Happy New Year!! - Resolutions for CEO's and Business Owners

By Doug Zeisel, TCV Growth Partner:

I’m guessing you have made a New Year’s resolution at some point in your life, perhaps even just a few days ago.  Most of us make these on a personal basis – stop irritating your spouse, lose weight, be nicer to people who make you angry, etc. (am I projecting??)

But what about company founders, owners and CEOs? What kind of New Year Resolutions would you be inclined to make if you fall into that category? Or should you be inclined to make? Let’s imagine what these could or should look like and the implications for their companies.

The first thing that probably comes to mind is sales growth.  Has there been a forecast built for next year that incorporates a reasonable growth factor?  How did you arrive at that multiple of sales? Here are some thoughts:

• A new product or service introduction can surely boost sales but how much? A sales increase might be modelled on the revenues of an existing product, or it could be modelled on an estimate of obtainable market share.

• How about entry into a new geographic market? That could surely add significantly to the top line. But again, by how much? What is the competitive landscape? Going up against a well-established competitor in a new geographic market may not be as easy as assumed. 

• Adding new sales talent in new geographic areas can help boost sales. But be careful, It can take up to 6 months for a new sales person (even if they are well experienced) to start winning new business.

There are other considerations as well but the bottom line is to be careful and use assumption as you model out projected sales for next year. Consider using multiple methodologies and averaging the results.

Speaking of “bottom line” the whole goal of increasing sales is to increase profitability. But attempting to significantly increase sales using any of the tactics above is risky and expensive.  Other methods of increasing profitability are:

• Increasing Gross Margin.  Yes, that’s the difference between the top line figure (sales or revenues) and the Cost of Sales (CGS) which are expenses directly related to the cost of producing the product or service. Reducing the CGS by a few percentage points can easily boost the bottom line without the risk of adding new expenses to increase sales. An oversimplified example below shows the results of reducing CGS by 2% which increases bottom line profits by 40%.

Compare this against hiring a new salesperson at a cost of $100,000 which brings total costs to $500,000, which results in a 20% increase in sales but results in a 20% decrease in profits:

Sure, these examples are over simplified but the point is well made – be careful to model out all scenarios and use experience and market research to determine what path to take.

• You can also consider reducing fixed expenses which has a dollar for dollar impact on the bottom line.  As our friend Hillel Glazer often tells us, improving operational efficiencies are paramount to success!

• Last but not least, don’t forget price increases. Of course increasing prices can be dangerous as well. So you need to understand the demand sensitivity to pricing. There are numerous factors that affect consumers sensitivity to pricing and you can learn more at Qualtrics.com

A key takeaway I am hoping you are getting from this is that forecasting and modeling is critical when making resolutions about sales and profitability. So maybe getting serious about that budget for the new year makes sense as a resolution - but where to start? For existing companies, the best place to start is last year’s financial statements. These give a baseline for creating a realistic budget. Examine each and every line item in the Income Statement and determine what that number should look like next year.  Some items are not controllable – like rent for example. But others can be controlled by shopping around for the best service/price combination.  Want more tips on the value of budgeting be sure to read Dave Costello’s excellent blog post – The Value of Budgeting.

A word of warning - please do not make the mistake of ignoring the balance sheet when creating a forecast or budget. Changes in inventory, accounts receivables and other balance sheet accounts can have a dramatic impact on cash.  Rapidly growing companies can actually grow out of business all the while appearing to be profitable if Accounts Receivable (AR) is not managed properly and sales do not translate to cash quickly enough.  This is why so many firms rely on a line of credit.

A last thought on corporate New Year resolutions – most of us have made resolutions in the past only to find a few weeks or months later we have all but forgotten them. And why is that? Because it is difficult to hold ourselves accountable without documentation and someone to keep an eye on our behavior. For companies this is much easier – this is the role (or should be) of the CEO’s wingperson – the Chief Financial Officer. In addition to making sure the overall financial operations are run smoothly, the CFO should be the CEO’s trusted advisor on all things that affect the financial health of the organization. So if you don’t have at least a fractional CFO perhaps your New Year’s resolution should be to find one!

Need help finding a good CFO? We have options, each with experience in different industries. Check out our Financial Leadership Partners HERE.