To Fail is to Succeed

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Being okay with failure is counterintuitive for most people. It’s one thing to accept failures, but another to not worry about failing at all. But if you listen to CEOs of some of the most successful companies in the world, failing is no big deal. In fact, it helps.

Fear of failure is normal, and most people take the path of least resistance to avoid failing. But when James Quincey first became chairman and CEO of the Coca-Cola Company he told managers, “If we are not making mistakes, we aren’t working hard enough.” Quincey believes Coke employees have been scared to fail since the “New Coke” disaster years ago. And fear of failure stifles the good and even great ideas along with the bad ideas.

Amazon founder Jeff Bezos has the same attitude toward failure as Quincey has. Big ideas are experiments and experiments have unknown outcomes. But that’s OK, says Bezos. “Experiments are, by their very nature, prone to failure. But a few big successes compensate for dozens and dozens of things that didn’t work.”

Netflix co-founder Reed Hastings is concerned that there hasn’t been enough failure at Netflix. He’s worried that the company has too many hit shows and not enough canceled shows, which means they aren’t taking as many risks as they should be. If employees were executing bold and creative ideas, they would have a bigger fail rate.

CEOs aren’t the only ones who think that failure is worth it. Smith College in Massachusetts offers a course called “Failing Well.” (Don’t count on many of those classes, kids.) Students enrolled in the class are given a Certificate of Failure that says they are “hereby authorized to screw up, bomb, or fail” at a relationship, project, test, or any other initiative that seems hugely important and still be a totally worthy, utterly excellent human being.” Rachel Simmons, who runs the initiative, explains that students who have permission to fail are ready to handle it and that makes them tougher and more likely to take risks.

The result of failing is good, even vital, to business and life. As a business leader, don’t be afraid to embrace the possibility of failure. Learn from it, build upon it, and achievement will come. After all, it took Thomas Edison over 1,000 experiments to finally get the light bulb right. Why be afraid to fail at least a few times?

The ABC’s of Financial Know-How

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As a business leader, you are barraged with endless acronyms for measuring the financial performance of your business, including NAV (net assets value), EPS (earnings per share), KPI (key performance indicator), ROI (return on investment), just to name a few. It can be overwhelming to know which acronyms are meaningful metrics for your business.

The Numbers Coach recommends starting with two simple acronyms: ROA (return on assets) and ROE (return on equity). These metrics are simple yet effective indicators of the overall financial health of a business.

Return on Assets

ROA is a financial ratio that measures the profitability of a business in relation to its total assets. It is calculated by taking your company’s annual net income and dividing by its total assets including facilities, machinery, equipment, vehicles, inventory, etc. To put it simply, ROA shows how effective your company is at using assets to generate profit.

Here’s an example: if your company’s net profit is $248 and the total assets in your business are $5193, divide 248 by 5,193 and you have a 4.8% return on assets.

What is a good ROA? It’s usually the highest, but it depends on the industry. It is important to judge your business’s ROA against the competition. What is a great ROA in one industry may not be in another. Banks, for instance, bring in as much deposited money as possible and use it to offer loans at a higher return. They are known to have low ROAs versus a software company having a higher ROA. An ROA that is much higher than the industry norm may suggest the company isn’t renewing its assets for the future.

Return on Equity

ROE, or return on equity, is a similar calculation used to measure financial performance. To calculate ROE, net income is divided by average shareholders’ equity. ROE uses equity, the net worth of a company, not just what it owns. It tells businesses what percentage of profit they make for every dollar of equity invested in their company. In other words, ROEs show the return on a corporation’s profitability and how efficient it is at generating profits for the owners. Here, as with gross margins and net margins, the higher the numbers, the better.

ROAs and ROEs are important tools used to indicate the financial success of a company over a specific time. If these financials are in order, they can be a relatively simple way to quickly demonstrate your company’s performance.

Need some guidance for calculating and applying these metrics in your business? Contact the Numbers Coach for a free consultation.

How Financial Modeling Can Help Your Company Plan for “What If?”

