Here’s an excerpt:

The concert hall at the Syndey Opera House holds 2,700 people. This blog was viewed about 9,200 times in 2011. If it were a concert at Sydney Opera House, it would take about 3 sold-out performances for that many people to see it.

Click here to see the complete report.

Create a list of prioritized projects: There are many ways to create a prioritized list. When working with a client, I prefer to use a brainstorming technique to start. First, the organization’s planning group reviews the Core Competencies, along with their related Value Drivers, Must Haves, Must Do’s and Metrics (see A Simple Strategy). The group should be made up of people from different areas and levels of the organization in order to get a comprehensive perspective.

Next, the group lists up as many ideas for strategic projects as possible, with no discussion or judgments made. Once the group has finished with furnishing new ideas, discussions begin. Often, as the discussion takes place, a consensus will form around the projects that seem to be of the highest priority. If no clear consensus emerges, the group may use a weighted vote to get a better idea of priorities.

In the end, the group must have a list of clearly prioritized projects, each project having its own priority level. You cannot have 2 projects with the same priority, as it leads to much confusion and conflict over resources. Once the list is complete, strategic project planning may begin.

Strategic Project Planning: Project Planning should normally be done by the entire project team, if possible. However, creating a Project Charter answering key questions about the project may be done by the project manager and a smaller group. It is possible that this work can be done effectively by the same group that created the prioritized list of strategic projects. The key questions fall into five areas: Organization and Authority, Strategic Alignment, Deliverables, Metrics and Project Impact (For a copy of the Strategic Project Charter Checklist, click here).

Organization and Authority: Who is the project manager and what is the project Manager’s authority? Who does the project manager consult if a decision is not within his/her authority?

Strategic Alignment: Who are the stakeholders? How does the project align with the organizations Core Competencies and Value Drivers?

Deliverables: What is the work to be done? How will it be done?

Metrics: What is success? How will the Value Driver Metrics be applied to measure success?

Project Impact: What resources are required to execute the project? How will the project impact company resources and operations?

My next posting will be a Case Study on Strategy and Execution from one of my clients.

According to Hugos, there are three basic systems that form “loops” within a business that are the basis for agile operations. As mentioned above, those loops are Awareness, Balance and Agility. The important concept here is that the three loops are interconnected, each one providing feedback to the other loops, without which the system would not work.

The first loop, Awareness, places a strategic focus on the marketplace right now, gathering information about what is happening with customers, clients and the marketplace in general. The information in the Awareness loop may come from outward looking systems, such as market research. However, inputs can also be found in business systems such as ERP and CRM. Data mining or Business Intelligence software can be helpful.

Information gathered by the Awareness loop becomes input for the Balance loop that has two purposes. First, the balance loop reviews all processes to standardize as much as possible. In particular, business agility relies on standard processes that can be automated to as great a degree as possible, allowing energy to be focused on the non-standard.

The second purpose of the Balance loop is to identify inputs from the Awareness loop that are non-standard. Any input that does not fit into an existing process is considered non-standard. The non-standard is what represents opportunity for the agile business.

The third loop, Agility, receives input from the Balance loop and performs analysis to understand emerging opportunities and threats. In particular, the Balance loop plays a key role in the ongoing implementation of strategy. When an opportunity or threat is identified, the Agility loop actively addresses what is different, and creates new processes to put in place to take advantage of change.

In addition, the Balance loop also plays a crucial role in the ongoing, incremental revision of strategy to meet the challenges that emerge. Strategy should not be a “once a year” activity. A vibrant, successful strategy must be transformed constantly if the business is to remain truly agile.

This week’s post is basedon an excerpt from the second edition of my book, Project Management Accounting.

Gaining and maintaining competitive advantage requires that your business be focused on the proper things; that is simple, but not always easy. There are really only two areas of business focus in order to establish competitive advantage: first, you must be competitive in your industry and secondly your business must differentiate itself from the competition. Sounds like a contradiction to me! Let’s take a closer look at each.

In order to be competitive in your industry your business must do “industry basics” well. For example, if you are Starbucks, you can have the nicest storefront possible, with great music and a cool ambiance. But, if your coffee is not at the right temperature, or tastes bad, you will not be able to compete in your market. For a coffee shop, temperature and taste are basics and the company must focus on them in the right way.

