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Ask entrepreneurs and executives about what holds back the growth of their business. Chances are the first word in reply will be "money"-capital. Capital is a reincarnation of the fickle, Greek goddess of Fortune. Everything seems to depend on her generosity and benevolence. At least that is how we perceive it. But no enlightened 20th Century businessman need be subjected to the whims and fancies of an ancient goddess. Capital is a power which can be attracted, mastered and harnessed for productive purposes by any company. In the last chapter, we looked at ways to make the market respond to your company and generate higher sales. As the market is attracted to companies which create the right internal conditions, so is capital. In this chapter we examine ways to make money move toward your company and generate higher profits. Capital differs from the other four components. It is at once a productive resource and a result of productive work. It is an essential requirement for the activities of a company and an essential end result of those activities too. Capital and profit are two different forms of the same thing. Capital is a symbol of productive power. It contains all the other components within itself in potential. It can be converted into many different forms and used to stimulate the growth of any of the other components-to purchase or develop technology, hire people, build organization and develop a market. The linkage and interrelationship between capital and the other components is a key to energizing capital and converting it into an engine of growth. HOW TO MAKE MONEY COME TO YOU? Larry Frederick must have known the answer to this question in 1981, otherwise he never would have consented to leave a secure executive position at International Teledyne Waterpik to become CEO of a company with a long history of research-and little else. Imagine trying to convince investors to put more money into a public company on the verge of bankruptcy, which has spent $4 million over 13 years trying to make toothpaste and never sold a single tube full. But that is exactly what Frederick did when he joined Vipont Pharmaceuticals and walked into what he later described as "a total disaster." Frederick spent the first 18 months restructuring the company to make it financially viable and talking to financial institutions, shareholders and the investment community to raise more money. The analysts were in unanimous agreement. "It's impossible!" Finally Frederick and his team came up with an imaginative solution. They created an new R & D partnership which would raise money and conduct research, then sell the research results to the parent company. The research would generate a good tax write-off for investors and enable Vipont to spend more on research without showing further losses on its balance sheet. The idea worked. Vipont was able to raise $1.25 million to carry on its research and bring the toothpaste to market. In fact, it worked so well that within two years Vipont bought back the partnership and paid the investors three times their original capital in return. By then Vipont was able to go to Wall Street and raise further capital through a fresh $4 million stock offering. Vipont's success is a dramatic example of making capital respond to the needs of a business. Two things made it possible. First, the experienced management understood the close linkage between capital and the other components. They knew that having a good technology and even a good market for its products were not enough. They understood what had to be done to build up all five components of the business to make the company profitable and attractive to investors. They drew up a comprehensive strategic plan for developing all five components, so that investors could see that the company had a viable basis and tremendous scope for growth. In other words, they created the five components in essence before seeking finance to create them in fact. Second, they believed in the hidden potentials of the component capital and knew how to tap them to convert capital into an engine for growth. According to vice president of finance, Larry Holt, who has been with the company since 1973, "We have always been able to finance ourselves. We are creative enough to do unusual things. Capital has never been a constraint on our growth. We have always raised the capital we needed without resorting to a leverage type of financing. We've always stayed away from debt and had equity." Michelle Morgan added, "I almost think we are better at raising capital than we are at selling products, and I think we are excellent at selling products. We have built up a good track record that has made the capital funding easier." CREATIVE FINANCING When Robert Swanson and four other people left National Semiconductor to start up Linear Technology, they had a wealth of managerial experience, technological expertise, and organizational know-how, and market knowledge. What they needed was money. Their plan was so solid, that venture capitalists offered $15 million to fund the new company in return for a 60% share in the business. The entrepreneurs almost accepted the proposal, but then decided to think creatively. So instead they persuaded a real estate builder to borrow $3.5 million from his own bankers and put up a building for Linear to lease from him. They also found a leasing company that was willing to lease $9 million in equipment for their production facility based on 20% collateral security. So they went back to the venture capitals and said they wanted only $4.5 million and offered a 40% share of the business in return. The surprised investors reluctantly agreed. By investing only $500,000 of their own money, the entrepreneurs got 60% of a $15 million startup company. That is creativity! In an enterprising business environment like ours, society is constantly creating new ways to raise capital for business. Companies that need funds for growth should concentrate on developing all the five components of their business and maintaining a balance between them. They should be constantly thinking and looking for innovative ways to attract capital for non-stop expansion. SOME SIMPLE, BUT POWERFUL PRINCIPLES In an earlier chapter we discussed the many different ways to motivate and energize people for greater productivity, profitability, growth and enjoyment. There are many ways to energize capital too.
