Grey Matter

Thought-leading business strategy
from a financial perspective

Learn what Rodney Davis has to say

Grey Matter is our financial thought leadership for enterprises and business owners. In our interview series, practice lead, Rodney Davis provides valuable insights into issues facing companies and organizations today through his CONVERSATIONS.

The CONVERSATION
On Cash Flow

No matter how profitable you are, cash is king. In this video, Rodney Davis, GreySuits Advisors Partner and CPA, breaks down the critical difference between profit and cash flow. He explores the cash cycle from start to finish—inventory, expenses, and ROI—to protect your business’s financial health. Rodney also shares insights on forecasting cash flow and why it’s key to business stability. Watch this video to get a glimpse into the basics of cashflow management.

TRANSCRIPT

RODNEY:

So, yeah, there are people who manage their entire business based on their bank balance. But when they’re smart, they also know what’s coming out of that bank and what’s going in.

ACCOUNTING PROFIT VS CASH FLOW

When one looks at an accounting set of financial statements, it doesn’t tell you whether or not your cash rich or cash poor. What really tells you whether or not your cash rich or cash poor in an organization is that weekly check in, or that by weekly or monthly check in on your cash flow that says, where are we today and where is our cash going to be? And that is super important. I’ve seen profitable organizations run out of cash.

The 2 or 3 things that will drive a company into cash flow issues despite being profitable? One is collection on their receivables. You know, you have clients who pay you in 30, 60, 90, 120 days where you recognize the revenue when you do the sale.  Oftentimes you have clients who give you cash, deposits ahead of a transaction. One would think, oh, well, that’s great, I get the cash in advance. But then what you have to always remember is I’m going to have to eventually incur the expenses that go with that cash that I got. And so the mistake that in that organization is they recognize the revenue on those deposits when they received it, but they didn’t set up the costs. And so the timing of when those costs are incurred versus when that cash comes in, there’s a significant gap. Well, if you haven’t done a cash flow to time your cash, you may spend that money on something else when it comes time to pay it.

The other thing is inventory. You know, if you’re selling products, you have to invest in inventory ahead of a sale. So when you buy that inventory, you’ve got to make sure you’re choosing that inventory effectively so they can cycle through, you know. So we look at the different cycles, the inventory cycle, the cash receipts, the sales and cash receipts cycle, and the purchases and disbursement cycle when building a cash flow, because awareness of those different cycles and how they interface with profit versus cash flow is really important for entrepreneurs.

Look at your receivable balances, look at your inventory balances and look at your accounts payable balances. And be aware of your normal fixed operating expenses and put those together on a sheet and see what’s coming in and what’s going out.

BUILDING A CASH FLOW: THE INPUTS

You know, there are some standard inputs that are critical to getting a good cash flow forecast. One is your cash transactions through your bank, one is your predicted sales, one is your predicted collections on your existing accounts receivable, which are the balances that your clients owe you. How is that going to come into the organization? And then there’s your accounts payable.

How are those accounts payable going to flow out to the vendors thinking about good vendor relationships, thinking about the organization’s needs and your credit limits, and a number of other things. And there are your operating expenses, which are the normal operating expenses, things such as salaries, things such as your principal and interest payments on your loans, things such as the repayment of IOUs that you’ve reached into to the shareholders, and so on.

And so, you know, you have to get the inputs to get a proper cash flow. I’ve seen a lot of organizations that look at cash flow in a very simplistic way, and can’t understand why the cash didn’t end up where they thought it would.

WHAT MAKES A GOOD CASH FLOW REPORT?

So the typical cash flow report should go, I typically say 4 to 8 weeks back and 8 to 13 weeks forward. And the reason why you want to do that is that if when you’re doing that assessment, you see that there might be bumps in the road or there might be challenges, you can plan for that.

You can often engage in conversations with your bankers, for example, to say, hey, you know, we might have a bump there, or you might see a permanent issue where you might say, we need to increase our credit line. Is that a possibility? So the cash flow cycle looking ahead allows you to have that discussion far enough in advance that you can find alternatives.

FINAL THOUGHTS

Failure to consider cash flow has resulted in bank intervention more times than I care to count in my career. You’ve had companies where the executives say, I don’t get it. We’re profitable. And I say, but your ability to predict your cash has your stakeholders concerned.

So my best advice I could give to any entrepreneur,  you better have some method of knowing where your cash is going to because cash flow is the ultimate. You know, you’ve heard that statement, cash is king. Okay. And so the importance of a cash flow boils right down to that statement. No matter how profitable you are, cash is king.

The CONVERSATION
On The Post-Acquisition Plan

Successful acquisitions don’t happen by chance; they’re driven by careful planning and intention. Rodney shares his insights on post-acquisition planning, emphasizing the importance of setting clear objectives, conducting thorough due diligence, and aligning operational details before closing. He also addresses common challenges which can lead to costly mistakes.

TRANSCRIPT

RODNEY:

But I can tell you, the ones that succeed are the ones that go in with intention, and they plan for the negative.

PLANNING STARTS WITH INTENTION.

What I would say to anybody contemplating getting into acquisitions, if it’s not something they normally do, is when you go into an acquisition, establish your intention. What is it that you want to accomplish immediately, what you want to accomplish in the short term, in the medium term? And what’s your long term objective for this acquisition? Because otherwise I think you’re going to find out that what you wait to find out may not play out the way you want to, or in your favor.

The other part is planning. You’re actually trying to figure out what this business is going to look like in the aftermath of the closing. There are integration issues. How is it going to integrate with your current structure? There are planning and budgeting issues. What is the budget? What is the expectation? That’s equally important because your banks might have lent money to you on the basis of forecasts and so, equally important, because you may have to get approval of the budgets that are associated with the acquisitions. So your due diligence is where you do all of that. You do your planning and you do what is called a post-acquisition implementation plan. If you really do have intent, which I spoke about earlier, and you at the very least have to do the verification side of things.

WHAT IS DUE DILIGENCE?

There are two purposes of due diligence. The first purpose of due diligence is the obvious one. To verify what the seller told you, that led you up to a purchase price. The verification stage is where you talk about the legal assertions that were made. Do we own what we say we own? Is there what we call warts on the corporation that you’re buying? So, are there leans or are there related tax impositions or any other thing that is associated with the legal entity that you’re buying? Those are much more about verifying.

And then there’s the second element of verification,the numbers. It’s not quite an audit, but you’re going through the numbers that were presented to you and make sure that they make sense. In some cases you do a full blown what they call a quality of earnings. In other cases you just bring your financial people in to run analysis on the numbers.

WHAT COULD GO WRONG?

The biggest pitfalls are the unknowns. You know, I did a conversation in one of my previous things where I talked about fail fast. Well, the pitfalls are you’ve got to make the decisions and come up with the situations, identify them and solve them fast. Because the faster you identify the situation, the better the chance you have of mitigating against the negative or adverse outcome of that situation.

And the common pitfalls are that you miss or underestimate the impact of on the employees. And then you have a significant exit of employees from the organization. The client side of things is also a common pitfall. You underestimate how much client attrition there might be associated with the merger of two entities. It’s less common, but certainly given larger sized acquisitions, there really is a real statutory or legal or regulatory pitfall that you better be mindful of if you don’t contemplate the competitive landscape, and what the regulators might think about that you might find yourself in trouble and executives, which is a real concern, is brain drain. So I talk about employee flight, but it’s an even bigger pitfall if it’s executive flight, know, who you want to keep on your management team, know who’s important and if necessary, bake it into your acquisition agreement.

SCENARIOS: POST-ACQUISITION

The wait and see attitude is an attitude that often leads to trouble, because in a wait and see attitude you might have issues like severance considerations. You might have issues like union considerations. You might have issues like the morale or the fit between the acquiring entity and the bought entity. So the planning side of things is where you actually run scenarios. What does it look like post acquisition? How does the union relationship in company A compare to the union or labor relationship in company B? What are the potential terminations or what’s the expected continuity of employment? What is going to happen to the client reaction? Quite often situations where companies will say, I was fine with two separate entities, but when you bring them onto one roof, there are considerations for your clients. There might be statutory considerations or legal considerations around competition. If you don’t do a proper post-acquisition implementation plan, and instead you do a wait and see, history tells me that can be very costly.

