RODNEY DAVIS: 

 The reality is, is if you haven’t set your business up to accommodate or to handle that growth,  you might find yourself breaking 

 HOW DO WE DEFINE GROWTH? 

Growth is important because if you don’t grow, you die. This is the common thing. But the question is, what are you growing? Are you growing your top line or are you growing your bottom line? Are you growing a gross margin or are you growing your net income? It’s very important that the organization understands what exactly they’re trying to grow. 

 WHEN IS GROWTH NOT GROWTH? 

I’ve seen companies grow, create a demand, and then not have sourcing of the product that they just created the demand for. I’ve seen companies grow and create a demand and not have the capability of delivering the service levels that they promised their customers that they could deliver at.  And in each of those considerations, or in each of those situations, I found that those companies were trying to figure out after the fact what went wrong. 

 HOW IMPORTANT IS A STABLE FOUNDATION FOR GROWTH? 

You’ll hear terms in business about scaling. You’ll hear terms in business about infrastructure. 

The reality is, if you haven’t set your business up to accommodate or to handle that growth, if you haven’t established that framework in which you’re going to grow, you might find yourself breaking and it might be more costly than had just stayed the same. 

 HOW DO WE APPROACH GROWTH? 

The best way to determine how you want to grow is through modelling. And I hesitate to say how many clients say you can’t plan because you don’t know exactly what’s going to happen. That is probably the most disappointing thing for me to hear from an executive team, and the hardest thing to overcome as a financial leader guiding a company. The important thing for you to understand in determining how fast and how we grow is, what are the implications of growth on the cost structure and the capital structure of our business? How do we finance that growth? All of that is down to the models that you build in order to do it. So if you build good models, you’ll come up with good answers and you’ll make good decisions. 

 HOW DO WE GROW, ORGANIC OR INORGANIC? 

Well, the primary difference between organic and inorganic growth from a definition perspective is that organic growth is growth of an organization based on existing resources within that organization, and or investment in your current resources in an organization. Inorganic growth typically, is tied to corporate development and or mergers and acquisition activity. Whether you affiliate with another organization, whether you require another organization where the merged with another organization. Those are your primary differences. 

 HOW DO WE GROW, VERTICAL OR HORIZONTAL? 

Vertical expansion is when you actually expand your service and or product offerings along the value chain. The value chain being if, for example, I’m in retail and I decide that I’m going to go into product distribution, if I want to go one step further and I go into wholesaling, or if I want to go one step further and I might go into manufacturing and raw material sourcing. That’s sort of how vertical expansion sort of plays out. Where are you going to play on the value chain within what you offer your customers?  

Geographic expansion is exactly that. Are you going to move into other markets? Are you going to go into other markets domestically within the company country in which you operate, in this case Canada, or are you going to expand geographically across North America and or internationally? And in each case, you then have to make that organic, inorganic decision. Am I going to set up a workforce and or a sales force in another market, or am I going to go into that other market and hire reps, or am I going to buy a business in that market and immediately expand geographically? 

 HOW DO WE FINANCE GROWTH 

Oftentimes growth comes with capital requirements and when one thinks about the cost of capital, one applies weightings to debt and equity. And when applying those weightings, your contemplation is the cost of debt versus the cost of equity. So you have to make a decision. You’ve got to again, I go back to because I can’t leave out the importance of the modelling. Your modelling will tell you whether or not you can service the debt. And if you can’t service the debt for the capital required, you have to seriously consider equity. And you have to consider what you’re willing to give up. And that’s what strikes that balance. 

 THE ROLE OF A CFO 

In my experience as a CFO, the role that I’ve had to play in the role that I think good CFOs play in the growth contemplation is that they often provide an unemotional balance to the drive of CEOs, sales leaders, marketing leaders.  I’ve always had this advice to CFOs that says if you focus on the minimum worst outcome, you’re likely going to get to the best outcome. And a CFO’s role is to be a contrarian in light of a whole lot of optimists. They provide the background and the support to drive the conversation. 

 FINAL THOUGHTS 

I remember being brought into a half a billion company and asked to take the reins as CEO. This was a business that had been around for probably 9 or 10 years, and they had just had a big loss year. We had an owner who believed in growth. He grew for growth sake, and two years later the business was 40% of the size it was. We were down to about 180 million in revenue, and we were multiples more profitable. And for the next 3 or 4 years, we built it back up to about a $400 million business, but this time profitably. 

 So I would say when you’re thinking about growth, make sure you understand the implications of growth. In their case, they grew on a weak foundation. We went in, we fortified the foundation and we grew again in different markets, different verticals, same underlying business, significantly more profitable.  

 Know why you’re growing, know how you’re going to grow and know what could go wrong during times of growth. 