Give it the attention it deserves It took Iacocca quite some time to really understand the depth of Chrysler's troubles, because it took that long to sort out the real meaning of numbers on the income statement and the balance sheet. Some companies strive so hard to conceal the bad news from Wall Street through favorable accounting adjustments that they successfully conceal it from themselves as well, until it is too late. One of the worst offending areas is inventory. From very small companies to very large, keeping an accurate count and valuation of inventory is a task many find daunting, because accurate inventory accounting requires flawless systems at virtually every point connected to the product from inspection of incoming shipments and correct data entry to writing of sales receipts and control of inventory transfers. Fred Lokoff's Bryn Mawr Stereo in Pennsylvania has one of the best inventory control systems we have encountered in a retail business. Lokoff's system enables him to carefully manage inventory levels to obtain more than six turns a year on his inventory, compared with an industry average of less than 3.5 turns for audio video electronics stores. This means that with the same amount of capital, he can finance 70% more business than the average store in his industry. Lokoff's financial systems have paid off: "In twenty years in business, I have never had a year where I have done less business or made less profit than the year before. The only thing that has happened in bad years is that the increase was smaller."
Accounts should be up-to-date How long does it take your company to close the books at the end of each month and find out how much it made or lost? Every day's delay is a real de-energizer to the growth of your business. Close the gap and watch the results. Conventional wisdom says that companies should pay their bills as slowly as possible and collect receivables from others as quickly as they can. But there is a deeper, more profound wisdom, whose validity the most successful companies have discovered, that says pay your bills as quickly as you can and collect receivables as quickly as you can too. There is a logic behind this wisdom. How enthusiastic would your employees be if they were never quite sure if and when they would be getting their paychecks? Paying others quickly goes a long way in energizes them in their relationship with your company. The energy and commitment of a supplier who is positively disposed and appreciative can be as powerful a driving force for growth as the positive attitude of your most important customers. Winning over your vendors is worth ten times more than the deals a company can make or the interest it can save by slowing down payments to suppliers.
Use the accounts as an active instrument Gartner Group produces an income statement within seven days after closing its books at the end of every month. The statement details the performance of every department and service which the company offers and shows which ones are making and losing money. Management closely monitors financial performance and acts quickly to cancel unprofitable services. "The key to success is to stop an idea in time when it is not working," says vice president of finance, Bernard Denoyer. AMRE completes 175 home remodelling jobs around the country every day. Within two days, corporate controller Dennie Brown knows exactly how much the company earned on each individual job. When the company opens a new office in a new area, this system enables it to adjust its pricing immediately to a profitable level, without waiting till the end-month financials are ready to know whether it lost or earned money. "If something is changing, the managers know immediately," says Brown. "They don't even care about month-end financials, because they already know their results." It also enables AMRE to identify the precise characteristics of profit-making jobs, so that the marketing department knows what they should and should not be selling. "We have parameters set up to tell us what works in terms of prices, commissions, labor costs, material costs, etc.," Brown says. Both of these companies utilize accounting as an active tool for making up-to-the-minute management decisions that directly impact on the bottom line. That requires up-to-the-minute accounting.
