Sometimes You Have to Explain it a Different Way

Incentive compensation systems have become a more common topic in Chief Executive Boards International meetings lately. While incentives are common among sales people, you'd be surprised how they drive behavior in other job descriptions.

I heard a remarkable anecdote last week that underscores this point. I heard it from a general manager of a professional services business, in a sector that's hard-hit by the current economic downturn. He's going all-out to secure new business, but it's become clear that some staff and cost reductions are essential to maintain breakeven.

At a recent company meeting (not a new thing -- he's been doing them regularly), he announced an across-the-board 10% pay cut for all employees (including himself). And then he did a brilliant thing -- he announced that anyone who billed 160 hours in a month (most months have 168-176 billable hours) would earn his 10% pay cut back for that month.

He was stunned when a couple of people came up after the meeting, and said "I think I may be able to find some more billable hours." To his credit, he kept his composure -- I'm guessing what he wanted to say was something like, "And despite the fact we've been struggling to increase revenue for the past 6 months, that idea is just now occurring to you??"

There's a reason for this. Even small groups of employees suffer from "crowd anonymity" -- they think someone else is going to do it, or that you're talking to someone else. When it gets personal -- like, "a 10% pay cut that you can recover if you'll do what I've been talking about", somehow they start to get it.

In this case, this general manager is now getting questions almost daily from a staff that wants to make sure they get their billable hours in, and earn their pay cut back. Suddenly, a group of people who "sort of" understood that the company needed them to bill every hour they could is actually doing that. Amazing -- it took a connection between their wallet and their billings to escalate billed hours per month to the top of their minds.

There's actually a second chapter to this story. He subsequently modified the program to a "sliding scale" that incrementally restores the 10% cut, beginning at 80% of available hours billed, increasing to full salary at 100% of available hours billed. Interestingly, this is a clever way to introduce an incentive program to a previously straight-salary workforce.

So, if your company is in need of employees stepping up to the plate, you may have to step up your communication -- from just asking them to pitch in to explaining it a completely different way. Here's a more thorough article on "Incentive Compensation Systems that Work."

If you've successfully communicated to your employees the need for a major change in behavior, with or without a compensation plan change, please click "Comments" below and share your experience with others.

Other CEBI Blog Articles...

To forward this to a friend, Click Here

Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

Credit -- Use it or You May Lose it

News Flash: Banks, credit card companies and other lenders are reducing "dormant" lines of credit. Why might that be a problem? We'll explain later -- first, some background.

Credit is a topic that's surfaced regularly in recent meetings of Chief Executive Boards International. Granted, most business owners are borderline allergic to debt. That emotional bias aside, debt is one of the tools in the business owner's toolbox, and it's there for a reason.

Simply stated, debt is a good thing whenever you can

• Be confident of available cash to service the debt (from within the business or elsewhere)


• Get a far better return on the capital from investing in something than the interest rate on the debt


• Have a fallback strategy by which to retire the debt if you absolutely had to (with cash from within the business or other sources)


• Get over your debt allergy

"Cash is King" -- seen almost daily in the business press, has rarely been more true. A more financially sophisticated view might expand that to "Available Cash is King." In fact, your existing credit lines qualify as available cash. And CEBI members are making good use of available cash right now, for things like:

• Buying durable inventory at distressed prices (from suppliers or competitors)


• Buying equipment and machinery at distressed prices (from almost anyone)


• Buying real estate at distressed prices


• Investing in people, promotion, training, maintenance, etc. to ensure the company's market strength in a recovering economy


• Pulling cash out of the business and investing it personally in good opportunities (distressed equities, real estate, etc.)

Let's agree, then, that keeping your credit lines open and available is an essential strategy -- in case of a short-term need for cash for almost any reason. And at current interest rates, almost any use of capital will return 2x - 10x (or more) the cost of renting the money (interest).

The news flash you should be aware of is that banks and other lenders are reducing lines of credit that aren't being used. Credit card companies are reducing limits or cancelling credit cards that aren't being used.

So, what's with this lender behavior? Simply stated, it's the way bankers think. They see a credit line as a potential need for cash, of which they might have short supply. And in some arguably circular logic, comprehended only by bankers, they see taking an unused line down from $250,000 to $100,000 as somehow making themselves $150,000 better off -- despite the fact it wasn't being used anyway. Oh well.

How might you keep this from happening? I may be a good practice to just exercise each or most of your credit lines on occasion. You fire up your standby generator every month or so, right? It doesn't take much diesel fuel, and you don't run your plant on the generator all day, do you? Wouldn't make sense. You do this to be sure the generator will be there when you need it.

