Guident Newsletter – March 2018 – Issue 23
Does Your Company Have A Solid Foundation?
I have the privilege of helping many business owners set-up their management teams. A company’s management team is the foundation from which The Boss builds the business. I have found that three positions are essential for success in an organization, they are; a good controller, an excellent operations manager, and a good sales manager. I like to describe these three positions as the legs that hold up the company as depicted in the drawing of this stool.
Imagine your company as this stool, if the legs are weak and wobbly, your company is in danger of collapsing. Let’s look at each of these key positions and in what order of importance I place on each. In most of the organizations I work with, The Boss is experiencing stress and anxiety over various cash flow issues. I see cash flow issues as “referred pain”, there is a pain in your wallet but it is coming from somewhere else in your organization. Most of the time the root cause of cash flow problems are a combination of; inconsistent sales, overstock inventories, or just plain poor money management by The Boss. How do you fix this? Let’s look at each issue separately.
Inconsistent sales can result from The Boss trying to run the company and generate the majority of the sales. A good salesperson whose sole responsibility is to drive top line sales should not spend the majority of their time in the office but out in the market creating relationships and generating orders to feed “the machine”. The Boss cannot do this and run the company on a day-to-day basis with any kind of efficiency. The Boss may think he or she can, but if they talk with their key staff they will realize it’s not working as good as they think it is. Hiring a good salesperson and motivating them with a fair commission on sales can free The Boss for more “value-added” responsibilities such as re-connecting with existing customers and strengthening those important vendor relationships ultimately improving cash flow without raising prices.
Having a good production manager can also improve cash flow by having a person responsible for the costs associated with the operations of the business. As The Boss, think of the amount of money you spend annually on materials and direct labor costs in your organization. When you spend that amount of money doesn’t it make sense to have one person accountable to you for those dollars? The production manager can oversee purchasing and scheduling of the jobs. They can oversee the job costing function after the job is completed to be sure the estimating process is still valid. Today this job is either not done at all or done by The Boss usually when time allows. If you are The Boss, ask yourself how efficient you are with any of your many jobs, be honest in your assessment. If you want to validate your answer, ask anyone of your key people and tell them to be brutally honest in their answer. Most of the problems in an organization regarding cash flow are apparent to the key employees and they also have a good start on what are the solutions. They just need to be asked their opinion and to work in a culture where they feel safe to answer honestly.
I left the most important position for last, the controller. I am deliberate with naming this position “controller”. I am also an advocate for this position to be one of the highest paid positions in your company. Think about why you decided to go into business and what risks you take as a business owner? You should be in business to make a profit and increase your company’s owner equity. You understand the risks of owning your own business and accept them. I expect that most business owners got into business because they are great technicians or “subject matter experts” in their chosen fields. Most business owners I work with have not had as much financial training as they would have liked. This lack of formal financial training is one of the main reasons The Boss is so anxious about cash flow and with all their other responsibilities is one reason for poor money management in some cases. My advice to you is to “invest” in a very good “controller”. A “controller” is someone who is formally trained and understands the three financial statements and how they work together. Let this person manage the checkbook, with your guidance of course because it is still your money they are working with. Free yourself from the day-to-day stress of managing the money and use your time to create value for the organization. I know this is going to be hard and that you may not want to give up the checkbook. Look at it this way, if one of your people were trying to be the salesperson, be the production manager, and control the checkbook, and not really doing an efficient job at either responsibility; what would your solution be?
Shore up the foundation of your business by investing in the key people you need in these three foundational areas, the legs to your company. The opportunity cost of you trying to do three jobs is too high and poor cash flow is the signal that a change is needed. Look inside your company for the signs that something needs to be changed, ask your key employees for their honest opinions, and don’t be shy to look outside your organization for solutions. Shore up that foundation and build your dream!