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‘Discipline’ or ‘Purpose’ – which one wins in the race for growth?

Jim Collins, the veteran author of Good to Great, believes that “10x companies” – i.e. those which outperform their industry average by 10 times or more – possess 3 fundamental and distinctive traits:

1. Fanatic discipline and monomaniacal focus on achieving goals.

2. Empirical creativity: an obsession with facts over opinion and a readiness to ignore conventional wisdom once armed with these facts.

3. Productive paranoia:  constant worry which fuels relentless preparation and precautions against even the most improbably bad events.

To illustrate 10Xers at work, Collins, along with his co-author Marten Hansen goes on to give some wonderful examples.

“Even his contingencies had contingencies”.

Drawing from outside of the business world, he tells the story of Scott and Amundsen’s race to the South Pole. While Scott took a somewhat relaxed and cavalier approach to the expedition, Amundsen’s level of preparation was truly extraordinary.

Even his contingency plans had contingencies. In some cases there were even contingencies to the contingencies within the contingency plans! He was the personification of productive paranoia which gave him the confidence to march forward, with a sense of knowing that when the inevitable challenges arose, his obsessive levels of preparation – the way in which he managed his risk – would be forgiving when mistakes were made or unforeseen circumstances arose.

Relentless Tester

Amundsen was a relentless ‘tester’ – In preparation for his journey, he ate raw dolphin meat to see if it could provide a decent energy supply. He loaded up with far more supplies than Scott to serve a much smaller team. And, tellingly, for Collins and Hansen, Scott took just one thermometer, which disastrously broke, whereas Amundsen brought four.
Amundsen reached the pole more than a month before Scott and made it back alive. ‘Amundsen and Scott achieved dramatically different outcomes,’ Collins and Hansen write, ‘because they displayed very different behaviours.’

By looking ahead and forecasting potential issues and pitfalls Amundsen engendered in himself and his team a reassuring sense of confidence. By doing the hard work up front, they made the journey somehow ‘easier’ for themselves, in the best sense of the word.

Why Microsoft thumped Apple in the mid 1980s to 1990s

The same applies to companies and helps explain why US company Southwest Airlines trounced its discount rivals and why Microsoft thumped Apple in the mid-1980s to 1990s.

Bill Gates used to keep a photograph of Henry Ford in his office to remind himself of how Ford had been overtaken by General Motors in the early days of the car industry. Gates wanted the constant reminder that, however well Microsoft did, there was almost certainly some younger version of himself toiling in obscurity to one day knock him from his perch.

The 20 mile march

Armed with these behaviours, 10X companies set off on what Collins and Hansen call the ’20 mile march’, a long period of sustained growth, characterized by hitting well-defined performance targets and demonstrating both resolve and control.

Through the discipline of behaving consistently over time and proving resistant to a changing marketplace, an organization discovers self-control. And this, far more than more nebulous ideas such as innovation or creativity, is what determines 10X success.
They compare the process of successful innovation to firing bullets in order to zone in on your target, and only then heaving a cannonball at it to do the job properly. Disasters happen when one uncalibrated cannonball after another is fired, each big, reckless bet made in the hope of recovering from the last one, with little or no time taken to test the waters.
One of the most important lessons in the book is that innovation is not always the surest route to success. In their comparisons of companies in the same industry, notably the biotech firms Amgen and Genentech, Collins and Hansen found that it was the less innovative firm, Amgen, that generated better returns for investors over 20 years. Sometimes, it serves companies to be ‘one fad behind’.
Consistent with this idea is the authors’ assertion that the 10X companies are not the brash risk-takers, but the ones that prepare rigorously for what they cannot predict, the antithesis of many Wall Street banks before the 2008 financial collapse. These companies hoard cash and keep comfortable buffers in every area of their business, just in case. They are hyper-realists, who act according to Collins and Hansen’s ‘SMaC’ methodology, being ‘Specific, Methodical and Consistent’.

Purpose vs Discipline – 10Xing the 10Xers

In 2004, the All Blacks were beaten convincingly by the Springboks.

The incoming All Blacks coach, Graham Henry, found a team that had lost its mojo, its sense of togetherness and most importantly its purpose.