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Financial modeling is perhaps best known as a technique used by Wall Street investment banks to anticipate performance of their investments. A financial model is a spreadsheet (sometimes a series of spreadsheets) that serves as a financial representation of a company.

A model incorporates formulas that calculate how the company might perform under a certain set of circumstances. For example, a model could be used to show how a proposed merger of two companies would stack up against other industry competitors in terms of estimated sales revenue, market coverage, expenses and profitability.

Benefits of Financial Modeling

Business owners often use financial modeling to explore “what if” scenarios and their likely impacts on the company. For example: What are the possible effects of opening stores in a number of new locations next year? Modeling can help you estimate the outcomes for a best case scenario, a worst case scenario and the most likely scenario. The business owner needs to see a range of likely outcomes to determine if the required investment is worth risking, given the range of potential rewards.

Perhaps your business has a new product under development. A financial model can help you decide whether to acquire new equipment to manufacture the product in-house, or whether it is more cost-effective to outsource the manufacturing process to a reliable vendor.

The financial model could also take account of likely timing and cash flow considerations. Outsourcing the manufacturing function perhaps means an earlier first product shipment date, accelerating cash receipts from product sales. In-house production requires an initial cash outlay related to purchase and installation of equipment. Estimate additional costs and time for training employees to use the new equipment and testing the first production run for output quality. Finally, the model can predict how soon product sales materialize under the in-house scenario.  

Predictive Modeling for a Range of Time Frames

Financial modeling is not just used by companies that expect merger activity, new product developments or other big changes. Often an owner simply needs to envision a company’s financial future, assuming a variety of possible growth rates and a range of time frames. A business owner may want to see annual growth rates of 2, 5 and 8 percent applied to the next quarter, the next year and the next two years. 

Until you run the numbers through a financial model, it’s difficult to understand how different the company would look after two years of 8 percent growth vs. two years of 2 percent growth. The output from this kind of modeling helps a business owner comprehend the range of outcomes and therefore make informed decisions. Sometimes just seeing what is possible inspires an owner to develop plans for achieving goals previously considered out of reach.  Building a model also gives the business owner and management team a chance to question some of the company’s ongoing practices and see if there are ways to improve.

If you have never used financial modeling to help manage your business, give it a chance. You may find it inspires you. Click here for some tools to help you.

Want to Avoid Running Out of Cash? Know Your Working Capital Requirement

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Does running out of cash keep you up at night?  If so, you are not alone.  Many business owners and leaders report worrying about the amount of cash available in their businesses. 

However, there is a way to measure how much money you need to operate your business without running out of money. It’s called the Working Capital Requirement (WCR).  By calculating the WCR, you will know how much cash you need to have readily accessible to sufficiently operate your business

The calculation is as follows:

Working Capital Requirement $= Cash Conversion Cycle (Days Receivable + Days Inventory – Days Payable) X Average Daily Sales (12 months sales / 365 days)

This means that you need to keep access to cash in the bank, line of credit, credit cards and other financing sources equal to this number.

For example, if Days Receivable is 30 days, Days Inventory is 45 days, Days Payable is 35 days, and annual sales are $1 million, then your working capital requirement would be: (30+45-35) X $2,739 ($1,000,000/365) = $109,600. Having this much access to ready cash will ensure you maintain day-to-day operations without running out of cash.

What is your working capital requirement? Use our Tool Kit to help you calculate

Need more guidance on how the WCR and other key metrics affect your business’s financial health? Schedule a free consultation with our Numbers Coach to discuss metrics that make sense for your business.

Financial Knowledge is Power: Do Your Employees Have Enough?

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Do you know if your employees are aware of your company’s finances? Or maybe you assume they don’t need to understand them unless finances are part of their job duties?

At the Numbers Coach, we believe all employees should be educated on the financial fundamentals of your business. How do you make money? What does profit and loss mean for the company?

It’s important to help connect an employee’s job to the financial results of your company. This helps them see how their work impacts the company’s ability to provide the products and services needed by its customers.