MANAGING THE BANKER RELATIONSHIP

HIGH INTEREST RATES AND THE BANKING RELATIONSHIP – A SHIFT

Rodney Davis: We had a long period of low interest rates for a number of years and many people thought it would never end. And it wasn’t that it ended that created the problem, it’s how quickly and how abruptly it went up and the extent to which it went up and what that caused from a bankers perspective was an increased risk, an increased number of defaults, and a higher cost of capital. And so you had the relationship with the bank. In many cases, the bank initiated conversations with their clients and said the very thing that I was okay with yesterday, I’m not okay with it today. And if you didn’t have a good two-way dialogue with your bank ahead of that high interest rate regime, you might have gotten a pretty big surprise at the conversations you were having with your bank last summer versus the summer before.

THE BANK: A STAKEHOLDER OR A SERVICE PROVIDER?

Rodney Davis: You’re dealing with the pressures of running your business and there’s this unforced error of interest rate increases that causes you to have to to continue to run your business a bit more shrewdly and a bit more savvy than you might have had to do the day before. And this stakeholder pressure and stakeholder pressure in businesses is very different than customer pressure because a stakeholder will shut you down faster than customers will. And so the relationship with the bank, the higher or the riskier you are as a client to the bank, the more it becomes a stakeholder relationship than you the client relationship because now the stakeholder is saying, wait a minute this person who I serve could actually cause me to lose money. And so the relationship changes during those times and the better your relationship, the more effective you are at communicating, the more efficient you are at communicating information to the bank that satisfies their needs so they can continuously assess their risk, the better that relationship is going to be.

THE ACCOUNT MANAGER OR THE INSTITUTION – BUILD YOUR FILE

Rodney Davis: Unfortunately, all too often we take for granted that the account manager is going to be there forever. And so what I say to clients is when you’re giving information to the bank, give information to the bank, not the individual. So keep in mind that the individual might change. 

People are people, and so it’s going to be about the relationship whether you have that with that banker, but you’ve got to be prepared to have a relationship with a new banker. And I think that the quality of information you’ve historically provided is the best reference that you can give to the incoming account manager that you’re going to be a good account. If you have good conversations with your banker about important topics, you have to follow it up with an email. If you have a conversation with your banker about your financial outlook for the business – if they don’t follow up with an email, you should follow up with an email confirming what you discussed with them because that’s going to go in the file.

So when that new person comes in, they’re going to look at the file. And if that file is mostly in the head of the outgoing account manager, it’s going to be much more difficult for you to transition. You have to think ahead. You have to say, “I’m going to just send something to confirm,” or if you have a difficult discussion with the banker, but it’s just a discussion. And if you’re concerned about the implications of that discussion, send an email confirming what you heard, confirming what you understand the actions to be, because that goes in the file.

THE IMPORTANCE OF BEING EARNEST

Rodney Davis: The point is that you have to be candid with your bankers. You have to make sure that you disclose the challenges, as well as the opportunities. Often when we’re talking to our bankers, we tend to try to spin everything in a positive light. We tend to try to only tell them the things that cast us in the best light. And I think it’s really important that you trust your banker with the good news, the average news, and the bad news. 

So for me, the importance of being earnest is you want to be as transparent as you can with your bankers because that’s going to help them make the decisions. You’re a customer of the bank. 

And as long as you remember that, you will govern that relationship a little bit differently than if you think that the bank is really in charge of every discussion. Yes indeed, they’re an investor and a stakeholder in your business during important times, but at the end of the day, they make fees and you’re a client. So if you think about how you deal with your clients, if you don’t feel as if your banker is dealing with you as a client, then let them know. I’m your customer, first.

MAINTAIN CONFIDENCE – PUT YOUR FINANCE TEAM UP FRONT

Rodney Davis: So, when bankers as a stakeholder are now saying, “Look, I need better and more insightful information in order to decide how best I want to treat this account”, the GreySuits team has experience with bankers. They can put themselves in the position of the bankers, and therefore they have the ability to prepare the right information, quickly, to get that banker what they need, so that they can make the decision – with the primary objective of being able to maintain the bank’s confidence – in the outlook of your business and the reliability of the information. That’s where GreySuits plays a huge role.

HOW TO THINK ABOUT SUCCESSION

Rodney: There’s no tried and true method of ensuring that the succession of a family business down to the next generation is going to have a positive outcome. But there certainly are things, depending on the size of that business, that you might want to make sure of. Like, for example, you know, if you’re running a business and it gets to a size where it has a life of its own, don’t automatically assume that the next generation in your family are the only ones who can run that business. And better yet, are the right ones to run that business. If you make decisions for your business that are in the best interest of the business, then you’re going to end up making the right decisions. Now, there often are times where having a family member involved in a business in some instances is the right thing for the business because of the optics and or the perception of clients of that business. But you’ve got to make sure that whoever it is that’s succeeding you in business is prepared.

