by Bruce Newman

   This article was originally published in The Productivity Institute (PI) Newsletter

It is next to impossible to impartially evaluate all aspects of a business.  Whether that business is a non-profit organization or a for-profit business is irrelevant - it must still run as a business.  As such, both entities must generate income, manage expenses and deal with a gamut of business issues every day.

Determining productive and non-productive costs can greatly affect a company’s positive cash flow.  Productive costs are those functions that produce revenues that are essential to the operation of a business.  One such example is the cost of research and development.  Conversely, non-productive costs are simply expenses.  A company car or unused rental space are simple examples of non-productive costs.

Often, companies are loath to reduce or even acknowledge these non-productive costs.  Usually born in better economic times, they nonetheless remain as vestiges of that foregone era.  This was readily apparent the first time the CEO’s of all three major American automobile companies flew to Washington DC on their company’s corporate jets to ask for bailout money (at a cost per flight of over $20,000, each).  It was merely a function of just how they do business.

Possessing feelings is a part of human nature.  From the time we are infants until our death (hopefully after many years), emotions and feelings are a part of our behavior and the basis for much of our interactions.  Given these innate and learned sensibilities, is it any wonder that we are unable to be impartial when evaluating our employer’s business?

When employees are asked to assess a business, an additional factor may appear: the desire to inflate that person’s value, often to the detriment of someone else.  This inherent conflict of interest requires further explanation.  Let’s say the person doing the evaluation is a senior vice president who has not been particularly effective in his job.  An impartial evaluation will denote his shortcomings, possibly resulting in his termination.  However, a biased evaluation may report his performance as exceptional, depending on how the assessment and report is structured – with another employee receiving the blame.

Impartiality also requires the expertise and knowledge to develop probing questions when evaluating a company.  Asking the question to a CEO and upper management (individually), “What does your company do?” for example, will usually elicit a surprisingly wide range of responses that require further study.  It is unlikely that a high level employee would ask this seemingly simple question to his co-workers and possibly his boss and impartially report and interpret the results.

To more closely examine this issue, consider the different levels of responses you would likely receive to the following statement with the only difference being whether the questioner was an impartial expert or an employee: 

Please rate and comment: The organization has a clearly defined strategy for adding outstanding and unique value in its selected markets.

Would a person suffering from job insecurity or afraid of a – potentially harmful - answer really respond truthfully? 

This raises my final point: the interpretation of the results.  An unbiased, experienced evaluator may look at the study results and draw vastly different conclusions from a company employee, primarily as a result of his perspective and experience - which might also become the basis for further study in determining the cause of a problem and its resolution.

Evaluating a company can greatly affect its positive cash flow and financial flexibility.  It can uncover huge non-productive costs – which are usually recurring, and make recommendations that can enormously benefit the company both in the present and the future.  To accomplish this requires the systematic efforts of an impartial and experienced evaluator.

Bruce Newman is the Vice President at The Productivity Institute, LLC, an acknowledged leader in locating, evaluating and matching the specific areas of expertise of consultants to the needs of its clients.  Bruce also specializes in evaluating companies to improve their productivity and positive cashflow using CFNA. He is also the editor of the Productivity Institute Newsletter, a free content-is-king newsletter and thought leader.  Follow him on LinkedIn, Twitter and the Productivity Institute blog.

Preamble: The reaction to our initial Article from members of various Linked In Groups to our article philosophy, THE THREE COMPONENTS OF EVERY BUSINESS  was very strong, outspoken, usually supportive and highly emotionally-charged.  The response we received from “Dave” was so strongly negative that we decided to publically respond to it.

Directly below is the response to Dave by Douglas Castle, followed by the original letter which Bruce Newman and Douglas Castle along with Dave’s strong response.

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Our Response to Dave

DOUGLAS CASTLE  
Director/ Founder at THE CASTLE CONSULTANCY

Dear Dave:

I acknowledge your criticisms and their fallacies. 

