CategoryUncategorized Archives — Page 9 of 11 — C. Lynn Northrup, CPA, CPIM

Building Customer Value

One thing about customers is that they have memories and will remember you regardless if you remember them. Therefore, how you treat your customers is going to affect your future profitability. The more impatient a company to achieve results, the more likely they are to take some action that will destroy customer behavior.The value of a company results from the future accumulation of “free cash flow.” You just can’t go the bank and borrow more customers. There are only so many customers to go around so it is critical to take of your existing customers in a positive fashion because they will likely represent the source of additional cash flow. Your customers will come back multiple times if they are satisfied and will also recommend you to other potential customer. This will have a multiplying effect of helping your business build customer value.

Your customers are your most valuable asset and resource. Therefore, it is imperative for you to create the most possible value from the customers and prospects available to you. The constraint on your profitability is going to be the limited supply of customers. In tough economic times you need to reorient your thinking and reorient your company. The real secret to building business value is to build customer value. Remember, the good guys win in the long run.

In our next post we will share some real life examples of how the good guys win.

Customer Value

In todays economy it critical to preserve customer value. The key is earning and keeping customer trust. Understand that your business creates or destroys customer value with every decision it makes and every action it takes. Every customer contact and interaction is vital. There is a good chance that customer value is either created or destroyed based on some action taken by someone in your organization.We know someone who recently had some work done on their house and the quality of the product installed was poor. They needed resolution to the issues. The communication from the company was as if they didn’t exist and didn’t matter. Their recourse was to withhold an amount in an attempt to get some resolution to their issues and concerns. In response, the company sent a notice of an attempt to file a mechanic’s lien. The salesman who sold the product knew of the pending action and never called in an attempt to settle the matter.

These people were justifiably upset. The president of the company ultimately apologized, but by then the damage was done. The amazing thing is the company could have gotten paid on time if they had done things right in the first place and listened to the customer. The president instituted the new collection policy to accelerate cash flow when he should have taken more time to make sure his people were listening to customers and taking care of their concerns.

It is important to realize that customers are no longer just connected to companies in business transactions. They are strongly linked and connected to other customers. Customers talk to other customers. You can no longer manage your business on a customer by customer basis. The actions described above will severely damage the company’s future business. This is a perfect example of burning customer trust and throwing it out the window.

Every customer represents potential future cash flows. Your future revenue is linked to how potential customers will behave. Each customer has a life time value which you can translate into the net present value of all future cash flow attributable to each customer. This can be further extended to the contacts of these customers. Customers represent your most critical asset and resource which are essential to the survival of your business. When there are only so many customers you can’t upset them. When you drive customers away you end up destroying the life blood and long-term value of your business.

Complacency

I thought it would be useful in this troubling economic environment to explore complacency. Linked together with complacency is a false sense of urgency. These are the two biggest issues that I wrestle with in my consulting practice and in dealing with clients.Complacency emerges from a sense of success or perceived success. Hey, I know what I’m doing because I built this successful business. The wagons might be circled and the bank has shut me down, but I know what I’m doing. Perception might be nine tenths of the law, but here reality is a different story.

Then the urgency level starts to spike. The trouble is this is a false sense of urgency because the complacent paradigm has these people doing the same things they’ve always done except they’re doing it faster. All they are doing is digging the hole deeper when they should stop digging.

I try to invoke the unvarnished truth and get them out from under the covers and feel how cold it really is out there. Maybe it is time to slow down and really think through the business and what we need to do going forward versus the same old things that aren’t going to work anymore. We need to change.

This is the challenge for CPAs in today’s economic reality. Stop doing what we have always been doing and start dispensing real business advice to our clients. It is going to be tougher and it’s likely that the same products and services won’t get the job done. It’s time for innovation to kick in and start thinking different about what to change and how to change.

Making It Happen

Here are seven simple management concepts that will help keep you on track and get things done. I thought it was appropriate as we get ready to celebrate another Thanksgiving.The seven steps are:
1. Know your people.
2. Insist on realism.
3. Set clear goals and priorities.
4. Follow through.
5. Reward people who get the job done.
6. Expand people’s capabilities.
7. Know yourself.

Have a great holiday, rest, and recharge your batteries so you’ll be ready to look for new opportunities behind those rocks of resistance.

To Owners of Closely-Held Businesses

Because our economic environment has bcome more precarious it is more important than ever for owners of closely-held businesses to think about their future and what happens to their business. Here are some key questions that need to be addressed:

• Have your personal goals been defined and have you established a vision for transfering ownership of the business?
• Do you have a successor in mind?
• Have you addressed the techniques for reducing or eliminating estate taxes?
• How much liquidity do you have and can you avoid a forced sale of the business?
• Is there a buy/sell agreement in place?
• What happens if you become disabled?
• Do you have adequate personal retirement savings to meet your cash flow requirements?
• What is your business worth and could you get it if you wanted/needed to sell?
• Have you considered the techniques for transfering stock to achieve your succession goals?