People may be working hard, yet have no idea if the company numbers are up, down, or stagnant. It’s up to business owners to educate employees with as least enough financial information for employees to understand how their role affects the bottom line. Many companies host regular financial seminars for their teams, or sponsor outside classes on financial fundamentals (because, after all, even those in upper management can use an occasional refresher!)

Creating awareness of the company’s financials can also spark motivation for employees. One CEO of a multi-location retail chain began to use money as a motivator to get employees in all stores to increase the company’s bottom line. It’s amazing how creative people can be when properly motivated. Store owners ran promotions, emphasized pre-sales, and even hit the pavement carrying signs. And sales began to improve almost immediately!

Whatever leadership tactics a business uses, it is important for employees to see how they personally affect the numbers. All departments, including customer service, sales, marketing, shipping and receiving, IT, etc., have an impact on profits and losses.

By making the finances personal and relevant to your employees, you gain their trust and empower them to make a difference. Paint the big picture for them, including the status of your business and what success looks like.

In the case of finances and employee buy-in, knowledge is power! Don’t be afraid to share the good and the bad with them. . . the payoff will be worth it in the long run.

Are You Selling a Product—or a Commodity?

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We all want to think our business’s product or service is a solution that our customers can’t find elsewhere. But do our customers see it the same way? A product becomes a commodity when all of its units of production are identical, regardless of who produces them (ex: a raw material, such as steel). If you want to be viewed as a unique offering by customers, you have to differentiate your product from the competition.

5 Simple Strategies

Here are 5 simple strategies to help your product or service avoid becoming a commodity:

  1. Create a niche market. Are your products or services able to serve a niche in the market where it is seen as a premium? Rather than trying to appeal to a broad audience, focus your offering around the niche that will highly value what you offer.
    For example: Here at the Numbers Coach, we do not try to consult with business leaders on every aspect of their business. Instead, we focus specifically on coaching them on how to really understand their financials and apply that knowledge to growing their businesses.
  2. Target the right customer. Focus on the ideal customer. The Pareto Rule is often found in many businesses, where 80% of the revenue comes from 20% of your customers. Build a profile for that 20% of your customer base and spend the majority of your marketing budget to pursue the prospects that fit that profile.
  3. Highlight your expertise. Show your expertise in your product or service, whether that’s the wisdom you have achieved with years of professional experience or your work as an artisan making a product.
  4. Provide outstanding customer service. How does your company stand out from the competition? Is it on-time delivery, is it orders fulfilled within 24 hours, is it answering customer questions with a live service representative? Find a way for you to “Wow!” customers with your customer service.
  5. Personalize interactions. Create a way to offer a personal touch to your product or service. It could be a handwritten thank-you for a purchase or a simple gift to say “thank you for your continued business.” Show customers that you personally value their business.

Here’s to offering products, not commodities, to our customers!

Understanding Net Income vs. Cash Flow (and Why it Matters)

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When discussing the financial health of a business, people often use the terms “net income” and “cash flow” interchangeably. This is technically incorrect, as the two concepts are very different. While it is important to understand the distinction between them, it is also important to recognize that they both have an impact on the financial health of a business.

Net Income

Also known as “net profit” or “the bottom line,” net income is the amount of money that a company has left over after all expenses have been paid. It is calculated by subtracting all expenses, including cost of goods sold, taxes, and operating costs, from total revenues. Net income is the amount of money that a business must pay out to shareholders, reinvest in the business, or use to pay down debt.

Cash Flow

Cash flow, on the other hand, is the amount of money that a business has coming in and going out. It is calculated by taking the total amount of cash that a business has on hand at the beginning of a period and adding any new cash that came into the business (ex: sales), and then subtracting any cash that left the business (ex: expenses). Cash flow is an important indicator of the financial health of a business, as it shows how well the business is managing its money.

What’s the difference, and why should you care?