OK. WE OWN THE BUSINESS.  NOW WHAT?

You know, there are different elements to an acquisition that one has to consider at various stages leading up to an acquisition. So, for example, there’s the accounting side of things, which is your day to day activity. And quite often again people are starting to deal with that post acquisition sort of saying we’ll deal with that after closing. The reality is should be lining up the accounting, particularly if you’re a multiple entity organization, to ensure that the accounting associated with what you’re buying can feed into the reporting of what you already own.

The other things you got to consider are just the day to day activities, banking, credit cards. What happens and how do you ensure that the deposits go to where they’re supposed to go to? How do you ensure that you’re able to write a check the day after you’re close? And those things have to happen at least a few weeks before closing because it takes time for the banks to do what they need to do.

I’ve had acquisitions where we’ve sort of said to clients, listen, we better start figuring out our banking. For example, something as simple as opening the bank accounts and ordering the checks and the like. Well, we can’t do that till we close. And I say, okay. And then the day after close, you got to pay the rent. The day after close, you’re wondering, where are my deposits? Your deposits are going into the seller’s bank accounts because that’s where they’ve historically gone. And so you’ve got to think about these things before you’re close. You’ve got to be aware that you’re running a business the day after closing.

FINAL THOUGHTS.

Plan. Plan. Plan and intention. Understand why you’re buying this business, what you expect to achieve by buying this business, and what you’ll do if those things don’t pan out. Have intention. If you go into a transaction without intention, I’ve seen many of those transactions fail. When I started doing acquisitions, I’m embarrassed 35 years ago, I will tell you that they said at those times 85% of acquisitions fail. Today, I think it’s probably a lesser number, but I’ll bet you it’s still greater than 50%. But I can tell you, the ones that succeed are the ones that go in with intention, and they plan for the negative.

The CONVERSATION
On The Business Plan 

Great plans drive success, but what makes a business plan truly effective? This video delves into the critical elements of planning, emphasizing the
importance of team input, accountability, and aligning financial reporting with the plan. Discover how a well-structured plan ensures long-term success and stakeholder confidence.

 

TRANSCRIPT

RODNEY:

The way that you report financial information should be the way that you present your plan.

GATHER THE INPUTS, START THE PROCESS.

When it comes to planning, there is no single action that one can point to that’s going to have this magic bullet outcome. Good plans are the collection of a series of inputs.

So if I were to give advice to a group that were embarking on a planning exercise for the first time, I would say to them, get as many inputs as you can. Understand how those inputs intersect and compile a plan that is the collective input of as many people within your group as have an ability to provide useful input, and then come up with a cohesive plan.

WHO IS RESPONSIBLE FOR WHAT? ACCOUNTABILITY?

One of the common misperceptions that people have about a business plan is that it’s finances’ business plan. If the planning process doesn’t include the whole team, then there’s an absence of accountability where accountability needs to lie.

So when one thinks about the planning process, if I were to define the different roles the operations team and the senior marketing and sales team, they’re each responsible for certain elements of that plan. Sales is responsible for the forecasts. Marketing is responsible for how we’re going to deliver that forecast in terms of go to market distribution and so on. And operations is responsible for the cost of delivering that forecast. Finances’ is role is actually supposed to be the least ownership driven because they’re just supposed to compile it. If you don’t get those accountabilities right, you’re going to have a very difficult time managing the results against that performance.

THE ROLE OF THE BOARD.

The role of the board in any planning cycle is to approve. It is to ask the difficult questions, to test the assumptions, to really press people, to make sure that it’s a reasonable and acceptable plan given the cost of capital, given shareholder requirements, given obligations to lenders. The board’s job is to make sure that we get it right.

BUDGETING & REFORECASTING … THE YARDSTICKS

So there are two elements to sort of the planning process and or cycle within an organization.

There’s the budget. The budget is typically something that’s approved by the board of directors and or approved by the existing management and that’s what you’re holding accountable to the entire team for the full year. But as you progress during the year, you might have to recalibrate.

And so what we do typically on a quarterly basis is reforecast. Maybe you heard me talk about intervals and measurements and fail fast and all the other terms, but free forecasting is where you’re taking a closer look at where you are today in light of new information,and that allows you to continually recalibrate how you’re going to deal with or address those issues.

MANAGEMENT REPORTING. MEASUREMENT AGAINST PLAN.

The way that you report financial information should be the way that you present your plan.

And it’s really important that every month, or however frequently you choose to review budgets versus actuals, when looking at those actuals against the budget that they map up, and they map up at a level of detail that allows you to examine the reasons for achieving the target and or not achieving the target, whether that’s even exceeding it or coming in below it, because sometimes exceeding target at a given point in time may just be timing. And so it may not be cause for celebration partway through the year, where you have the timing of a critical sale and you start sort of going, yeah, we’re way ahead of plan but the truth is you just had a timing benefit and it’s going to kind of course correct itself in the next quarter.

So, it’s really important that the way you plan and the way that you present your plan is consistent with the way that you capture actual financial information. That’s a job for your finance team. Their job is to make sure that planning is at a level of detail that allows them to look at the actuals at a sufficient level of detail to drive decisions.

THE BLUEPRINT.  HOW DO WE USE THE PLAN?

I used to run a half billion dollar organization, and I used to have my 10 or 12 direct reports come to meetings once a week for what we called Exco, executive committee meetings, and I would always walk in with the very detailed business plan. It was, in our case, assembled in a binder and I used to walk in with that book, almost symbolically, so that the team knew that as we were talking, I’d be flipping through the plan to their sections and to their relevant part of the conversation for today, that associated itself with the original budget, and we would have conversations that allowed us to take today’s decisions and compare them to yesterday’s plans. Well, we couldn’t have done that without a well-structured plan because that plan was built as an actual blueprint for how we were going to run the business.  When people were talking about what’s happening in the business today, we were able to associate it.

I would say to folks who are using planning, don’t just treat it as a tick in the box. Use it as a working, breathing document, and that only happens if it’s well put together.

FINAL THOUGHTS

The most costly mistake is a loss of confidence of stakeholders and that loss of confidence of stakeholders, stakeholders being defined as either your bankers, your board, your shareholders, or your employee stakeholders, and in some cases, even your customers, and

a badly put together plan or a plan that’s not executed well can lead to that loss of confidence.

And it probably will lead to the biggest single cost, because you need the support of those stakeholders to ensure the viability of the business going forward. So you don’t do planning right,  you don’t communicate your plan effectively, you don’t implement your plan according to the expectations that you set when you delivered that plan and it could cost confidence. That’s very expensive.

The CONVERSATION
On Leadership 

In this insightful video, Rodney Davis, leader of GreySuits Advisors, delves into the concept of ‘Autocratic Democracy’ in leadership. Discover the strategies and philosophies that can transform decision-making processes, inspire teams, and achieve measurable success. Watch now to learn how to lead with confidence and clarity. 

 

TRANSCRIPT

RODNEY: 

 Good leaders know how to do that. They know how to open the box. 

 LEADING AN AUTOCRATIC DEMOCRACY 

There’s a term I’ve used for 30 years now, and that’s an autocratic democracy. Good leaders run an autocratic democracy, okay. They seek all of the input they can. They demonstrate that they’ve contemplated and considered that input. But at the end of the day, they make the decision. The decision is theirs. The adverse outcomes are squarely on them, and the positive outcomes are squarely to the credit of the team. So good leaders can engender confidence and trust in the people that they lead. 

 FAIL FAST OR DON’T FAIL AT ALL 

Fail fast means if you’re faced with incomplete or imperfect information, make a decision. But the more imperfect you believe that information to be, or the more incomplete you feel that information is, the more frequently you have to check your progress in moving towards the goal or the outcome that you would envision when you made the decision. In other words, fail fast. Find out if you’re going in the wrong direction quickly and then adjust. 

 Good leaders insist that the metrics against which they measure performance are clear and objective, and good leaders also recognize when faced with adverse outcomes. Don’t paper over it. Don’t explain it away. Address it. Make a decision. Pivot and keep going forward. 