Now, let me explain why:

1. Not a single one of the companies which you referred to was actually following the “traditional archaic business model” represented in what we had written in regard to CFNA™. Their long-term failure to re-evaluate and contain costs rendered them inefficient, uncompetitive and ultimately destroyed them in point of fact. They became entrenched in endless union negotiations, unwarranted extravagance, theft of services, issuing shareholder propaganda, highly-creative accounting (the indefinite deferral of loss, overvaluation of assets and promulgation of unrealistic projections), misappropriation of the public’s funds and borrowed funds, and colossal compensation packages that were unaffordable by any reasonable standard. Not a single one of these scoundrels cared about 1) value, 2) efficiency, or actual profitability. Now these corporate wastrels are dependent upon government subsidies in order to continue to support their extravagance, excesses, inefficiency and complete failure to plan for the longer term.

The companies which you set forth as examples are terrible examples that support our paradigm. These companies are begging for dollars because of their failure to utilize a systematic, basic, quantitative approach as espoused by CFNA™. In brief, they ignored the fundamentals which we espouse, but which apparently bring out strong negative sentiment in you. I do admit that the fundamentals of business can indeed be boring – especially to those without any quantitative responsibility or those who are uncomfortable with the notion of being evaluated on their utility of performance.

Evaluating your worth, in terms of your contribution to a company does not define your value as a Human Being or as an individual. It merely enables any company to assess its resources and their utilization.

Many persons engaged in developmental and creative activities in companies immediately cringe at the thought of either 1) any budget cut, and 2) not being properly valued for their “true” but often obscure or difficult-to-quantify benefit to the companies which employ them. Perhaps some of this insecurity could be eliminated if an in-depth assessment of their value was made by their employer.  They would also benefit by aptly describing the nature of the benefits that they provide, quantifying those benefits, and presenting what the potential loss would be to their corporate employers (or clients) if their services were to be eliminated.

2. Your choice of three most important factors is just simply wrong.  Without “revenues” or “profitability” there is no company – just bankruptcy and unemployment.  In your “qualitative” approach, where does the money come for expense coverage? You mention marketing and expenses, but it takes revenue to drive them. The same for innovation - someone must still pay the bills.

And if the marketplace changes, just how quickly can you innovate to save your market share? When revenues are shrinking, you must certainly be under a great deal of pressure to innovate. And, the assessments companies require in good times become even more important in troubled times.  You need to pivot instantly in order to innovate and apply new approaches under intense financial pressure – using the application of the simple tenets of CFNA™, you merely have to be pragmatic.

Dave – do you realize that CFNA™ is a way to (pause for breath) plan for uncertainty? It could actually save both the company and some of its employees’ careers.

3. It would seem that you are speaking more about the individual attributes of a desirable entrepreneur and about the attributes of a desirable employment lifestyle, rather than about the issues of corporate survival. Remember, a client would have to be generating some profits (based upon the ancient equation REVENUES – EXPENSES = PROFIT) in order to pay all fees and salaries.

4. While innovation is a key to business survival, every innovation must either work to a) differentiate the nature or quality of a product of service in order to bring in more revenues or in order to open new markets, b) reduce the cost of operations, production, marketing or delivery, or c) making the business otherwise profitable.

5.  We all like to have fun. But we also need to balance our love of leisure with our burden of earning the entitlement to it. Some people enjoy their work and take great pride in it.  For others, it’s a paycheck.  In either case, it’s dangerous if you count on a company to keep you entertained and much more important that you be productive.

Without adhering to some of the CFNA™ fundamentals, your passion leads to poverty. We do work, and sometimes work is simply, well…work.

I agree with at least two out of three of your ideals, though… so dream on. Every great company started with a dream. And any company can fail by forgetting about generating profits. Then, what becomes of the innovators, dreamers and fun-seekers?

Have you noticed, Dave, that innovators, dreams and fun-seekers seldom run large organizations — even if they, themselves started them. Perhaps someone must assume the reins of management in order to keep those innovations and dreams alive.

Faithfully,

Douglas Castle

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The Original Article

THE THREE COMPONENTS OF EVERY BUSINESS - YOUR INPUT PLEASE.

Bruce Newman of The Productivity Institute, LLC (www.prodinst.com) believes that every business enterprise, at its highest decision making level needs to re-evaluate itself using a simple program which Bruce and I have co-authored called CRITICAL FACTOR NEEDS ANALYSIS™ (“CFNA™”).

Similar to the concept of Zero-Based Budgeting, this evaluative approach is designed to objectively analyze any organization in terms of: 1) price and revenue sensitivity; 2) variable costs and profit contribution margins; 3) fixed costs – both productive and unproductive.

