CFO Book Review – Drive by Daniel Pink

The Industrial Revolution gave the world a new found efficiency in production and distribution in business. This revolution had a profound impact on employees and how they were motivated to produce an ever increasing supply of goods. Our current business operating system, in many ways, remains unchanged from over a hundred years ago.

The primary approach to employee engagement over the years has been built around external, carrot-and-stick motivators. Science has long recognized that humans respond to rewards and punishments in our environment. However history suggests that this approach in business doesn’t usually work long-term and in many cases can actually do harm and become counter-productive.

Daniel Pink expands on the research of behavioral scientists of the last few decades that have discovered a different human drive. Motivation in the past has been fueled more by extrinsic desires than intrinsic ones. Motivational behavior was concerned more about external rewards to which an activity leads rather than the inherent satisfaction of the activity itself.

Daniel Pink suggests that business today needs to take a different approach. This new approach has three essential elements: Autonomy, Mastery, and Purpose.

1. Give Employees Autonomy
By nature, humans want to be “autonomous and self-directed.” Pink suggests empowering employees to explore new ideas, allowing them to work flexible schedules, giving them a say in hiring new talent, and letting them decide how they want to tackle a problem.

2. Give Employees Mastery Opportunities.
Pink says “making progress in one’s work turns out to be the single most motivating aspect of many jobs.” You can help employees achieve a sense of progress by working closely with them to assign tasks that match their skill levels, so employees are neither anxious nor bored.

3. Give Employees a Sense of Purpose.
“Humans, by their nature, seek purpose—to make a contribution and be a part of a cause greater and more enduring than themselves,” says Pink. You can fulfill your employees’ sense of purpose by making community service part of your corporate culture. Try organizing in-office food drives, or inviting the team to spend a day volunteering.

This new motivational drive, if business owners understand and can tap into, will strengthen our companies, elevate our lives, and improve the world.

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How Much Cash Reserve is Enough?

”Cash is King” is the mantra of many small business owners. It is true that cash is the fuel that makes a business run. It is needed to pay salaries, fund marketing programs, acquire and retain new customers, invest in equipment and facilities, pay rent, supplies and the many day-to-day activities of a small business. But how much is enough? When does is make sense for the small business owner to share the wealth with key employees or take a distribution from the business? This blog will give some insights into figuring out how much cash to have in reserve.

Most financial experts recommend three to six months of operating expenses, but using this for every business in every situation is misleading. Regulating cash flow isn’t just about quantity. It’s about having enough cash at the right times. Having enough cash in Week Four doesn’t help when you don’t have enough cash to cover payroll in Week Three. Consider the following three key areas to help determine how much cash you need.

1. How Much Cash Have You Been Using?
Run monthly cash flow report from your accounting software. This report will provide an historical and seasonal perspective. Note the cash received from sales and the cash spent. Most cash flow reports will show you your net income for the given period and adjust the numbers based on how much cash you received from customers and how much cash you spent on operations; in essence removing Accounts Receivable and Accounts Payable from the equation. The net of these two is often referred to as the “net burn rate.”
Your “gross burn rate” only takes cash expenditures into account and is the more conservative analysis, since it does not assume any sales are made. Historical spending patterns are a good starting point in considering future spending plans.

2. How Much Cash Do You Plan to Use?
Look at the monthly cash flow projection covering the next 12 to 15 months. You should be able to find this information in your monthly budget, or if don’t have a budget, from a financial forecast created for this purpose. As you did with actual cash expenditures in the preceding paragraph look at the sales (cash in) and expenditures (cash out) separately.
Be conservative in your forecast as actual results often differ from what’s stated in your business plan. And keep in mind that expenses are usually more predictable than revenue because many are relatively fixed, such as payroll and rent.
For a small business, the past is not necessarily the best predictor of future needs. You need to consider the stage of your business in your forecasts.

3. What Is the Stage of Your Business?
Are you in start-up, first year of operation, maintaining an ongoing business that stays fairly consistent each month and year, or do you have plans to grow or make large purchases. Each of these will impact the cash forecast discussed above. While an established business may have good benchmarks, a start-up has few benchmarks and the most uncertainty, and thus should be more conservative when setting cash flow needs.
In growing businesses, accounts receivables, and maybe inventory, expand to support the increased sales. But it is often overlooked that you need cash to fuel this growth—you must spend money to generate the sale before the customer remits cash.