 GOALS MUST BE ACHIEVABLE 

The more often that people can actually achieve the target that you set for them, the more they’re able to envision achieving the target you set for them, the more likely that success will motivate them to keep going forward. I’ve seen some companies set targets that we all know that they’re not going to achieve. 

 So when setting goals and setting the impact of achieving or not achieving those goals, good leaders understand the psychology of the people that are trying to achieve those goals, and they adjust for that psychology. 

 IS THERE AN END IN SIGHT? 

Good leaders also engender in their teams that you don’t have to know everything to move forward and give them the confidence of going towards that edge, not knowing what’s on the other side of that edge. But what they try to do is they give visibility as far forward as they can to all the people that are involved in the process. 

 And as people move forward, the quantity or level of visibility increases. If you always only see to a certain point and beyond that, you don’t know that makes progress sort of undefinable. But when you say we can only see this far now, but as we progress, we’ll increasingly see more and more towards what that end state is. You’re going to find that your team gets the sense of progress while actually achieving progress. And good leaders know how to do that. They know how to what I call open the box.  Black boxes are not good for leadership. You need to open the box. People need to see inside of it. To the extent that you can. 

 FINAL THOUGHTS 

The best advice I can give a leader besides simply lead, is that the people you’re leading are not homogeneous, that you need to understand each member of your team as individuals, and then understand how they fit into the collective of your team. Too many leaders take what they’re given and make assumptions about them based on their education, based on their gender, based on their origins. The truth of the matter is to people that look, feel, and sound, the exact same might be motivated completely differently. The objective or the mission of a good leader is to know the people on your team as individuals. 

 

The CONVERSATION
On Growth 

In this enlightening discussion, Rodney explores the critical importance of understanding what exactly you are trying to grow, the differences between organic and inorganic growth, vertical and geographic expansion, the necessity of a solid foundation, the role of comprehensive modelling and the balance between debt and equity. 

 

TRANSCRIPT

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. 

The CONVERSATION
On Decision Making

Good leaders make decisions. Great leaders execute effectively. Rodney shares his insights on improving decision making through obtaining the right inputs from key personnel, why bad decisions are better than no decisions, and the importance of measurements.

 

TRANSCRIPT

RODNEY DAVIS:

GOOD LEADERS MAKE DECISIONS

Good leaders make decisions. There’s no question about that. And better leaders know what inputs they need in order to make the right decision. Too often, leaders will make decisions on the information they’re given, absent of the definition of the information they need. Now, not having what you need isn’t an excuse not to make a decision. But if you haven’t defined what you need to make a decision, you’ve missed an opportunity to ensure that you get as much of what you need as possible.

THE INGREDIENTS MAKE THE CAKE

You assemble the right team members to participate in a decision and it may not be the same team members every time. Understand and know what your resources are at your disposal. And if you don’t find you have the necessary resources at your disposal,
don’t be afraid to go look outside. But find the right resources to make the right decision.

Getting to the place where you have what you need to make a decision is not a transaction exercise. You, as an organization have to create an environment where you have enough exposure to the various levels within your organization, so that when a problem exists, you readily have an understanding of the capabilities, whether it’s at the staff level, the supervisory level, the management level, the executive level, the board level or the consultant level.

If you want to be a leader constantly aware of the resources in your ecosystem, then you put yourself at a disadvantage when you need to make a decision.

ACT: A BAD DECISION CAN BE BETTER THAN NO DECISION

It’s almost always better to make a bad decision than to make no decision at all. Good leaders and a lot of the textbooks and rightly will tell you, fail fast. So if you’re not 100 % sure about the integrity or the quality of the decision you’re making, put checkpoints in very early on and move far enough along that there’s something to measure.

So yeah, I’d rather you make a decision and then put checks and balances in early in the process so that if it’s the wrong decision, you can quickly assess it, course correct, and make another decision.

MEASURE – KNOW WHAT YOU ARE TRYING TO ACHIEVE

Knowing the inputs you need in order to make a decision. Well, once you determine what those inputs are, working oftentimes with your financial people, particularly if there’s an economic output associated with what it is you’re about to make a decision on, you then need to put in place the measurement capability. So you need to put in place, how are we going to measure this? Because it’s one thing to make a decision. It’s one thing to expect an outcome. But if you don’t have the ability to measure the progress and or achievement of that outcome, then how will you ever know that it was the right or wrong decision? Your finance team is really important in helping you to do that.

No matter what the metrics are that are non-financial, their ultimate objective is a financial outcome. And that’s why you’ve got to have the finance people understand the measurements of the various other disciplines and bring that to its logical financial conclusion so that the senior management team, the board, the stakeholders can get an indication quickly as to whether or not that was the right decision. And if they need to remediate, what are they trying to achieve now? Finance helps you with that.

COMMUNICATE: GET TO THE RIGHT CONVERSATION

It’s critical that you understand how to determine if you achieved your objective and finance is major in helping you to do that. You’ve got to communicate often enough that people and the leaders have information at their fingertips to make the right decisions, but it’s also got to be in a format that’s easy to read and quick to make decisions.

So, I say communicate because communicating isn’t just about giving people information, it’s about giving people information in a usable and efficient format.

FINANCE AND OPERATIONS – SYNCHRONIZE

Quite often GraySuits is called on to bridge the operating team with the financial measurement and the financial report. And that’s exactly where we play a very pivotal role in a lot of organizations. We will marry financial information with operating metrics and present a report that allows decision makers to see a more nuanced set of results that allows them to consider: “Did that operating decision result in the financial outcome that we were trying to get to?” And Graysuits is a big part of that.

FINAL THOUGHT: FAIL FAST

My main message to companies and clients and even my team members is,
don’t be afraid to make a decision. Don’t be afraid to be wrong. And often the best learning comes out of a failure. So fail fast.

The CONVERSATION
On Managing Your Bank

For businesses, the end of low lending rates has not only affected the higher cost of capital but the very relationship with your bank. Partner Rodney Davis delves into this issue with his thoughtful insights on business banking, providing insightful, practical advice.

 

TRANSCRIPT

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.

The CONVERSATION
On Remote Working

Remote working continues to be a balancing act. Leaders looking for some answers will find an insightful perspective from partner, Rodney Davis, as he addresses questions of work productivity, and shares what works and how to measure success in these situations.

 

TRANSCRIPT

REMOTE WORKING: LEADING THE TEAM BACK TO THE OFFICE

Rodney Davis: You know, when remote work started out as something that was becoming a reality, I was concerned about where this would end and where it was heading. I think it’s here to stay in some verticals or some industries. industries and I think that as an employer you’ve got to be willing to take the time just like you would in any other HR challenge or technology challenge – to make sure you put the necessary resources to facilitate this new reality. But you also got to be willing to ensure that your employees understand that it’s not a right or an entitlement you got to lead by example, and you’ve got to lead from the top. It has to be a deliberate management of your team members. 

Today you have to figure out what element of the work requires people to be in office, and what element of the work can function with people outside of office. You also have to consider how people work because I think people went a bit too far in painting the entire staff with the same brush. The reality is there are some people who work really well remotely and some who don’t and you’ve got to manage them according to their strengths. 

The competition for people is the problem. There are many employers who will accommodate the lifestyle choices of employees today. That wasn’t the case three or four years ago. So if you attempt to impose too stringent a policy or too stringent a set of rules, you might find that you have a talent problem; that the talent will migrate to where the working conditions suit their style of work.

 

DOES REMOTE WORK LOWER PRODUCTIVITY?

Rodney Davis: I have a client in the services space who was very concerned about people working out of office and was very vocal about it. He asked our team to give him some insight on whether or not remote working had affected the productivity of the team. Over the course of a six -month period, we found that for the most part, there wasn’t a tremendous productivity impact at all. The nature of that work was very output-driven. So if you didn’t do those outputs, your work would stop because the flow of work required certain outputs to be hit. But what we also found was there were some people who just weren’t good in a self -governed, work-from -home environment and it stood out. But there are measurements. So we were measuring work productivity per hour. We were measuring billable hours versus unbilled hours. We were measuring total volume over the period of time when they were working in office versus total volume when they were working outside of office. We were able to spot and identify trends and in some cases, isolate were there deviations or exceptions.

