Category: Professional Recommendations

CFO Folklore: Segmental Performance Analysis


SegRep #1 Regardless of whether your company is large or small, rich in cash or eke out its survival on a tight cash flow, operate with the most sophisticated custom-designed ERP fitted with Cognos or makes do with QuickBooks/Excel combo, if I ask you to pinpoint the exact segments where you lose or make money, most likely the answer is too broad, or intuitive, or incorrect.

Based on my experience, segmental performance is one of the most deficient areas of business analysis.  Ok, the larger are probably doing better than the small ones.  The latter, unfortunately, are clueless 99% of the time.

Then again, what is your segment?  Do we need the Large Hadron Collider to break the business matter into invisible particles?  Of course not, but a sensible breakdown can give an invaluable insight and bring about organizational changes.  And let me clarify that when I talk about "performance," I don't mean revenues, which are easy to track, I am talking about EBITDA – my favorite indicator.     

Familiar to everyone example – CBS Corporation.  Its portfolio consists of 23 separate brands (subsidiaries), including CBS Television, CBS News, CW, Showtime, Simon & Schuster, etc.  Of course, there are separate P&L's for each of these sub-entities. I am positive, Showtime Networks knows who does better Showtime or The Movie Channel.  I am pretty sure they are aware of how much "Dexter," or "Nurse Jackie" contribute to the bottom line.  Moreover, thanks to digital counting of viewers tuned in, they know for a fact how much Gross Revenue each episode generates.  As I said, that's easy – they know how much they get paid for each subscriber.  (Side Note: it's just as easy for the network television, where the revenue is calculated based on the commercial time).

But do they know how much profit (or loss) they make from each episode?  ALL costs allocated, including CBS Corporation CEO's salary?  What, it is not required by financial statements?  We are not talking about  them.  We are talking about magerial understanding of the business.  Is it important?  It's fundamentally important.  Each episode is written by different writers, directed by different directors, some use more effects and extras than others, etc., etc.  This is BUSINESS INTELLIGENCE and those are factors impacting this particular business.   

Here is promised CFO Folklore.  At some point in my career, I accepted a position in a company with national exposure – 14 operational facilities in different states.  They needed me because they couldn't understand why they experienced cash flow shoratges.  The first thing I did was the profitability analysis for each of the locations.  I uncovered that 9 out of 14, have been consistently loosing money for the past 18 months.  

There are, however, inherent difficulties that prevent most financial executives with limited human resources from undertaking this exercise.  First of all, it is not easy to properly define your segments.  It is pretty much a game of optimization between the level of details you would like to have and the resouces you need to achieve it.  The most intense part of the analysis, however, is the selection of proper principles of allocation for all shared costs and the allocation process itself.     

The spreadsheet image is courtersy of E&D CC, Inc.  If you are looking for help with segmental analysis, I recommend  contacting E&D CC – they specialize in assessing reporting needs and designing specific analytical tools related to profitability and costs, as well as budgetary, treasury, viability, forecasting and planning instruments: mzosya.edcc@gmai.com  

The Frustrated CFO Attends a Panel on Risk, Probability, and Chance


IMG Annual World Science Festival took place this week in New York City.  It is a wonderful fair with over 40 events and I try to catch at least two or three.  One of the discussions, I felt, was important for me to attend this time was The Illusion of Certainty: Risk, Probability, and Chance. 

Not only that I find practical application of mathematical, statistical and cognitive theories to business risks, economic uncertainty and commercial intuition to be imperative for strategically inclined CFOs and Controllers, but also my upcoming book on functionality of hands-on financial executives will have a chapter on Risks.  Besides, I've enjoyed books penned by two of the panelists – Leonard Mlodinow's The Drunkard's Walk: how randomness rules our lives and Gerd Gigerenzer's Gut Feelings: The Intelligence of the Unconscious (both are featured on by book list to the right).  And even though the distinguished panel, which also included mathematician Amir Aczel and MIT's professor of Computational Cognitive Science Josh Tenenbaum, ran out of time before they got anywhere near concepts of risks, they have touched on quite a few other fascinating concepts  that have direct application to our professional lives.

Here are few highlights.

