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CFO Book Review: It’s About Excellence: Building Ethically Healthy Organizations by David Gill

The author has several objectives in writing this book. His first objective is to provide tools and resources for the entrepreneur and business developers to build ethical and excellent companies that do what’s right and do well financially. The author notes that while there are many good ethical companies, there are too many companies whose leadership has failed morally and ethically. So he writes this book with the intention of calling the leaders in the business world to a new level of ethical leadership. The last objective of this book is for corporations to consider ethics first and foremost as a matter of excellence. Ethics needs to be more than a stop-gap measure to contain the damage after something has gone wrong. Ethics means being proactive in operating a business with excellence.

The author starts his case by trying to define ethics in a way that recognizes the widely diverse world that we live in. He identifies six criteria to consider when determining if a corporation or an individual is acting ethically or not. First is an acknowledgement that our laws are based on an ethics of right and wrong. Second, industry or company codes of ethics are important to follow. Third, almost all humans have a general sense of right and wrong, or a moral compass, and this should be followed. Fourth, obey the Golden Rule: Do unto others what you would have them do to you. Fifth, if you don’t want the public to see what you are doing, don’t do it. Sixth, do no harm to others that would be considered irresponsible.

The author then goes on to acknowledge that even if someone knows what is ethical, he/she does not always want to do the right thing. Many times corporations or other entities of authority must implement incentives for people to choose the right action. These incentives can be either a fear of negative consequences or the desire to experience a positive consequence. This then can create an environment for the right thing to be done on a more consistent basis. However, not all scenarios can be anticipated in advance, and so a company needs to have a thought out strategy of how to deal with an ethics crisis before it happens.

The author goes on to describe four additional proactive measures a company can implement to build ethics and values into an organization. When a company has an inspired and shared mission and vision that its employees can get passionate about there is a much greater likelihood that they also will willing follow a set code of ethics. This passion about the mission of the organization also feeds into creating a healthy culture within the company. Having a code of ethics and expecting a certain style of operations leads to an atmosphere that is values-oriented. The expected style of operation comes out of identifying what principle-guided practices are important in the day to day operations of the company. When a company’s mission and vision aligns with the culture or environment of the organization as well as the expected practices and principles, ethics becomes a positive outcome of operations and not a negative restraint or list of what not to dos. Ultimately, these measures will be ineffective if the leadership and governance of the organization is not leading by example. Good ethical leadership is essential for a company to implement an environment of good ethics.

Each of these measures must be supported by a continual process of education for the stakeholders in the organization. A company must clearly articulate and continue to remind people what is important in accomplish the vision and mission of the company. The company must be proactive in implementing the values, principles and processes that are important. Finally, a company must continue to evaluate how it is doing in accomplishing carrying out the values and ethics identified. Leadership needs to identify strengths and weaknesses and develop ways to improve processes. When the ethics of the company are violated an in-depth review should identify where the process failed, and how to keep it from failing in the future.

The value of a book like Excellence, is to provide leaders and employees a way to evaluate how their own company matches up with the ideal work environment. If each business leader decided to make a concerted effort to evaluate how he/she provides ethical leadership and begin to implement changes based on the measures outlined in this book, significant changes would be realized in the business world. The challenge is to break the herd mentality that says the company will be put in a competitive disadvantage if it operates in a completely ethical and transparent way.

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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: Leading Change

Leading Change
by John P. Kotter
Harvard Business School Press (1996)

Leading Change was written as a follow up to an article the author wrote for the Harvard Business Review entitled “Leading Change: Why Transformation Efforts Fail”. This article received such an overwhelmingly positive response that John Kotter wanted to provide greater detail and more examples of how companies have been successful in leading change.

Many business managers read about the common mistakes listed by the author for the reason companies fail in implementing change and realized they were mistakes they have seen and experienced. Ultimately, the book has resonated with many in the business world because of the way the author has provided a framework for breaking down a transformative change process into identifiable pieces that are realistic to follow.

The author first outlines eight common errors that leaders in organizations follow into when they try to implement change within their companies. The consequences of falling into these errors are that new strategies aren’t implemented and many of the hopes and plans for creating synergy and energy in a company fall flat. The author doesn’t spend much time talking about the errors that are made. It is likely that most readers can identify quite quickly with the errors and are looking instead for solutions. So the author takes the majority of the book to outline eight stages that he has identified as critical to success in implementing transformational change in an organization.

1. The first stage is to establish a sense of urgency. In many cases a crisis of some sort is happening that creates the urgency to implement change.

2. The second stage is to create a guiding coalition. Here the idea is that in order for change to happen, there needs to be more than just the CEO or one person to suggest and lead the change process.

3. The third process is to develop a vision and strategy. If people are unable to see how this change will create a better future there will be too much resistance.

4. The fourth stage is communicating the change. This needs to be a simple and clear message that is repeated often. The area of communication is such an important piece of leading change and yet it often times is the weakest link. The message is either too complicated or not repeated often enough.

5. The fifth process is to empower broad-based action by employees to remove obstacles to change. This may include taking risks and trying nontraditional ways of doing things. Here employees need to be willing to move out of their comfort zone and not do things just because that’s the way it has always been done.
6. The sixth process is generating short term wins. People can become tired and overwhelmed with change and lose their focus in accomplish long-term goals.

7. The seventh process is consolidating gains and producing more change. This is similar to generating short-term wins, but it goes beyond this by taking these wins and building on them to implement change in an even better more productive way. The final process is to anchor the new approaches into the existing corporate culture. This is a key process to achieve lasting change. If employees don’t see that the changes implemented match up with the current values and culture the new processes will slowly disappear and eventually the organization will do things the way it always has.

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