WHAT WORKS AND WHAT DOESN’T

Rodney Davis: I have clients who say all staff in on Tuesdays and Thursdays and at least one other day. I’m not sure that’s the best approach because it’s implying that everybody fits into this same sort of standard of working. They had a lot of resistance. Had they tried to achieve the same thing in a less command and control way, they might have actually gotten

there. It’s actually not a bad idea to say our target is to have people in three days a week. But to  legislate it in a one size fits all, most of the employers who I’ve seen adapt that approach hasn’t worked well. The ones who’ve really made it work are the ones who give people the flexibility. But if they’re not productive or if they’re having challenges with the quality of their work, we have them work in office until they fix what’s failing. And then be true to our word and give them a chance to then try remote remote work again. You’ve got to be flexible.

THE ROLE OF FINANCE: HELP FIND THE BALANCE

Rodney Davis: When you think of the role of a CFO in any organization, they’re the scorekeeper and they’re the results communicator. If there’s a concern about the implications of remote work versus in -office work, there’s a role for your finance team to put together information that allows you to assess and understand it. The longevity of a business requires all of the resources to be doing what needs to be done and not exclusively what folks want to do. But also my message to employers who are trying to figure it out. Does it have to be all in office? Find the balance.

The CONVERSATION
Getting Your AI Implementation Right

Artificial Intelligence is likely to change every business in coming years. Good companies will find ways to work smarter and get more value from their employees. One key to success is figuring out baseline metrics against which to measure the success of AI enhancements.

 

TRANSCRIPT

AI IN THE WORKPLACE – IS IT A JOB KILLER?

Rodney Davis: We’ve actually determined that it’s not about cutting out jobs or saving money, but it’s more about enhancing the value of what we give to clients, enhancing the speed with which we deliver our services, and freeing up our existing resources to do a different task within the same period of time. So overall, the client gets the benefit. So we don’t see it in our space as a cost saver. And in the cases where I’ve seen clients use it, most of the time, it hasn’t been about saving costs, though I have seen some where it saves significant costs.

 

WILL AI RESULT IN EMPLOYEE IDLE TIME?

Rodney Davis: I think that good businesses, and smart and ambitious team members find ways to productively fill the time. The day when people aren’t really working, and everything is done by robots or some other method of artificial intelligence. I’m not sure that their jobs would remain as fulfilling. I think people will find other things to do. I often say to my people, I don’t need you to work harder. I just need you to work smarter. And I’m hoping that artificial intelligence allows us to work smarter.

 

AN AI CASE STUDY

Rodney Davis: A client of mine who was in resource allocation, where scheduling was a big part of their business and took up a lot of time, made a big investment in artificial intelligence. It would have been the equivalent of 3 or 4 FTEs in the upfront cost (FTE meaning full time equivalent) over the course of a year. They took the equivalent of four salaries and invested that money to determine if artificial intelligence could actually make their processes more efficient. In that situation, a 1% enhancement would translate to about $200,000 a year savings. The average salary was about $45,000 to $50,000. So essentially they were betting that they could get more than 1% savings per year by making this plan in artificial intelligence.

Fast forward, it took them about 9 or 10 months to implement the first iteration. Within three years, they had saved about 4% using the artificial intelligence that they implemented. The value implication on their business was significant. They actually created value in their business. Did it result in job losses? In their case it did. But it was the right thing to do.

 

CAUTION – NORMAL CHANGE MANAGEMENT RULES APPLY

Rodney Davis: As with any change, the risk of negative implementation is that without thinking it through carefully, you may not get the results you wanted. Negative implications from bad implementation can have a multiplier effect. So my advice is to put your time and energy into how you want to use it, plan, and lay a good foundation. Because if you implement something like artificial intelligence on a bad foundation, the multiplier effect will turn it into a more negative outcome.

 

THE ROLE OF THE FINANCE TEAM

Rodney Davis: We were instrumental in confirming that if you automate things or make better decisions faster, which is what the AI was designed to do, it would be great. The finance team was critical in providing information that formed the baseline against what was being measured against what was being achieved. Is it X per hour? Is it X per month? Does it take X many in order to achieve the outcome? Your finance team can help you, as an organization, establish the baseline metrics against which you’re going to measure the productivity enhancements, or the efficiencies that come out of artificial intelligence. Without them, you may not have the framework from which to compare and contrast your decisions.

It’s coming. We can’t avoid it. I do think that most businesses that I look at today will be infected by artificial intelligence within the next five years. And if they aren’t, they’re probably behind their competitors.

The CONVERSATION
On Boards

Our own Rodney Davis discusses when a business should activate a Board, how to compensate board members, as well as the shareholder and board dynamic, and the types of issues Boards face from a financial perspective.

 

TRANSCRIPT

WHEN SHOULD A BUSINESS HAVE A BOARD?

Rodney Davis: The reality is every company has a board. As long as you’re incorporated, you have a board. So exclude partnerships, exclude sole proprietorships. But every corporation has a board, even if it’s just one person that you’ve named as a director. And a lot of small businesses don’t actually recognize or acknowledge that. The question really is, at what point should you activate your board so that you should actually use that board in a conscious and deliberate way to make decisions? And then once doing that, the question is, is it all internal or insiders, or do you have a mix of insiders and external people participating?

So the role of a board in a company is to carry out the will of the shareholders. So often in very small organizations, the board is made up of one or more shareholders because the organization is small enough and the distance between making a decision and carrying out the process of approving that decision is one to one. It’s the shareholder sort of saying, I want to do this. And so therefore you have to legally execute that by the will of the board. A shareholder is not actually authorized to make a decision by law. Only an officer or a director of a corporation can actually make a binding decision for a corporation. So only a director or an officer, meaning officer, meaning a manager of the company who’s duly authorized by the board can actually make a decision and bind you by legal contract. So it’s actually impossible for a shareholder to legally bind the corporation except in their capacity as a director of the board. So that’s the importance of the board. They are that important in an organization.

 

HOW DO YOU COMPENSATE BOARD MEMBERS?

Rodney Davis: You can’t do business without a board. So you can’t even enter into contracts. You can’t open a bank account. You can’t authorize a purchase. So all authority that’s vested in the management of a company is done so by virtue of authority granted by the board. So the value of a board it’s indefinable, because without a board you can’t function. In terms of how do you compensate board members, that boils down to who are your board members? When it’s internal board members, meaning shareholders, they don’t often think about compensation as a board member. Typically when you appoint management to a board, you don’t typically compensate management for sitting on your board. It’s actually something that management wants to do because they want to be closer to the governance and decision-making of the organization. They want to have a say in the governance and the policies and the high level sort of strategic direction of the organization. Where compensation becomes important is in a couple of scenarios. Scenario one is where often shareholders are directors and they run the business. And as they get ready to transition, you might want to migrate their role from a manager to a director, and therefore you might want to use that as a basis to form a compensation level that allows them to transition away from staff or management compensation to director compensation. And then secondly, if it’s an external party. When it’s an external party, you typically do it just as if you would hire an employee, like what are the comparable rates for the type of work that the board is going to be performing? And you actually use market pegs often to determine what’s the right rate to pay a board member.

 

WHAT ISSUES DO BOARDS GET INVOLVED WITH?

Rodney Davis: When you’ve got more staff within your organization, you probably want to start thinking about how do we determine staff policies? Now up to a certain size you hire an HR manager, you make those decisions. But when you get into really complex issues as an organization, whether it’s about raising money, whether it’s about recruiting and attracting top talent, whether it’s about growing the business, whether it’s about selling the business, whether it’s about expanding into different markets so diversifying the business. Those are the types of things that you might want someone or a purview that’s outside of the day to day operations. And that’s where a board really comes in handy.

 

THE BOARD SHAREHOLDER DYNAMIC — WHO’S IN CHARGE?

