Among the greatest things the U.S. military has going for it in today's tight budgets and multiple war fronts is the ability to squeeze massive amounts of efficiency from a single event or series of events. Each occurrence, from target practice at the firing range to a multi-plane offensive into enemy territory follows the same sequential flow of: planning/briefing – execution – debriefing/lessons learned. While you might think most of the time is spent in the planning and execution, the reality is that the vast majority of time allocation is put toward the debriefing/lessons learned. Resources are scarce, and while planning and execution are important, the lessons learned from the debrief are what carry over to the next event's improved planning.
Business organizations and teams need to ensure they are debriefing each project they undertake. They should dedicate time and space where they routinely look at decisions, even small ones. Where they ask what the process was like? What were the failures? What should we have done differently? What kind of information didn't we have that we should have had? Only then can the next project have a chance at being better by incorporating the answers into the next planning meetings.
Beyond that, organizations also need to ask broader questions, like, what are we doing? Does it make sense? What if we were taken over? Or what should we be doing that we are not doing? These are the kinds of "debriefing" questions we should ask on a regular basis, but don't.
For help with organizational efficiency contact:
info@bisonmgmt.com
Monday, October 20, 2008
Sunday, October 5, 2008
WORKING CAPITAL
What Should Manufacturers Be Doing Right Now about Working Capital?
That depends, doesn’t everything? If your firm is a company making products for export, for example simple medical devices used during routine examination in developing countries, you will be doing something different than a firm that supplies, for example, the US automakers with bumpers for SUVs.
The difference has to do with the near term future demand for your product and its shelf life. In the case of the medical device firm you are probably focusing on honing your manufacturing costs, expanding your inventory, improving your efficiency, and stoking your sales force or distributors to sell as much as possible. If you are making bumpers for US made SUVS you are looking at ways to reduce your inventory, cut your manufacturing costs to the bone, and potentially looking at how you can maximize your cash flow in the short term to, well, just survive to the end of the year.
The way you manage in each situation is very different, but certain skills cut across both scenarios. The words “control your use of working capital” summarize the sameness of each position. In order to make your company successful you need to know how to control the use of working capital, when to use more and when to conserve it. Net Working Capital is the difference between Current Assets and Current Liabilities, but operatively it also includes the funds that the owner has, or can put in the business, as well as the amount of credit that the business might be able to get from other outside sources including the vendors or suppliers to the company. While the classic definition is a very sound way to look at Working Capital the more inexact estimate that takes into account the access to capital that the owner and the supplier represents is key, particularly if you are the SUV bumper manufacturer.
The less working capital needed to complete a sales cycle, including creating the sale opportunity by having the right merchandise the customer wants is what you are aiming for.
Writing this seems simple but I have to say that figuring out how to pull this off is an inexact science. There is also a cycle to the use of the capital that roughly equals the selling cycle. Its length and intensity dictate how you manage the company. Usually longer cycle times are rewarded with higher prices and fatter margins but that is also not always true.
Many business owners make the mistake of confusing the making of a profit and the resulting retained earnings for working capital. The confusion is understandable but dangerous. It’s almost a law that as a business expands its demand for working capital increases. Those funds have to come from somewhere. There are very few businesses where the growth of the firm is additive to the excess working capital, which ultimately represents the cash flow that is the driver of success.
There are two that come to mind. The first is Wal-Mart, because they are very efficient and can sell their merchandise before they have to pay for it. Second is Dell Computer who, at least in the early years, made a computer very fast after the customer purchased and paid for it. Both of these companies occasionally had negative working capital needs during growth. For the rest of us we need to seek out the additional capital to grow while at the same time squeeze as much out of each dollar we have. This is done by controlling our inventory, collecting our money for the customers promptly, and selling for as high a price as we can get for our merchandise.
For help with Working Capital contact:
info@bisonmgmt.com
That depends, doesn’t everything? If your firm is a company making products for export, for example simple medical devices used during routine examination in developing countries, you will be doing something different than a firm that supplies, for example, the US automakers with bumpers for SUVs.
