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CEO Advisor® Newsletter
December 2018
Control Fixed and Variable Costs/Expenses to Increase Profits

Almost any small to mid-size business will experience ups and downs. There will be periods when demand for products and services are strong and customers are paying their bills on time. But there will also be periods when money may not come in as fast as it goes out.

Whether you are coping with a cash flow crisis - or just looking for ways to save on Costs and Expenses to improve your company's profitability - the service of a disciplined third party objective business advisor can be the catalyst you need.

Understanding the difference between Fixed and Variable is key. Let's look at these two types of Budget items in business - Fixed Expenses and Variable Costs.

Fixed Expenses are those that are not related to the amount of sales or production. They usually include rent, insurance, marketing, utilities or other expenses needed for running the business. Fixed Expenses can change over a period of time, although the increase or decrease is not directly connected to sales volume.

Variable Costs tend to be directly related to sales volume or business activity. Direct labor, raw materials and inventory are all Cost of Goods Sold and are perfect examples of the Variable Costs of a business. Service and production-related businesses require direct labor and outsourced contractors that directly service customers and this is a Variable Cost. You will ramp up direct labor personnel as your business grows, and you will bring in independent contractor labor as sales volumes spike temporarily.

So now, you must be wondering just how to lower these Costs and Expenses in order to control your spending and stay on Budget. Well, there isn't one cut and dry answer, and you will need to examine your whole business strategy to determine how to achieve Cost and Expense savings without impacting your business adversely. Paradoxically, sometimes in order to save money you will need to spend money, such as upgrading the technology or equipment in use.

Here are some effective Variable Cost and Fixed Expense saving strategies:

Scrutinize Your Products or Services.
Make sure your Financials pinpoint your Cost of Goods Sold and Gross Profit Margin. Quantify which of your services are the most and the least profitable. Cut back or eliminate products and services that give you the least Gross Profits, while investing in those products and services that are the most lucrative. Create efficiencies to more profitably service your customers.

Make Variable Costs Your Target.
Monitor and cut fluctuating costs like direct labor, independent contractors, shipping and materials first, before targeting Fixed Expenses like general and administrative salaries, rent and utilities. A reduction in your Gross Profit Margin is the best indication of the need to cut Cost of Goods Sold, such as direct labor, contractors, customer support, personnel, etc. Proper tracking and reporting will also greatly improve your ability to access information for improved decision making.

Question Every Fixed Cost in Your Business. 
Look at general and administrative expenses and salaries for savings, and evaluate marketing programs and ineffective salespeople to further reduce Expenses, while improving your operations and your Net Profits. Assess every Expense, including rent and see how each one adds to the value of your business. Does it make any difference to the bottom line? Are there any other options to healthcare coverage, administrative salaries, office supplies? Are there better, faster, cheaper ways of doing things?

Vendor Terms.
Work out improved terms with your vendors. This effort will pay off many times over. The goal is to pay vendors in a comparable manner as your customers pay you.

Monitor Receivables.
One of the fastest ways to get into a cash flow crisis is to provide goods or services to slow-paying customers. Slow paying customers create a need to tap your line of credit which in turn increases your Interest Expense. Being proactive about monitoring Receivables is essential to any business.

Here are other suggestions:

  • Send invoices as soon as the product has been shipped or the service performed. Waiting until the end of the month just means you wait longer for payment.
  • Offer incentives for customers to pay invoices quickly. Everyone loves better terms - and a small discount of 1% - 2% may well off-set the cost of collection efforts.
  • If you accept credit card payments, shop around and make sure you're getting the best deal possible on payment processing. Seek out alternatives to credit cards such as ACH.

These are hard decisions that can require additional professional help. CEO Advisor, Inc. provides CEO advisory services, including cost cutting and restructuring, sales planning and mergers and acquisitions advisory services and other services to CEOs and owners of small and midsize companies.

Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Source: Excerpt from the Philadelphia Business Journal, Aug 9, 2018
I'm a big believer in career advisors. For one thing, they help drive measurable and positive outcomes. That's clear from a wide range of studies over many years on the subject. Advisors, coaches, mentors - however you label them - have been found to improve competitiveness and leadership development.
A review of 25 years' worth of research on mentoring, published in the Journal of Vocational Behavior, found mentors "improve career outcomes for individuals. My own experience confirms all these findings." 
The type of relationship or counsel you are looking for also evolves over time. Ironically, many people abandon these sorts of partnerships as they climb the corporate ladder. They feel they can go it alone, but I am a firm believer in leadership under advisement. 
Early on in my career, I sought out coaches or mentors. As I rose through the executive ranks, and especially as a CEO, the stakes became higher and I sought out trusted advisors - individuals who sat outside of the organization that I could safely and confidentially bounce ideas off of and get insights from, in addition to my management team. These people continue to round out my thinking and help me navigate through challenging situations, prioritize opportunities, and improve performance.
When it comes to advisors, the duration of the relationship is an important factor. There can be people in your professional life who make a distinct impression. A great orator, a wise elder, or a paid consultant that gives you sound advice.
But, in my experience, when it comes to making an indelible mark on your career, finding a person who you implicitly trust, who truly understands your strengths and weaknesses, who pushes you to be accountable, who you are willing to take constructive feedback from, and who can be a thought partner - well, that doesn't happen overnight. That builds gradually and requires investing time and energy and deliberation. It's a relationship where there is no agenda other than making you the best you can be and reinforcing it through remarkable results.
I've been fortunate to have several long-time advisors. One of them has been working with me for many years as an executive coach. His role at that time was to help us think through executive leadership, transformation, and value-driven outcomes. I remember one of the first things that struck me that he was a "strategy guy," with strong business acumen and a hard drive for accountability and results. 
He asked thought-provoking questions, always pushed for more, challenged the status quo and was all about partnering to achieve the best outcomes for the organization. As a senior executive in the company, I quickly came to value him as a resource to help think through some of the complex issues we were facing. The relationship evolved to trusted advisor.
His experience is diverse. He was a Marine Captain and has worked for a range of Fortune 100 companies, such as Pepsi, GE and Citigroup, as well as smaller companies, including a recent one in the medical devices industry where he led the build-out of a top-tier domestic and international organization. His vast experience across a variety of highly competitive industries informs his keen insights, intuition and advice on business and cultural issues - all of which have been invaluable to me. 
While nothing fully prepares you for the challenges of being a chief executive, having a business advisor when the going gets tough or to just to be a thought partner is an enormous plus. Our always-evolving, never-ending agenda is building "a remarkable organization" and keeping it remarkable as dynamics change. 
Very few companies consistently outperform over long periods, so setting out to do so means you have to strategically beat the odds. It's a fluid and complex process - you have to get the right team and culture in place, set forth a clear strategy that the team can execute against, establish goals with measurable outcomes, and learn how to navigate and best serve a diverse group of stakeholders with different agendas. 
As time goes on and new opportunities and challenges constantly present themselves, organizations and cultures need to be rethought and assessed. It's important to have someone who is not ingrained with the day-to-day team, that you trust, to help you think through these issues, challenge you, and provide critical insight.
I'm enormously grateful for the impact my business advisor has made - and continues to make - in my professional growth as a trusted confidante. I now take elements I have learned from him and use it with others who are looking to grow as leaders. Whatever stage you're at in your career, make the time to cultivate a trusted advisor. 
CEO Advisor, Inc. has 38 years of advising some of the most successful CEOs and business owners of companies in the Southern California area. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520,by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for a no cost, no obligation initial consultation today.
7 Ways CEOs Can Continuously Improve Their Performance 
Continuous improvement is vital to performing optimally as a CEO. The best ones make time for it, because they see it as an investment in themselves and their company that will pay off in real dollars now and down the line. So what specifically can you do as a CEO to improve your skills and performance? Here are 7 ways. 
1) Attend Training Programs: For the past several years I have given an annual seminar on the CEO position. The biggest excuse I hear from CEOs for not attending is that they don't have time. From my experience the CEOs who do attend are typically the ones who are already better than most. Because of this, they know how to make time to improve their skills. If you think you don't have time to get better at your job, then you are not doing your job properly.
2) Read Books: CEOs who take the time to read about the experiences of other chief executives and other business leaders have an advantage. While the advice may not be perfect for every situation, I can tell you that I almost always come away from reading a top-rated business book with a couple of ideas that make a difference in my businesses.
3) Write Some Content: Writing forces you to clarify your thoughts in a way that is highly beneficial for future action. Taking the time to write a regular email to your company explaining your thoughts and actions can do a lot to improve your thinking as well as align the team with your vision. Many CEOs have begun a regular blog to comment on issues they find interesting. Formalizing your writing schedule will pay big dividends as a CEO.
4) Meet with Wise People: As a CEO it is part of your job to find people from outside your company who can bring knowledge and experience to bear on your problems. Make an effort to get to know people in your community who have relevant experience. Seek out the other leaders in your industry to establish relationships. Many times the relationships I formed within my industry provided tremendous value to the company.
5) Study Yourself: Learning about yourself, how you think and react, is critical to developing as a CEO and overcoming your internal biases. There are many different self-assessments tools available - from Myers-Briggs to Marcus Buckingham and Donald O. Clifton's strengths-based assessment. Many firms specialize in this area and may offer a free interpretation of your results. If you find one you like, extend it to your employees so you have a common language to address personality issues across your entire team.
6) Gather Feedback: If you are not getting feedback about your performance, then you have a problem. It is not enough to just ask for feedback and hope it comes to you. You should actively solicit feedback both from your employees as well as your board or outside advisors. Getting feedback from employees will often require an anonymous feedback mechanism or third-party gatherer. Feedback from your board should be both informal and formal as well as on a regular schedule.
7) Seek out Mentors and Advisors: Reach out to those who have gone before you to gain from their expertise and experience. The CEO job is unique, so make sure you have people in your circle who have been in the chair and know the challenges of the job. Avoiding lost time and missteps converts to big dollars in your pocket.
If you are not improving your knowledge and experience, you are letting the company down. Don't be the CEO who keeps doing the same things over and over and wonders why he/she doesn't get different results.
To learn how to achieve better results, accelerate sales, increase profits and increase shareholder value, call Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520 for a no cost initial consultation. 
Using Your Budget to Control Costs and Set Financial Goals
Your budget must be a working plan that is used on an ongoing basis. It should be used proactively on a monthly basis to limit and track Costs and Expenses in all areas of your business.

