Do You Have Plenty of Margin?
No, I’m not talking about gross margin, net operating margin or net margin.
Instead, I’m talking about MARGIN, as in the book by Dr. Richard Swenson. I call MARGIN the best non-business book ever written that every overburdened, overworked, and overstressed executive should read.
Dr. Swenson calls MARGIN the opposite of overload. My favorite description of MARGIN is the formula he offers below:
Power – Load = Margin
Where Power is made up of factors like skills, time, emotional strength, physical strength, spiritual vitality, finances, social supports and education. Load includes internal and external factors (personal expectations, emotional disabilities, work, relational problems, responsibilities, financial obligations, and civic involvement).
So when load exceeds power, we are in negative margin, or we’re overloaded according to Dr. Swenson. Over the long haul, we hit burnout if we stay in negative margin status. Want to increase margin? Simple. Increase Power or reduce Load, or do both.
“Given that the formula is simple and the consequences of living without margin are painful, why is the concept not universally understood? The answer reveals a principle: not all societal pathogens are equally opaque. Or, in other words, the cause of some pains are more readily apparent than others.” Dr. Richard Swenson
This book as been a source of wisdom and strength for me over the past decade. When I’m in overload status, I now know the solutions to the problems that got me there.
While the book is replete with many statistics, charts, and supporting research, the book is still easy to digest. I highly encourage you to read it.
U.S. Government Default – A Super Quick Primer
I have been reading with interest how our government is close to reaching its inability to borrow more funds in a couple days to continue its business-as-usual activities. I’m interested because the government gets to play a game that we as individuals, families, and businesses cannot do over the long haul—spend more than we bring in.
My personal question in this process has been a simple one. What happens if we default? We probably do not want to know, but let me offer what will happen quickly.
1. All U.S. debt instruments would be downgraded. And that’s a big deal. That means pension funds and 401k plans may be forced to sell off these securities at huge losses as the underlying plans may not allow for low-rated securities in such portfolios.
2. I’m guessing the recession would continue and may worsen. Why? Because of uncertainty. If you own a mid-sized business, are you going to go into growth mode? Will CapEx increase? Will you add employees? Common sense dictates the answers to these questions.
3. Access to bank financing is probably much harder as lending limits at financial institutions would probably be much more limited—I’m speculating on this one.
Mark’s Final Take
As always, solidify your balance sheet. Make sure every expense is necessary, and eliminate if it does not impact customer service or the quality of your products and services. And finally, continually enhance the quality of your revenue stream(s).
Self-generating Metrics
I recently responded to a question on another CFO blog about the metrics for professional services firms. Specifically, the person asking the question wanted to know the number of billing personnel to overall headcount should be.
Personally, I think the answer is simple. The key is to look inward, not outward. Let me explain.
Let’s work backwards. Small professional services firms should easily be able to command gross margins from 25 to 35 percent. And net operation margins (NOI) should be from 8 to 12 percent, easily.
The difference between those two margins is your SG&A which will hover around 15% percent.
Now we know the numbers, it’s easy to identify billable headcount to administrative staff. Is the admin staff lean? Is it effective? If that’s the case, you’ll need to focus on efficiency and effectiveness in your cost of generating revenue to improve your headcount metric.
In short, by doing the above, you are in essence self-generating your own need-to-have metrics. So don’t necessarily gauge yourself on other firms. If you do, you’ll be comparing yourself to the average. Instead, determine where you are, and determine where you want to be and develop a plan to get there based on your new insights.
When Gary Harpst Speaks, I Listen
Gary Harpst is one of the truly great guys in the accounting industry. He was one of the founders of Solomon Software and is the author of the book Six Disciplines (one I’ve read multiple times).
Gary was recently interviewed by Dan Bobinski over at Management-Issues. Gary was asked about the advice he would give to mid-sized businesses in this economy. Some of his comments included:
1. Get costs in line with revenues,
2. Make sure the strategy fits the current economic environment, and
3. Build a strong team and get them involved.
You can read the full interview here.
Do Huge Sales Gains Equal Huge Increases in Earnings?
I’m sure any CEO would love a 44% increase sales over the prior year. Who wouldn’t?
But would you expect your earnings to drop $114 million or 23% on this 44% sales increase? That’s exactly what happened to Amazon for the six months ending June 30 according to Business Wire. While sales were soaring 44% higher, operating expenses were growing faster at 60%.
Yes, when sales go up, the following happens:
1. Margins may drop as price points may be dropped to add to market share,
2. Labor costs go up to meet surging demand,
3. Marketing costs will expand to fuel top-line increase,
4. And other costs will rise too as the surrounding infrastructure typically has to be phased in at a capacity larger than the current revenue base.
So is Amazon unique? No, this is typical for any business with high growth. But here’s where Amazon probably succeeded where smaller businesses fail. Amazon planned their growth, and executed accordingly. I’m not saying they predicted this high of increase, but they started planning this growth curve a year earlier and probably conducted their rolling forecasts monthly. By carefully planning this growth, financing and proper liquidity were in place. Most small companies would be hemorrhaging by now because no planning process was in place.
Amazon, nice job. By the way, I love my new Kindle.
Source: Business Wire Dollars in millions.
Keys to Building that Great Management Team
One of the most critical jobs for any CEO is to build the management team. It’s a never ending process. Need some help on how to do this? Consider the framework developed by Gallup called the Four Keys to Great Management. Their conceptual model for great management was published in 1999, but is still a bedrock in their management training programs.
Employees, Being Number 2 Isn't That Bad
Sadly, while the nation is trying to figure out how NOT to default on the country’s debt, the firing of Tiger Wood’s caddy kept hitting the headlines last week. Who gives a rip?
