Countless Americans seem to have an insatiable desire for immediate gratification. This drive for gratification has led to an increase in “on-demand” start-ups, such as Uber, one that is frequently in the news these days. These start-ups address needs such as transportation, food, entertainment and beauty treatments. The short-term euphoria derived from the instant gratification meets a perceived (or even real) need, resulting in billions of dollars being available to fund these companies. Investors have bet the companies will build enough revenue and momentum to go public. With an opportunity to exit through an Initial Public Offering (IPO), they can get a great return on the investment. The IPO market has allowed some unprofitable, high-growth companies to pass through the gates and create hope for others – including Amazon and FitBit.
History often repeats itself – there were many “on-demand” start-ups during the dot.com boom in the 1990s that were unsuccessful, including Webvan, known as poster child of the dot-com “excess” bubble, according to techcrunch.com. My belief is that the initial euphoria of immediate gratification is then seized by the control freak in us who wants to choose our product. For example, when the apple from the grocery delivery shows up with a bruise or we cannot communicate with the office manicurist, the urgency for immediate gratification dies and we drive to the grocery store to pick our own perfect apple or to the spa to get the manicurist of our choosing.
The success of Uber has given the on-demand space an extra surge of enthusiasm and creativity. Many riders frequently use Uber because they appreciate the experience and the price. On the one hand, this is a great business outcome; the fact remains, the company eventually has to make money. Uber continues to struggle with growing regulatory issues that will eat into revenue, create higher operating costs and, ultimately result in higher rates. I recently landed in the New Orleans airport and requested an Uber car at the airport. An immediate and distinctive pop up on my phone alerted me that all Uber rides were $75 from the New Orleans airport due to city ordinances. This is compared to a $15 cab ride to my client’s office. I cancelled my Uber request and went to the cabstand.
The message to entrepreneurs and business owners is that we can learn from history, and basic business fundamentals are clear – you have to make money selling the product. Investors expect a return on investment, and at some point will be unwilling to continue to fund a losing proposition. Keep your books and records current to ensure all your products are making money or, by default, you could be making the decision to fund a loss leader.
Nonprofit leaders often make decisions about adding structure, enhancing staff expertise, or conducting advanced planning in response to a risk situation, or, as an afterthought. Savvy leaders recognize the need to make periodic adjustments to processes, staff and technology resources if they want to stay on the path to financial brilliance.
Donors have many tools to assist with decision-making. GuideStar is a tool most sophisticated donors use. GuideStar is a public charity that collects, organizes, and presents the information in a neutral format. GuideStar publishes your 990, providing potential donors with full access to the information. Do you know what your GuideStar rating is? The process of adding the appropriate information to receive a Gold (the highest level) rating takes less than an hour and the return on that investment is providing transparency and financial clarity for sophisticated donors.
Take this quiz to see if you are on the right path to financial brilliance, or if it’s time for one of those adjustments, then tally up your score to see where you stand:
- Do you have a financial professional on staff? How often do you forego infrastructure development to save money? When you engage the expertise of a CPA on your team, the next six characteristics can become reality.
- Do you have an annual budget? Navigating the fiscal year without a budget is like driving down the interstate blindfolded. By reviewing past revenue and expense flows to forecast future income and expenses, you can create a budget to see where you are going.
- If yes, do you monitor actual vs. budget? The annual budget is a dynamic document, meant to be part of your monthly financial review process – planned versus actual expenses. It’s OK to make periodic adjustments, a process that helps you know if the company goals are on track.
- Is your G/L infrastructure meeting the need? If your monthly financial reporting: (a) is either non-existent, or (b) is not helping you run your business, consider a review and restructuring of your GL. Make it work for you – not the other way around.
- Do you have an endowment fund? If yes, ensure accountability with a documented Endowment Fund Management Policy and related procedures.
- Do you have restricted funds for operations? With the help of your financial professional, meet the obligations to record, report, and effectively manage restricted funds by understanding the requirements. Document how your company meets these obligations in your fund management policy and follow the practice in day-to-day activities.
