On average, each $1 in cost reduction can equal $5 in new revenue. In an economic environment where sales are flat and customers resist price increases, cost reduction becomes the primary way to improve the company’s bottom line and increase shareholder value. Companies have traditionally viewed cost reduction as a one-time annual exercise. For CFOs to drive meaningful improvements in a company’s financial and operational efficiencies, cost reduction should be an ongoing process. Typically the major barrier to continuous cost reduction is not from suppliers; instead, the internal resistance to change by employees is often the primary reason companies can lose out on valuable cost reduction opportunities. This is why the ability to see these opportunities is a good skill to look for in your CFO search.
Business owners often overlook selling their company to their management team, with help from an outsourced CFO, as a possible exit strategy. But for solid companies with good cash flows, selling the company to management may yield a higher financial value for the owner, and a much brighter future for the business, management, and the seller. Business owners choose this exit strategy as in the right situations this type of sale can provide four key benefits:
1. Sale at a higher value than offered by third private equity firms.
2. Receive significant cash proceeds at the closing.
3. Sale to a group most qualified to successfully run the business – the management team.
4. Owners get to stay involved in the business.
The characteristics of “Growth Champions” were defined as those elite middle market companies that grew at four times the rate of U.S. GDP by the National Center for the Middle Market, a partnership of The Ohio State Fisher College of Business and GE Capital. These characteristics as defined by the Center were summarized in a prior Harvest article and are listed below:
- Strong management culture
- Exceptional talent management
- A formal growth strategy process
- Sharper customer focus
- A broader geographic vision
- Focus on innovation
For many companies, reviewing and managing their financial results is simply an exercise of looking at the P&L and balance sheet after the close of a month. Management then makes a brief determination as to the results usually based on how current month compares with the prior month close, or the same period of the prior year. In essence, the company is informally benchmarking and budgeting against its own actual results. This style of financial management does not take into consideration how the company’s results compare with its industry or competitors, or even with the goals of management and shareholders. Establishing and utilizing benchmarks and budgets to gauge and improve financial results should be a part of every company’s best practices.