How Long It Will Take to Get More Cash?

Now you know your cash needs for the next 12-15 months. The next consideration is how long it will take to get more cash if and when it is needed. If you’re funding the business from your own resources, the time is short. Getting the needed funds likely means writing a check from a bank account or selling a security from an investment account—you might only need three to five days for the cash to be available to use.
However, if you need a bank loan to get cash, it might take two months or longer—one month to find a bank willing to make the loan and one or more months to do the paperwork. This option assumes you have a business plan in almost-ready condition and have maintained good relations with your bank if you have an established business or on your personal account if you’re in start-up mode.

Raising funds from angel investors extends the time considerably. If you go this route, count on six to nine months to prepare the business plan/investor pitch, make presentations to several angel groups to find one that is interested and a good fit, and wait while the angel group conducts its due diligence.

Once you know how much cash you’ve been using, how much you plan to use, and how long it will take to get it, you can determine how much cash you need to keep in the business. For example, if you plan to use a bank loan to fund your cash needs and you plan to spend $50,000 a month then you should probably keep a minimum of $100,000 in your bank account—if you have certain sales revenue occurring in these two months you can reduce the needed cash in the bank by a like amount. However, if you plan on using angel funding then you might want to have $300,000 in your bank account.
Before approaching a bank or angel group, consider some other funding sources

Are There Other Cash Sources?

There are many other sources of cash. For purchases, ask the vendor for credit terms or a longer period in which to pay. For sales, ask customers to pay you in shorter timeframe and offer a discount as an incentive to pay earlier. Other cash sources include increasing your credit card balances, taking out a home equity loan, borrowing from family and friends, tapping into savings and retirement accounts, leasing rather and purchasing equipment—the list goes on. It’s also good practice to have a bank line of credit as a safety net—one that can be dipped into when needed.

When Is the Best Time to Seek More Cash?

A common axiom is that the best time to obtain funds is when you don’t need them. Sounds counterintuitive, but during these times you aren’t desperate to take the only offer made. You have time to shop for the best source, with the best terms, and you can negotiate from a position of strength.

Too Much or Too Little Cash

There are many lists of common reasons for business failures. The two items frequently near the top are undercapitalization (not enough cash) and overcapitalization (too much cash). The first reason is pretty easy to understand. But companies can also get into trouble when they have too much cash, as they often undertake projects, hire staff, buy equipment, move to larger offices, and other such expensive actions, which incur ongoing implications like fixed costs.

Often these decisions are not made with the same planning rigor when cash was tighter. If your company is fortunate to have “excess” cash beyond the forecasted needs, then make a distribution to the owners or a bonus to your employees rather than make a decision that may have far-reaching effects.

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CFO Book Review: The Steward Leader


The Steward Leader

Stewardship of people within an organization has taken on a whole new level of meaning for me after reading Peter Block’s book Stewardship: Choosing Service Over Self-Interest. Block approaches the issue of leadership, in the face of the changing business environment, from a stewardship perspective. His primary thesis? Focusing on individual leaders as the key agents for meeting the challenges of the new marketplace is misplaced.

In contrast, he believes, “It is this pervasive and almost religious belief in (individual) leaders that slows the process of genuine reform.”1 Empowerment is the answer to many of the difficult questions of business. He believes strength lies within each person working for an organization. In this environment, stewardship gives away power to make decisions to those who may have the least ‘important’ positions in a company.

Block drives to the heart of the issue by saying:

Stewardship begins with the willingness to be accountable for some larger body than ourselves – an organization, a community. Stewardship springs from a set of beliefs about reforming organizations that affirms our choice for service over the pursuit of self-interest. When we choose service over self-interest we say we are willing to be deeply accountable without choosing to control the world around us.2

Block notes that much of his advice on leadership within an organization runs completely counter to the way most business leaders have been trained. The idea that they should willingly put themselves in a position that requires them to be held accountable for actions or decisions completely outside of their control challenges convention. And yet, I see this as a critical part of creating an environment for personal transformation.

Trusting and believing that every person is meant to make decisions and will make decisions, if given the opportunity, that benefit the community or organization over self, lays the foundation for a transformational environment. No matter how counter-intuitive the concept may be, it changes employees–who might otherwise only do the minimum required–into active participants who feel a vested in seeing your business succeed.

1 Block, 6.
2 Ibid. + page number.

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