Actually, I did as I was fascinated by how much Steve Williams, the second fiddle to Tiger, earned by being the big-time golfer’s caddy. Not a bad haul … somewhere along the lines of $8 million over 10-plus years (source: Business Insider). Even if that number is inflated, he still made a lot of money. That’s more than many great CEO’s make.
So here’s the question, can you make a great living by not being the big guy (or gal) in the company? There can only be one CEO, one CFO, one CIO, and so on. And the Steve Williams story reminds me how critical it is to have a strong team surrounding the CEO. Without those people, the CEO is going to be average at best.
Another Similar Lesson from History
Let me digress for a minute. One of my favorite stories in ancient Hebrew history has many ties to business and along these lines (having a strong supporting team).
The story goes something like this. The Hebrews (the good guys) are being clobbered by the Amalekites (the bad guys). Moses (our CEO and visionary) does his part by raising his arms. When he does, the good guys are winning. But when he gets tired, the bad guys pull ahead.
Poor Joshua (the COO and head of execution). He’s leading the fight and is probably wondering why the battle keeps going back and forth.
Enter Aaron (middle management) and Hur (just a staff person). They get it. They have a solution. They have the CEO sit in an ergonomic chair from Herman Miller. And Aaron and Hur feel empowered to lift the arms of the visionary leader.
The outcome? The good guys won, of course (with a little divine intervention).
So What’s the Point?
Steve Williams, Aaron, and Hur merely reminded me that we need strong number 2 people in every organization. Accordingly, if you are a young and rising star in your company, let this guy with more grey hair than you offer a few suggestions.
1. Many of you are ambitious. A good thing. But be realistic. Understand you may only be able to go so far in your company or any other organization.
2. It may take you ten or more years to learn this, but don’t be complacent once you figure it out. Keep striving like there’s no tomorrow. Press hard, and be the best you can be.
3. Accordingly, understand that you are absolutely crucial to your company, and never take it for granted. By being an awesome number 2, will you make as much as Steve Williams? Nope. But in time, I’m confident you will see the rewards. But you need to be patient.
Steve Williams, you had it good. Hope you never forget it. Aaron and Hur, nice work. The chair idea, nice touch.
The National Debt Ceiling, Business and the Family
First, I’m no economist … not even close.
But I continue to be intrigued with all the talk about the government raising the debt ceiling. While I have an opinion, I will keep it to myself. However, I will point out that only 22% of Americans are in favor of increasing the nation’s debt load according to a recent Gallop poll.
As a small-town CFO, what’s frustrating to observe is the government’s inability to execute on the basics of sound fiscal policy each and every year. Yes, the economic complexity of any government is complex compared to the family, the small family-owned business, and other businesses on a larger scale.
But here’s where any government (Greece, U.S., Ireland, and all others) can pull a page from other economic entities as I show on my economic entity pyramid below:
When Facing Economic Crisis
1. Develop a war-room mentality with a continuous turnaround mindset,
2. Then focus on cutting costs, and
3. Finding ways to enhance and maximize revenues, then gradually
4. Reduce debt to manageable levels.
Yeah, I know–easier said then done.
In our government’s case, item 3 above may be impossible (raising revenues). So the focus needs to be on item 2, cutting costs, and not just incrementally. Without a war-like attitude or a turnaround mindset, cost cutting will never happen on a major scale.
So no, I’m not an economist, but I do understand the basics in sound fiscal policy. As families, we do. Ditto for small and bigger businesses (the good ones, that is). But can our government figure a way to follow suit and keep the mindset sustainable over the long haul?
Incorporation Services
I’m a big fan of incorporation services because they’ve got the system down to a perfect science at a low, affordable price. I’ve used such services before and they are super simple to use.
But while I like these services, they are no substitute for a good business attorney and a CPA.
Choice of Entity
A good CPA will walk you through the best entity for your situation providing pros and cons of each. If you pay for incorporation services online, you’ll never understand which entity to select. Even a wizard-based system cannot properly tell you the right entity. You need that CPA to help you with your entity selection. Afterwards, you need the input from your attorney to make sure there is agreement.
Operating Agreements
Most entities are LLC’s these days. And that makes sense as LLC”s can either be taxed as a sole proprietorship, a partnership, or s-corporation. But who will write the operating agreement? The operating agreement is so, so critical for partnerships or s-corporations. DON”T do it on your own. I promise you–you will be sorry. Instead, get the attorney to write the operating agreement.
The Perfect Scenario
1. Hire the CPA to help you with the entity selection.
2. Then consult with your business attorney to go over the entity selection.
3. Have them draft the operating agreement (but it HAS to be a fixed price). Have them use your incorporation service you have selected, but they can do the leg work. Your cost may be a the pricing on incorporation’s website plus an extra $50 bucks or thereabouts — big deal
Bottom line, don’t do this on the cheap or you’ll be sorry for it down the road. And that’s a guarantee.
Auditing firms, is this your field PC of the future?
When I go to clients, I ALWAYS lug around a second monitor with me. I’ve been using dual monitors since 2004. So when I’m in the field, I need that second one. I’m also glad to say that most of my clients now have them (some even have three and four monitors).
So I recently asked an auditor from a top 10 firm how they tote their extra monitor when auditing in the field (surely they have something fancy they use for a second monitor or a nice case for lugging it around). The auditor said they definitely take a second monitor and they haul it around by turning it upside down in a second laptop bag. Drats. I was hoping for a great idea. I’ll continue lugging mine around in my arms.
I’ve seen this before, but below may just be the future of laptops that field auditors use on their engagements. Mashable states the entry price is $2,395.
The Wall Street Journal featured B2B CFO® as experts in cash flow management. 