WHY A SHAREHOLDER’S AGREEMENT IS IMPORTANT

Rodney: A lot of family run businesses that are started by two brothers or three brothers or two cousins or husband and wife, take for granted that they’re a family. And often don’t put in place a proper shareholder’s agreement or a proper succession plan  because they take for granted that they’re family. 

And then as the business progresses, family member A may think where the business ought to go is different than where family member B thinks the business ought to go. In most situations, where I’ve seen these things go the wrong way, there hasn’t been a good shareholder’s agreement in place to guide exiting the business, or a good guide to succession. Good shareholder’s agreements actually deal with that. 

Even where there is good shareholders agreement, force of wills tends to take the overriding factor in creating and or resolving the types of issues that come up. It’s family running a business as opposed to the business being the underpinning of the family. And often it’s the latter that happens where the business runs the family as opposed to the family recognizing that we’re running a business.

THE IMPORTANCE OF SETTING UP A BOARD

Rodney: The best way to ensure the success of a business beyond the founders is to put in place a good solid board structure. A board has a mandate that is different than that of the founder. The mandate of a board is the success of the business – the  best outcome for the business. The ultimate objective of a founder may be very different. And so an organization that is thinking about succession, and does not consider a board structure is leaving out something that’s critical to success.

I would think something that’s very important to consider when setting up the board of a family business is general board principles and board frameworks. Don’t run the board as sort of “to do” as opposed to having a purpose for the board. Take the time to understand the board’s purpose and its role. And take the time to create a framework that’s not inconsistent with running any good business and applying and adapting it to your family circumstances. If you do that, you’ve got a much better likelihood of success. Sometimes the family issues bleed into the business decisions and then they bleed into the family issues. That’s when, depending on the size, a business needs to think about having an outside board member, an outside board member is not a family member. And can therefore bring a set of fresh eyes to the conversation that as a  family member deeply ensconced in an issue is unable to deal with.

EVOLVING A  FAMILY BUSINESSES TO A BUSINESS

Rodney: We try to take a very objective approach to identifying the necessary skills for the jobs or roles in question –  for understanding how an organization makes the transition from a deeply entrenched senior management “founders” to the next level of management. We bring them the best practices and we bring them standard role definitions and job descriptions. We spend a lot of time with them talking about the nuances of a family environment in the context of these best practices and well-defined roles. And with trust built, it becomes a much easier discussion.

ADVICE ON RUNNING A FAMILY BUSINESS

Rodney:  When I go into a family business, my observation is that you often have jack-of-all trades with founders and family members. When you’re playing the role of a family member, understand that it’s distinct from your role as a board member, or shareholder, or manager. When you’re in the role of management, and you’re dealing with management decisions, try your best to recognize that there are three distinct roles. Recognize that you can never separate them or even separate from them. We spend time with family members in these situations to show them the difference between the role of a family member, the role of a board member, the role of a shareholder, and the role of management. And once you fully understand those roles, you can have those conversations. In those conversations, you are conscious of who you are speaking to.  Am I speaking to you, the shareholder, or am I speaking to you as the director? So when you’re dealing with difficult issues, you know who you’re having a discussion with. 

FINAL THOUGHTS

Once we have the trust of the individuals involved in the situation, and they see examples of what’s worked in the past, what’s not worked and what’s failed, it puts us in a good position to work with them to make the decisions that are going to get them to the right place in the long run.

How Has The New Work Culture Affected Employers? 

We are now seeing a world whereby two years ago, employees were nervous; they were trying to figure out “what’s going to happen to me”. Employers are going to lose revenue and therefore jobs are going to become scarce. So people were trying to dig into their place of employment to secure their place. Over the last two years, what we’ve realized is that it hasn’t decimated a number of employers and a number of employers have actually had for one reason or the other, demand increases in certain sectors that offset the losses in other sectors. Employees have realized that they can work in a different way, and they have a number of different choices about where they can work and how they can work. 

What ends up happening is they’re paying more and it’s disrupting. Finance has to help them to figure out “what does that mean for our organization?” Does it have a lasting impact or is it just a one-off because of the point in time?

How Has Increased Choice Affected Existing  Salary Demands.

Rodney: Many companies are facing this dilemma, but the cost of the replacement staff is out of whack with current salary levels within their organization. How do we deal with this? Am I really going to bring in new recruits at a higher level than experienced recruits or experienced staff, team members, because the market demands that I pay more in order to get those replacements? 

The dilemma is I have to fill the position, but the cost of filling that position is outside of my current salary bands. Do I bring people in and hope that nobody talks about salaries and therefore I never have to deal with the situation? The rule of thumb for smart managers is assume that it’s going to be public. 

Rodney: It’s a very difficult issue that many companies are dealing with because the ultimate outcome of that is higher prices to your customers. Because if the cost of delivering the service goes up, if you’re going to retain the profit, then ultimately you’re going to have to pass that cost on to your customers.