The end result of the process is to quickly develop and implement a plan to reduce the break even revenue level required in order for the business to maintain maximum survival flexibility despite external economic variables. This can be accomplished without compromising the organization’s ability to expand to meet a better economic climate. The plan can be implemented rapidly, and with minimal trauma involved.

The CFNA™ approach is built on basic cost-accounting principles, but is tightly structured in a very practical format for even the smallest organizations.

Please download Article 1 (in a series of 5) from http://www.mediafire.com/?2jw2ijyzz4z
and review it. We would like your input, ideas and criticisms. Attribution will be given prior to actual publication of the entire work. You can respond by posting here, or by emailing Bruce at info@prodinst.com. 

Your input is very welcome.

Douglas Castle
THE NATIONAL NETWORKER  (http://thenationalnetworkerweblog.blogspot.com)
(Subscribe for free)

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Dave’s Response

Dave 

   Purveyor of Powerful Ideas Executed Sensibly

The three components of any [successful] business are as follows:

1. Innovation

2. Marketing

3. Expenses

I am very wary of any ‘plan’ that calls itself ‘tightly structured’. This seems to represent a business format that is antiquated to say the least. Can you think of a business model that had more structure than banking, or more hierarchy than the big three? The plan du jour is design. Any successful business in a climate as uncertain as the one we live in must be built around the idea of constant adaptation. Trying things and then building upon what works and scrapping what doesn’t. There is no end-game in business, there is only the next play.

I think anyone would do well to steer clear of a business model that uses terms like:
* price and revenue sensitivity

* variable costs and profit contribution margins;

* fixed costs – both productive and unproductive

as its selling points. There is no mention in the above of qualitative analysis, no human factor and - oh god, not in a BUSINESS - fun.

to be sure, there is a place for measurement of profit, streamlining systems and general accountancy, but it is not - or should not be - the plan. Great success is a result of passion (and you can have passion for widgets or ball bearings). Answer the question: Is the work worth doing? And if so, why? And then, in my opinion, the most important question: Would I mind if the endeavor was the first line of my obituary? If you can answer these questions and still want to do it, then hire Bruce and Doug to worry about ‘CRITICAL FACTOR NEEDS’ because this is obviously what makes them get up in the morning (and bravo for that).

Download the article, by all means, but save the read for a nice sunny day when you’re tired of being outside doing human things and longing for tax season.
[END OF DAVE’S COMMENT]

Douglas Castle (http://aboutdouglascastle.blogspot.com) operates The Castle Consultancy and is an advisor, managing member and a director of several companies in diverse industries.
Bruce Newman is the Vice President at The Productivity Institute, LLC: www.prodinst.com .

by Douglas Castle and Bruce Newman

   This article was originally published in The Productivity Institute (PI) Newsletter

Every business generates its profits, subject to the same basic methods and constraints - regardless of the nature of the products it sells or the services which it renders.

It takes in revenues from sales or service activity, pays out variable costs, meets (by paying) its fixed cost obligations, and ends up with either a pre-tax profit, or a pre-tax loss. In a Not-For-Profit organization, the same dynamics apply, but the nomenclature is different: they collect contributions or donations (in lieu of revenues), and pay out variable and fixed costs. For the purposes of this article, we will address all organizations as if they functioned in a For-Profit environment.

The objective of every going concern is to collect more money than it pays out. Simply put, this means maximizing revenues and minimizing costs, thereby increasing the spread.  As business organizations evolve, they become so filled with complexities, diversions and conflicts, that they lose sight of these simple basics.

There is a need to re-evaluate these business basics periodically – to take a fresh look at the business of the organization instead of at the entire organization as a socially complex entity with a variety of objectives, many of which conflict with or constrain profitability. Stripped of all these factors, one can examine the inherent profitability structure of the business.

At the risk of being politically incorrect, and of sounding callous, CFNA™ (Critical Factor Needs Analysis) does not focus any of its energies on corporate citizenship, environmentalism, jobs creation, and the like. CFNA works precisely because it deliberately eliminates all of these largely qualitative factors from its evaluation approach, working to effectively evaluate a corporation’s well-being and make accurate recommendations.

CNFA also looks at cash inflows and outflows, rather than theoretical accounting constructs such as accruals, amortization and the like. These are good tools for properly matching expenses to the revenue-generating process, but they are not representative of “in the trenches” reality. CFNA™ does not delve into the world of best accounting practices.