If you haven't completed your 2019 Budget, you should consider gaining help from a business advisor who is willing to take the time and provide the expertise to create financial goals for your business to maximize your Net Profit.
 
1. Costs vs Expenses
Costs are directly related to creating your products or servicing your customers, such as materials, direct labor, customer support, etc. Sales minus Costs equal your Gross Profit. Expenses, on the other hand, are general and administrative, sales and marketing related, such as executive salaries, rent, trade shows, sales salaries and commissions, etc. Properly tracking your Costs and Expenses against your 2019 Budget is critical to maximizing Net Profits.
 
2. Use a Line Item Method
When you created your chart of accounts in your accounting software, you created categories such as direct labor, office supplies, office rent and repairs and maintenance. For the purpose of Cost and Expense control, you want to create a 2019 Budget broken down into subcategories in order to track in detail. This will give you specific information on exactly where the money is being spent so you can monitor and correct any excesses. Comparing your actual Costs and Expenses to the Budget, and the actual amount spent a year earlier on the same items, is a good way to see if your Costs and Expenses are in line and in order to optimize your Net Profit.
 
3. Monitor on a Regular Basis
Even when the trend is exactly where you want it to be, don't give up the regular habit of monitoring Costs and Expenses against Budget. This requires monthly accountability on your part and the part of your managers. Meet with your management team at the end of each month and quarter and reinforce the discipline needed to keep Costs and Expenses within Budget.
 
4. Give Budget Authority to Managers
A critical element in accountability and success is assigning responsibility for bottom line results. At the beginning of each month, identify the amount of money budgeted for each department and ask the department manager to create a list of priorities along with anticipated Costs and Expenditures. Then, at the end of each month, check the results of their expenditures against the amounts budgeted. Perhaps you can include an incentive program for those who come in under Budget or exceed Net Profit goals.
 
5. Use Purchase Orders
Whether in the corporate world or the world of small business, it is human nature to spend all the money in the Budget because there is always some marketing idea to squeeze in or some piece of equipment to upgrade or replace. Be disciplined and resist that urge. Require signed Purchase Orders, approved by the Accounting department, with any expenditure over a certain amount. Purchase Orders can be a critical aspect of holding your team accountable to the Budget, staying on Budget and meeting your Net Profit goals.
 
6. Planning, Budgeting and Forecasting
To grow your business profitably or avoid a cash flow crisis, you must be proactive and smart. Create a brief Business Plan to focus your time and your business strategy. Create a monthly Financial Forecast with goals and use it as a disciplined Budget to monitor and cut Costs and Expenses.
 
7. Be Prepared to Sacrifice
A healthy business can create a great return and reward you and your employees with tremendous growth opportunities. Don't make the mistake of choosing short-term satisfaction at the risk of long-term stability. Consult an expert business advisor to assist in the above critical steps - this can be the difference in making it through a crisis or achieving your Net Profit goals. Planning, forecasting, budgeting and cost controls require specialized expertise.
 
CEO Advisor, Inc. can assist you in business planning, forecasting and keeping your monthly spending within Budget, while continuing to maintain growth and productivity.

Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520 or by email at
MHartsell@CEOAdvisor.com for a no cost initial consultation.

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