In what might seem to be contradictory, it is also true that you should not exceed your industry basics in the name of competition. That practice can be costly and self-defeating. Take the example of a distribution company that competes in a market where 5 day delivery of goods is the standard and customers do not expect more. If a company were to spend time and money on next day delivery, they would be wasting money creating differentiation that their customers don’t want. Doing so puts the focus in the wrong place and could actually hurt the business.

In many cases, businesses do not always focus on the right places to understand industry basics. For example, a business’ financial results, in comparison with the industry median for that result is often a good place to see where your business stands in your industry.

A software development company might look at their software production cost (Cost of Sales); they may not be competing on price, but if their production costs are significantly higher than others in the market, they will have a hard time competing. Proper focus here will keep them competitive in their industry.

Differentiation, on the other hand, is not about industry basics. It is about how your business can do something differently to distinguish itself in the industry. Of course, what you do differently must also be something that your market wants!

Let’s look at distribution again. Supposing that the company that tried to differentiate with quick delivery took some time to talk to their customers that are retail operations. Perhaps they might discover that their customers spend time breaking down the goods they receive from the distribution company into smaller lots for reshipping. The distribution company might be able to save their customers time and effort by packaging their goods in such a way that the customers would have minimal repackaging to do.

At times, it might be possible to turn an industry standard on it’s’ head in order to gain competitive advantage. Prior to Starbucks, most of the coffee industry was centered on fast food coffee chains such as donut shops. Fast was the operating word. Starbucks created a product that included not just upgraded coffee, but an entire experience.

The company wanted people to stay longer, not leave quickly. Starbucks achieved tremendous success with that strategy; only recently have they made moves that have harmed them (but that’s the topic of another Blog).

The name of the game in competitive advantage is to stay focused on the right things for your industry!

According to Dr. Chuck Bamford the end result of strategy development need not be more complex than a one page map containing five key elements: Value Drivers, descriptions of Stakeholder Experience, Critical Success Factors, Must Do’s and Metrics. The map also includes a Mission Statement based on the strategy elements. In this article, I would like to give a brief illustration of each element.

To illustrate I will use the example of a well known company, Starbucks. Although Starbuck’s performance has not been stellar the last couple of years, no one can deny that in building the Starbuck’s brand the company succeeded brilliantly. Starbuck’s Mission Statement is, “To inspire and nurture the human spirit— one person, one cup, and one neighborhood at a time”. What follows is my own decomposition of their Mission Statement to illustrate the strategy elements.

Value Driver

A Value Driver is a short statement that expresses how a company will create value for their client. The statement is based on the resource capabilities that the company possesses and utilizes for their client. A possible Value Driver that could serve as one piece of the foundation of Starbuck’s Mission Statement might be, “Feeling at home”.

Stakeholder Experience

The Stakeholder Experience consists of a series of statements that represents the stakeholders’ view of the value driver in action. The statements are what the company hopes to hear from their stakeholder to confirm that the value driver is correct, and also if the company is executing on the value driver. Some examples of statements that Starbuck’s might seek are: “At my Starbuck’s, they know what I want before I ask” and “The Starbuck’s staff are like my friends”.

Critical Success Factors

Critical Success Factors are the first crucial link between strategy and operations; the company must get the factors right in order for the Stakeholder Experience to happen. Critical Success Factors for the Stakeholder Experience described above might be, “Staff Knowledgeable about products”, “Staff Knowledgeable about customers” and “Staff well trained on drinks, able to engage customer”.

We should note, at this point, that when a strategy map is developed for a company, the first three elements that we have outlined above are the same for every employee of the company, from the CEO on down. In contrast, the next two elements may change for different functions within the company.

Must Do’s

Must Do’s are the activities that each function within a company must perform in order to create the Stakeholder Experience. These could vary depending on the function. For example, in order to have employees who are able to prepare drinks quickly and correctly, the training department must create effective training programs.

In order to motivate employees, Human Resources must hire the right kind of people and put in place a structure that will motivate. At Starbuck’s “baristas” must be outgoing and friendly and know their clients well. Starbuck’s also has different levels of certification; have you ever noticed the different color aprons on Starbuck’s employees?

Metrics

The final element, Metrics, does not change for different functions within the company. The collected metrics are studied to see how well the company is performing and give the company the ability to change operations quickly if performance is not where it should be. For example, metrics that could support the “Feeling at Home” Value driver might be to conduct a count in different Starbuck’s that determined how many customers came through in a period of time, and of those customers, how often did the employees know what the customer wanted before they even ordered.