The thought here is that substantial stakeholders and directors must understand the nature of a) their market, revenues, price sensitivity, and contribution margins, and b) the structure and nature of their fixed costs.   People are not in business to cover overhead – especially accumulated, non-productive “legacy” overhead.  Rather, they are in business to generate profits by exerting control on every possible and reasonable variable.

Another important thought is that, generally speaking, the more established a business becomes, the more fixed costs are perceived as if they were actually the bottom line – especially where matters of personnel costs, perquisites, esthetically-pleasing offices and other categories of fixed costs are seen as compensatory to some of the business’ management. These fixed costs begin to take over the priority position of actual profits. Companies begin seeing revenues as a way to merely subsidize continued wastefulness or excess.

How businesspersons look at business

Businesspersons have several ways of looking at business, and these mindsets ultimately will affect potential profitability. Here are the several different “schools” of thought:

• We have high fixed costs. We have to generate enough contribution to cover them. We had better generate enough cash flow to meet these “given” costs. Bottom line: We work to pay fixed costs.
• We have high revenues. We don’t have to monitor fixed costs too closely…in fact we can afford the luxury of a growing fixed cost threshold as we become a bigger revenue-generator. Let’s get bigger offices. Let’s get some corporate aircraft (to make a good impression when traveling to meet financiers and [gulp] legislators in Washington, D.C. Life is good. The business should exist to support our improved standard of living (e.g., our growing fixed-cost structure). Bottom line: We will continue to generate increasing revenues, so fixed costs (even a bit of excess) will not hurt us.
• We have to make a profit. Let’s keep the fixed costs to a minimum just in case revenues take a dive. In fact, to be conservative, let’s accumulate some reserves of liquidity in the event that revenues decline significantly. But whatever we do, let’s not get obligated to a high contractual fixed-cost structure. After all, every dollar that goes toward paying off fixed costs would be better if it could be part of profit. The lower the fixed cost threshold, the greater our profit. Bottom line: We should minimize our fixed cost structure, so that we have latitude if revenues decline, and increased profits if revenues increase.

Each of these schools of thought actually exists, but the CFNA™ evaluative model requires that we think in the third way. Fixed costs must continually be evaluated and controlled – especially if we are in a business where:

1. Our product or service is price-sensitive, and we must be prepared to cut prices (and decrease revenues) in order to compete in our marketplace. We are not a monopoly, and cannot exert pressure on prices. Revenues are sensitive, and only partially under our control.

2. Our product or service is considered a luxury or discretionary expenditure by our client or customer base, and we may sell fewer units (and decrease revenues) if market demand decreases. Revenues are sensitive, and, price notwithstanding, are not under our control if the economy turns downward or if our product loses its market share, or market desirability.

3. Our contribution margin is thin (the price per unit is not much greater than the variable cost per unit). Revenues are doubly-sensitive, in that if we lose either some sales, or if prices drop, we will be victimized.

4. Our profit is significant.  However, because of market factors – including increased costs, an economic downturn and/or increased competition, we might not be able to maintain this margin – which can quickly decrease.  To maintain this cushion and not be victimized, we must maximize profits and remain agile.

The thought here is that substantial stakeholders and directors must understand the nature of a) their market, revenues, price sensitivity, and contribution margins, and b) the structure and nature of their fixed costs. We are not in business to cover overhead – especially accumulated, non-productive “legacy” overhead. We are in business to generate profits by exerting control on every possible variable upon which we may reasonably do so.

Another important thought is that, generally speaking, the more established a business becomes, the more fixed costs are perceived as if they were actually the bottom line – especially where matters of personnel costs, perquisites, esthetically-pleasing offices and other categories of fixed costs are seen as compensatory to some of the business’ management. These fixed costs begin to take over the priority position of actual profits. Companies begin seeing revenues as a way to merely subsidize continued wastefulness or excess.

Conclusion

We cannot heal until we know that we are ill, and until we understand the nature of the illness. In all circumstances, objectivity is required, fixed costs must be perceived as an enemy, and not as a hurdle to be met, or as a target objective. This pattern of thinking and associated conduct leads to a mere “breakeven” or “minimal survivalist” conduct that destroys companies. Companies are not in business to cover overhead: the core objective is to be profitable – in both the short and long term, for without profitability everything else becomes merely academic.