Likewise, you can exercise your credit. How much available credit do you have in your wallet? For many of us, it's over $100,000. And if one of those credit cards goes away, it's correspondingly less. Fact is, your credit score is based on your current outstanding balances as a ratio of your total available credit limits. Why not use each of those cards regularly to keep the issuer interested (even if you pay it off every month and don't pay a dime in interest)? They're happy as clams with a 2%-3% merchant fee for an average of 20 days' float. It's easy to see, also, that getting limits raised on your credit cards works in your favor -- just make the phone call.

At today's interest rates, exercising a $100,000 hit on your revolving LOC for a week costs you maybe $100 in interest. Do it every 90 days or so -- good insurance. You might want to do the same with your home equity line. If you don't use it, you may lose it.

The premise of this article is that you're a savvy business owner who sees (or is watching for) opportunities to invest available cash in high-return strategies, and that your credit lines can provide that cash quickly when those opportunities come up. It further assumes that you shouldn't be the source of that cash. Instead of keeping $100,000 on hand in the business for a "rainy day", pull it out of the business, out of reach of creditors and lawsuits, and use $100,000 from the bank. Don't spend it -- invest it in an asset for your own balance sheet.

Think about it -- would you rather have an additional $100,000 on your personal balance sheet and $100,000 of debt on the company's, or zero on both?

The idea that debt isn't intrinsically bad and that available credit is an essential business strategy is provocative, and not a widely held view among business owners. Whether you agree or disagree, please click on "Comments" below and let us know.

Other CEBI Blog Articles...

To forward this to a friend, Click Here

Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

Roles & Responsibilities -- Director, Manager, Supervisor or Coordinator?

We're happy to say that the Chief Executive Boards International Blog is becoming something of an "ideabook" for small and midsize businesses. A few weeks ago, I received a request from a blog reader, asking if we might suggest some "criteria for determining what level of responsibility an employee should have to be titled Director, Manager, Supervisor, or Coordinator."

An interesting question, and, I believed, something that might be a useful reference for lots of small and midsize businesses, like those whose owners and CEOs are members of Chief Executive Boards International. In general, smaller companies have a hard time with title alignment, and perhaps a set of guidelines is a good place to start. So, here's my point of view:

• Coordinator -- The people with whom she works have NO organizational reporting lines -- they don't work for her, and she can't do anything about getting them hired, fired, or raises granted. Supervisors are important, but not in control -- their job is to do the best they can with the situations they're given to coordinate. They're a span-breaking mechanism. See: http://www.chiefexecutiveblog.com/2008/01/do-you-have-too-many-direct-reports-six.html
  


• Supervisor -- Deals with individuals and tasks. People are directly responsible to the supervisor (they work for her and no one else). Supervisor may or not have hire/fire/salary authority. They surely do have recommendation authority over who gets hired, fired, or a raise. And they get to say what someone must do, vs. a Coordinator, who's just telling them what they should do. They're a span-breaking mechanism with authority.
  


• Manager -- Deals with groups and priorities. Allocating resources to the most important projects and initiatives. Mostly a tactical perspective -- takes things that Directors & VPs have defined as important and makes them happen. Key element among managers is finding a way to get done what the organization (read Directors and VPs) has defined as important, done. They should be measured on results expected. They make hire/fire decisions, and make them quickly. See: http://www.chiefexecutiveblog.com/2008/01/when-do-you-decide-to-do-something.html
  


• Director -- This title should be a real big deal (as should VP). This is a person who decides where we're going, not how we're getting there (left to managers). A person who has a sense of mission, some vision, and who's adding energy to the system. Someone without whom the organization couldn't move forward. They set organizational goals, either themselves, or collaboratively with the Managers. See: http://www.chiefexecutiveblog.com/2008/01/employee-goal-setting-that-works.html
  They define the direction of change, and effect change. See: http://www.chiefexecutiveblog.com/2008/01/newton-was-right-effecting-change-in.html
  

If you haven't done so recently, I'd recommend you read Jim Collins' book Good to Great. Here's a "Leadership Pyramid" offered by Collins. Supervisors should be operating at Level 2.5, Mangers at Level 3, Directors at Level 3.5, and VP's at Level 4. The CEO should be operating at Level 5 (if you're not operating at Level 5 most of the time, see: http://www.chiefexecutiveblog.com/2009/02/20-ceo.html).

If you have other viewpoints or alternate definitions for these jobs, please click on "Comments" below and share them with us.

Other CEBI Blog Articles...

To forward this to a friend, Click Here

Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

Beforemath 2 -- Are You Ready for Less Business?

A contingency plan, by definition, is a degree of readiness for an event of some reasonable likelihood. Generally, the timing thereof is beyond your control. So, you imagine the possibility, imagine the impact and define your response. We've used the term "beforemath" to describe this degree of readiness. Here's an everyday example of "beforemath."