The main difference between net income and cash flow is that net income is a measure of profitability, while cash flow is a measure of liquidity. Net income measures the profitability of a business by looking at the net amount of money that is left after all expenses are paid. Cash flow, on the other hand, measures the ability of a business to generate and manage cash. Cash flow is important because it shows how well a business can pay its bills and reinvest.

Net income is a measure of the long-term performance of a business, while cash flow is a measure of the short-term performance.

  • Net income is a measure of the overall profitability of a business over time and is used to determine the value of a business.
  • Cash flow, on the other hand, is a measure of how well a business is managing its money in the short-term and is used to determine how much money a business needs to pay its bills and invest.

Both net income and cash flow are two metrics that are critically important in understanding the financial health of a business and managing a business’s finances.

Need help with defining these two key performance indicators? Check out our Numbers Coaching services and our KPI Toolkit.

Learn How to Fish: Hire a Coach vs. a Consultant

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An ancient proverb states, “if you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.”

In the business world, financial acumen is the fish. Companies hire experts to understand and solve financial issues. The experts complete the task and voila, the company has its fish.

But what if a business hires a coach who teaches the team leaders how to fish? Then the leaders will be able to ask the right questions, and then understand, analyze and solve financial problems on their own. The team leaders will now become the experts.

Hiring a coach instead of an expert equips, educates, and empowers company leaders. No more waiting for a consultant to provide all of the answers. Now managers have the necessary skills and insights to find the answers (which may include saving money on experts!)

Think of it as a football coach who teaches the quarterback how to run and call plays on the field. In addition to instruction, the coach gives the quarterback advice and support. As the quarterback gains confidence in their abilities through coaching, they begin to call audible plays on the field themselves based on how they see the defense line up.

Instead of an expert who is hired to identify specific problems and opportunities, a Numbers Coach offers financial tools that allow businesses leaders to be more engaged and active in their financials and to take charge of their financial success.

Hiring an expert will solve the immediate or near-term issues, but you will be right back where you started from when it comes to the next one. Alternatively, coaching is geared toward a broader understanding of financials and teaches the necessary skills.

With coaching, leaders will see the bigger picture, not just specific problems, and can handle future challenges and opportunities on their own. They will catch their own fish and have plenty to share.

Learn more about our Numbers Coaching services

As a Business Leader, Do These 3 Worries Seem Familiar?

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Running a business as an owner or part of a leadership team brings along with it worries that can keep you up at night. Here are three of the most common worries, along with strategies for overcoming these fears:

Worried business owner
  1. Employee retention. When you lose a key employee, it is difficult to replace them, especially in a tight labor market. A rule of thumb to replace an employee is upwards of 3x their salary! One way to help retain valued employees is to do a routine check-in with each employee. Some might call it a “stay interview,” meaning what does it take to keep the employee happy enough to stay? In many instances, an employee primarily wants to be heard and valued, which comes from soliciting their feedback on how the company can do better.
  2. Customer retention. It seems with many of my clients fall within the Pareto rule. This means that 80% of their sales comes from 20% of their customers. Hence, if you lose one of these 20% customers, it can be a significant impact on the business. I have used in my business the Net Promoter Score (NPS) which asks a simple question: ”On a scale of 1 to 10, with 10 being highly likely, would you recommend to a colleague to do business with me?” This simple question can help you see if you customers are satisfied with the value you bring.
  3. Running Out of Cash. This fear can vary greatly among business owners and leadership teams based on their risk tolerance. However, if you run out of cash, that’s it. . . lights out and close the door. I have customers who keep a close eye on cash to ensure they have enough to weather economic storms that inevitably come our way. However, I have others who push it to the edge. Each business has a “speed limit” to grow and an amount of working capital that it should have available to meet everyday needs. Calculate your working capital needs by knowing your cash conversion cycle. This is the gap from when one dollar of cash leaves your door until it returns to your bank account from your customer.

Having a strategy for each one of these three worries can be the difference between having a thriving business or closing your doors. Let us know how we can help.

Building your 2024 financial plan? 3 factors to consider

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As we get ready to wind up 2023 and head into 2024, now is the opportune time for business financial planning.