Use cost accounting as an index of performance
Saving money vs cutting costs Cost cutting is a negative activity. It achieves its results through contraction. Whereas saving money is a positive and expansive activity that achieves its results by raising the quality and quantity of performance. Saving money means to carefully analyze every job, system and activity, then ask: How can we do it better or for less money? Saving money requires clear goals, an intimate knowledge of the business, and a genuine commitment to building up the company to higher levels of performance. Federal Express is firmly committed to saving every cent it can, provided that saving takes them a step closer to realizing Smith's vision of the future and provided it does not contradict the company's commitment to its core values-people, service, safety, etc. Since 1975 Federal Express has brought down the cost of transporting a package from $9.15 to $2.70. This achievement is not the result of scrupulous cost cutting. It is the result of a constant effort to improve the overall efficiency of the system at every conceivable point. Federal Express looks at every operation from the viewpoint of how it can help reduce the overall cost of handling a package, so that costs and prices can be further decreased and volumes can be further increased. This is how the company stumbled on the ideas of lengthening the body frame of its planes to add an extra container, introducing interactive video to reduce the number of training days for pilots, using peelable labels to save courier time, and countless other cost innovations. All these improvements are generated by a positive, expansive attitude of wanting to do things better, not one of wanting to cut jobs or travel expenses. The company constantly monitors critical success factors, such as the cost of transport per available ton mile, ATM. Currently the ATM is around 36-37 cents. The company's goal is to reduce it to 32 cents by 1992. So it looks at every activity to see how it can be improved to help achieve that goal. Every department in the air operations division is asked to scrutinize its activities to see what can be done to reduce flying time, reduce maintenance costs, increase productivity, etc. Each manager is asked to determine the performance parameters on which his or her department should be evaluated. Jim Reidmeyer, senior vice president of the division, says: "Don't force measurements down on people. They must buy into them. They must perceive them as reasonable. If there is a productivity improvement, it is not going to come from some finance guy. It is going to come from the ground level." The guiding light for saving money is adherence to the company's values. Reidmeyer constantly tells his managers: "Don't worry about the bean counters in finance raining death and destruction down on you. Don't change or compromise our values, whatever you do." The key to saving money at Federal Express is not overzealous cost cutting. It is an insistence on a proper balance between all the essentials of the business. "I don't believe in the least cost approach. I want to demonstrate improved production efficiency," Reidmeyer says. "You earn your future in the airline business by displaying a balance of technical, operational and economic excellence."
Capital can energize people Henry Triesler of Precision Grinding Inc. in Phoenix developed a simple indicator that has had tremendous impact on the motivation of his people and the profitability of his grinding business. Highly paid skilled workmen in this industry are paid on an hourly basis. Work for customers is also quoted on an estimate of total man-hours required to complete it. Triesler developed a system to measure the amount of revenue the company earns from the work completed by each workman in terms of revenue dollars per hour. Performance of each worker on each job, each day and each week is tracked and reported to the shop manager and the individual workers. When the new measure was first introduced, the average shop rate was $37 per hour. Within 18 months, the average had risen to $52 per hour-without any direct linkage between performance on the index and compensation.-and the company went from 10.6% losses to 11.6% profits. A simple index increased productivity by 40% and turned a losing business into a very profitable one. Be sure your measures really reflect the result you want to achieve. A company measuring the net earnings of each of its branch offices ran out of cash, because the system encouraged each branch to accumulate high inventories to ensure they had materials to sell. The system did not take into account the cost of the inventories they carried or the number of turns each office achieved. It did not measure or reward good inventory management, so branch managers ignored that aspect of their jobs. In order for financial measures to motivate people, they should be simple and easy to understand. Buzz Jensen introduced a complex commission system for his sales people to encourage and reward them for selling the right products at the right prices to maximize the company's profits. In practice the sales people found the system so difficult to understand that it did not serve as a guide for their sales strategies at all. When he simplified the system and made it easy to understand, the sales force immediately took up the cues and improved the company's margins. Financial measures should not only be easy to understand. They should be easy to calculate and track too. One company became so obsessed with using numbers to motivate that it negotiated different commission arrangements with each of its branch managers and their key staff. The system was so difficult to manage that the central accounting department needed sixty accountants to handle the work that would normally be done by thirty people in a company of this size.
Attitude is critical Dennie Brown of AMRE tells his accounting staff: "On pay day you are in the attitude business. If a salesman doesn't dot an 'i' or cross a 't', pay him anyway. If you try to teach him a lesson, he is going to have a bad attitude and he is not going to go out and sell a job that night. And if the sales people don't sell, we don't need payroll accountants!" ENERGIZING CAPITAL Think about the way capital is managed in your company and answer these basic questions.
PROFIT PLANNING
SUMMARY
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