As the number 1 team in the world for so many years, what did they have left to achieve?
Henry inspired the team with a new vision that went beyond the individual players themselves.

The vision was to create a values based, purpose driven team, playing for something bigger than themselves.

His watchword was ‘legacy’: for every single player to leave their jersey in a better place.

His philosophy: “when you’re on top of your game, change your game.”

The culture he created, defined by a collective sense of purpose was like none other in All Blacks history.

The result?

They reached a totally new level of success. With a staggering 87% win rate they went on to win every possible piece of silverware.

Firms of Endearment

In his seminal book, Firms of Endearment, Raj Sisodia, charts the rise of the purpose driven business.

He shows that organizations aligned around their true purpose exponentially outperform their competition.

In fact, he argues that ‘purpose’ is the magic fuel that can break the bonds of conventional growth and take companies to a whole new space, outperforming Collins’ Good to Great companies.

When times are tough and external circumstances are beyond our control, often the best place to look is inwards.

When we remind ourselves of what our true purpose is, in life and in business, we tap into an energy that gives us the fuel to change the world, or at least some small part of it.

At The CFO Centre our mission is to help companies define their true purpose – what they really want from their life/business – and build the plan to actually make it happen.

In fact, we help you bring the discipline described by Collins into your business to give you the space to tap into your true purpose and build a legacy you can be proud of.

If you would like to have a conversation about your ambition for your own business contact us at www.thecfocentre.ca or [email protected]

Future Proof Your Business

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How to Double the Size of Your Business in 2021

While much uncertainty still remains after the craziness of 2020, our Chairman Colin Mills talks about his process on how to significantly grow your business.

“The best advice I ever received for ‘doubling’ the size of our business, was to list down the Top 20 things we could do to increase the revenue by 10 times. You can then identify the Top 3 activities to concentrate on for the following year” says Colin.

So let’s say you’re a $4million business. Spend a few hours listing out the 20 things you could do to turn this into a $40million business over the next 12 months. This will force you to think outside the box and away from small incremental changes you can make.

I suggest you then spend another hour or so considering the Top 3 activities. These will be the activities that are most likely to get you towards your goal of $40m.

You then have the top 3 activities to focus on over the next 12 months that may well enable you to double your turnover.

For each of those top 3 activities, develop clear action plans on how you are going to achieve results.

Next, get input from your management team (including your CFO of course) in developing these action plans.

Don’t forget to consider the risk and downsides to each of your priorities. Then develop strategies to mitigate the risks you identify.

Above all, ensure your plans are realistic and find capacity that can support your ideas. Your CFO should be able to support you in developing finance and funding to ensure your growth plan is realistic.

The overall economic climate won’t allow all business to double their size this year. However, this radical approach for business growth will hopefully enable some to change their thinking from doom & gloom towards optimism and growth. As Henry Ford famously said “If you think you can, or think you can’t, either way you’ll be right!”

The CFO Centre is the global No.1 provider of part-time CFOs. We are dedicated to making a real difference for our clients and their businesses.
Rate your company’s finance function 
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Thriving in the New World Guardian

Thriving in the New World Guardian

Thriving in the New World requires a CFO to expand their Guardian role for the organization.  The CFO must see themselves driving the organization’s efforts to harness increasing levels of complexity while embedding behaviours and systems to defend against existing and emerging threats to business continuity.

Organizations of all sizes have relied on their financial leaders to develop internal control systems and financial compliance with taxation and regulatory bodies.  The business owner and key stakeholders will better navigate the future by ensuring their financial leader is accountable for maximising the organization’s overall information integrity and for broadening the compliance framework.

Successfully achieving this broader mandate will require the CFO to elevate their collaboration and partnership with other functional leaders.  Success will also depend on how intensely the leadership team commits to sharpening their ability to convert information into insight.  There are two initiatives your CFO can pursue to create greater visibility of information related opportunities and potential compliance challenges.

Harnessing Digital Transformation

The recent pandemic has accelerated the digital transformation for every business.  Over the past year, it has become clear that companies who want to win must consistently adopt emerging technologies to exploit the opportunities offered by digitization. Businesses who select the right solutions will convert the promise of richer information into higher revenue and lower costs.

