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Fast-Tracking Finance: Cash is King – A Healthy Trend

U.S. publicly traded companies continue to grow their cash reserves thanks to increased revenues and reduced working capital needs. While pressure to put these funds to work continues to mount, particularly with respect to hiring, the stockpiling trend is likely to continue as uncertainty remains amid global economic and political instability, the potential for regulatory changes and even catastrophic natural disasters.

Over the last eight quarters, companies increased cash on hand at an average of 5% per quarter or about 15% year over year to reach $1.36 trillion — an unprecedented level. Clearly, companies that generate and build cash reserves are best positioned to weather crises, provide value to shareholders (dividends, stock buybacks) and invest in or protect the future (R&D, acquisitions.) Yet cash generation cannot be done by reduction alone. To grow and succeed over the long term, companies must focus on the core of revenue generation.

This issue of Cash Is King looks at what happened in the second part of the year and how companies fared in 2010 compared to 2009. We will then explore how companies can diagnose revenue concerns and effectively implement tactics to drive significant growth with a limited capital investment. Assuming cost remains stable, any additional revenue will contribute to increased cash flow and cash reserves, expanding options to manage growth or simply protect against uncertainty.

Confirming the Trend

A recent survey conducted by Alvarez & Marsal (A&M) of the performance of 2,300 publicly traded companies during the second half of 2010 and year over year showed:

• Continued revenue increase of 6.6% in the second half of the year (11.5% year over year)
• Increased gross margins by 7.2% (14.4%)
• Increased profits by 10.1% (22.4%)
• Reduced working capital with continued reduction of inventory (6 days on average) and DSO (3 days on average).

Cash continues to pursue a healthy trend. Operational cash rose by 5.9% and 22.4% year over year and cash balance increased by 7.6% and 14.7%.

In total, U.S. companies added $174 billion year over year as a result of all key drivers of cash trending the right way: increased revenue (+11.5%), reduced costs (COGS and SGA as a % of revenue decreased by 0.6% and 1.2% respectively) and reduced working capital, which as a % of sales decreased by 0.4% and equivalent of two days of sales.

Healthier Pool

The A pool continues to grow: 75% of companies are generating and building their cash pool and the percentage of companies not generating cash fell from 15% (C&D) to 7%.

D, however, is still a quadrant in trouble. Companies in this condition will likely either experience a transaction or fail. D companies are not generating cash and don’t have enough to cover their short-term obligations. If they can’t raise new money in the form of debt or equity, they will have limited options and time.

More than 50% of the companies previously identified in this quadrant in our last newsletter became distressed (partially sold, in restructuring or bankruptcy); the remaining 50% managed to raise new money in the form of debt or equity. In addition, one out of three experienced an executive or board shakeup. Most of the D companies are in the vertical dependant on consumer spending, such as household and personal products or consumer durable and apparel sectors.

However, confirming the comeback of the economy, primarily in the business to business sector, the healthiest verticals (defined as the vertical with the most A companies) include aerospace and defense (93% of A), capital goods (87%), technology, hardware and equipment (86%) and semiconductor (improving 10% to 89% from six months ago). The least healthy verticals (defined as the vertical with the least A companies) are the utilities (53%), telecom (60%), media (63%) and energy sectors (63%).

Once working capital has been optimized (Cash Is King, Issue 1), and direct (Issue 3) and indirect (Issue 2) costs reduced, the best remaining lever of cash generation is to increase revenue.

Having worked with scores of sales organizations across a variety of industries, A&M’s Revenue Enhancement group offers the following strategies designed to enable companies to identify opportunities to drive immediate revenue and profitability growth, ultimately building cash reserves.

Financial Budgeting

When developing overall budgets, many organizations fail to solicit input from the sales team, which is ultimately responsible for generating revenue. Experience has shown that the most accurate financial budgeting is derived from a top-down and bottom-up approach. While the top-down budget comes from executive management, the bottom-up approach begins with the most junior sales representatives.

To generate a bottom-up budget, every sales member should produce an individual forecast by reviewing each deal in his / her pipeline and multiplying the likelihood of closing the sale by the total value of the proposed deal. This provides an expected value for every deal. Then the sales members should aggregate their individual deals to generate a total sales forecast. To ensure realistic values in which the organization can have confidence, the head of sales should review the total forecast, as well as each expected sale with the individual representatives.

Once validated, all sales forecasts should be combined and submitted to executive management. In addition to producing more realistic financial goals, the input from an individual sales member helps to gain alignment from the sales force around reaching the company's overall growth objectives, which is essential for setting sales targets.

Sales Targets

Once a financial budget is in place, sales targets must be set for every member of the sales organization — down to the most junior level. While it sounds like a simple practice, companies rarely cascade financial expectations through the management levels. This can lead to results falling short of projections on an account, individual or company-wide level. To ensure everyone is operating from the same page, the combined sales targets should match or exceed the overall financial budget. For ultimate accountability and the highest probability of reaching financial targets, each dollar in the financial budget should be accounted for in the sales team's targets, not only on a management level, but also for everyone who has selling responsibilities.