If you haven’t addressed these questions, you might want to take a minute and give them some consideration. In many instances, family businesses don’t have the liquidity to continue growing and lack the level of management talent and expertise needed to cope with growing a business that is capable of surviving in these tough economic conditions. In order to avoid a shutdown or a forced garage sale it might be time to address these questions before a problem becomes a crisis.

Remember it’s the business that provides for the salaries and wages and ultimately the liquidity to support the employees and the owners.

Debt-Finance Tip

I sent my son this tip and he said, “Dad, you should post this on your blog.” So here is and I hope it is helpful.

Here is an idea you might want to pursue. We were able to get a 0% rate for 12 months on a credit card for balance transfers. We then transferred purchases relative to our new house to the card to avoid any interest payments for 12 months. This saved higher service charges and interest on the cards we used for the purchases. They went to zero. It also allowed us to avoid using our HELOC line so we have that for emergencies and we kept our cash in the bank.

This might not be available to everyone, but it is worth a try. The key is that this buys you some time when cash is king, which is a big plus.

Change

Change covers a lot ground. It happens whether we like it or not. Based on where we are and where we are headed, we better have some.I have some thoughts -questions- running through my head on change. How do we change? What do we change to? People want to change, but then the wheels get stuck.

One of the reasons people don’t change is because they’re afraid to try new stuff. Smart people won’t try new tricks. People tend to stay with what they are good at rather than take a risk where failure could be the outcome.

Why not simplify and try to advance. The reality is if you want to achieve 80% of your objective then you need to focus on 20% of the factors involved in the process. This minimizes risk and gets you moving in the right direction.

People need to see the path and the destination. They need to clearly see what is going to take them from doing the right thing poorly to doing it well. Once they have been shown the path then it is critical to apply repetition so they really get it. You can’t over emphasize the impact of effective communication. Set the path and the direction and repeat it over and over again. Believing is what counts.

Where are We Going?

In this day and age, I’m not sure where we’re going to end up. What a mess, I just look at my SEP Plan and figured out I better keep working. And that’s exactly what I did while I watched the guys coming down the the 13th fairway. Oh well! Pretty amazing to be playing golf out here in the Rocky mountains. Yes, there is snow in them there hills, but not here in the valley (Montrose, Colorado).

We will have new stuff out on our store in the next week or so. A new ebook for CPAs to facilitate providing business advisory service to their clients, and diagnostic toolkits to aid in the assessment process. We also have a self-assessment toolkit for business owners to evaluate their businesses. I call it self medicating. In this economy business owners don’t want to spend tons of money on consultants, so I am giving them/you a self help first aid kit. We are also working on our new Building Business Value guide to help businesses navigate through these turbulent waters.

I thought it would be a good idea to let you know what will be arriving on the site over the next few weeks. Besides I didn’t have any pearls of wisdom other than “keep your powder dry, hope for the best, and prepare for the worst.”

I will get something good out for next week as you prepare for the Thanksgiving weekend.

Work Simplification

In these days of uncertainty and tough economic conditions it is critical to take all the necessary steps to keep costs under control. Usually the first step most companies take is to wield a big sharp axe and cut their payroll, often without thought or consideration. I have a better approach. How about work simplification.

Here’s how it works. Gather each supervisor and employee and have them challenge every detail of their jobs. Here are a list of questions they should ask:

• What is its purpose?
• Why is it necessary?
• Where should it be done?
• When should it get done?
• Who should do it?
• How should it be done to get better results?

This is a simple process that can pay big dividends. It will also give you good feedback on which supervisors and which employees are really thinking. Give it a try and my guess is that it will pay dividends.

In the long run it might be a sharper tool than the unwieldly axe.

Evaluating Current Reality

I was working on my BBV Program and thought it might be good to share some thoughts and even some questions to ask. Evaluating performance on a regular basis is critical. The key is asking the right questions before taking corrective action in the wrong direction.

There are three categories of conditions to consider. These conditions include:

1. A Business Tune-up
2. Turnaround situation
3. Are you in a crisis?

Tune-up questions should include the following:

1. Have earnings deteriorated?
2. Are sales leveling off or declining?
3. Is your workforce less inspired?
4. Are you satisfied with recent product or service introductions?
5. Have you developed a plan to maintain your rate of growth in spite of new competitors entering the market?

Now let’s review some turnaround questions:

1. Are you starting to lose money after years of profitability?
2. Do you have too much inventory that’s not moving?
3. Are you able to recruit new employees?
4. Do you have too much debt and not enough equity?
5. Do you know where you are making your profit?
6. Do you know why you sell the products in the markets you are in?
7. Have competitors taken business away from you?

Now for some crisis questions:

1. Is making payroll a problem?
2. Will your bank lend you more money?
3. Have you lost any key employees?
4. Have any vendors stopped shipping goods to you?
5. Have you had time to think about strategy?
6. Have customers who are slow pays stopped ordering?

Based on the answers to the above questions you will gain a sense of what action you might need to implement. These questions are the first steps of our Building Business Value methodology. From here we establish the scope of corrective steps a business will need and how to re-orient the business. In these times of uncertain economic conditions we thought these questions were appropriate. Asking the right questions is usually the first step in solving the problem. Don’t panic and take measured action to address the current reality of your business.