It is likely your business is headed towards larger technology investment. Business leaders must, of course, rely on their technology advisors and their market oriented leadership to drive digital transformation; however, the contribution of the CFO should not be overlooked.   Owners and CEOs should seek to pair their technology advisor with their financial advisor to ensure the technology selection process is sufficiently thorough and holistic.

Decision makers often desire greater amounts of information; however, there is no guarantee it leads to better decisions.  For most organizations, their finance teams have the most experience in digesting large amounts of information and structuring it to make recommendations.   Fostering collaboration between finance staff and your digital marketing leaders will promote more streamlined, more accurate, more actionable information.

Creating a Compliance Culture

The reality is that discussions regarding “compliance”  are low on the excitement list for most individuals, and almost certainly not the driving force for most CEO’s or owner operators.   For finance and operations teams, compliance may not be their primary passion; however, their functional success links directly to processes that ensure compliance requirements are visible and achieved.    The challenge for compliance in a post pandemic world has grown. Workers remotely accessing business systems and confidential data puts greater pressure on protecting customer information and maintaining adherence to internal practices.

It is no surprise that the first step to creating a compliance culture begins with the leadership team. For many business the choice to task the CFO to take on compliance culture responsibilities will reinforce to employees the organization’s commitment to a disciplined overall compliance framework.  Your CFO should bring a compliance mindset to the organization. Equally importantly, they should bring proven methods to establish compliance systems.

Once the initial building blocks of leadership commitment and senior level accountability are established, the CFO can work with their colleagues to put in place three additional elements that have proven effective in financial compliance.  These elements are Visibility, Review and Corrective Action.   These three elements have been essential for every finance leader to demonstrate a reliable compliance framework to tax authorities, regulatory bodies, and financial stakeholders.

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The Operator Highlights

Thriving in the New World Operator

In this series of Thriving in the New World, The CFO Centre explores what exactly it means to be an operator in the “new world” and essential elements that allow your business to thrive.

Most owner-operated businesses would agree that increased cash and more access to capital would help them exceed their business objectives.   Recent societal and economic realities have strained or even exhausted cash resources for many companies.   Even those companies enjoying unprecedented growth are scrambling to fund unexpected expansion.   The essential building block for liquidity has always been Operational Excellence, defined as consistent and reliable execution of each business’ unique processes to acquire and satisfy customers.

High performing operations processes have always been the foundation for generating cash from within the business.  Equally important for those business owners seeking to thrive in a post Covid world is the critical need to demonstrate operational excellence to third party financing sources.  Seeking to expand your credit line with your bank or pursuing additional investors will require the business owner to present a clear and compelling story for how the company will produce profits, cash and sufficient return on capital.

The traditional role for a CFO in Operational Excellence is to provide accurate financial information and act as leading voice in cost reduction.   Creating a truly reliable foundation for generating cash and profits; often requires financial leaders to contribute more than they have ever before.  The experience, attributes and mindset of many CFO’s positions them to act as a catalyst for delivering cash and profit maximization across the full range of business processes.

Fix the Finance Foundation

The processes and practices of the finance function must be viewed as rock solid by the owner and the rest of the organization to create a path for participation or preferably leadership of broader operational improvement initiatives.

There are three key functional outcomes that must be in place to give the finance team the credibility to extend its involvement to other operational processes.  Without these deliverables in place, the organization’s ability to undertake deeper process review will be severely impaired.

The first base level capability is timely, accurate and useful financial reporting.  If the leaders of the company are not receiving this level of financial reporting, then it is unlikely that the finance leader has earned the right to apply their team’s expertise to general operating processes.

The second must have competency from the finance team is an understanding of the cost drivers for the business. The understanding of costs does not have to be perfect; however, there must be a methodology in place to capture and analyze the complete range of items that form the cost of  products or services

The third requirement for finance team effectiveness is to have a solid grasp of the company strategies that will drive future growth and success.   If your finance staff are seen just as number crunchers it will be difficult for them to contribute to operational initiatives.   The first installment of our CFO contribution series suggests a practical approach to engage your finance leader in developing future proofing strategies.