Rodney Davis: The shareholders appoint the board members, so that’s how they get their power. If you have a large block of shares behind you then you know that your will will be carried out, because you know that those shareholders will support the decisions that you make. So even though most board decisions are done by unanimous or by majority even consent on a, on a vote. You may recall a situation in the news in 2022 where even though there was a majority who voted against the will of the chairman who represented a large shareholder block, they just replaced the entire board and did the vote again. Ok, so the shareholders came in and said, we’re firing all of you, we’re putting in board members who are going to vote the way we want them to and we’re going to recast this vote. So that’s how that power comes because ultimately, if you don’t carry out the will of the shareholders in most circumstances, if not all, there’s a way for shareholders to remove board members.

 

HOW DOES FINANCE SUPPORT THE BOARD?

Rodney Davis: Well the role of finance in board meetings, in the whole functionality of a board, is to provide the board with the necessary insight about how the business is performing, is to take the results of the business and to take the forecasts and the outlook for the business and compress it into a format that’s easily digestible by a board to deal with the types of decisions that boards might have to make. So if a board is trying to decide to expand our operation into Europe or into Asia from only a place in Canada, finance is going to put together the forecasts of what might happen if you were to go into those markets and provide enough of a reverse engineerable reporting that the board can actually look at that and determine, ok, we understand what would happen if we make those decisions and we understand what would happen under various scenarios. So it’s typically finances’ job to put together the financial metrics and the related metrics that go with the financial metrics so that a board can decide, how are we doing?

It’s not uncommon for a chief financial officer to be a board member. It’s more common for the CEO to be a board member, the second most likely member of management to sit on a board is going to be your CFO. In many cases the CFO is a board member, but it’s not necessary. But it’s quite often. I would challenge you to find a successful board that ignores the role of finance.

 

The CONVERSATION
On Family Business

Handing down a family business from one generation to the next can have a successful outcome with the right practices in place. Partner and CPA, Rodney Davis provides practical and philosophic insights into succession, setting up a board and shareholder’s agreements.

 

TRANSCRIPT

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.

The CONVERSATION
On Managing Priorities

Rodney Davis continues to share his insights with business leaders with a focus on managing priorities. He delves into symptoms of mismanaging priorities, leadership and priorities and how to measure its success.

 

TRANSCRIPT

Rodney:  Your priorities emerge out of your evaluation of what you’re likely to do from a performance perspective over the next year, and what that means from a financial perspective. So priorities are, at the end of the day, give and take and a cause and effect. And so as an organization in setting priorities, you have to determine what is the potential impact of neglecting something or putting something ahead of something else in terms of what we choose to focus on in a world of limited resources.

 

HOW DO WE KNOW WE NEED TO LOOK AT PRIORITIES?

Rodney: Unexplainable gross or profit margins – where you’re looking at your profit margin and you intuitively know it should be better. That often is a sign that something within the execution of steps that lead you to profit is not executing the way it should. You know that if you’re in this particular industry, a good margin is 10%, or in that industry a good margin is 30%. If you’re operating below those numbers, you have to ask yourself where are you putting your focus? And likewise, if you’re too far above those numbers, it could be a sign that you’re sitting on a house of cards that’s waiting to break. So success is an interesting barometer.

TOO BUSY TO PRIORITIZE? WHY IT MATTERS.

Rodney:  When you don’t have time to focus on priorities, you are going to realize that it costs more in the long run when you don’t evaluate your priorities. The message I typically tell entrepreneurs who say,  “I don’t have time for that” is that you don’t have time to not to stop and plan and establish your priorities. When you’re just doing things either in a sequential order or as they come up, they may not be the most important thing for you to focus on. And you may miss something that really matters. Or you may not allocate enough time to address something that really matters. And that could be costly.

If you are assessing priorities and determining where to lay your resources or how much of your resources to give to a particular task, you want to know what it costs and what the benefit of doing it. The purpose of a business is to maximize returns for shareholders. And so it’s hard to get away from financial contributions to major decisions.

 

THE  BUDGETING PROCESS: AN EXERCISE IN PRIORITY SETTING.

Rodney: We definitely use a framework for establishing a budgeting process. So we have a framework that forces them to think about the main things that drive their business. It starts with understanding the drivers for the business. Is it the number of customers you have? Is it the amount of money you get out of each customer? Is it the diversity of your products? How do you compare what the competitors are doing? Is it the markets that you choose to sell it? So in developing a framework for planning and budgeting, you create an environment whereby the organization is examining each of the things that drive their business success. That’s what we use to help our clients. Many times they’ve never done budgeting, so we  speak outside of financial language to successfully assist small businesses in getting through a budgeting process.

 

HOW DO WE KNOW IT’S WORKING?

Rodney: The best way is to look at the trend. You look at the historical performance versus the current performance. If you’re able to isolate what were you doing last year and what were you doing this year, you can get an understanding of the impact of doing or not doing certain things. It’s not enough just to look at the financial results. You have to understand what’s continued and what’s discontinued over that period. When you approach it in the right way, you can actually isolate the impact of the choices that they made.

 

LEADERSHIP: USING ADVISORS IN THE PROCESS.

Rodney: Good leaders are not insecure or are afraid to say, “ I don’t know enough about this.” But when you’re not sure if you know enough about it, it doesn’t hurt to ask somebody who knows more about it. So  you can make that decision. If I’m a business owner, I’m going to speak to somebody who may know more about something than I am. And that’s going to determine whether or not I go forward with an outsider. 

The sign of a good leader is that they are always aware what they’re doing and how the business environment is affecting the people who work in their space. If you are that type of a leader, you can look around and realize, I’ve got a prioritization issue. I’ve got to step back, set some priorities. For me and for my team members. And then let everybody start roaring in the same direction.

The CONVERSATION
the New Work Culture

What is life post-COVID? As staff head back to the workplace, a new set of dynamics are at play. Partner, Rodney Davis examines the financial impact of a new work culture and outlines strategies to help guide leaders.

 

TRANSCRIPT

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.

The CONVERSATION
About Company Valuation

It may not seem like the right time to start planning an exit, but partner Rodney Davis talks about how, when and why business owners should start valuating their companies for a future exit.

 

TRANSCRIPT

 

How Do You Determine The Value of A Business?  

Rodney Davis: You should understand the assets that you have in the business because when someone thinks about the ultimate future income from that business it includes the proceeds on the sale of assets.

So you should understand your balance sheet and understand how the things on your balance sheet can turn into cash in the future. Whether that’s the liquidation of your accounts receivable, offset by the extinguishment of your accounts payable, whether that’s the sale of tangible assets in a manufacturing business that might be a much bigger number, than say, in a services business, which you still may have tangible assets in the business. So you should understand your balance sheet when you’re trying to determine your current and your future exit value for a business.

And you should understand, not only the sources of income for your business, but also the strength, and the likely continuity of those sources of income, in the event that you were to exit. So going down a checklist, you look at your balance sheet, you look at where does my income come from, you look at the underlying cost of delivering those services normally. Because often when you look at the exit value of your business and you’re looking to sort of see what are the normal costs going forward. Obviously, people look at the historical cost, to get a sense of what the future cost might be, but you have to remove from those historical costs, those things that are non-recurring in nature.

So you may have one time put some personal expenses through your business. You want to take those out when considering future operating costs of the business. You may have incurred things to solve a problem in a particular year that are not likely to reoccur. You want to take those things out when you’re considering the future cost of the business.

 

How Do You Improve Your Company’s Value? 

Rodney Davis: So, some of the best things you could do, when you’re thinking about how do I enhance or maximize the value of my business, is try and ensure that there is a predictability to the future revenue of the business, there is a predictability to the cost structure of the business, there is a predictability to the working capital required in order to support that business. Because the more that that is predictable, and people have confidence that it’s reliable, the lower the risk premium they attach to the business, and therefore, the more they were willing to pay at the same level of earnings.

 

What About The Value That The Owner Brings To The Business?

Rodney Davis: Well, when we talk about the replaceability of the owner of a business, we’re talking about the difference between personal goodwill and business goodwill. People don’t pay a lot of money for personal goodwill, because personal goodwill isn’t necessarily transferable. So, if the business is totally dependent on you, then what good is it to me to come in and step into your shoes? If the clients are going to leave, upon your exit, then I’m not really buying that book of business.

