a leisurely budget development process, but it’s not too late to have a budget for 2017 if you get moving. Here’s the link:
Let us know what you think.
Interesting question that was raised at a recent meeting of the National Association of Corporate Directors in Los Angeles, one that has value for every company that has a management team of non-owners. If you own a company that is managed by professional executives, even if you are the owner/CEO who manages that team, consider these thoughts: First, my assumption: You have a vision for the company and a mission statement that supports that vision. If it doesn’t have those things clearly defined, you can stop reading. The company’s planning systems are probably not sufficiently goal based for these advanced ideas, so it doesn’t matter.
OK, if we’ve gotten past that obstacle and the company has a well thought out long range or strategic plan in place, how does the compensation of the company’s management team support movement toward fulfilling the mission and achieving the vision? Specifically:
How are managers paid for achieving goals set out in the strategic plan?
- Are there multi-year bonus elements in their pay package in addition to the usual “thanks for a good year” raises and bonuses based on short term performance?
- Are payouts based in part on milestones of significant value in the plan?
- Are your milestones specific enough to enable identifying success with acceptable certainty?
- Is every manager eligible for such payouts clear on what is expected to earn those payouts?
Going beyond money to the more personal side, is there appropriate recognition, in addition to bonus payouts, when a key milestone is reached?
- Is the achievement publicized to others in the company, along with credit to the achievers?
- Is there a congratulations lunch, dinner or other event to make the most of that recognition, perhaps at which the compensation reward is actually presented?
- When a promotion opportunity arises, are the achievers with the capability to succeed at a higher level given priority for that promotion, and the achievement recognized as part of the basis for the promotion?
You know what the right answers are, and you know what your answers are. If they’re not the same, maybe you should call us for a consultation. The number is 888-788-6534.
As always, I welcome your feedback and suggestions.
A few years ago I wrote a book on financial mastery for teachers at the request of a client of our firm that publishes textbooks and learning materials for teachers. One of the chapters dealt with wise use of 401(k) plans for retirement savings and investing, the predominant vehicle at the time for employer supplemented savings plans. Since then there has been a rise in a different way to save and invest, the 403(b) plan. Unfortunately the new plans are fraught with extra risk, as this article from the New York Times describes:
If you or someone you know is a teacher, please read this article and circulate it to others. And to take the next step in your financial awareness, covering the full spectrum of money management for teachers, get my book, Financial Mastery for the Career Teacher, published by Corwin Press. Find it at Amazon.com or https://us.corwin.com/en-us/nam/financial-mastery-for-the-career-teacher/book233891#siciliano.
As always, we welcome your feedback, comments and questions.
I’ve been writing to business owners for some time about the coming exit tsunami of baby boomers from their businesses, and some owner/operators nod and acknowledge it sounds like something they really should pay attention to – one of these days. Well, to reinforce the poor state of preparedness for that exit among the aging owner community, this just came in from Morgan Stanley, compliments of John Bunzel, a good friend and one of the top MS financial advisors:
Recent research has shown that more than $10 trillion in boomer-owned business assets will be passed down or sold by 2025. However, according to the 2015 US Family Business Survey conducted by PricewaterhouseCoopers, only about 27% of private businesses have done any exit planning whatsoever. Even fewer have a documented hand-off plan in place, which may leave them vulnerable to events which could force a hurried sale.
According to Matthew Shafer, a Financial Advisor and Senior Investment Management Consultant for Morgan Stanley, succession planning is one of the major challenges facing family-owned businesses today—even ahead of labor costs, finding qualified employees, foreign competition and health care expenses.
“Unfortunately for many unprepared business owners, as this wave of business transactions gets going, it may create a ‘Buyer’s Market’ in which only those who have planned well will experience a successful exit.”
I’m just sayin’…
After the announcement that Verizon was buying Yahoo (after selling off its landline business and buying out the minority owner of Verizon Wireless):
“Any time a business stands still…and tries to just live on what you’ve done, you’re beginning the death spiral.”
Words to live by…
Just found a very good but short article on the benefits of filing for Social Security as late as possible, for you baby boomers who haven’t filed and haven’t yet decided when to file. Thanks to businessinsider.com and Selwyn Gerber for the link:
Business advisors and writers (including me) often tout the value of a dashboard as a way to keep tabs on your business without having to absorb masses of data. The follow up questions we get most often are “What is it, exactly?” or “What does it look like?” or “How does it help us?” So let’s see if I can provide some quick answers to those questions.
A dashboard is an abbreviated summary of the financial and operational data that are most critical to the success of your business, preferably represented in a page or less of charts, graphs or images that can be instantly absorbed without having to plow through tables of numbers or paragraphs of prose. The data chosen are typically referred to as KPIs, or Key Performance Indicators, and as my most recent book says: “KPIs are the performance metrics that enable us to look at the relationships in a company’s financial numbers in a new way. KPIs are best accompanied by a benchmark, a standard against which the metric is compared to see if the company is doing better or worse than was expected or hoped for. The result is an insight that we didn’t have previously about an area that’s important to us.”
The metrics we like fall mostly into 3 categories: measures of profitability, productivity and (where appropriate) financial leverage. All these can be found – or should be – in your financial reports. But it’s far easier to relate to a metric like Gross Profit Margin if you can see a line or bar chart showing the actual GPM achieved for each of the past 6 or 12 months compared with your budgeted GPM or the industry average GPM or your previously achieved GPM. It’s instantly clear what has happened, what you wanted to happen, and how close or far apart they are. No need to scan a table of numbers. And you can easily put 6 to 10 images on a page that will give you an instantly readable picture of the business, even if the table of numbers is part of the same monthly report. The idea is to use our brains to quickly grasp important data by giving it what it needs right up front – a picture. How about these as possible metrics worth following, presented over a rolling 12 months:
- For a retailer: Sales $ per Customer, per Employee, per Square Foot of Floor Space.
- For a manufacturer: Order Backlog Behind Schedule vs. Total Order Backlog, or Firm Backlog vs. Booked Sales.
- For any company with products and customers: Contribution Margin by Product or Profitability by Customer.
- For any company with a bank loan: Debt Service Coverage Ratio or Debt to Equity Ratio vs. Loan Covenant Requirements.
For more information on this subject, check out Chapter 7 of my book, Finance for Nonfinancial Managers, 2nd Edition.
As always, I welcome your comments and feedback.