What Is The Role Of Finance In The Changing Workforce?

Rodney: It’s determined if the cost of what the business wants to do will have a single or sustained impact on the profitability of the business. So the operating folks are going to say, I need this. Finance is going to say, at what cost and at what benefit? And so when you’re talking about disruption to salary bands. It’s quite possible to model what the knock-on effect is of changing those salary bands in terms of the service delivery costs. 

So finance steps into that equation to say, OK, we understand what it is that you say you need to do or you would like to do, here’s what the implications are going to be in terms of service delivery cost. How do we make that up? Do we get more volume or more output from the same staff complement, or do we just have to raise the price to our customers? If we raise the price to our customers, are we still competitive in pricing against our competitors? Do we have to worry about that? Or is our value proposition such that our customers are willing to take on that additional cost? So finance is trying to make sure that that conversation is part of the decision.

Is There An Intrinsic Cost To Attracting And Retaining Staff?

Rodney: Well, there are two things, two areas of the lifecycle of an employee that employers are having to deal with right now. One of them is attracting the employees in the first place. Then the other is retaining those employees. If you’re thinking about how do I attract them, what we’re seeing come out in the marketplace these days is employees are saying, I want to work remotely. So to what extent can I work remotely? And remotely might mean I may never even live in the country where you’re hiring me to work. It’s gotten to be that kind of a conversation sometimes. They might say, I want flexibility of hours. They might say that if I have to travel to come into the office, you actually have to pay for my transportation and or accommodations if I’m working remotely. I’ve seen those in employer/employee discussions, and those are very difficult discussions because employers aren’t used to these kinds of discussions. They might be discussions about longer vacations than you’re used to giving and therefore, you now have to look at your vacation policy. Employees are talking about the benefits and whether you’re giving them a set of benefits that they find acceptable. 

We’ve got to make sure that we give them diversity of work. We’ve got to make sure that we’re aware of their likes and dislikes of doing their jobs and find the work-life balance and the work assignment balance that gives them that reward that they’re looking for that’s the non-financial component. Ultimately, they probably will get the financial reward if they perform.

How To Measure Remote Employee Performance?

Rodney Davis: Well, with a remote staff, it becomes that much more important that you have ways of measuring output because you can’t simply have them clock in and clock out, and they’re not necessarily doing predefined supervisable tasks. So even though you’re supervising in an all-on-site work environment, the supervisor has a number of visual ways that they can determine if staff are being productive. Whereas in a remote environment, it’s going to be a lot more based on the metrics, the level of output. So that means that you’ve got to define what’s expected of the staff in a more measurable way with a higher degree of specificity so that you can determine if people are actually giving you the value of output that you require based on their compensation levels. It’s just going to require a whole new set of dashboards for a lot of companies.

Final Thoughts

Rodney: Don’t be afraid of what’s happening to compensation. Be much more concerned and spend a lot more of your time figuring out what that compensation level is going to do to your service delivery costs and try and decide how as an organization you’re going to make sure that you can offset some of those costs. And as I mentioned earlier, with price increases and or with just better efficiencies and higher productivity from the team. In the long run, it’s definitely cheaper to retain your staff and to continually be looking for new staff. So you’ve got to figure out how to make it work.

What’s the best way to establish a relationship with a bank?

Rodney Davis:Banks want predictability. Banks want confidence. Banks want transparency. And so, if you’re going to have a good relationship with the bank, you need to satisfy those three conditions and if you satisfy those three conditions, even in adverse times, you’re going to find it’s easier to deal with the banks.

There are inflection points in the life of any business, at which time, whether the cashflow suggested it or not, you should try to establish credit relationships that will serve you well, as you require them.

So, take a profitable business that suddenly started within the last few years. It generates positive cashflow all the time. Why would they go to a financial institution to establish relationships? Well, because if they’re growing, it’s very possible that you need resources to finance that growth, and it’s not necessarily the right source of financing to finance long-term growth with short-term operating results.

When you think about how you finance your business, if you’re financing your business entirely out of the profits of the business, then you should, as a business owner, consider that to be making additional equity investments in your business and a lot of owners don’t do that. If the business is financing itself, they consider that as they’re not making additional investments.

But the reality is, if you’re using only your operating profits to finance long-term sustainable growth, you may actually be missing the opportunity to better balance the capital, the total capital structure of your business, because you never know when you’re actually going to need financing. And the worst time to apply for financing is when you’re desperate for it and that goes back to predictability.

Why are relationships with banks often mismanaged?