- Do you have grants and loans with covenants? As with restrictions, part of monthly reporting should be key indicators on how the business is complying with covenants.
- Do you know the core financial data contained on your organization’s 990 and its GuideStar rating? Knowing the answers to the questions before potential donors is a must to maintain credibility and be in the best position to make the “ask”!
How many “Yes’s” did you score on the Financial Brilliance Meter?
0 – 3 – Financial Dunce
3 – 5 – Financial Aptitude
6 or more – You are on the road to Financial Brilliance!
Whether it’s creating your first budget, enhancing your general ledger infrastructure or reviewing and tightening up financial reporting, successful leaders ensure these characteristics are part of their culture. This financial clarity helps ensure stability to carry out your mission.
Raise your Financial Brilliance score, let Mindy Barker & Associates show you how. We can help you gain the financial brilliance that empowers you with the tools and financial information to improve company value, profitability, and cash flow. Contact me here.
As the CEO or CFO of your organization, when was the last time you looked at the commission payout to your lead sales staff? While you were razor-focused on increasing sales, did you also consider the full impact of the commission dollar in developing and executing the company sales plan?
The difference between an accountant and the strategic CFO (Chief Future Officer) is the accountant will calculate and pay whatever commission they are given, whereas the strategic CFO will help their CEO understand the entire journey of the commission dollar and its impact on the organization.
Before a commission plan is implemented, consider these five impacts:
- Who will have plan accountability and oversight to avoid fraud, abuse and plan obsolescence?
- What metrics will be used to measure/monitor that the plan drives the desired short and long-term results?
- How complicated is the plan to administer? Calculate? Pay out?
- Should there be a commission clawback provision?
- How does the plan fit into the overall compensation structure of the organization
If the journey of the commission dollar begins with a few conjectural quantitative analyses, you may avoid implementing a plan that does not achieve the desired outcome or has unintended effects. You can create a system that is full of opportunities to take advantage of the system and in some cases create fraud. If your idea on how to calculate commission is not fully vetted with several “what if” quantitative analyses, you could find yourself in a situation where you are having to revisit and revise the plan continually until you hit on a formula that works.
Consider the following “real life” scenarios:
The Scenario: The accounting department found they were spending days calculating the commission. The decision-makers who developed the plan were not aware of the mountain of work they created by failing to test the end-to-end process to administer the plan. Get your financial strategist involved to help think through the commission calculation. Test that the calculation will not be unreasonably time-consuming while you are creating the plan and before you communicate it to the sales team.
The Scenario: The commission plan may incent the sales personnel to bring on unprofitable or uncollectible revenue dollars. A commission plan that includes a clawback provision builds in responsibility so the commissioned sales person is a participating party to the business. The clawback items should include account receivable write offs, returns and credits and any other reductions of revenue that may occur with the customer. Without this, the sales person is just interested in getting the business on the books. The recent mortgage crisis is a great example of this, as the mortgage brokers selling the mortgages received the initial commission on the mortgage and had no clawback if the mortgagee defaulted on the mortgage.
The Scenario: The commission amount is so low, not only does it not incent any increased sales, it also wastes accounting infrastructure to administer. I recently learned of a retail establishment that began an incentive program to provide each employee $20 per month if the store met its monthly goal of thousands of dollars of sales for the month. The manager would ask the employees who had worked a 12-hour shift if they would like to stay later so they could make the extra sales to receive their incentive for the month. The exhausted employees laughed about this behind the managers back – the low bonus and high hours to earn it served as a disincentive to meet the sales goals. The store manager and accounting department were exerting energy to calculate a program that was irritating the customer-facing employees. This is not a good investment.
Take the time to evaluate new or changing commission programs by considering the full journey of the commission dollar. Make sure you are actually providing a healthy incentive to your sales professionals without creating an expensive or inadequate process to administer the commission payment.