Douglas Castle (http://aboutdouglascastle.blogspot.com) operates The Castle Consultancy and is an advisor, managing member and a director of several companies in diverse industries.
Bruce Newman is the Vice President at The Productivity Institute, LLC: www.prodinst.com .

by Bruce Newman
 
The current economic crisis has affected the hiring and use of consultants.  Many companies erroneously view consultants as a needless expense.  This short-sightedness overlooks many of the benefits consultants can provide.  First, consultants usually have a contract for a specific period of time or per job.  Unlike employees, they don’t require the (up to) 30% overhead* for benefits, social security, etc. that companies face with each employee.  Second, they provide rapid expertise and insight in area companies may need to quickly address.  This in turn, enables companies to pivot quickly while adjusting to rapidly changing marketplace and economic realities. 

Many people who agree with this philosophy also point out that long-term employees have the industry and company knowledge that can only be learned through years of experience.  While this is true, having expert outstanding consultants who can provide additional expertise and out-of-the-box thinking could greatly augment productivity.  Such increases would be particularly noteworthy with the support of senior management and through outstanding communications and training.

Bruce Newman is the Vice President at The Productivity Institute which specializes in matching the consulting needs of companies to the expertise of rated outstanding consultants.  With over 25 years of business and consulting experience, Bruce is an expert on consultants and productivity.

* You May Earn 30% More Than You Think, by Siri Anderson, PayScale.com, Yahoo, 3/2/09.

by Bruce Newman

   This article was published in The Productivity Institute (PI) Newsletter

I recently wrote a brief article that discussed the growing number of companies who have contacted us and require direct help with analyzing their employment-related expenses in order to sustain their businesses through difficult economic times.

My posting continued, a thorough “Needs Assessment” will assist a corporate employer (very small businesses to medium-sized businesses) to determine which positions need to be continually maintained, and which positions can be either consolidated or contracted out to one or more expert, rated outstanding consultants.

Two of the biggest mistakes that companies are making is 1) waiting until they are in a complete crisis and then eliminating the wrong people and the wrong jobs, and 2) trying to go to numerous impersonal online services to try to find consultants and freelancers on a trial-and-error basis. In our professional practice we eliminate the trial-and-error issue completely.

Below are several of the numerous responses I received.

One thing a company almost always forgets is a Threat & Risk assessment.  They then go on a cost cutting spree and in today’s litigation happy world, can end up in a major legal battle or spend a lot to pay a settlement to keep things quiet.  I am currently helping a small business that cut back and never thought about a threat assessment. They are currently getting ready for trial.  What they would have spent on a TRA was a fraction of the cost of their first retainer for outside counsel.

This is big business today. People at the top have no idea what anyone below their group of cronies does. As such, when payroll needs to be cut they single out positions and not people. And even immediate supervisors for the most part don’t know what the job function reporting to them takes to get accomplished because chances are they got their position because of who they knew and not necessarily because they were the right person for the position or held the position previously.
  
Bruce - I agree completely, continuously keeping an organization thin is a much better proposition than expanding then contracting. Better run sales organizations should be doing this every day! EVERY DAY!

The evaluation of potential is a powerful tool, which, if undertaken, can restructure an organization by placing people in a position where they can function effectively.  It therefore promotes the development and implementation of strategic plans of growth while often resolving existing difficulties that, in the new framework often turn out to be trivial. 

One of the largest employment-related expenses is the cost of business communications. With the most expensive employees (namely management) spending upwards of 90% of their time on business communications and even the front-line assembly worker still spending upwards of 20% of their time on business communications, the real savings come from switching from traditional means of business communications to cloud communications systems where both time and cost can easily be reduced by half if not closer to 80% of today’s costs.

While these are only some of the responses I received, they all denote the importance that companies need external evaluations to remain lean and safe.  It is through these evaluations that improved gains in productivity can also be attained.

Bruce Newman is a consulting guru and the Vice President at The Productivity Institute, LLC (PI)(http://www.prodinst.com) which provides prodinst by matching the specific software products and services needs of companies to rated outstanding consultants who can meet those needs. Any company that wishes to improve their productivity can sign up for this free referral service and be contacted by up to five rated outstanding consultants. PI also offers a Needs Assessments that can greatly help a company improve productivity and become more cost competitive.