Rodney Davis: The difficulty about the relationship between banks and their clients is we absolutely need banks. We have to have a repository for our funds. We have to have a vehicle of settling our accounts with our suppliers, with our staff, with our clients. It’s absolutely mandatory and so, sometimes as a client, we forget that we’re a client of the bank, as opposed to in desperate need of their services, and sometimes bankers like it that way. So, the relationship isn’t quite as balanced or set in the right method for it to be productive for both sides. It’s rarely not productive for the bank, unless there is a situation of default, but many times it’s not what it needs to be for the client. At the end of the day, you’re a client and if that relationship is going to work in the most efficient way for both sides, the supplier-client relationship should never be lost, and many companies find themselves not acting like a client with their bank.

How do I project whether I’ll need financing?

Rodney Davis: If you’re doing good business planning at the beginning or during your business cycle, which is your annual business cycle, it should give you a predictor of whether or not you’re going to need cash. 

Now I will tell you, a lot of businesses do forecasting or do their budgets and don’t budget their balance sheet. In fact, most businesses don’t budget their balance sheet. But the way that you know whether or not you’re going to need financing is by carrying through the operating and capital requirements of your business through to a projected balance sheet. Because that will tell you if you’re going to have periods during the year where you might have cash crunches, and therefore puts you in a position to start to negotiate ahead of time to put facilities in place to meet those cash crunches.

Is it wise to use your own personal credit?

Rodney Davis: I think you should do as much as you possibly can to separate your personal life from your business in terms of intermingling the financing and the credit and anything else that puts your home at risk for the purposes of your business.

And I say that, in law, you may know that a business is a person. A business is considered an individual in the eyes of the law, for tax purposes, for litigation purposes and for any other civil matters and even criminal – a business can be criminally indictable. They can indict a corporation, however, not a sole proprietorship because a sole proprietorship is an extension of you. 

Once you incorporate a business, that business takes on an individual existence of its own, separate and apart from you. And that’s done for a reason. The reason for that is to put you in a position whereby the actions of the business, which is typically governed by a board of directors, is separate and apart from the actions of an individual.

 Of course, there are times when it is not only necessary, but not a bad thing, to put personal guarantees on the business, because that’s the only way that the bank will take the risk on you – on the basis that if you’re not willing to take a risk on your business why should they?

But when businesses get to a certain size, a certain predictability, it’s much easier for you to say to the bank, “Look, this business is predictable. I’ve been transparent with you. You can rely on where this business is going.” Therefore, you want to not need a personal guarantee. So, you should only guarantee your business as long as you have to. It should never be a choice. It should be something that’s necessary.

Is it important to have a financial advisor in these conversations?

Rodney Davis: I’ve seen situations where entrepreneurs have thought they could go at it alone and that same entrepreneur has seen the difference when they’ve had an advisor beside them.

I would recommend that if you’re in any kind of meaningful financial discussions with your bank as an entrepreneur, unless you have a financial background, I would think it would be wise to bring somebody who can speak bank-speak. The banker-client relationship is a very difficult relationship to navigate and often mismanaged. So the best advice I could give to anybody is understand from friends and colleagues who’ve had experience dealing with bankers over the years, and get some education on how you should manage your bank, particularly if your business is either going to go through a difficult period, go through periods of rapid growth or simply just needs to have the right capital structure.

It really is important that you take personal responsibility as the owner of business in helping to define what the relationship is going to be with the banks. 

I know a lot of clients who don’t even know their personal banker, their business banker. They may have a passing relationship with that individual and they’re proud of it because they say they don’t need the bank for financing. You should always know who your banker is.

Rodney Davis: This is very interesting, because a business has sort of the infrastructure implications and that is, how do I provide the infrastructure necessary for my staff to work outside of the office. 

How do you maintain a workplace environment when people are never in the workplace? And so there’s a cost associated with that. You’ve got to buy technology that enables you to communicate more often and or effectively with your team. You’ve got to invest in measures that allow your team to still feel as if they’re part of an organization, and then there’s simple things like, do you keep your place of business? 

How do you know you’re getting the most productivity from your employees?
Rodney Davis: The subject of out of sight out of mind, is a very difficult issue for some employers to grapple with. In other words, what the end product is that they need to get from their resources and their staff, have a much easier time with remote workers. So, how do I measure productivity in my business? I know what I expect my people at the various levels, on the various assignments to deliver within the specified timelines.

You have to trust a lot more. You have to put a lot of less emphasis on the how, and make sure that you’re measuring the what and the when.

So there are different productivity measures. But then I say to some employers who want everybody in every day, all the time, “Are you really getting more productivity because they’re sitting in front of you? 

Are there financial benefits to having your company work remotely? 

Rodney Davis: Travel costs. So employees who get travel allowances for traveling to and from the client premises. A lot of that has been cut out, significant savings across the board for travel and entertainment for clients over the last year. 

Those are probably the biggest areas of savings companies have had, but something as simple as office supplies, when you’ve got 200 to 300 employees in a workforce and you’re burning through office supplies and everyone’s working from home, all of a sudden, there’s a lot less printing. There are two sides to that as well. I’ve seen some employees who, working from home means they never know when to turn it off, and so they’re actually working more time on their employers matters.