The difference has to do with the near term future demand for your product and its shelf life. In the case of the medical device firm you are probably focusing on honing your manufacturing costs, expanding your inventory, improving your efficiency, and stoking your sales force or distributors to sell as much as possible. If you are making bumpers for US made SUVS you are looking at ways to reduce your inventory, cut your manufacturing costs to the bone, and potentially looking at how you can maximize your cash flow in the short term to, well, just survive to the end of the year.
The way you manage in each situation is very different, but certain skills cut across both scenarios. The words “control your use of working capital” summarize the sameness of each position. In order to make your company successful you need to know how to control the use of working capital, when to use more and when to conserve it. Net Working Capital is the difference between Current Assets and Current Liabilities, but operatively it also includes the funds that the owner has, or can put in the business, as well as the amount of credit that the business might be able to get from other outside sources including the vendors or suppliers to the company. While the classic definition is a very sound way to look at Working Capital the more inexact estimate that takes into account the access to capital that the owner and the supplier represents is key, particularly if you are the SUV bumper manufacturer.
The less working capital needed to complete a sales cycle, including creating the sale opportunity by having the right merchandise the customer wants is what you are aiming for.
Writing this seems simple but I have to say that figuring out how to pull this off is an inexact science. There is also a cycle to the use of the capital that roughly equals the selling cycle. Its length and intensity dictate how you manage the company. Usually longer cycle times are rewarded with higher prices and fatter margins but that is also not always true.
Many business owners make the mistake of confusing the making of a profit and the resulting retained earnings for working capital. The confusion is understandable but dangerous. It’s almost a law that as a business expands its demand for working capital increases. Those funds have to come from somewhere. There are very few businesses where the growth of the firm is additive to the excess working capital, which ultimately represents the cash flow that is the driver of success.
There are two that come to mind. The first is Wal-Mart, because they are very efficient and can sell their merchandise before they have to pay for it. Second is Dell Computer who, at least in the early years, made a computer very fast after the customer purchased and paid for it. Both of these companies occasionally had negative working capital needs during growth. For the rest of us we need to seek out the additional capital to grow while at the same time squeeze as much out of each dollar we have. This is done by controlling our inventory, collecting our money for the customers promptly, and selling for as high a price as we can get for our merchandise.
For help with Working Capital contact:
info@bisonmgmt.com
WELCOME TO BISON MANAGEMENT SOLUTIONS, LLC
Why is Bison Investments, Inc., a 12 year old buyout firm, diversifying into consulting?
I have spent a lot of time thinking about this question and the answer. Since 1996 there has been a continuous train of both entrepreneurial executives as well as seasoned, mature industry corporate executives who have sought our counsel. Those meetings have usually varied from hours long to several days. On a number of occasions Bison Investments, Inc. has received some kind of opportunity, whether that be a chance to invest in a new venture, a chance to finance a venture, or a chance to purchase a firm outright. While time consuming, the exercise has always been viewed in our office in terms of the old adage, “what comes around goes around.”
While not all the advise meted out has resulted in success for the person seeking it, the majority of the feedback has been that things have worked out and the “fix” offered had the desired effect. There have also been a number of cases where the advice was to change direction entirely. Or, given the position and age of the advice seeker, take some risk. There the results have been breathtaking. In most cases the advisee has realized a dream, or equally as important, has gotten a dream out of his system.
In 2003 there was a profound change in the buyout business. It matured, and due to something one of my acquaintances, John Silvia, an economist at Wachovia Bank calls “efficiency,” returns went down. This was caused by two things: 1) a huge increase in the number of capital rich buyout firms, and 2) a simultaneous environment of very low cost debt at remarkable terms. The latter has certainly contributed to the tough market conditions we find in our financial arena today. “Efficiency”, defined another way, is the wringing out of returns as more and more smart people better factor in the upside in a transaction and pay up to get the opportunity. Here at Bison we were proving remarkably unsuccessful in the newest aspect of the buyout market, the “controlled auction” of companies. Our models of value, honed over almost 30 years of doing buyouts, didn’t change but the market did. Firms that used to sell for 3-5 times the time tested factor called EBITDA suddenly seemed worth 6-9+ times EBITDA. It seemed like a time to sell our portfolio. And sell we did. Whether the valuations will drift down to our models remains to be seen. What is for keeps is that the easy credit days have ended, probably for a generation, and I suspect the concept of “efficiency” will be less so going forward.