So it’s really important that as a business owner, you try and establish business good will and you try and diminish personal good will. I mean, our egos make it hard to do, because the thought that our business could survive, or that we’re not the most important thing in our business, is something that’s hard to deal with, from an ego perspective. But it’s expensive to make your business continue to depend on you because other people aren’t willing to pay for that.

 

When Should Owners Start Planning Their Exit Strategy?  

Rodney Davis: You want to consider the potential opportunities for the business. You may be at a point where you just started a new business and it hasn’t had a chance to come into fruition so when you’re checking off sort of what’s my business worth. What’s the exit value of this business? You want to give thought to what it might look like tomorrow, in addition to what it looks like today, because there may be some underlying value that you might leave on the table that you don’t go through that checklist.

Every business eventually is going to require its owner to exit because businesses generally live longer than people. So if you’re operating in a business, no matter what stage you are in that business, every so often you should give thought to when, if and how you might want to exit that business, and whenever that inflection point comes along, make sure to think about value and think about what it is it needs to be done and whether you are doing the things that you need to do to maximize the value of the business, because it’s inevitable.

They say we’re born, we live, we die. Well, your businesses don’t follow that pattern, there are businesses that will live forever. There have been businesses that will forever, there are businesses that have been around for hundreds of years, they’ve outlived every owner they’ve ever had. There will be a time to talk about exit value, so just prepare ourselves for it.

 

The CONVERSATION
On Managing Your Bank

Your relationship with your bank is seldom a simple one. Hear Partner Rodney Davis speak about how business leaders and owners can strategically make the most of the complex relationship.

 

TRANSCRIPT

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.

The CONVERSATION
On Service Pricing

Is pricing services different than pricing products? Partner Rodney Davis speaks on how business owners and leaders can follow a better framework for setting prices on their service offerings.

 

TRANSCRIPT

How should a company price for services?

Rodney Davis: You know, people often struggle with how to price services, it’s something that in my career, I’ve been in the service space almost as often as I’ve been in the product space, so I have a very keen sensitivity to how you price services, and one thing I try to tell entrepreneurs all the time is, valuing a service is always down to how much time it takes to deliver that service. 

And so, unlike a product where you set it, and the machine runs and therefore it’s very predictable, the time it takes to deliver that product, and therefore the underlying materials that go into it and associated costs. In services, you have to manage the resource to deliver that service in as efficient and way possible. So on pricing services, at the end of the day it’s time and then whatever else goes into delivering that service.

Well, what I tell clients or what I do when I price, is first you figure out what it’s going to cost you to deliver that service. Then you determine what margin you’d want to make on that delivery service, just like you would for a product. As in products, at the end of the day, you have to then compare that to what the market will pay.

So if you, and the reason why that exercise is good for many entrepreneurs is once you’ve priced what that product should cost based on your service delivery costs, you realize whether or not you’re efficient or inefficient, because it indirectly tells you you’re reasonably efficient. So I tend to price independent of the market first, internally, and then compare that to what the market rates should be for that service.

And if I’m way off on the market, either high or low, it might mean I’m either way more efficient than the market, or way more inefficient than the market, and then I have to go back and look at my service delivery model, but at the end of the day, the market dictates everything.

In some cases, if a person costs you $10 an hour, for example, it’s not uncommon for when using very simplified metrics to have that person charged out at a billing rate of somewhere around $30 an hour. If you’re paying somebody $40 an hour, it’s not uncommon to have a metric that says the billing rate for that person is $120 an hour.

So it’s typically a three to one ratio for most professional services, in terms of what that rate should be, but then again, you’re guided by the market and you’re guided by the level of efficiency in delivering the service. 

 

What if the value of the service is worth more than the hourly rate?

 

Rodney Davis: That’s where the market prevailing rates are incredibly important, because I might deliver a service that takes me three hours in time, but my 40 years of experience in dealing with matters similar to that enabled me to do that in that amount of time, whereas somebody with far less experience who’s at a similar charge out rate might take three or four times that, because it might be a new industry to them, or it might be a new problem that they’ve not yet encountered.

And the important thing about that is that whatever it is you ultimately charge the client should be agreed upfront. When you’re in the service industry, you should not be trying to figure out what you’re going to get for a service after it’s been delivered, because once it’s been delivered, it’s gone. The benefit of it to the client is either already received, or the cost of lowering that service has already been incurred. 

 

Is it fair for a client to pay for every hour of service?


Rodney Davis:  The law profession, still is one of the few remaining professions that just bills by the hour and they expect to be paid for every hour. That they deliver regardless whether or not they’ve operated efficiently or not efficiently. There have 
been some firms that have come in with a block-based pricing for M and A activity, for financing activity or for particular corporate services that they provide, but by and large, the legal industry still does charge by the hour at the stipulated rates. It’ll be interesting to see how that’s evolved.

It’s evolved quite a bit in the last 30 years, I know, if you were looking at this question 30 years ago about the law profession, the accounting profession, to some extent the engineering profession, they would have all said, we get full billing for whatever we bill, in terms of hours.

In industries like I.T and marketing and advertising haven’t had that luxury, they definitely don’t get to do that for their clients, never have, and probably are better at pricing than the other three, so as competition has seeped in, I’ve known a few law firms that have really struggled with the idea of not being paid for every hour. 

And in fairness, I think from the law side, it’s complicated for a client to understand what the scope of an engagement might be, it’s complicated for client or a lawyer to predict what may or may not unfold in a legal matter because of the amount of things that are outside of the control of the client. It’s very hard as a client to walk into a relationship where somebody says, I know where you want to get to, there’s a lot of moving parts in getting you there so I can’t tell you what it’s going to cost, but whatever it does cost, I need you to make sure you commit to paying me for that,

I mean, think about that as a consumer if you went to buy products, as opposed to services, how you would react to someone saying to you, I could sell you this ball, but I’m going to have to let you know later how much you’re going to pay for this ball, you’re going to be like, it’s still a ball at the end of the day, the service that I’m being delivered, it can be defined, and to the extent that it can be defined, you should expect a lot more or pushback from a client about unknown pricing.

The CONVERSATION
On WFH

During COVID, one issue that has been weighing on business owners’ minds is the financial implications of a work-at-home staff. Partner Rodney Davis wades in on that discussion.

 

TRANSCRIPT

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.

The CONVERSATION
On Budgeting

The all important budget. Every organization has one. But as a business owner, do you take the right strategic approach? Partner Rodney Davis outlines what leaders should look at when creating their budgets.

 

TRANSCRIPT

Q: How should a business create a budget?

Rodney Davis: There’s two ways people look at budgeting. Some people like to do zero-based budgeting, which assumes that you’re starting from zero and what would happen from there. I think there are circumstances where that makes sense. I’m not a big proponent of zero-based budgeting in isolation. There are elements of your budget that you can take a zero-based approach but if you’re an existing business that has a track record and history, it’s incumbent upon you to look at the budget as a progression of your business. A business like a person has a life, a lifespan and a life cycle. 

When you’re budgeting, if you take into consideration your history, you have a better chance of understanding where you’re likely to go. But if you’re a brand-new business without a history, then you have to consider what you’re trying to achieve, who you’re trying to reach, and what things make it a viable business. Then break them down and try to get an idea of where you’re likely to end up. 

I often say to businesspeople who really struggle with this, it’s your best guess. There’s nothing wrong with guessing and being wrong, as long as you’ve put the right amount of thought into it. You’re going to be better for it, no matter what the outcome is.

 

Q: Why is planning and benchmarking important?

Rodney Davis: I don’t advocate flying by the seat of the pants. I get that sometimes it’s a time crunch. I get that sometimes you can’t do the exhaustive process. The challenge I have with some people who resist planning is the all-or-nothing approach. I either do this incredibly elaborate, super detailed plan, or I don’t do a plan at all. There’s always a balance and there’s always time for planning.

There’s a conversation theme that comes up time and again. And that’s benchmarking. On the question of marketing, or on the question of how much I should spend on any other attributes of my business. If you’re not looking at the whole, it’s very hard to answer that question because the business where the product cost is 50% should probably spend less on marketing than a business whose product cost is 10%. However, what comprises the remaining 50% will dictate what they have available to spend on marketing and still make a profit. And likewise for the company that only has a 10% product cost. The effectiveness of your marketing is equally important when you’re determining how much you should be spending, If you’re spending 15% of your budget on ineffective marketing versus spending 15% of your budget on effective marketing, that’s a very different outcome. So it can’t be looked at in isolation. 