They feel guilty because throughout the day, they’ve had to tend to issues that they wouldn’t ordinarily tend to when they’re in the workplace, and so instead of calling it a day at four, they’re giving the kids dinner and spending another 45 minutes. And so as an employer, it’s only fair that you focus on the output, because if you focus on the time and set blocks of time, you really are going to put a lot of undue pressure on the people who work for you.

What have been the financial implications of hiring during this time?

Rodney Davis: I think that this issue will be a real issue for companies, because there is a financial cost of getting people to choose to work in different locations and so, think of the company that has offices in San Jose, where it’s very expensive to live, it’s very expensive to work and their employees say, oh good I can work remotely, and they move to Cincinnati or the outside of the suburbs of Cincinnati, where it’s a fraction of the cost to live and they’re delivering the same service. I think that there’s going to be a rationalization and a reconciliation of that. I think we’re going to see situations where people expect you to give them a workstation or whatever other tools are necessary for them to work in a work at home environment, to put them in a position where they’re not having to incur costs in order to do their jobs. I might get a desk or I might get the chair, or I might get monitors, or I might get compensated for using my own tools or workstation at home. Well in home environments, the level of comfort and the amount of space you have dedicated to working affects your productivity. We’ve got to create a situation where somebody can still be productive and there’s going to be a cost to that. I think employment agreements are going to start to reflect that.

I think a lot of those things are going to find their way into discussions with employees when you’re hiring, going forward.

Is there a financial impact on company culture?

Rodney Davis: One of the most difficult challenges companies are facing during COVID, is how do you maintain that sense of collegiality, and just empathy among your work staff? 

I know many companies have hired a number of people who haven’t met their work colleagues. I mean, that becomes very difficult after a period of time because no matter how much we want to deny it, knowing someone gives you a predisposition in some situations to going above and beyond.

And so that work relationship can in fact change the way that people deliver services, the urgency with which people deliver services. So there is a value to that collegiality, that sense of belonging, that sense of loyalty that comes from interaction. I’ve seen companies try a lot of innovative ways to try and recreate or to provide an alternative to that. I’m not sure I’ve seen it done in a way that yet replicates the simple benefit of people actually interacting with people directly. The thing I would say the most about working from home is, I think it’s here to stay. I think we’ve been doing remote working long enough that it’s become a habit and it might be very different to rebottle this.

WHY IS DOWNSIZING SO DIFFICULT FOR BUSINESS LEADERS?

Rodney Davis: You know, probably the most difficult decision in any businesses is the decision to let go staff or to reduce the size of your workforce and that decision, I would imagine more CEOs have laboured over that decision than almost anything else, with the exception of shutting down entirely and no, it shouldn’t be your immediate reaction when things tighten up,  but it definitely has to be a consideration, depending just how much of a service delivery, versus a product based business you are. But when you start contemplating the decision to downsize, you’ve got to understand what the implications are, fewer bodies or fewer resources are to the ultimate delivery and quality of service delivery to your customers.

It may not be the answer. It may be that you are experiencing the decline because it’s a quality issue in the service that you’re delivering and therefore, maybe you need to possibly throw more resources that in order to get that quality where it needs to be. To get that revenue back to what it could be, if you’re delivering at the level that people expect, it could be that technology, rather than a revenue decline is probably more of a factor in what should determine the size of your workforce.

ARE THERE OTHER SOLUTIONS THAN LAYING OFF PEOPLE?

Rodney Davis: Absolutely. You might change your footprint, you might re-examine the workforce company relationship, there possibly are things within your labour contracts that some changes to that those could address some of the shortfalls you’re having as a result of your belt-tightening. And sometimes I’ve seen that very successfully discussed, where you actually negotiate with your workforce to make a few compromises and then you don’t have to let anybody go, you can manage through that with your group as a team and come out stronger on the other end. 

Rodney Davis: Companies shouldn’t get caught by surprise, in terms of optimizing their workforce or optimizing their product and or service delivery. In a previous conversation, we talked about benchmarking. I’m a big believer in benchmarking. I’ve seen benchmarking translate in one-to-one cause and effect or one-to-many cause and effect, in terms of improvements to the bottom line. And if you’re in a business where you are serious about it for the longer term, if you’re not considering what it costs for you to deliver your service or to drive customer growth, as it relates to what it costs your competitor or your peers, then you probably are going to run the risk of getting caught off side at some point in the future

HOW DO YOU KNOW IF YOU’RE OVERREACTING WHEN DOWNSIZING? 

Rodney Davis: Things like that should not be a surprise. If you’re constantly refreshing your understanding of how the key drivers of your business are working within your business, it’s going to come out of the numbers for you. And there are going to be early indicators, whether there’s going to be a tightening of the revenue because of fewer clients, reduced demand, increased competition, or whether there’s going to be the advent of new technology that your competitors have put in place that put them in a better position to deliver the same service, greater access to suppliers. You should be aware of your environment.