Sales Compensation

With sales targets in place, individual compensation plans should be set to link compensation to results. Many companies merely offer compensation as a percentage of revenue produced by the sales representative. This fails to provide an incentive for the sales team to stretch to reach higher goals set in the company’s targets. One way of linking compensation to financial targets is to allow sales representatives to earn a percent of revenue for each sale only after reaching a certain sales threshold.

In addition to linking compensation directly to sales targets, plans must effectively address the following questions to ensure plan engagement, appropriate payout variation and distribution, appropriate sales force activity levels and that cost objectives are met:

• Sales Force Attraction and Retention: Does the current plan attract and retain the best talent?
• Plan Engagement: Does the plan engage, motivate and excite the sales force?
• Performance Distribution Analysis: Is the payout variation appropriate (bell curve)?
• Bias Check: Do all territories / account owners have similar earning potential?
• Relationship Between Pay and Performance: Does the current plan reward performance?
• Sales Tracking Analysis: Does the current plan motivate sufficient quantity of sales force activity?
• Time Allocation Analysis: Does the plan direct activity appropriately?
• Cash Culture: Does the plan link the sales targets all the way to collected revenue? Are credit and risk taken into account?
• Cost Analysis: Does the plan meet cost objectives?
• Plan Complexity: Does the sales force understand the plan?

CRM System

A Customer Relationship Management (CRM) system is one of the most important tools for sales managers and representatives. It enables the representative to actively manage contacts, accounts and opportunities while providing management with the visibility and reporting functionality to drive sales force behavior and prioritize activity on a real-time basis. These are requirements for running a best-in-class sales organization, making the technology well worth the investment.

However, just because a CRM system is in place, sales force productivity will not automatically or immediately skyrocket. Many organizations fail to leverage their CRM systems fully, with the most common pitfalls including: rushing initial data migration, incomplete adoption (by both the sales team and management), inability for sales leadership and IT to "speak the same sales reporting language," and lack of basic training.

During the initial data migration stage, it is important to conduct a thorough review of required fields, including both the database manager and sales input. This ensures that the majority of data migration is automated, rather than done as one-off inputs from the sales team. Assign accounts to individual account owners (sales representatives), populate any historic information and assign any other classification (i.e., industry, account).

Setting Standards

Adoption of a new CRM system across a sales organization of any size generally requires the heaviest lifting. Setting sales activity standards is a requirement to drive adoption. Activity standards include calls, meetings and even e-mails in some cases. Sales activities are leading indicators into sales performance and a CRM system will enable real-time activity tracking and reporting for sales management. We have seen clients institute these types of activity standards and generate a 200% to 300% increase in reported sales activity, with a resulting 5% to 20% increase in sales revenues. The mantra: "if it's not in the CRM system, then it didn't happen." Open discussion throughout the sales organization and in sales meetings is another way to light a fire under a competitive sales team.

Another common pitfall occurs when sales leadership and IT do not have a shared language or vision around reporting. It is rare to find someone who leads a sales organization and also has a strong working knowledge of CRM systems — or vice versa — making it important for sales leadership and IT to work hand in hand. The most basic dashboard should incorporate activity reporting, opportunity management and pipeline reporting to successfully manage growth using a CRM system.

Sales representatives often have their own way of doing things and feel any new system will "take away from their selling time." They look at entering information into a CRM system as a “policing” activity or unnecessary burden. While a CRM system improves management visibility, the sales team must be convinced that it also benefits them and the value proposition is clear. A CRM system enables sales members to stay more organized, respond to accounts faster, pull up historical information in real time, receive targeted management assistance, review accounts with large and / or soon-to-close opportunities that have not been contacted recently. Training the sales team on the simplicity of utilizing a CRM system and involving them early on in the implementation is the best way to achieve buy-in.

Key Account Planning

Key account planning is critical for any sales strategy. With the 80:20 rule as a backdrop (80% of sales comes from 20% of the accounts), organizations should identify top priority accounts based on historical sales — and develop plans for retaining and growing those accounts. Successful key account planning should not only include a prioritization of existing accounts, but also a perspective on how much growth is required from new accounts and an understanding of which accounts to target (i.e., Can we reach our goals with our current accounts or do we need to acquire additional accounts?).

Conducting an “Acquisition, Retention, Penetration” (ARP) analysis to understand where the company has historically grown or failed to grow can provide guidance on where to focus the key account strategy. Regardless of the focus, the organization should set stretch goals for key accounts based on reaching or exceeding the fair market share. The process begins by taking a "war room" approach to gaining an understanding of key accounts, including mapping each organization's decision makers and future decision makers, understanding competitors with whom they work, building insights into the company’s strategy, as well as gaining an understanding of where the organization has helped the client to grow and where improvements can be made to drive additional business.

From this extensive mapping, a key account strategy should be provided to all sales representatives for all high-priority accounts — existing or potential. Once the key account is mapped out and the strategy is in place, the organization should allocate appropriately tenured resources to serve as key points of contact with the decision makers. Then a contact strategy should be set utilizing best practice activity standards, leveraging the CRM system and making the organization a true partner to the client, rather than just another product or service vendor. While every sales organization and industry has its nuances, implementing best practices across sales targets, CRM systems (activity tracking), key account planning and cash-focused sales compensation can provide companies with a quick hit to the top and the bottom line with a limited capital investment.

Zac Mattey, Senior Associate, contributed to this story.