Will your automation business survive, thrive?
Accounting for engineers: Beyond engineering, system integrators and other automation and controls companies rely on non-operational skills, like finance, to stay afloat. Accounting can be obtuse, and a mid-market business can sink—unseen—into insolvency, without attention to key metrics, said Nick Setchell, CEO, Practice Strategies, at the CSIA 2013 Executive Conference. Video gives more advice.
Engineers like numbers but often find accounting obtuse. Paying attention to a few key metrics can save a profitable engineering-related business from doom and make the workplace more satisfying for all, suggested Nick Setchell, CEO of Practice Strategies. Setchell talked about the “RealTime CEO – Maximizing Real Business Value,” at the 2013 CSIA Executive Conference, providing insights into accounting best practices for engineers.
The consultant, from Adelaide, SA, Australia, explained to system integrators that company leaders need a balanced understanding and application of 1) strategy and vision, 2) leadership and motivation, 3) finance, and 4) operations. Many leaders, especially those in mid-market companies (MMCs) with engineering backgrounds, have the most expertise in operations, then in strategy and vision, followed by leadership and motivation, with often little knowledge of finance.
Employees or third-party accountants hired to fill in the gaps usually don’t explain what they often assume others know. Tragically, profitable companies can go belly-up before leaders realize they’ve missed key indicators, such as cash flow, that are not entirely obvious in traditional accounting methods.
“We want to shape future by acting now in real time. How you choose to deal with challenges will define you as a leader,” Setchell explained. Frustration, he said, often stands in the way of success. “Find the silver lining in every cloud and run with it.”
Balance, before bankruptcy
He discovered during time as a turn-around consultant that ultimately, only two things are relevant: Cash flow and people. Looking at related metrics before a company gets to the brink of bankruptcy can help companies run more effectively. Balancing time spent in four areas provides a good start.
1. Strategize daily. Most leaders have 20 undone things from yesterday and 80 more from today. Strategy and vision can get pushed aside.
2. Motivate those around you.
3. Understand operations (be good at what you do). Companies rarely underperform because you don’t have good operational skills.
4. Understand finance.
Illustrating the importance of organizational balance, Setchell asked, “Which of the following columns provide the best support for a structure?”
Obviously, the column on the left is ideal...and, unfortunately, rare.
Improve in four ways
Setchell provided some questions in four areas to consider improving balance.
Foundation: Why do you exist? (Don’t just answer, “To make money.”) Is your business foundation able to support your future vision for next two years of massive opportunities, during the fastest rate of change yet? If the foundation is not strong, a company will collapse. A painful; example of this was Enron that fooled many smart people for long time. If nothing else, celebrate weekly that you’re still here. “If all you do is grumble, then employees will suffer and productivity falls.”
Operations efficiency: Can your operations engine produce timely, high-quality output? Companies not well positioned for a downturn wind up cutting employees and then, even if they survive, can become part of a second wave of bankruptcies as they try to grow too quickly with limited resources and funding. Like people, a company will choke more quickly than it will starve. Growth at 10%-14% is better than 50% with the wrong pricing strategy. Market leaders (like a salami company) can go out of business in five days after having a “small” problem with botulism.
Market: Who are your customers? Are your sales and marketing strategies complementary? Sales is tactical, to identify and close deals. Marketing is strategic, to create a desire to do business with you. Why is marketing an afterthought for most businesses? Part of putting strategy before tactics is that companies should have a clear pricing strategy related to their dominant competitive advantages (DCA), meaning, “Why you should buy from us, and not others.” Most MMCs don’t have one, and those that think they do often answer, “Good customer service.” A DCA is something you can say that your competitor cannot.
People: Do you have a validated a way to evaluate people to ensure effective communication and performance? Few leaders have psychology degrees, though there are many tools available to help with this greatest asset. Scary, but too-often true, is the saying, “Whippings will continue until moral improves.” Tolerating the wrong people within an organization can suck energy out and suffocate innovation.