IS THERE A RIGHT WAY TO DOWNSIZE A COMPANY?                         

Rodney Davis: Firstly, you have got to do it humanely, and that means you have to communicate effectively, when it is time for you to communicate and you can’t do it with a broad brush. 

I see companies do it, where they universally just go equal parts across the organization, or they offer blind, voluntary downsizing without having a good idea of who’s going to accept that and then find themselves in a situation where people that they had hoped wouldn’t accept it, have accepted it and people that they hoped would accept it, have not accepted it. And then they’ve got a workforce that’s smaller, but far less effective than either they anticipated or than they had before.

Rodney Davis: The normal approach I’ve taken to downsizing and one that I’ve advocated with a lot of senior executive teams and often with great success is you take your organization chart, and you remove all of the names and you build the organization chart that you expect to emerge with. Once you’ve done that, then you put the names in boxes. In many cases, it’s obvious who goes in which boxes and in some cases, it causes you to really contemplate who goes in those boxes. But essentially, you build an organization chart, independent of the people who are in the organization.

Once you’ve gone through that exercise, you realize you’ve built the organization that you think you need to have, and then you take that and overlay your existing organization chart over top of that and it’s very revealing what you come out with. It sounds cold, but it’s actually very cognizant of who works for you, because in order to do that well, you should know what the skills are, what the habits are and what the strengths and weaknesses are of the people that work for you if you’re going to do that effectively.

Rodney Davis discusses the folly of many entrepreneurs – too many ideas. He provides an understanding of why ideas are not enough for a successful business and how to use KPIs to measure an idea’s success.

Q: Why Ideas Are Not A Business

Rodney: Entrepreneurs have ideas a mile a minute, they think and I used to, I remember I was working in China, probably five or six years ago, and I had a CEO who had great ideas, very poor execution, couldn’t quite translate those ideas into effective operating models for the business and I remember sitting with him one day saying, an idea, no matter how good, is not a business. A business is the implementation of ideas into an operating model and marrying sales opportunities around that and effectively executing against those opportunities, and so, what I try to tell an entrepreneur is, you can only do so many things and you only have so many resources available at your disposal. Good reporting focuses the entrepreneur on the most effective throttles within their business and so, what I try to do for entrepreneurs is build them a framework within which we can discuss the business that keeps them focused.

I’ve seen entrepreneurs who bet the farm every time, the bigger the business, the greater the risk when they take those challenges, if it’s a small business, they can rebuild. If it’s a big business, it’s really hard to rebuild and you’re affecting a whole lot of lives and so, you have to be very careful about making decisions at the farm, because you have a staff that you got to think about it. You’ve got stakeholders and legal obligations you have to think about. Finance’s job is to make the entrepreneur aware of what they’re putting up, when they’re making those decisions, and then let them be entrepreneurs.

Q: On The KPI of Ideas

Rodney Davis: My first job is to make sure that they trust me. How do I gain that trust? I gain that trust by repurposing or reshaping the way that they look at their business from a financial perspective and then rinse and repeat. So, by creating the habit of looking at financial information on a regular basis, that’s prepared in a useful way that focuses on cause and effect. It’s amazing how six months in or eight months in that entrepreneur can at least pause, because they’ve had enough visibility of those drivers that when you bring up this conversation that might otherwise have had fallen on deaf ears, because you don’t understand, you’re just the finance guy. You always say no, or please, you don’t think like we do, we know what the opportunity is.

That habit of looking at KPIs in the context of the business that you’re evaluating with the entrepreneurs and decision makers of that business is so fundamental to having them pause and walk with you as you take them down the scenario building of what the steps that they want to take are likely to lead to and when you have that, and you’ve already got that routine, you’re halfway there, you’re not always going to win, but you’re halfway there. 

In an interview series, Rodney Davis helps to provide organizations with a blueprint for success, addressing common business problems with a strategic approach that always begins with his signature CONVERSATION.

Q: How do you determine if an employee is worth what you’re paying them?

Rodney Davis: That can be a subjective conversation point, but it doesn’t have to be. The job of a good finance person is to isolate the cost components and understand how they affect the bottom line. Only after that can you layer on the more human, subjective side.

That can be a subjective conversation point, but it doesn’t have to be. The job of a good finance person is to isolate the cost components and understand how they affect the bottom line. Only after that can you layer on the more human, subjective side.

Q: How can you compare employees with the same job description? How do you financially measure performance?
Rodney Davis:

If I’m making jam, there’s a role for the oil, there’s a role for the fruit, there’s a role for the sugar. It’s the same principle. If I’m dealing with people, there’s a role for the salesperson, there’s a role for the marketing person and there’s a role for the finance person. The measurements for each of those people are associated with the inputs and outputs that we derive from each of those people. So in the case of a salesperson.