Own Cash Flow

The responsibility of generating positive cash flow clearly belongs to the CEO and the entire organization; however, expanding the mindset of your financial leader to thinking and acting as the owner of cash flow can be a powerful tool.   Finance and accounting staff have historically only been tasked with producing cash flow forecasts based on inputs from other leaders.

We suggest making a clear organization signal showing reliance on the finance team to go beyond analyzing cash inputs and outputs. The new expectation should include concrete actions aimed at increasing the amount or timing of cash inputs while reducing the amount or timing of cash outputs.  One example of a high impact cash inflow recommendation is to convert the finance team’s experience with both external and internal obstacles to timely collection of receivables into operational practices that eliminate these obstacles in advance.

Refine and Revolutionize Business Processes

Each organization varies in complexity of business processes, capabilities of process analysis, and often very different levels of CEO interest or prioritization of process improvement initiatives.  Given the nature of many small to medium-sized organizations, there can often be aptitude and attitude gaps leading to under prioritizing  detailed data-driven process review work.

Even a small finance team can become the internal champions for generating improved results achieved through documenting and enhancing your most critical processes.   Elevating the CFO to, at minimum, a shared level of ownership with the firm’s operational leaders will apply complementary expertise to process review efforts.  Converting process improvements into additional cash and profit can often involve just a few additional questions that may be missed by other functional areas.

Create Compelling Capital Acquisition Content

There is a high probability that pursuing operational excellence will lead to capturing more cash from optimized processes and deliver positive returns in the short term.

The longer-term benefit of intense CFO involvement in the operational aspects of the company is the ability to work with the owner to put a more convincing investment case forward to potential sources of debt or equity financing.   Revenue growth is understandably the primary focal point for future investment; however,  the business case is significantly strengthened by a tangible action plan showcasing gross margin enhancement, profit improvement and positive cash generation.

Reviewing, examining and revising processes has always been part of running a successful enterprise.  Although most companies have made improvements over the life of their business; there is often a substantial opportunity to further optimize the organization’s capability to convert every dollar of revenue into more profit and more cash.   One of the positive byproducts of the turmoil related to the pandemic is that business owners, management and employees are more aware and likely more open to the need for change than ever before.   The time is right for businesses to count on their CFO to bring a thorough, disciplined methodology to deliver operational excellence and improved financial results. Uncover more.

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Profitable Growth

PROFIT IMPROVEMENT – Driving profitable growth – Part II

How a part-time CFO will help to boost your profits

The CFO Centre will provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO.

This means you will have:

  • One of Canada’s leading CFOs, working with you on a part-time basis
  • A local support team of the highest calibre CFOs
  • A national and international collaborative team of the top CFOs sharing best practices (the power of hundreds)
  • Access to our national and international network of clients and partners.

With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.

In particular, your part-time CFO will help you to boost profits.

There are four things you can do to increase your company’s profitability:

  • Sell more
  • Increase margins
  • Sell-more frequently
  • Reduce costs

If you can do all four at once, your profits will increase dramatically. Even changing one of these four factors will boost your profits.

Your CFO will help you to identify the ways in which you can sell more, sell more frequently, increase margins (without losing customers) and cut your costs.

Selling more and selling more frequently

Driven by a need to make more sales, most business owners will chase new customers.

This can be a costly exercise since it will often involve more expenditure on marketing and advertising. Acquiring new customers can cost as much as five times more than satisfying and retaining current customers, according to Management Consultants Emmett Murphy and Mark Murphy.

That’s because convincing people to buy from you for the first time is difficult. Prospective clients are scared of making a mistake: of choosing the wrong supplier and wasting their money.

If your sales are low, it’s better to focus attention on your existing and previous customers and find ways to encourage those people or companies to buy more and to do so more often.

Your existing and previous clients do not have the prospective clients’ fears and objections to doing business with you. You’ve already demonstrated that you can deliver the benefits they want from your products or services.