3W: What, by whom, when
Some core management principles to implement are:
Action responsibility using 3W accountability, which is defining what will be done, by whom, and when. Let who define when, but then hold the person or team accountable for that. To provide instant accountability, every meeting should start with 3Ws from the prior meeting. “Sorry, Nick, I was too busy to get that done.” That is not acceptable answer. The rest of us were not sitting around scratching our butts. If you cannot finish, you need to ask for an extension. Within 2 weeks, this teaches people to make deadlines. You’ll learn who is legitimately overwhelmed and who is taking you for a ride.
Entrepreneurial measurement of fiscal focus: Do you really understand accounting? Do you really want to? Setchell has short list of key fiscal indicators to keep from going belly-up without noticing. (He started his career in a Big 8 accounting firm.)
Decision validation: Validate your gut feel with a mechanism that enables you to ask two key questions for each major decision - “Should we do this ? Can we do this.” While “gut feel” decisions may go serve well for a time, they can sink the company.
Strategic investments: Use J curve management for key projects, to avoid dropping dollars through the cracks or spreading your organization and people too thin.
Risk management: Use real-time planning.
For chief executive officers, creating value and mitigating risk are the only two responsibilities, Setchell said. Most CEOs are inclined to one or other. Balance is challenging.
A leader of a software company had to fire an “Einstein-brilliant, hard worker” who was in late daily (though worked more hours than everyone else) and regularly did things his “better” way, rather than following individual, team, or company best practices, regularly upsetting everyone else. After his departure, productivity went through the roof.
A sensitivity analysis can help identify how can to allocate scarce resources. Companies fly blindly when they don’t know how changes will affect the business.
Price is the most powerful driver of change and is a double-edged sword. Discounting is the fastest way to destroy a business.
One of the least powerful ways to change is to reduce indirect costs. When a crisis hits, most companies cut indirect costs. How you make investments will make be a massive determinant of how much value you can create during the next 2 years of huge opportunities.
If you change 1% in key areas, what happens? Rank them and put most the most sensitive on top and least on bottom. In one specific example, a 1% price increase can increase profitability almost 4%. Increasing work (volume) by 1% creates a 1% gain. This shows that for system integrators (and many businesses), price is at least four times more important than volume. Dropping prices and increasing volume won’t work. Businesses often fear increasing prices for fear of lost sales. Do not set your strategic direction by the rants of the weakest salesperson.
Frequently challenge the critical question: What is and how suitable is our pricing strategy? Match your pricing philosophy with your product delivery strategy. For example, a little blue box from Tiffany is very expensive, so Tiffany sells less than Walmart. Walmart can drop prices until it picks up every sale in the world, but do NOT sell Tiffany products at Walmart prices. You will fail. This is the most common reason for failure. Set your pricing strategy by the strength of your DCA, by the strength of your brand.
An exercise showed how, at one company, 10% higher prices allow greater investments in supporting DCA and margin, while lower prices erode margin, increase volume, require much more work proportionally for a smaller margin, and strain resources to pick up what could be “pain in the ass” customers, according to Setchell.
Impact of price discounting: If you give away half your margin on each sale, then you may have to work twice as hard to get back to your previous levels. Mathematically price increases normally benefit a business; price decreases harm it – this is the opposite of conventional wisdom.
Manage J curve investments: Companies invest money now in something not immediately profitable to gain benefits later. The J-shape of the curve happens as the activity 1) is cash flow negative for a time, then 2) is cash flow positive in the short term, but still negative from start of the project, and then, if successful 3) is cash flow positive over the life of the project.. The idea is to minimize the depth and breadth of the valley, move to phase 3 as quickly as possible, and not undertake too many J curves at once, which can kill a company. J curves include a new product launch, equipment purchase, acquiring a competitor, expansion, location change, or a new hire. Are you prioritizing and managing cash flow related to J curve investments? Few businesses have a defined way of tracking J curves. Caution: Do not become emotionally attached to any project, riding it to the bottom. Watch for flat-liners and pet projects that are ski slopes to the bottom. There must be a predetermined point for any project past which you will not put in any more money.
For example, there are three phases of recruitment: faith, hope, and charity. Faith that they’ll work out, hope that they’ll work out, and charity, past which point, the person is not only costing you the price of salary and any benefit, but also dragging down others.
Next page has more accounting advice for non-accountants: See more on value and timing of projects and a cash-flow testimony.