At a Chief Executive Boards International meeting, a member shared his "beforemath" plan for further slowdown in his industry. He's looking at the general uncertainties in the economy, and is concerned that perhaps his business will slow down to the point he needs to take actions to reduce his fixed costs.

He has predefined a couple of "triggers" that will determine whether he kicks his beforemath plan into action. Namely, two consecutive months of a net operating loss of $20,000 or more or a drop in his backlog of unexecuted work to ten weeks or less. Easy things to measure, and he won't have to think about whether it's "time" if either of those happpen. This is an important part of a beforemath plan -- to know exactly when you're going to invoke it.

His beforemath actions are a predetermined set of cost reductions, staff reductions, etc. that will reduce his fixed costs, allowing him to operate at neutral cash flow or better at a reduced level of revenue.

Do you have a beforemath plan that's similarly specific? Please click "Comments" below and share it with others.

Other CEBI Blog Articles...

To forward this to a friend, Click Here

Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

Why Isn't My CPA Asking These Questions?

A surprising number of business owners think their CPA is watching their books for things to be concerned about. In my experience, that's rarely the case. Here's what some Chief Executive Boards International members discovered about that assumption: http://www.chiefexecutiveblog.com/2009/02/how-much-is-not-having-cfo-costing-you.html

In my business coaching practice, I generally find myself drilling into a client's financials, asking questions like "What's this?", "Why did you book it that way?", "Why is gross margin % bouncing around month-to-month like a random number generator?" etc. And as I explain why those things are important, it's almost predictable that the client will ask, "Why hasn't my CPA ever asked me any of this stuff?"

And my now-practiced response is, "Did you hire him to do that?" They look at me quizzically, and then I ask, "Did you hire him to coach you, to help you improve your business, or did you hire him just to do your taxes (and perhaps an audit)?" At that point they realize that, as conventionally defined, a CPA is not a CFO. There is a huge difference between the two. Let's take a look at a quick comparison between them:

CPA	CFO
Compiles financial statements from client-provided data	Plans, considers and decides how financial transactions will be booked, consistent with the objectives and strategies of the business
Works mostly in the past -- from historical data	Plans, forecasts, budgets and projects the future financial performance of the company, in light of the company's objectives, strategies and capacity to perform
Delivers financials weeks or months after the close of the accounting period (month, quarter, or year)	Focuses on a clean, quick, and solid closing of the books within days of the end of the period. Generally has daily or weekly real-time key indicators of performance or trouble, shared with key players in the company.
Compiles financial statements in accordance with statutes and practices consistent with the type of business	Analyzes results in the context of the company's objectives, strategies, and owners' intent for the business. Establishes key indicators that provide early warning for management
Compiles financial statements that can be relied upon by 3rd parties, such as banks, creditors and investors	Works to maximize the value of the business to the owners, including investors, while remaining within loan covenants, creditor requirements, etc.
Assumes you (the owner or CEO) are going to read and understand the financial statements as delivered	Makes certain you (the owner or CEO) understand the financials, the trends and the issues they identify. Reads them to you, if necessary.
Does what he's hired to do -- generally Taxes and Audits -- including mid-year tax planning, quarterly estimates, and appropriate posting of expenses	Does what he's hired to do -- help you strategize, plan and operate your business to your maximum financial advantage, within the law.

In reviewing the above, it's probably obvious why your CPA probably can't be your CFO. He's not in the game. You haven't been paying him to come over, sit in your planning and management staff meetings, and get fully engaged in the business. He has, in most cases, no perspective by which to help you plan, forecast or monitor financial performance. Because you haven't invited him in (and paid him to come).

Now, please don't misunderstand -- I'm not saying the services of your CPA aren't valuable -- they are. And I'm not saying you can't engage your CPA or someone else from his firm as a part-time CFO. Most CPAs would be thrilled to have a client actually engage them to help improve the performance of the business.

You'll have to pay him to do that -- probably a monthly retainer. You'll have to spend time with him, and you'll have to think to schedule and invite him to meetings where strategic or major tactical initiatives are going to be debated and decided. In the case of most of my coaching clients, I find myself filling that role, at least partially. I have one client who has a former corporate CFO, who now works for the client's CPA firm, on a monthly retainer to perform the duties and services in the "CFO" column above.

In this case, he's hired the same guy to wear both hats, and the two engagements are explicitly different -- a part-time CFO on retainer, and a CPA working on a conventional fee schedule, doing conventional reporting, tax and audit work.

Think about it -- is your company without a CFO? Can you really afford that (or do you know how much it's costing you):?

If you've either hired a full-time or engaged a part-time CFO in addition to your CPA, please click "Comments" below and let us know how it's working out for you.

Other CEBI Blog Articles...

To forward this to a friend, Click Here

Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com