On my previous delivery I was talking about what's the ultimate intend for financial management, the kind of decisions we need to make and somehow about the methods we can use to achieve and measure the effectiveness of financial management.
Even though there is no secret recipe for financial management, because each market, each industry and above all each corporation has its own goals, benchmarks and expected threshold regarding profitability, customer experience, brand management, reputation, etcetera. However there are several rules of thumb that we may apply to our financial management.
But first let's talk about the collection of factors that may and will affect our profitability, some of them we can control, some of them are out of reach; this threats are both internal and external, on the former we may find among others: organic growth, efficiencies, productivity changes, corporate culture and values, acquisitions, quality issues, diversification, product portfolio, investment projects, etcetera; on the latter we will face as per instance market trends, new technology development, socio-political realities, business stop due to acts of God, competitors behavior, changes on legislation, foreign trade barriers and fees, and so on and so forth. This lead us to the need of implementing risk management models that I'll tackle on a different article.
When we are dealing with a growing company, we must be careful and look for long term scenarios, it's quite common we hire workforce as immediate fixture for increase on workloads and even though creating new jobs is nice, we have to acknowledge every growing market, every growing company will eventually slow down and even contract itself, that's a fact history has shown us over and over again and when that happens we have to lay-off personnel and that not only affects the morale but also presents itself with high costs due to severance payments and processes restructure; also whenever a company suddenly grows sometimes we find ourselves facing quality cost increases and on-time delivery issues; all of this falls well beyond our reach so we can prevent them; some of my rules of thumb about this may be:
Rules of thumb – Internal threats
Organic growth
Defined as the growth rate a company can achieve by increasing output and enhancing sales internally, whether it may be due to efficiency or capacity growth so my rules of thumb for a day to day business would be:
1. Keep lean processes and a flexible organization tied with a simplified (but effective) internal control with key check points
2. Automation of processes to make work more efficient and minimize human error
3. Set up performance indicators at all levels of the corporation to measure productivity (SMART goals)
Market share growth
Market share represents the percentage of an industry, or market's total sales, that is earned by a particular company over a specified time period; this may come from different initiatives as per instance: gain ground to other players via enhanced customer experience, marketing or a diversified/specialized product portfolio, acquisitions, among others; so whenever we make any of this decisions we must consider:
1. Enhanced Customer experience – Even though pricing it’s still a valid driver, nowadays companies are more appealing based on the experience customer faced when buying a product or a service; this effect it’s clearly shown on coffee shops, airlines, and even on technology companies, we buy apple devices based on the sexyness of its products and the quality image we received, we drink Starbucks coffee because of the perceived environment at the shop, or fly with an specific airline because of the added values offered; however this experience is not 100% measurable on the bottom line of the P&L therefore it’s quite important to look for other measurable as per instance customer perception about the brand with Net Promoter Score (NPS) which is a management tool that can be used to gauge the loyalty of a firm's customer relationships. (It serves as an alternative to traditional customer satisfaction research and claims to be correlated with revenue growth.), so whenever we start a project to enhance customer experience we need to measure the effect at NPS and look forward to assess how much it can pump revenues in order to validate the viability of the project.
2. Marketing/advertizing campaigns – Investment over marketing and advertizing is again an inexact science, as we can not clearly identify the direct effect of a marketing campaign if not by specific promotions or discount codes that may be linked directly into that campaign, nonetheless, the absence of marketing and advertizing could very much reduce sales and market share; however stablished industries as per tobacco or alcohol may subsist without it but on those specific cases the lack of advertizing came due to legislation changes which I will tackle later on the article.
3. Product portfolio - One instance where we can expand our market share is the diversification over product portfolio, this is a known fact as per instance within pharma companies where a new product or drug may increase revenues for the company; one successful story was Viagra, which prior to it's launch there were no ED drugs available, but by creating this new drug Pfizer not only grew their product portfolio but opened a new market called lifestyle drugs, challenging the functional-emotional orientation of the pharmaceutical industry.
4. Acquisitions - Another way to grew the market share may be the aquisition of our own competitors; this practice has been commonly used for decades, however within stablished markets sometimes it may complicate itself due to anti-monopoly regulations, most of all if the buyer is a preponderant player on the market. However eventhough aquisitions can be made on different ways, a common practice is the echange of stocks, where the buyer will provide stocks of its own company to the stockholder of the acquired company; which not only save a lot of cash expenditures but increase the value of the Buyer's common share.
Cost Efficiencies
Defined as the act of saving money by making a product or performing an activity in a better way; cost efficiencies are deeply oriented to look for better oportunities wheter it may be on among others: sourcing of raw materials, labor productivity increase, supply chain savings, automation, etcetera. This item is quite peculiar to each industry and/or corporation, but form my perspective we need to focus on:
1. Look for the detail to fix the big picture - Sometimes we can save money while fixing on a small detail which won't affect customer perception but may imply a big cost savings, as per instance airlines saves money reducing a minimal part of ingredients on in-flight meals or taking out inflight magazines, this is based not only on the cost of the specific item but also because of the weight on the aircraft at take-off which allows major savings on fuel costs.
2. Take care of the running business (operation) - Whenever you create any cost saving initiative be aware of the impact over the daily business, you may interrupt it, and instead of having a positive effect due to cost reduction you may risk the current market position. Be careful not to risk raw materials availability, disrupt supply chain or affect productivity
3. Make all savings count - even thought every penny add up, sometimes initiatives may disrupt labor morale and affect it's efficiency, therefore whenever you take action be careful not to do that, and remember not all savings are worthy and they really need to pump up the bottom line.
On my next delivery I'll explore the rules of thumb regarding external threats, and share some do's and do not's on financial management
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