A simple strategy is clear, easy to understand and creates direct links between operations and strategy. If you would like more information on creating strategy, I highly recommend Dr. Chuck Bamford’s book, A Small Business Approach that was published in 2010.

They do so by not taking into account the timing of cash flows. Remember, an income and expense sheet is reporting sales and expenses as they are booked for accounting reasons, but the cash flows that accompany the sales often do not happen at the same time.

For example, unless they are in retail, most companies do work on a credit basis (when retail accepts a credit card payment, they deposit slips like cash, so there is no extended term). You may not think about that way, but terms like Net 30 or Net 60 are nothing more than extending credit to your clients. In other words, your company is financing your customers’ purchases. The longer that it takes to be paid by your customer, the larger the debt that you finance.

Every company has a cash cycle, and depending on the business that you are in, there are more or less components to that cash cycle. Let’s take a company that distributes materials to other businesses. Here is a view of their cash cycle:

1. Purchase materials on credit terms (Net 30, 60, etc.) from suppliers
2. Hold in inventory
3.Repackage and sell to customers on credit terms (Net, 30, 60, etc)
4. Paid by customers
5. Pay suppliers

Now, this is a simplified cash cycle, but you get the idea. Obviously, if your customers are slow to pay you and you must pay your suppliers, you could be in for a shortfall of cash. Actually, one of the greatest risks to a startup or small company that is trying to grow is running out of cash while the business is expanding quickly. We should also note that there are other expenses (salaries, benefits, office space or utilities) that must be paid even if your customers are not quick paying you.

That brings us to the concept of Working Capital. Working Capital is the amount of cash that your company needs to have available in order to keep the cash cycle going or better put, to keep the company going. Working Capital is usually tracked in a type of spreadsheet known as a Capital Balance Sheet (which is a bit different than a Balance Sheet).

In a regular balance sheet, capital is kept above and debt below. In a capital balance sheet, a certain portion of debt is brought above. Here is the outline of a how to calculate Working Capital in a simple capital balance sheet:

Receivables (what your customers owe you)
+ Inventory
+ Current Assets
- Payables (what you owe your suppliers)
= Working Capital

Working capital represents the cash that a company needs to keep on hand to operate with receivables, inventory and payables. Receivables represent the cash that you have invested in materials and financing your clients. Payables are what your suppliers have invested in your company.

If the company sells $10,000 worth of materials in a month, 50% at Net 30 and 50% at Net 60, it means that they will not collect any cash for at least 30 days (if the customer pays on time!), and some of it not for 60. Even so, after expenses they might show a net profit of $1,500. There’s the rub, the net profit is not cash in the bank! If the company has bills to pay this month (or salaries) they must use the cash flow from previous sales to pay.

A startup company, in particular, will have problems if as they grow they do not have adequate cash in the bank to pay for expenses while waiting for cash to flow from sales. Often, a portion of the original investment capital in a new company is put aside for Working Capital; other means of having working capital at the ready could include a line of credit.

This is precisely what is meant by being adequately capitalized. Working with investors, bankers and others, the company’s executives must ensure that they have the cash in the bank to operate or they will literally be “out of business”!

Proper project initiation and planning asks a series of fundamental questions that set a performance baseline that can be integrated into pro forma financial statements. Once integrated, the pro forma statements enable a company to review a range of possible financial outcomes in order to decide whether or not the project meets the company’s criteria for being undertaken. The baseline also permits the company to make intelligent decisions at markers along the way, called Phase Gates, as to whether or not the project should continue.

Here are questions that will help a company get the project right the first time around:

What is the project; what will it deliver? Fundamental question – often ignored. This is like taking off on a trip without ever determining where you are going. Now, the answer to the question may not be readily apparent when it is first asked. The company may have an idea of the business objective that they want delivered by the project, without understanding exactly how it will be accomplished. A crucial part of planning is determining, in more detail, what the end objective will be?

Who are the stakeholders? As with the first question, this one is frequently unanswered, in particular with strategic projects. As I mentioned in a previous blog posting, A Simple Strategy, identifying each of strategic stakeholder and what their stake is can be the difference between success and failure. Stakeholders can be both internal and external to the company, but most often it is employee stakeholders that are missed.

What is success and how is it defined? You would think that this is a question that would never be missed. Not so! When defining success for a strategy project, each area of the company needs to have their particular element define, and how that element is linked to success measures. The link needs to be concrete and measurable.

