Category Archives: Finance Matters

Posts in this category are related to the financial side of strategy and operations

Compensation, Executive Transition, Finance Matters, Get Aligned, Grow, People Matters

Paying Fair: Four paths to fair pay and succession for private venture executives.

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Synthetic Equity Cover - Paths to fair pay and successionBackground

Public company equity-based pay practices, such as stock, restricted stock, and employee stock options are often a poor fit for private companies committed to reward leaders for performance and growth and to motivate leadership and capital succession.

Equity based programs that make sense and work well in a public company come with many ills for private companies: they can be costly, tax-inefficient, static, ineffective, and sometimes downright unfair. In the worst case, equity pay practices can derail the owners’ plans for growth and succession.

Dynamic synthetic equity presents a more tailored solution for private companies interested in leadership and capital succession. Restricted stock and employee stock options often distort outcomes for private companies. Consider that:

  • The underlying stock price in a private company gyrates as owners enter and exit from, for example, a living or a death buyout or even a recapitalization. Stock price can jump 50% – unjustly rewarding the owners of true equity awards.

Continue reading Paying Fair: Four paths to fair pay and succession for private venture executives. →

Finance Matters, Grow

How a services firm can discount its price without compromising hourly rates.

When a professional services firm contracts to perform a big project, it is common for it to get a request to work at reduced hourly rates.  While it may be tempting to discount to lock in the deal, doing so also sets a precedent with the customer and those it talks to, making it more likely that future work will be at the lower rates.

Since a rate, once set, is hard to increase, it is all the more critical to protect it.  A good alternative to discounting is to offer a lump sum credit in the contract.  Position it as an amount that is earned over the course of the contract so that, the more services provided, the greater the share of the credit is realized by the customer.

Continue reading How a services firm can discount its price without compromising hourly rates. →

Finance Matters, Grow, People Matters

Are we for sale?

Being part of a successful start up is invigorating.  Even for those with no equity stake, the energy and excitement is contagious and makes it easy to work hard for the good of the whole.

In the face of growth and strong performance, some may begin to wonder if the good times will soon end as founders, owners, and investors look to pocket the value that has been created through a sale of the organization to larger firm. Leaders sometimes struggle to keep up employee morale in such circumstances.

It can help for leaders to remind everyone that the best thing, in all scenarios, is to build the best possible business because doing so leads to:

  • Making the most positive impact in the market served.
  • Creating the most value for owners.
  • Creating the most opportunity for employees to assume new responsibilities, earn increased compensation, learn new skills, and be in position to take on attractive roles upon an acquisition. Continue reading Are we for sale? →
Do & Review, Finance Matters, Manage to Lead

Four questions an organization needs to ask every performance period in order to perform, learn, and grow to its full potential.

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It is impossible to control what you cannot, and what you do not, measure. For every important thing that the organization does, decide what is most important to monitor and then watch carefully to know how things are going.

If what to monitor is not known then:

  • Watch everything and whittle away what turns out to not be useful and keep watching what turns out to be useful.
  • Study similar organizations to learn what they track.
  • Look up industry analysts and market researchers to find out what they watch.

Continue reading Four questions an organization needs to ask every performance period in order to perform, learn, and grow to its full potential. →

Finance Matters, Grow, Manage to Lead

How to increase the accuracy of revenue forecasts.

Revenue Forecasts asserts that a certain amount of revenue will be earned in a certain period of time with a certain probability that the actual revenue earned in the period will be within a certain tolerance of the forecast.  For example, management may forecast that there is a 90% chance of actual revenue being not more than 10% less than a forecasted amount.

Generally speaking, the percent probability of revenue from a source is assigned by management based on their judgement in light of their collective past experience with similar revenue generating opportunities in similar circumstances.

Some managers set forecasts equal Expected Value; that is, their revenue forecast equals the sum of potential revenue generating opportunities each multiplied by an assigned probability of occurring.  There are several potential problems with this approach that should be considered carefully before proceeding:

  • Summing expected values allows fractional results when there may actually be little to no chance of fractional results.  For example, an opportunity to generate revenue of $100,000 with a 50% probability of occuring would contribute $50,000 to a forecast computed as a weighted sum even though the actual result is more likely to either be $0 or $100,000.
  • Actual Results are more likely to binary; that is the the result either happens or it does not happen, so fractional results do not occur.
  • The percent probability assigned to a given opportunity may reflect the probability of the revenue ever occuring but not be specific to the period in which the revenue will occur.  A good approach to forecasting needs to set the probability of revenue in a specific period
  • Probabilities assigned often reflect stage of progression through a sales process but do not represent a real assessment of probability of the event occurring.  For example, one might assign a 75% probability to all prospective sales for which a proposal has been submitted because it is, at the point of submission, about 75% of the way through the sales process but it may be, in reality, that only 50% of all proposals are successful.

Failure to account for any or all of the three cautions can lead to actual revenue results that are consistently outside the forecast tolerance range.