You assess the controllable and the uncontrollable outputs that come out of them doing their job and then form a set of metrics. Sales is a good one because you can measure how many leads they get, how many people they convert, how long it takes them to convert, what’s their average sale value, and so on. In the case of marketing, how much money did you give them to spend? How did that translate into dollars earned? In the case of manufacturing, how many units came down the line and how many of those units came out defective? So, you have different measurements for different job functions, and the job of finance in that conversation is to identify the inputs and outputs and the controllable vs uncontrollable and assess that individual against it.

Q: How can the finance guy help the senior management team have a conversation about staffing?

Rodney Davis:The baseline of every good budget has two components that are typically broken out from the rest. One is revenue and cost of goods sold associated with that revenue, and the other is staffing. In any good budget, staffing is a completely separate component, broken down to the individual number of positions in each of the different functions and all of the associated costs with each of those positions. So, when finance is having that conversation at the senior management level, they typically speak in terms of the staffing costs of the various functions and how those translate as a percentage of organization, in terms of cost or revenue. And of course they’ll provide metrics against those same functions in other organizations, so that you’re having a real conversation about the effectiveness of that team in carrying out their job. It’s often quite easy to get metrics that you can compare them to.

Q: What’s your point of view about sharing financial performance with employees of the company?

Rodney Davis:I believe that at a high level, sharing financial information with the organization can be a good thing, depending on your objective. Sharing it as a means of demonstrating to the team their effectiveness in achieving the company’s overall objectives, is usually not a bad thing. But I’m not sure it’s particularly useful to share it for sharing’s sake. If you don’t underpin it with KPIs, it’s not a useful conversation.. In all the reporting I do for companies, if you don’t bring ‘cause and effect’ to the conversation, your conversation ends up incomplete. So if you tell your employees how profitable the business is without telling them what drove that profitability and what could cause that profitability to disappear is not going to give them the right perspective.

Q: How much information about the financial health of the company should we be sharing with our employees?

Rodney Davis:I think it’s a situational call. There are varying degrees of information we should be sharing with varying levels of employees within the organization. I say that cautiously because if you’re unable to have a complete conversation and provide context, then sharing that information could be harmful. I have a rule in business that I followed for 25 years: Anybody in my organization that makes hiring decisions has a responsibility to see the results. Because if they’re making decisions that affect the results of the organization, they should see the results of the decisions that they make so that they can be held accountable. I’ve seen many organizations where the person making the decision isn’t even aware of the ultimate outcome of the decision they had made. That is a real error in an organization when dealing with senior managers. Senior managers must be accountable for the decisions that they make and the KPIs they choose to measure will enable them to see the associated costs or benefits of the decisions made.

Q: When an organization is doing well, how do you determine a bonus? What metrics should be put in place to help entrepreneurs determine bonuses?

Rodney Davis:I tell every one of my clients, if you can’t calculate the bonus or total compensation independent of your judgment, then there’s something wrong with your compensation plan. Interestingly enough, it’s fairly easy to ascertain what the right bonus levels are within your company or industry. They should be tied to the target compensation for that position.

Rodney Davis:Typically a company will say, “I want X percent of their compensation to be fixed and Y percent to be variable, and that variable compensation is achieved if they hit their target performance metrics.” For example, let’s say we’re talking about an executive. I think the target compensation and the competitive environment for an executive of that level is $100K and I want their compensation to be 80% fixed and 20% variable, because that’s consistent with the industry. I might say we’re going to give them a base salary of $80K, with a bonus objective of 25% as a target, and really drive home how important it is that they perform. We have an upside that’s tied to overperformance or we have a ratchet that’s tied to underperformance. Some companies will make that all-or-nothing, which I don’t think is the right move, because if you’re 80% into the year and you know you’re not going to get your bonus no matter what, you may take your foot off the gas. If you know that there’s something at stake, you’ll keep driving all the way to the finish line. So target earnings is one way you do it. The other way is this: you might say that the company has a return requirement of X, so we want a return on equity or return on revenue of X. If management does their job and they make that return, then the pre-bonus is higher, because they’ve either done cost savings or they’ve blown through on the revenue numbers. Then they might say, “We’re going to give management a share of everything above that target return on revenue.” In that case, you know that sky’s the limit. So, you might say, “If our return on revenue target is 13% and they’ve achieved 17% pre bonus, we might give them 50% of that, and 4% of that return,” which could in some cases be significant.

I’m very specific and very clear with senior management that there must be a predictability to compensation. And that has to be something that an executive can actually calculate. If your executives have that ability, invariably you’re going to find that they’re going to perform better, because they know the rules, they know where the goalposts are, and therefore they can shoot for the stars where they can determine how much effort they’re going to make to get there.