On average, loyal customers are worth up to 10 times as much as their first purchase.1

There are other benefits to selling to existing and past clients too: it cuts your refund rate, raises the likelihood of positive word-of-mouth, and lessens the risk of your clients buying from your competitors.

A 2% increase in customer retention has the same effect as decreasing costs by 10%.

Even better, a 2% increase in customer retention has the same effect as decreasing costs by 10%, according to Emmett and Mark Murphy. Cutting your customer defection rate by 5% can raise your profitability by between 25% and 125% depending on the industry.2

Customer profitability tends to increase over the life of a retained customer. In  other words, the longer your clients are with you, the more they will spend.

When working with you and your management team, your part-time CFO will investigate ways to get customers to return to you more often and buy more when they do make a purchase. The methods include:

  • Using a strong follow-up sequence.
  • Leveraging scarcity by using time-limited or limited availability offers.
  • Using up-sells, down-sells and cross-sells.

Raising prices

All too often, business owners believe their prices must be lower than their competition. They also believe if they increase their prices, they will lose customers. Both assumptions are false.

It all comes down to the perception of value. People will happily pay more for a product or service they perceive as having added value.

If your products or services are on par with your competitors, your prices should be similar or higher.

Even a small price rise will have a positive impact on your profit margins. After all, the larger the difference between the cost of a product or service and the price it sells for, the higher the profit.

Reducing costs

Companies that fail to control their costs are often forced to borrow but then find that servicing that debt erodes their profits still further.

The benefit of cutting your costs is that it will have a direct short-term impact on your bottom line since a dollar saved in expenses might mean an extra dollar in profit.

Your CFO will encourage you to consider the likely impact of any cost cutting on the quality of the products or services you provide before you take any action.

Your CFO will also help you to identify the major cost centres in your company. These might be:

  • Purchasing
  • Finance
  • Production
  • Administration

Your CFO will also help you to identify the profit drivers in your company.

Typically, profit drivers will be to increase sales, reduce the cost of sales and to reduce overhead expenses but they could be any of the following:

Financial drivers (which have a direct impact on your finances)

  • Pricing
  • Variable costs (cost of sales)
  • Sales volume (for example, generate more prospects, convert more prospects to customers, retain current customers, increase the size of each purchase, increase the sales price, etc.)
  • Fixed costs (for example, overhead expenses)
  • Cost of debt (for example, interest rates on debt)
  • Inventory

Non-Financial drivers

  • Staff training
  • Product innovation
  • Market share
  • Productivity
  • Customer satisfaction
  • Product/service quality
  • Analyze every area of gross profit to understand where the biggest opportunities lie and to determine how to reduce less profitable activities.
  • Find your most profitable customers (those who consistently spend more with you).
  • Find the customers who you are currently serving but who are not profitable.
  • Analyze return on investment on capital and product development expenditure.
  • Ensure your management information is up to date and in a format that is useful and reliable.
  • Educate the senior team about the importance of Critical Success Factors (CSFs). These are the  activities that your business must do to survive. You can determine your CSFs by answering the following questions:
    • How is our business better than our competitors?
    • What do our customers like about our products or service and the way in which we operate?
    • What don’t our customers like?
    • What would make our customers stop buying from us?

You measure your CSFs by using Key Performance Indicators (KPIs)

