Managing Cash and Liquidity

In a turbulent environment, cash returns are important, if not more important, than reported profit returns. Cash returns lead to liquidity, and liquidity is a top priority consideration whenever risks and uncertainties surround a business situation, as they do in so many cases today. Cash and liquidity put any company in a better position to withstand a surprise blow, adapt to sudden changes, and capitalize on the narrower windows of opportunity that are commonplace in a turbulent environment.

This doesn’t mean that profits and profit growth are not important. The whole purpose of any business enterprise is to maximize profits and profit growth, but this objective will  not be achieved if business unit managers do not focus more time and attention on managing their cash and liquidity. Any entrepreneur that has lived through a start-up knows the importance of cash and liquidity. The entrepreneur knows from experience that a business can go bankrupt even while it is reporting profits. But it will never go bankrupt as long as its cash and liquidity positions are strong. Most corporate executives understand this point also, but many do not follow through to make sure it is sufficiently stressed or understood at the operating level. This is where the problem lies. Most business unit managers who operate under a corporate umbrella tend to overlook the importance of managing their own cash and liquidity and look instead to the corporation as a never ending source of funds.

The results are apparent in most corporations. Capital expenditure proposals tend to be a “wish list” often justified on project volume gains or cost savings that never occur. Working capital is allowed to build without adequate regard for carrying costs on the cash commitment. In short, overinvestment in plant and equipment, and working capital often serves as a buffer to cover sloppy business practices and control. These are practices that inevitably lead to an investment base that is too big for the business and to marginal profit returns.

Many operating managers in a corporation are not even aware of the costs incurred while excess capital is tied up in the business. This is not an exaggeration. Just ask any four or five business unit managers how much it costs to carry their inventory. Most of them will acknowledge an interest cost of, say 7—8 percent, but few will recognize that total carrying costs, which include storage, taxes, obsolescence, and shrink, actually run closer to 30 percent in today’s environment. We would also bet that none of them have such charges against their earnings, even though it is a very legitimate cost of doing business.

Not every company operates this way. Most corporate executives are not tough minded or rigorous enough in challenging cash commitments, and most business unit managers have more cash tied up in their business than required.

Ideally, every manager should think like a small business entrepreneur with his or her own money at risk. If this were the case, we would not see so many companies with bloated balance sheets and marginal returns. Left on their own, most business unit managers do not think this way, however. Life is not easier when you can draw almost at will on coroprate resources to meet the payroll, build inventories, and buy supplies, tooling and a lot of equipment. Under such conditions you don’t have to worry very much about how to make ends meet.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit, Line of Sight

Customer Retention Program

To develop an effective customer retention (CR) program, organization can follow this five-step process:

  1. Determine your current CR rate. It is surprising how few companies know the percentage of customers that leave (the defection rate) or the percentage of customers that they are able to retain annually (the retention rate). There are many ways to measure customer retention. Choosing an appropriate measure provides a starting point for assessing a firm’s success in keeping customers.
  2. Analyze the defection problem. This is a three-pronged attack. First, we must identify disloyal customers. Second we need to understand why they left. There are six types of defectors. Customers go elsewhere because of lower price, superior products, better service, alternative technologies, market changes (they move or go bankrupt), and “political” considerations; (switching motives) can also provide insight here. Third, strategies must be developed to overcome the non-loyal purchasing behavior.
  3. Establish a new CR objective. Let’s assume that your company is currently retaining 75% of its customers. A realistic goal may be to improve client retention annually by at least 5%, to 80%, and to keep 90% of your clients within 5 years. Customer-retention objectives should be based on organizational cabalities (strengths, weaknesses, resources, etc.), customer and competitive analyses, and benchmarking with the industry or sector, comparable firms, and high performing units in your company.
  4. Invest in targeted CR plan to enhance customer loyalty. The cost (potential lifetime value) of a single lost customer can be substantial. This is magnified exponentially when we realize the overall annual cost of lost business.
  5. Evaluate the success of the CR program. As an iterative process, the final phase in designing a solid customer retention plan is to ensure that it is working. Careful scrutiny is required to assess the program’s impact on keeping existing customers. Upgrading current customer relationships may be a secondary business objective. At this point, we gather new information to learn to what extent our CR rate improved. We may need to revisit our benchmarks and further probe isolated causes of defection. CR strategies and tactics will be closely analyzed to determine which methods worked best and those that had little or no impact on keeping customers.

 My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit, Line of Sight

Eyesight, Mindsight, Winners, Losers, Dreams, and … Success

A great life always begins with a dream—a vision. Each person has two kinds of vision: Eyesight and mindsight. Eyesight tells us what objects are around us. Eyesight forms pictures of trees, people, buildings, mountains, water, stars, and other physical, tangible things. Eyesight is physical.

Mindset is different from eyesight. Mindset is the power to see not what is but what can be when human intelligence is applied. Mindset is the power to dream. Mindset forms pictures of the future – the home we want, the family relationship we desire, the income we will enjoy, vacations we want to take, or our wealth at some point in time.

Eyesight is strictly physical and sees only reality. Mindsight reveals what is not yet real nor tangible. How we choose to use our mindset to dream determines our success (achievement, influence, and satisfaction), our wealth (income, net worth, and physical well-being), and our happiness (respect, joy, and commitment).

People differ little in eyesight. At a very early age, all children using eyesight can clearly distinguish objects, such as people, buildings, stars, and water. But people differ enormously in mindsight or mental images of what is not yet real or tangible. A great majority of people see spending a life in a mediocre, modest-paying job. In the social department, their mindsight sees little joy but lots of boredom and big problems. And in the home department, they see, at best, only an ordinary, dull, problem-plagued existence.

On the other hand, a few success-directed dreamers see the future as filled with challenge. They see work as a road to advancement and prestige, and to large rewards. Creative dreamers see social relationships as encouraging, as stimulating, and as fun. In their home department, they see excitement, adventure, and happiness. They choose to dream of a good and great life.

Whether we spend life winning or losing depends on how we use our mindsight—what we choose to see or to dream. Each of us has the power to make this life a heaven or a hell, depending on how we choose to dream about it. Those who see life as heaven are the winners; those who view life as hell are losers.

Some believe luck or chance determines their destiny. These people think that fortunes, success, and the good life depend on the roll of the dice, on the spin of a wheel, or on a randomly selected number in a gamble.

Wishing is different from dreaming. Wishing is passive and inactive. Wishing is an idle pastime with no brains or effort behind it. But dreaming is backed up with an action plan to produce results. Anyone can wish. But a dreamer takes action on what he or she wants.

You can divide people you know into two categories: The winners and losers. Winners are active dreamers working to convert their dream into positive, tangible accomplishments. Losers are inactive faultfinders who believe the system is against them and luck or fate determines what will happen. Losers are cynical. Losers are pessimists. Losers are selfish—not my job; why should I help; nobody ever did anything for me. Losers want something for nothing.

Winners are people of good will. Winners are generous. Winners know “there’s no free lunch,” “Sacrifice means investing in the future.”

People who dream big think, “Regardless of how good or bad the situation is now, it will get even better. It always does. They bank on a great future.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please contact, Line of Sight