The marketing budget is a good example for measuring how effective you are at budgeting. If you said, if I spend 15% of my marketing budget, I should be able to attract a certain number of clients with a certain amount of spend. When you finish the period and you look at how many people purchased and you look at what their average spend was, you can compare whether or not that was the right amount. Or if I had spent a little bit more, I may have gotten more out of it, or if I spent a little bit less, would I have gotten the same result? 

It’s a journey and it’s an iterative process. You shouldn’t assume you’re going to get it right the first time.

 

Q: How do you measure the success of a budget?

Rodney Davis: Getting a good budget is understanding the drivers of your business. So if you’re a service business that has a client base that’s easily identifiable, you should say, do I need 50 customers to spend $50 to get to my revenue number of $2,500? Or could I do that with 10 customers spending $250?

If you know the drivers, you’re in a much better position to budget. Budgeting isn’t about top-line. Executives might give you a top line number, “We did $10 this year. We’re going to do $15 next year.” But do you know what gave you the $10? If you’re going to approach budgeting with an intent to get budgeting right, you should know what drives my costs, what drives my revenues.

The CONVERSATION
On Downsizing

Rodney Davis talks about one of the more difficult issues facing business leaders – downsizing. He offers insights into better strategies, how to seek other solutions and how to find the right way to downsize.

 

TRANSCRIPT

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.

The CONVERSATION
On Business Expenses

Partner Rodney Davis shares his thoughts about how business leaders can be more strategic in their budgeting when it comes to expenses, what metrics to consider and where to focus resources when times are tough.

TRANSCRIPT

Q: All businesses have expenditures. How you determine the value of an expense? 

Rodney Davis: You can’t outright assume that an expense because of its size is good or bad. What you have to understand is when I incur that expense, what are the outcomes that will be derived from that expense? Albeit, whether that be incurrence of that expense might set a precedent that could cause a problem somewhere else. Is that expense going to generate revenue in a day and a month and a week? Is a dollar spent going to generate $10 of revenue? Is $10 spent going to generate a hundred dollars in revenue or is $10 spent going to generate $8 in revenue. 

The disconnect that sometimes happens that finance is meant to bring to the table is because they are supposed to understand the knock on effect of all expenditure decisions to actually give an accurate representation, or at least a forecast of what that truly should translate into, based on all the inputs from sales, from marketing, from creative, from technical and from the banking or so, the source of funding, they’re supposed to be able to say, if I spend that dollar, yes, I can translate that back into $3 within X amount of time and therefore, that’s either acceptable or not

Q: Is determining an expense a subjective call?

I think it’s really important that the finance person resist offering their subjective opinion on these things. They should first present the objective, get the objective understood, have the conversation objectively and then they’re welcome to weigh in their subjective opinions. That advice then allows them to look at the results or the, one of the best things that we do for clients is we project. So, we take those metrics, we look at the historical results of those metrics combined, and then we take those exact same metrics and project what would happen if different components of those metrics where to change and show the entrepreneur if you’ve got more sales leads and this is your conversion rate, this is what your revenue would be. One of the tests I do with a lot of entrepreneurs is I take those metrics and I say, tell me what you think the outcome would be, change the metrics and what do you think the outcome would be? And many times they think they know the answer and instinctively they’re typically in the right direction. The advice allows you to be a bit more precise in your prediction, and a bit less invested in those predictions emotionally. 

Q: How do you determine what expenses to cut, especially in challenging times?

My approach, when you are faced with a series of circumstances,  where a great many of them are outside of your control, step back. Identify what’s within your control and focus on that. Don’t try to change what you can’t change. So, it takes a whole lot of control and discipline to recognize what you actually have the ability to change. So, I say to entrepreneurs, when you’re in survival mode, don’t try to rewrite your business, understand which parts of those things that are affecting you are outside of your control, try your best to understand where that control lies.

So, whether that’s protecting your existing cash reserves, fortifying your product or service to be the best that they can be, wring out efficiencies that you’re able to wring out of your product, serve your clients better for those clients who still are doing business with you, but focus on the things that you have the ability to control. 

Q: what happens when cutbacks affect the mission or even culture of a company?

Changing your core is changing your business and so you’ve got to understand like, so the great example is the metamorphosis of Netflix, from being a mail order video business. They quickly realized that they could change the way that they do the exact same essence of their business. The mission is still the same, convenience, view movie or content when you want to view it, where you want to view it and when you’re finished, it’s not difficult to get rid of it. It’s the same mission, they just translated how they did it.

So what I say is, they pivoted without changing their core. They didn’t change their original reason for being. They didn’t change their purpose as an organization, but they pivoted to take advantage of a new way to deliver the promise that they gave to their customers. So don’t change your promise, you know what I mean? Pivot to deliver that promise in a way that’s suitable for the current circumstance.

The CONVERSATION
On Entrepreneurs And Too Many Ideas

Rodney Davis was interviewed about the folly of many entrepreneurs and their temptation of pursuing new business ideas without a clear plan. Hear what he has to say about how they can work with finance to set up clear metrics.

TRANSCRIPT

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. 

The CONVERSATION
On Business and COVID

Rodney Davis speaks about how business can adapt to the uncertainty and fallout from COVID, and how they can prepare for future challenges.

See The Financial Post version of Rodney’s Interview.

TRANSCRIPT

How can businesses adapt to these COVID times?

Rodney:  In a previous conversation we talked about sort of the cultural impediments to change, COVID is a classic example. Organizations that were not culturally built for change, probably had  a worst time dealing with COVID. They probably had far more difficulty in adjusting to the new reality. But the reality is probably the number one driver for everything you do and that’s a cultural thing and that comes from the top. If you have that, you’re putting in place things constantly to enable you to respond to what the customer needs, and if you don’t, it’s harder.
Finance isn’t really the custodian of the customer relationship. Finance is the custodian of the outcome of not taking care of the customer, which is the financial implications of losing customers – the financial implications of service delivery that’s more expensive than the benefit you receive from a customer. 

They are the monitor that says you’re losing customers or you’re gaining customers or your service delivery costs are too high or your product costs are too high. So finance, all of that has an effect on the customer relationship, because if you’ve got that customer relationship in a particular place, you can put through those changes, with less impact on the business and if you don’t, then you may have a much more difficult situation. 

How can finance help prepare businesses for future problems?

Rodney:  Yeah, the short answer is, in a time like that, where you have a sudden change to your business, that was completely unexpected, completely outside of your control, and it affects your customers and, or your ability to do business, the more variable the costs associated with your business are, the more resilient you are. And there are businesses in our eco society that have costs that are 80 to 90%, before you get to making a penny. So the gross margins are very small, The thin gross margins means you’ve got to generate a considerable amount of revenue before they cover those fixed costs. I would be willing to bet you that a lot of businesses that are in that situation, have looked for ways to reduce their fixed costs because that makes them more resilient during a difficult time. If I’m going to deaden or lessen the impact of the unexpected, then I’ve got to know what I have available and also what it’s going to cost to continue to operate. 

Why it’s important to stay close to the money?

Rodney:  You have to understand what the actual money impact, real money impact is of decisions and so, when I talk about costs, I’m not talking about notional costs when I’m making a management decision. I have to know how a decision to pursue a particular line or course of action translates into money at the end of the day. The money that comes in, the money that goes out and the money that’s left after we’ve covered all our costs associated with that. Good finance teams understand that and can help the business in evaluating decisions by pointing them to the residual cash that’s available because at the end of the day, the manifestation of every business is cash. 

What advice do you have for businesses at this time?

Rodney: Be very aware of your financial position as close to the completion of your financial periods as possible. 

