Sunday, February 22, 2015

Establishing a Company's Annual Budget

Well run companies are focused on managing to an Annual Budget.  This CEO Blogger has always been rather conservative when establishing our Annual Budget.  I don't believe in spending money we don't have, borrowing extensively to fund the company, or pie in the sky budgeting.  That means we budget based on business we know we have; not business, or assumptions, that might never materialize.  We budget based on the desired Pre-Tax Profit we would like to earn.  In some cases, that could mean Rightsizing the Company, which is just another term for potential lay-off's when necessary.  Since generally in service companies, people represent 65 - 70% of overhead, it is the first place we must look when budgeting to determine our expense line. 

Marketing expenses, not to be confused with Marketing staffing, are completely discretionary so they are another place to look to find savings if and when necessary.  Finally, occupancy cost make up a good percentage of overhead.   An aspect of Rightsizing also involves getting rid of excess space that is no longer needed and as quickly as possible to impact the budget year. 

For our company, the budget process actually starts no later than September of each year for the next year as we anticipate what we will face in the new year.   If we have to make cuts to expenses, they often start in the fall of the preceding year so that we get the full impact of those cuts in the new year.   Sometimes the budgeting process is used to change the company's direction.  Establishing a budget each year is critical to running any business.  Cards talk and numbers don't lie.   The Annual Budget usually tells the company story in real terms.  

Friday, February 13, 2015

Performance Reviews - Talent Management By Another Name

Most well run companies use annual Performance Reviews to judge and rate employee performance related to specific objectives for the job.   Ratings, or scores, are often used to determine a merit increase percentage and or bonus potential.  Performance Reviews should also be used to identify areas for improvement.  These discussions, if done properly, are really Talent Management, by another name.  This CEO Blogger has been managing people, in one capacity or another, for more than 40 years.  I have worked through all the Human Resource jargon, with the latest being "Talent Management" to basically do the same thing. 

A manager, who has direct reports, has as a primary function, the role of helping people grow and develop.  Constructive criticism, within an annual Performance Review, is a good thing.  In fact, employees interested in promotional opportunities should ask for it.  Every employee, even "A" players, can improve their performance and contribution to the company.  In providing suggestions for improvement, the manager does the employee a great service. 

Performance Reviews should be taken very seriously.  They are not just about determining the merit increase percentage, or bonus potential.  Performance Reviews should be used as an integral aspect of Talent Management in building a bench within the company.   That bench is the basis for Succession Planning as people retire, or otherwise leave the company.  Performance Reviews should be used to identify and promote long term employee growth and development.  The time spent on Performance Reviews, which can be considerable, is time well spent.          

Sunday, February 8, 2015

Creating Company Value & Higher Share Price

Whether a company is privately owned, or publicly traded, employees are hired to make the company more valuable by managing expenses and growing revenues and profitability.  Companies are usually sold based on some multiple, which varies by industry.   It could be 3 to 10 times annual profit, or some other industry specific formula.  It does not matter if the company is for sale or not, the shareholders of the company, that have risked their money to invest in the firm, are always concerned about shareholder value.  Naturally, shareholders expect a return on their investment that could come in the form of dividends, or upon sale of the company, presumably as a capital gain. 

A company is technically not in business to create jobs; but rather to create jobs that can provide a return on investment to the shareholders.  In well run companies, employees will benefit by creating value and a higher share price, in the form of higher salaries, incentives, bonuses, commissions etc. to share in the wealth that is created.  Ineffective employees are actually a drag on shareholder value, which is why performance objectives are used not only to measure individual performance; but to determine if the employee should remain in the company. 

Rightsizing, or lay-off's occur to cut expenses in response to lower revenues than anticipated.  Sometimes employees have a hard time understanding why lay-off's are necessary, even when presented with cold hard facts that make continued employment impossible.  This is particularly confusing when the company is hiring others, at the same time it is laying people off, to fill other positions that can better create value.  However, when all is said and done, Senior Management is responsible to the shareholders of the company and must act to protect their interests as the owners of the company.  At the end of the day, profits come from subtracting expenses from revenues.  What is left over we refer to as Pre-Tax Profits. 

Some businesses, like grocery stores, are high volume; but very low margin.   Those companies may be content to earn a 3% Pre-Tax Profit.  Most companies are focused on earning a 10 - 20% Pre-Tax Profit.   Of course, there are some companies that earn much more because they offer products, or services, with little or no competition, which allows them to dictate price.  That situation usually does not last for long as other companies enter industries deemed to be lucrative.

Most important, all employees must realize that their jobs are completely dependent on creating company value, higher profits and the higher share price that results.  It may seem cruel; but in a free market capitalist economy, creating company value is what makes everything work.   And, nothing works better.  We have seen the end result of Socialist and or Communist economics, where theoretically everybody is guaranteed a job.  I say "theoretically" because ultimately those systems have led to loss of freedom, misery and poverty.   Free Market Capitalism, with all its boom and bust cycles, focused on creating company value has created more wealth for more people than any other system in the history of the world. 