What is the work, who will do it and how much is there to do? Defining the actual work to be done to a level of detail that guides competent team members is foundational. This work will lead to the creation of a project schedule, cash flow statement and budget. Of course, the previous questions set the stage for these last three, whose answers become the baseline mentioned above.

Once all of the information about schedule, budget and cash flow are integrated into forward looking pro forma financial statements, the company has information for good decision making.

Now, the award winning Union League Club in Chicago has many outstanding employees who give great service all the time so that it is easy to say that the club administration is doing all the right things to encourage their employees. Many of their employees have been on staff for years, indicating that they enjoy working at the club, and it shows! All the same, there is something special about Joseph; you can’t just teach somebody to be the way he is, although others could learn from his example. After thinking it over for a while, I concluded that there are four qualities that Joseph personifies: pride of ownership, personal warmth, attention to detail and enthusiasm.

Pride of ownership: It does not matter in which of the clubs restaurants you see Joseph; he always acts as if he owns the place. I mean this in a good sense, that he wants people to enjoy his restaurant and he will do everything possible to see that you do.

Personal Warmth: I believe that there are few people who can go to one of the club’s restaurants more than a couple of times that don’t know Joseph and consider him a friend. He consciously works at getting to know you and what you like. His efforts include more than just food and drink; in his unobtrusive way, Joseph gets to know about you as a person and remembers what he learns.

Attention to Detail: Joseph is always moving, seeing what is going on and who needs something. He is able to anticipate what you need next almost before you know it. As I mentioned above, my favorite soft drink will appear on the table before I get there with my food. Grab a dessert and he will be there with a fork before you sit down.

Enthusiasm: It is obvious that Joseph loves what he does. His underlying enthusiasm for his work shines through as he surveys the room and does whatever needs to be done. At the same time, Joseph has a great sense of timing, knowing how to take care of something without becoming the focus.

Recently, I took my granddaughters to the club for lunch for the first time. They were in Chicago, and I felt were ready for the experience. I was sorry that Joseph was not there that day, as I had prepared them in advance to watch him as an example of how to approach life with a great attitude and the spirit of great customer service that anyone in business should possess.

To better follow this posting, I have created an Excel spreadsheet, which can be seen in Google Docs by clicking here. (You may want to open the spreadsheet in a separate window or tab. Not only will the spreadsheet help you with this explanation, it can also be extended to a full year to use in your business.

On the left hand side of the spreadsheet, you will see a summary of the January Profit and Loss Statement, indicating a profit before taxes of $750. The business owner may look at this and scratch his head, asking, “My bank account is overdrawn, what gives?” The reality is that due to the timing of cash flows, he will only have incoming cash of $3,000, based on the percentage of cash sales along with collections of his accounts that pay in Net 30, 60, 90 and more.

When the business owner calculates cash flow out, first for Cost of Sales, it turns out to be $6,250 because not only does he pay some of his accounts in cash, but he also has payables of Net, 30, 60, 90 and more. In addition, he has his regular expenses, or overhead, that cost him $3,950 a month.

Therefore, the business owner’s total cash outflow is calculated by adding together Cost of Sales Cash Out and Total Expenses, which equals $10,200. Since his Total Cash in equals only $3,000, the owner has a Net Cash Flow of -$7,200. As you look across the months sales gradually increases to the point where cash flow is no longer negative. However, if the business owner does not have either an equity investment or a loan to cover the shortfall, he may be out of business in 3 months.

Below, you will find detailed instruction on how to gather information to calculate your cash flow. Using this same tool, you can also forecast your cash flow into the future. Forecasting is a useful exercise that will help you understand in advance when you will need the working capital to stay afloat.

Calculate Cash Inflow

The first task is to calculate your actual cash inflow. Follow these steps.