A lot of the companies that I deal with that faced scrutiny, whether it’s from potential new customers, potential new suppliers or their financial institutions, or the financial backers of that organization, the number one concern that anyone who was a stakeholder or a supporter of that business had at the Covid time is, are you going to be around? And so, in order to give them that comfort, the closer you were to your numbers and the more you had a framework that allowed for reporting, but not just reporting, but reporting and the ability to respond to the questions that arise out of that reporting, the more likely it is you gave confidence to the people who had to make decisions about whether or not they were going to support you. 

Most of the new business that we picked up during COVID, was people who were saying, “I wasn’t close enough to my numbers. I didn’t realize how much of a deficit I had in terms of the immediate awareness of what my underlying financial condition was or my underlying financial performance was.” 

Rodney: Having money in the bank, without having an understanding of how that money turns into more money or how fast that money has the potential to disappear,  you’re just as vulnerable as someone who has no money but knowing how to make more money and knowing how to retain money after you finished delivering your services is probably the most ideal scenario for a business.

The CONVERSATION
About Employee Compensation

Rodney Davis provides his expert insights to help business leaders. In this conversation, he talks about how finance can help assess employee compensation as well as measuring staff performance and bonuses.

TRANSCRIPT

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.

The CONVERSATION
On Staying Ahead of The Competition

Rodney Davis advises companies on staying ahead of
the competition and understanding why pricing
strategies aren’t the only solution.

Read the Yahoo Finance version of Rodney’s interview.

TRANSCRIPT

The CONVERSATION – On Staying Ahead of the Competition?

They’re definitely are ways that you can stay ahead of the competition, and again, data, data, data.
There are several ways we’ve approached this, and different scenarios require different approaches. The first entry point for that discussion is understanding what drives profitability for that organization, and in driving profitability for an organization, I always break them down into what drives revenue and what part of the cost structure is fixed versus variable when you get a dollar of revenue. And then understanding how much revenue do I have to drive to cover the fixed component. Understanding the variable component and so when I advise a company, that’s first and foremost is, do I understand their fixed versus variable? Do I understand how much revenue they need to drive to cover their fixed? Now we can have any conversation about cost, in the context of that paradigm and sometimes that labour component is variable, or a portion of that labour component is variable, and sometimes that labour component is entirely fixed, in which case there are other components that drive the variable nature of how their business costs move as a function of how their revenues go up and down.

Why You Shouldn’t Default Prices

A lot of times, operators get lucky. There’s just so very margin rich business, and so they start to convince themselves that they actually are great at pricing and great at margins, and they can just give up margin and get the sale, and the problem is, is depending on the barriers to entry in that marketplace, as competition comes in, first thing that they’re all going to do is chip away at that margin. So, if you don’t have a better strategy other than price, you better hope it’s a high barrier to entry, enter industry because eventually people will go where the easy money is, and price can’t be your only barometer as a system in a sustainable model. It’s just too difficult.


How Do You Keep Salaries Competitive?

The short answer to that is, and it’s one of the most interesting things I tell a lot of organizations, as it relates to their sales teams or other staff components is, there is a responsibility at a particular level or different levels in an organization for understanding the labour as a cost component of how your business makes money, and to me, that is at the manager level and above. So, what do I mean by that? I mean, you know, I have one client who, their business is sales, so they sell services and they have a sales team that operates out of a central sales room and those salespeople have to sell and so, the salespeople want to earn a particular salary, and we’ve been having this discussion for the better part of a year and a half, I think we’ve got it figured out now, but, in their case, it’s management’s job to bring the leads or to bring the opportunities for those salespeople.

The labour component of that, is not the person who’s doing the jobs, responsibility necessarily to make sure that they’re covering their salary. Depending on the level of that person, it’s the persons who are making that labour decision’s job to make sure that they’re paying the right amount to get the right resource into that role.
My experience has been when those superstars are there, who are worth more in the marketplace, sometimes you’re better off to pay them, to keep them because losing them can have a pretty significant knock on effect throughout your organization, but sometimes you’re better off to let them go, if you can’t figure out how to turn that into revenue and your profit for your organization, but you have to put that onus on the people who make the decision.


Why Price Isn’t Everything

One of the most interesting I can remember, was one of my clients was in the retail gas business in a highly competitive marketplace.
I remember going into that industry with a client where the entire marketplace was making decisions and just constantly undercutting each other on price, because they just assume that price was the differentiator.

And we went into that situation with a client who felt that price was the only barometer and we built what we eventually coined as a pricing database, whereby every week there were surveys done, independent surveys done, and we organize this program, implement this program, created this database, where every week there were surveys done of all of the major competitive gas stations representative sample of the market, and interestingly enough, in that case, what we learned fairly quickly was that there were four different pricing quadrants in that market, and what we meant by that was that each of those quadrants had a higher or lower elasticity, in terms of customer sensitivity to price. We also, then went and identified within those quadrants how you best price against the competition, and by putting the customer into that mindset, what we actually ended up with achieving over a two year period was an annual increase in their bottom line of $2 million by changing the pricing conversation from purely price, to understanding which markets had greater elasticity, and therefore you had an ability to price in one particular way and which markets had a greater customer service driver, which had not contemplated previously in that particular marketplace. Customer service did drive some of the customer decision making and it completely changed the way that they looked at their market competition and completely changed the way that they price their business, and then on the other side of that, helped with the cost implications.

The CONVERSATION
On Finance And Company Culture

Rodney Davis shares his perspective on how companies and organizations can make key financial decisions without compromising company culture and how non-financial leaders can work with finance.


See the Financial Post version of Rodney’s interview.

TRANSCRIPT

In the first of our interview series, Rodney discusses the struggle between financial leaders and company departments like sales and marketing.  He addresses how companies and organizations can make key financial decisions without compromising company culture; how non-financial leaders can work with finance; and when CFOs should stay out of company discussions.  

Q:  Financially-based planning and  decision making often seem at odds with the purpose and culture of many organizations. How do you ensure the two are aligned?

Rodney Davis: This concern may come from a technical lead, marketing lead, sales lead, or even operations. We often hear: “We know what’s necessary to achieve the goals of the organization. The finance person just doesn’t understand what we do.” It’s an interesting dilemma I’ve seen play out many times. Good finance people understand what drives the organization. Rather than having to prove yourself, let the data speak for itself. The conversation should only happen once you’ve distilled the key performance indicators (KPIs), or in layman’s terms, the cause and effect. When you take a particular action,  you should always look at the outcome of that action. 

Q:  How do you set out goals that non-finance leaders can get behind?
Rodney Davis:

The most important thing that a senior financial leader can do for his organization is to truly understand the cause and effect of the various areas of your business: technical, marketing, sales, and even finance. Find the metrics for success that each department uses and amalgamate them with your financial data, and then have a conversation. For example, the sales team may look at how many leads were generated. And of those leads generated, how many confirmed bookings? Of those bookings, how many converted into sales, and what’s our average sales size? Five or six simple metrics that salespeople can get behind, that are not subject to emotional interpretations or manipulation or changes. They are verifiable and they’re objective.
On the technical side, it might be how many hours of labour go into producing something. What are the costs of the raw materials based on the amount billed by suppliers, and what is the allocation of overhead? Again, they’re objectively determined. You marry the metrics they already use with the financial results, and you’re able to have conversations with these different leaders, speaking objectively about the financial implication of their actions. You then take away any doubt, like “those aren’t my figures” or “I’m not sure those figures are correct.” There’s always going to be some sort of tension with sales, marketing, technical or creative departments because the finance person says they can’t do it or they have to do it  differently, which they think compromises their integrity. But it doesn’t have to, if you speak in these terms.


Q: Are there times when the finance guy should just butt out?

Rodney Davis: I used to be in the telco sector and my VP marketing, my chief marketing officer would send me their ads for approval. I’d say, “I don’t have useful input on colours, font size, or picture selections. Let’s talk about how many impressions it’s going to take to generate a dollar of sales or how long it’s going to be before the marketing dollars translate into revenue.” I would try and make sure that I wasn’t weighing in on items that were outside of my expertise. It’s a mistake that I think a lot of finance executives make, where you have a discussion about technical integrity of something, or get into creative conversations. You have to resist that temptation because it dilutes the effectiveness or the importance of your actual financial message. Which is what a CFO brings to the conversation.

Financial Health


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