I.  Self-confidence vs. probability and empirical evidence.  Our ambitions and drive to succeed mandates nurturing of confidence.  Business schools and work experiences show us that only assertive people who stick to their positions, even if they are based on guesses, achieve their goals.  Here comes, the Monty Hall Paradox – a logical statistical problem with an odd, but empirically demonstrable result. 

It is a probability puzzle based on the TV program Let's Make a Deal originally hosted by Monty Hall.  In the first round, the contestants on the show had to chose one out of three closed doors – two concealing goats and one hiding a car.  Then, the host would open one of the remaining doors revealing goats.  Now, that this door is eliminated, the following question is posted: do you want to switch or retain your original choice.  The confident, "believe-in-yourself" people like us most likely will stick to their guns.  Yet, years of replicating the experiment showed that changing your original choice doubles the probability of winning the car: from 1 in 3 to 2 in 3.  This maybe a good indication that there is nothing wrong with rethinking your position – it may actually be beneficial.

II.  Influence of visual presentation on interpretations of data.  Throughout our careers we have been using graphs, charts, dashboards, etc. in presentations of performance results and other information, because experience shows that it impresses the data recipients better than numbers in tables or narratives.  The reason it works so well is because our instinctive cognitive abilities are much better than conscious digestion of facts.  We are capable of processing visual data flowing at us without even thinking about it. 

Like in the chart below, which shows the relationship between marketing expenses (Y-axis, in thousands of dollars) and sales (volume represented by the bubbles, in millions of dollars).  Just by glancing at the chart anyone can see that the larger bubbles (sales) correspond with higher marketing expenses.  Biologically, it is not that much different from our ability to discern danger when we walk through the jungle.  So, when we design our graphic presentations, we should keep that in mind and try to create images that don't just look pretty, but actually transmit the most valuable messages.

Bubble chart

III.  People's blind belief in numbers.  This is something that all financial professionals constantly use while communicating with lenders, investors, bosses, commercial partners, etc., without even thinking twice about underlying scientific theories.  Everybody knows, when you pitch a proposal, renew a credit line, or report on the business results, the more numbers you throw at "them," the better.  Presence of the numbers in a message on its own creates the illusion of certainty, regardless of their substance. 

Advertisers know that very well too.  When we hear in a commercial that 9 out of 10 users of this new cosmetic product saw an improvement in their appearance (or whatever), we automatically accept this as a proof of great achievement.  People forget that because these values are assigned by humans, they cannot be precise.   First of all, what is the definition of "improvement?"  And what if I tell you that the product was used on a group of 30 healthy, good-looking people, ages 20 to 25.  Will you still think that it will work on you as well?

Donna Ballman’s Great Article on Workplace Rights


Those who visit my blog consistently probably remember my post The Distortion of Bill of Rights in Small Business and know that I frequently come back to the issues of an employee's freedoms and rights even in the pieces not related to to those topics directly.  I would like to draw the readers' attention to this great article by Donna Ballman written for AOL Jobs 10 Workplace Rights You Think You Have, But Don't. 

Ms. Ballman is an employment attorney, so unlike my insider's point of view, her perspective is independent and supported by legal expertise – really a must-read for everyone who confused their workplace for a democracy.

Case Study: The Marketing of Fear


In my consulting practice, I have a client who has a family-ran business.   It has been established several generations back.  He is doing well.  Yet, one of his sons wants to be an entrepreneur of his own stature.  He wants a complete independence – something I very much admire.  The young man has a pretty fascinating idea worthy of at least trying to attract venture capital.  Of course, he wants to do everything himself.   I know the boy for a really long time – when he embarked on figuring things out, I told him he could always count on my advice if he had any questions.

He came to me a few days ago, his model  clearly formulated and ready to be formalized in a business plan.  But he was all out of sorts about the business plan.  His original intent was to buy a PaloAlto's Business Plan Pro (still a #1 business plan software on the market) for $199.99 and work within its framework.  But then somebody told him that he can go cheaper and "easier" with a Growthink's Business Plan Template – only $97 for a pre-written, fill-in-the-blanks, Word document/Excel spreadsheets.  Excited, he went to look at the company's website and ended up having a panic attack.