Cash Inflow for the Month
o Using the Income and Expense statement for the current month, and any other available information (invoices or contracts) to calculate cash inflow for the current month
o Using the Income and Expense statement for the previous month, and any other available information to calculate Net 30 cash inflow for the previous month
o Using the Income and Expense statement for the month before last, and any other available information to calculate Net 60 cash inflow for the previous month
o Using the Income and Expense statement for months prior to month before last, and any other available information to calculate Net 90+ cash inflow. All income that is more than Net 60 is usually added together into Net 90.
o Total Cash Inflow = Cash + Net 30 + Net 60 + Net 90

Cash Outflow for Cost of Goods Sold in the Month
o Using the Income and Expense statement for the current month, and any other available information (invoices or contracts) to calculate cash outflow for the current month, calculate Cost of Goods Cash outflow for the month.
o Using the Income and Expense statement for the previous month, and any other available information to calculate Net 30 cash outflow for the previous month.
o Using the Income and Expense statement for the month before last, and any other available information to calculate Net 60 cash outflow for the previous month.
o Using the Income and Expense statement for months prior to month before last, and any other available information to calculate Net 90+ cash outflow. All income that is more than Net 60 is usually added together into Net 90+.
o Cash Outflow for Cost of Goods Sold the month =
Cash + Net 30 + Net 60 + Net 90+

Monthly Expenses
Use the total of monthly expenses from the Income and Expense Statement

Total Cash Outflow:
To calculate the total cash outflow for the month, add cash outflow for cost of goods to monthly expenses.
Total Cash Outflow = Cost of Goods Cash Outflow + Expenses Outflow

Calculate Net Cash Flow:
Subtract cash outflow for the month from cash inflow for the month to calculate Net Cash Flow.
Net Cash Flow = Cash Inflow – Cash Outflow (could be negative number)

• Add the beginning cash balance to the monthly net cash flow to determine current cash.
Current Cash balance = Beginning Cash Balance + Net Cashflow (could be negative number)

They do so by not taking into account the timing of cash flows. Remember, an income and expense sheet is reporting sales and expenses as they are booked for accounting reasons, but the cash flows that accompany the sales often do not happen at the same time.

For example, unless they are in retail, most companies do work on a credit basis (when retail accepts a credit card payment, they deposit slips like cash, so there is no extended term). You may not think about that way, but terms like Net 30 or Net 60 are nothing more than extending credit to your clients. In other words, your company is financing your customers’ purchases. The longer that it takes to be paid by your customer, the larger the debt that you finance.

Every company has a cash cycle, and depending on the business that you are in, there are more or less components to that cash cycle. Let’s take a company that distributes materials to other businesses. Here is a view of their cash cycle:

1. Purchase materials on credit terms (Net 30, 60, etc.) from suppliers
2. Hold in inventory
3.Repackage and sell to customers on credit terms (Net, 30, 60, etc)
4. Paid by customers
5. Pay suppliers

Now, this is a simplified cash cycle, but you get the idea. Obviously, if your customers are slow to pay you and you must pay your suppliers, you could be in for a shortfall of cash. Actually, one of the greatest risks to a startup or small company that is trying to grow is running out of cash while the business is expanding quickly. We should also note that there are other expenses (salaries, benefits, office space or utilities) that must be paid even if your customers are not quick paying you.

That brings us to the concept of Working Capital. Working Capital is the amount of cash that your company needs to have available in order to keep the cash cycle going or better put, to keep the company going. Working Capital is usually tracked in a type of spreadsheet known as a Capital Balance Sheet (which is a bit different than a Balance Sheet).

In a regular balance sheet, capital is kept above and debt below. In a capital balance sheet, a certain portion of debt is brought above. Here is the outline of a how to calculate Working Capital in a simple capital balance sheet:

Receivables (what your customers owe you)
+ Inventory
+ Current Assets
- Payables (what you owe your suppliers)
= Working Capital

Working capital represents the cash that a company needs to keep on hand to operate with receivables, inventory and payables. Receivables represent the cash that you have invested in materials and financing your clients. Payables are what your suppliers have invested in your company.

If the company sells $10,000 worth of materials in a month, 50% at Net 30 and 50% at Net 60, it means that they will not collect any cash for at least 30 days (if the customer pays on time!), and some of it not for 60. Even so, after expenses they might show a net profit of $1,500. There’s the rub, the net profit is not cash in the bank! If the company has bills to pay this month (or salaries) they must use the cash flow from previous sales to pay.

A startup company, in particular, will have problems if as they grow they do not have adequate cash in the bank to pay for expenses while waiting for cash to flow from sales. Often, a portion of the original investment capital in a new company is put aside for Working Capital; other means of having working capital at the ready could include a line of credit.

This is precisely what is meant by being adequately capitalized. Working with investors, bankers and others, the company’s executives must ensure that they have the cash in the bank to operate or they will literally be “out of business”!