Saturday, February 7, 2015

Diversification & Resource Allocation

As someone who has managed through recessions, real estate down turns, the highest and lowest interest rates in American history, stock market corrections, 9/11 and the most recent fiscal calamity, this Blogger CEO has had to make many tough decisions and quickly for our company to remain in business and financially sound.  It hasn't been easy and sometimes painful rightsizing and off shoring has been necessary to cut expenses; but the goal must always be to remain standing to fight another day.  Sometimes that means taking two steps backward to take one step forward.  Since our company has been in business for 24 years, when many others do not even make it through the first few years after opening the doors, it would be fair to conclude that for the most part the actions that we took to deal with all of the issues we faced were correct.  Could we have done somethings better; of course, but the fact is we are still in business and focused on our company's growth and development. 

What this Blogger CEO has learned through it all is that it is not good to have all your eggs in one basket.  And for that reason over the years, we have focused on diversification in an attempt to ride out the business cycles.  The logic is that when one business is down another might be up to help weather the storm.  All of this boils down to resource allocation.  Management ultimately needs to decide where it will put company money; whether specific to a department, division or subsidiary.  Though emotional ties often get in the way, this should be done related to Return on Investment.  At the end of the day, if a company invests a dollar, the question must always be, where will that dollar achieve the highest return in profits to the company.

There is both a short and long term view related to investing company money.  Certainly some amount of funds must be invested in existing core businesses.  However, it is important to ascertain their future growth potential.  If margins are shrinking in a core business because of too much competition, then it may be time to implement a diversification strategy, both to protect the company from business cycles; but also to obtain higher profit margins.  Most important, the CEO of the company must always see the train coming to avoid being run over by it.  The CEO that fails to see the train in time will lose control over his or her destiny one way or another. 

When implementing a resource allocation strategy that takes money away from core businesses and invests it in new businesses, it is very likely that employees working in the core business will be very resistant, if not hostile to the changes taking place.   Some who are short sighted may even leave the company.  They may see this resource allocation adjustment as an attack on the business that is near and dear to their hearts because they are too close to it.  The CEO's job in that case is to make all employees understand that the growth and development of the company is in every one's interest and that it represents the best opportunity for promotions across business lines. 

Diversification and Resource Allocation happens every time a new annual budget is formulated and approved.   Senior Managers are always picking and choosing where they want to put money.  Companies in business for many years, probably are doing a pretty good job of it.  Those companies that fail to put money where it will provide the best return on investment, probably will not be around for long.   

Friday, February 6, 2015

Nurturing Talent In An Organization

Every manager in an organization should be focused on nurturing talented people in the company.  That responsibility is obvious related to direct reports; but this includes other employees, as well.   If "C" players can be turned into "B" players, within a reasonable amount of time, it is worth the investment.  If it does not happen, "C" players should be invited to leave the company.   Nurturing talent is really about turning "B" players into "A" players and realizing all the benefits to the organization that can come from "A" players.

Sometimes, companies are structured in silos that stifle employee development.  That is the reason why this Blogger CEO often makes the point that everyone in the organization actually works for me, regardless of the reporting relationships that may exist.  This allows me to assign special projects to individuals and or to prioritize work that I want done that is the interest of the company.  The CEO is often able to see the big picture better than anyone else because he or she is not tied to the day to day running of the company.  This also allows the CEO to recognize under utilized talent in small and mid sized companies.   In very large companies, the CEO must rely on a talent management structure and process to achieve the same effect. 

Generally, employees can do anything asked of them even when they initially think it is impossible.  Though, I know that look when someone is given a task that he or she thinks can't be achieved.  However, this CEO Blogger has faith in people and I have rarely been disappointed.  Using special projects is a great way to nurture talent and help employees grow into a promotion.  Since employees are the single biggest investment in most companies, particularly in service industries, there is really nothing more important than talent management to achieve the organization's objectives.  Ask a lot of employees.  Demand excellence and don't settle for anything less.  Keep raising the bar.  Really talented employees will always rise to the top given the opportunity.    

Sunday, February 1, 2015

Dealing With Promotions

Some employees think that they should be promoted and or make more money just because they have worked for the company a long time.  Nothing could be further from the truth.  Promotions are earned by hard work, dedication and contribution to the growth of the company, regardless of years with the company.  And, it is impossible to be an "A" or "B" Player without having a great attitude and the ability to work with other people. 

Communications Skills are critical to getting a promotion and are probably the key to successfully working with others.  When we hire and or when we promote, this CEO Blogger is always looking for the "package", which includes education, experience, attitude, flexibility and problem solving skills.  The employee who has the "package" never needs to worry about getting a promotion, or more money.  These things will come automatically because really talented people are always rewarded and usually without asking.  These are the employees that go the extra mile without ever being asked to do so. 

As the CEO of a mid sized company, I know which players in our management group are really critical to the organization.  Not that all managers are not important, or we would not employ them, but I am particularly aware of outstanding performers and I make sure that they are properly recognized, one way or another.  Recognition is not always about more money; but sometimes salary adjustments are warranted for really outstanding performers.

In some cases, the money issue is addressed automatically for people on incentives, commission and or various bonus plans as a source of reward.  Outstanding performers on these plans are already paid for performance so it is really more the recognition of their contribution that is important.  It goes without saying that outstanding performers are promoted, sometimes into jobs that are completely unfamiliar to them because their work history is so good that there is an assumption that they will succeed no matter the job.   That has always been my experience.