This brings me back to the why in the original question. Bison Management Solutions has terrific head of knowledge and decades of experience. The train of executives seeking our counsel continues. The time commitment is such that we feel we can give the advice, but we can do that better by being involved more intensively in the business. In order to make that work we have to get paid for the advice, it’s that simple. We still believe that immense good can come of our advice and that incentives beyond time related charges are a great way to incent our Managing Directors for the time that they spend helping that train move forward. We also believe that on occasion a great investment will pop up in a client.
Now something about this blog and why it is here for you and is, I hope, the first entry of many to come. To entertain and educate is the true meaning of human interaction. Shakespeare knew that and so do we. The education is what we aim to do. Over the next months you will see pieces on all aspects of business. You will learn, we hope, about the business experience in our firm in a way that makes it work for you, and that advice is still free, at least the written part.
Please give us feedback: write to info@bisonmgmt.com
I have spent a lot of time thinking about this question and the answer. Since 1996 there has been a continuous train of both entrepreneurial executives as well as seasoned, mature industry corporate executives who have sought our counsel. Those meetings have usually varied from hours long to several days. On a number of occasions Bison Investments, Inc. has received some kind of opportunity, whether that be a chance to invest in a new venture, a chance to finance a venture, or a chance to purchase a firm outright. While time consuming, the exercise has always been viewed in our office in terms of the old adage, “what comes around goes around.”
While not all the advise meted out has resulted in success for the person seeking it, the majority of the feedback has been that things have worked out and the “fix” offered had the desired effect. There have also been a number of cases where the advice was to change direction entirely. Or, given the position and age of the advice seeker, take some risk. There the results have been breathtaking. In most cases the advisee has realized a dream, or equally as important, has gotten a dream out of his system.
In 2003 there was a profound change in the buyout business. It matured, and due to something one of my acquaintances, John Silvia, an economist at Wachovia Bank calls “efficiency,” returns went down. This was caused by two things: 1) a huge increase in the number of capital rich buyout firms, and 2) a simultaneous environment of very low cost debt at remarkable terms. The latter has certainly contributed to the tough market conditions we find in our financial arena today. “Efficiency”, defined another way, is the wringing out of returns as more and more smart people better factor in the upside in a transaction and pay up to get the opportunity. Here at Bison we were proving remarkably unsuccessful in the newest aspect of the buyout market, the “controlled auction” of companies. Our models of value, honed over almost 30 years of doing buyouts, didn’t change but the market did. Firms that used to sell for 3-5 times the time tested factor called EBITDA suddenly seemed worth 6-9+ times EBITDA. It seemed like a time to sell our portfolio. And sell we did. Whether the valuations will drift down to our models remains to be seen. What is for keeps is that the easy credit days have ended, probably for a generation, and I suspect the concept of “efficiency” will be less so going forward.
This brings me back to the why in the original question. Bison Management Solutions has terrific head of knowledge and decades of experience. The train of executives seeking our counsel continues. The time commitment is such that we feel we can give the advice, but we can do that better by being involved more intensively in the business. In order to make that work we have to get paid for the advice, it’s that simple. We still believe that immense good can come of our advice and that incentives beyond time related charges are a great way to incent our Managing Directors for the time that they spend helping that train move forward. We also believe that on occasion a great investment will pop up in a client.
Now something about this blog and why it is here for you and is, I hope, the first entry of many to come. To entertain and educate is the true meaning of human interaction. Shakespeare knew that and so do we. The education is what we aim to do. Over the next months you will see pieces on all aspects of business. You will learn, we hope, about the business experience in our firm in a way that makes it work for you, and that advice is still free, at least the written part.
Please give us feedback: write to info@bisonmgmt.com
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