I went to see for myself what could possibly spook him like that.  Let me tell you right away that I have nothing against Growthink, a 10-year-old consulting company, specializing in business planning and investment brokerage.  They appear to be quite successful in their core business of charging high-rate fees to moneyed clients looking for more funds, expansion or exit strategies.

The thing is, though, that in their daze of success they also decided to "reach out" to the general public.  According to their Special Announcement, they

"regularly receive requests from entrepreneurs who want to hire Growthink but cannot afford our consulting fees. For this reason, we have developed a business plan template that allows entrepreneurs to quickly and cost-effectively develop professional plans."

How about that?  They charge their conventional clients tens of thousands of dollars for their services, but here it is – for $97 you can have exactly the same thing.  Well, that's nothing new.  Consumer beware!

What caused the young entrepreneur to go into a frenzied mode was something else – it was the brutal, fear-fueling tactics that Growthink uses to market their side products.  I don't know how they talk to their conventional clients, but their online lingo is nearly unethical.

You take a vulnerable group of people setting off on a scary quest of entrepreneurship and you tell them,  "You don't know anything.  We are the only ones who know all the secrets.  Here, we tell you 4 out of 10 things you must know and then you will have to buy more products to know the rest.  If you don't do it you are doomed.   Here is another set of products with secrets from Venture Capitalists that were revealed only to us.  Everybody else do it wrong and so will you, if you don't buy this," etc, etc.  And it all enhanced with a rapid-speed audio. 

By the time they are finished talking, the poor young entrepreneur feels he MUST SPEND $1,200, or there is no hope for him.  And all he wanted to do is to spend two hundred bucks on the best business plan software on the market.      

The funny thing is that the template has only three reviews.  Do you think that the $1 billion of venture capital, Growthink claims their clients raised, was attracted by a ready-made generic template?  I don't think so.  Plus, if you are a creative person, capable of original brilliant idea, would you really want fill in the blanks and have somebody else's words expressing your aspirations?                 

Job Search: Sales Pitch Behavioral Breakdown


In "The History Boys," a play by Alan Bennett, Douglas Hector explains to his student how, once in a while, you read something that is so close to your own thinking, it makes you feel as if a friend extended a hand towards you.  Beautiful! 

Sometimes, it happens with online reading as well.

Like this article, written for The Ladders by Dan Coughlin, Understand the Mind of the Interviewer.  I really appreciated his applying fundamental concepts to a particular issue.  It targets the job search process, yet it addresses business behavior topics I frequently discuss, namely the importance of:

  • understanding people's motivations,
  • treating everyone you meet with equal respect,
  • keeping professional demeanor at all times.

Mr. Coughlin's  assessment of the interviewing process is applicable to any form of "bargaining."  Whether you are selling your professional skills and qualifications for a job position, or pitching a TV series idea, or promoting an improvement in your organization – the behavioral principles are the same.  And there are important conditions to keep in mind:  

  • you are on somebody else's turf,
  • you may interact with people who are not directly involved in the selection,
  • in the first rounds you encounter people who decide whether you can go on the next stage or not,
  • if you get recommended, you meet the final decision-makers.

Because you are on somebody else's territory, you don't know who can observe you.  When you drive through the security gate on the way in or out, you may be seen on a camera, for example. So you'd better keep your professional armor on at all times.  Don't miss that garbage can in front the building, when you throw the soda bottle on your way in – the woman having a smoke nearby might be the HR Manager. 

Many people loose their creditability by saying or doing something in the reception area.  Doormen, assistants, secretaries may have their own impact on your case.  Once, I interviewed someone: by the time he walked into my office, I already knew that he was snappy and rude with the receptionist.   Did I hire him?

The actual decision-makers who have the power to either recommend you for the next round or to hire you (buy from you, option your script, adapt your improvement proposal) are motivated to make the choice by their own sets of reasons.  Your task is to understand what those motivations are and to try to accommodate them.

The two most important stimuli are the interviewer's reputation and professional advancement.  If there is a possibility that an HR manager will look foolish for passing your candidature to a CFO, she will never do it.  On the other hand, if a creative exec reading a script thinks that showing it to the executive producer will boost his status, he will be running to his boss like an olympic athlete. 

Understand what the person sitting opposite from you wants and bring the ability to fulfill that need forward.  That's the trick.