A well-developed business financial plan, or budget, helps you manage to your expectations. It provides measures to keep things on track. (And as we all know, “If you don’t measure it, you can’t manage it.”)

Creating a financial plan for your business is critical to helping you navigate these 3 challenging issues that I see coming in 2024.

  1. Growth will be slower than in 2023.  According to IMF, the predicted GDP for 2024 will be 1.5%, down from 2.1% in 2023.  This change is in large part due to a slowdown in consumer spending as interest rate increases, inflation, and decelerating wage growth impacts spending.  If your business or your clients’ businesses are consumer focused, it could affect your predicted 2024 revenues.
  2. Inflation pressures continue along with rising labor costs.  Your budget should consider the changes to the rate of inflation.  A Vistage survey of manufacturers indicated 62% of them plan on increases in automation to help offset continued labor supply and cost issues.  Wage inflation will be strongest in the leisure and hospitality industry with education and health services a close second.
  3. .  Other factors that you should consider in your planning for next year:
    • Credit card delinquencies have risen sharply over the last 8 quarters to 2.8%
    • Higher interest rates including mortgage rates are approaching 8%
    • A weaker dollar makes imports more expensive
    • COVID-era stimulus is waning, and the savings rate is starting to lower
    • Transportation costs are in flux with consolidation occurring and this summer’s bankruptcy of Yellow Freight is an indicator of too much capacity

Now that you have your parameters in mind, the financial plan is simply a description of the day-to-day activities that will help you achieve it.  This can be as simple as determining how many new clients you will need at X dollars per month, or more detailed with specific key performance indicators for all areas of the business (finance, operations, sales and marketing, HR, etc.),

Start planning today so you can prepare for whatever comes your way tomorrow.  Let us know how we can help.

Here’s to planning a successful 2024!

Profit Answer Man Podcast: Increasing Cashflow with The Numbers Coach Mike Iverson

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In this episode, Rocky sits down with Michael Iverson –  the founder of the Numbers Coach, whose services include the preparation of key financial functions such as budgeting, cash flow forecasting, banking and capital funding, mergers and acquisition activity and general accounting for month end analysis and decision making.

In this episode, you will learn the following:

  • Understand your financial numbers and gain insights that can drive your business forward.
  • Master the art of cash flow management to keep your business running smoothly even in uncertain times.
  • Learn how to navigate through economic downturns and recession-proof your business.
  • Discover the secrets to creating financial reserves that will provide stability and peace of mind.
  • Take control of your financial future by implementing effective financial planning strategies.
  • Learn how to make informed decisions that will improve your business’s profitability and success.
  • Gain the confidence to face uncertain times head-on and come out stronger and more resilient.

The Customer Is Always Right. . . Or Are They?

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The phrase “The customer is always right” was drilled into me by my Marketing professor many decades ago. It was the common mantra espoused by many a sales and marketing guru. Customers can help businesses grow in directions they never thought possible—but they can also drive you in the wrong direction.

I recently read an article titled “The Customer Is Always Right. . . Is the Most Misunderstood Phrase in Business.” It talked about a business who had a demanding customer asking for changes to the functionality of their software product. The features being requested by the client were only loosely aligned with the service this company was providing. The company leadership was considering doing the upgrades mainly because the client was a big piece of their revenue. The customer was demanding, and employees were stressed out trying to meet the demands.

After accommodating the customer on a few occasions and seeing some employees leave due to the stress from this one demanding and rude customer, the owner of the business fired the customer. It did result in a sharp decline in revenue and caused additional terminations. However, company morale changed, and the work environment shifted where the team decided to focus on customers who fit a specific profile and most of all did not have a “jerk” mentality when it came to dealing with its vendors.

Ultimately, some years later the business returned to the level of revenue it had lost from the one customer and found itself more diversified in its customer base, more profitable, and more employee satisfaction. Don’t be afraid to say “no” to a customer. While the customer may always be right, that doesn’t mean every customer is right for you and your business.