  • Systematically analyze relevant KPIs and trends to identify potential hazards before they become a problem.
  • Review arrangements with your main customers to see if there is a more profitable way to supply them.
  • Review pricing arrangements with existing suppliers.
  • Research alternative suppliers across all areas of the business.
  • Research sources of grant funding.
  • Determine your company’s eligibility for Research and Development (R&D) tax credits.The tax relief will either reduce your tax bill or provide a cash sum. To receive R&D tax credits, you must show that your company is carrying on a project that seeks an advance in science or technology and how it will achieve it. The advance being sought must constitute an advance in the overall knowledge or capability in a field of science or technology, not just your company’s own state of knowledge or capability.
  • Develop effective incentive schemes for staff to encourage productivity and to manage risk.
  •  Prepare customer surveys to understand what the market really wants (and then sell it to them).
  • Analyze competitors to find out what is working well and what isn’t and course correct accordingly.
  • Review significant overheads and isolate opportunities to reduce expenditure.
  • Investigate exchange rate hedging and planning.
  • Create a realistic and achievable action plan then communicate it to all your employees.
  • Increase prices.
  • Explore online selling.
  • Explore more cost-effective ways of marketing by forming strategic alliances and joint ventures with companies that deal with your prospective clients.
  • Arrange for business mentors to give advice and share experiences with you.
  • Review organizational structure and delegation procedures to maximize efficiency.
  • Develop customer retention strategies to prevent loss of revenue.
  • Evaluate business location and determine possible alternatives (to save costs on production, delivery, etc.).
  • Outsource some functions (and so save on wages) or employ someone on a part-time rather than full-time basis.
  • Look at the viability of redundancies. If you’re making people redundant, you will need to fund redundancy payments. You will also need to ensure you meet current legislation and standards regarding consultations with employees, the grounds for redundancy and the selection of employees.
  • Introduce an expense control program. Your CFO will challenge expenses in all categories, large and small. Besides cost-cutting measures, your CFO will also ensure you tighten your control on costs. If you don’t already have a purchase order approval policy, for example, you’ll be encouraged to introduce one.
  • Look at your bank charges. Your CFO will question all bank fees on your statements and compare them with what other banks charge.
  • Check invoices from suppliers for overcharging (incorrect charges, missing discounts, double billing, etc.).
  • Get rid of inefficient systems (for example, paper-based systems).
  • Measure the return on all your advertising and stop using whatever hasn’t worked in the past
  • Replace frequent small orders with bulk buy discount orders.

As you can see from this, profit improvement is not an emergency fix. It’s something you and your organization need to plan for and follow consistently. If you don’t, there’s a very real danger that once you return to growth, you’ll get swept up with the day-to-day demands of running your business. That increases the risk you’ll find yourself back in an unprofitable position.

As with many challenges facing growth businesses, the solution lies in good planning for profit improvement on the one hand and an ability to stick to the plan, month in and month out, on the other.

Profit improvement should be seen as an ongoing project. It takes some time to establish systems, which enable your business to maximize its profitability, and then it takes focus and resources to maintain the monitoring process.

That’s where part-time CFOs can help. They can take care of the finance function and the support systems within your business, which frees up your time to focus on growing your business.

Profit improvement should be seen as an ongoing project. It takes some time to establish systems, which enable your business to maximize its profitability, and then it takes focus and resources to maintain the  monitoring process.

Conclusion

Most business owners say making a profit is the number one reason they are in business. Everything else (passion, purpose, mission) is subordinate.

Profit is an expression of getting the most out of your business for the least amount of effort. It is a reflection of your efficiency.

Building a large company and being able to cite impressive revenue figures are often the wrong drivers for business owners. Again, this is not to say that increasing sales is the wrong approach – on the contrary – it is merely to point out that selling lots of product without a full understanding of the profitability of the product can be a waste of valuable resource.

A compact, efficient business which operates under tight management procedures is nearly always a happier place to work than a chaotic business which is able to boast significant revenue figures.

Expanding overseas, taking on more staff and resourcing up may well be the right way for you to take your business. It could equally be the case that you may be able to enjoy increased profitability (and an improved lifestyle if this is an important driver) without expanding rapidly, but merely by improving profitability.

The path you follow will be determined by your objectives for the business and that’s something your CFO will help you to clarify and then achieve.

Increase your profits with the help of a part-time CFO

Don’t miss this opportunity to talk to a part-time CFO about how you can improve your profits. To book your free one-to-one call with one of our part-time CFOs:

tel: 1-800-918-1906
email: [email protected]
www.thecfocentre.ca

__________________________________________

1. Source: White House Office of Consumer Affairs, ‘75 Customer Service Facts, Quotes & Statistics: How Your Business Can Deliver With the Best of the Best’, Help Scout, www.helpscout.net

2. Leading on the Edge of Chaos: The 10 Critical Elements for Success in Volatile Times’, Murphy, PH.D., Emmett C., Murphy, MBA, Mark A., Prentice Hall Press, June 15, 2002

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