A company reaches maturity in its decision making when its decisions are based on financial (economic) and marketing considerations. However, a high-tech product start-up company can take a considerable amount of time to reach this point. During the company's growth, each operating discipline takes over control of the company for a period, dominating the company's decision making. Eventually growth slows until the next function takes over. These time periods can be shortened if management recognizes what lies ahead. The following discussion describes the typical evolution of a high-tech start-up enterprise.

Usually, individuals who start companies are technical entrepreneurs. Their management skills are limited, if they have any at all. Too much energy is wasted on new experiences, such as dental plans and building leases. Whenever the entrepreneur learns a new management technique, it is like a new toy, and he tries to apply it to every situation.

This person often makes agreements and deals unilaterally, and establishes precedents that will come back to haunt the company. The customers relate to the one man, and he must be everywhere and on top of everything. His great ego creates the illusion that he can do everything better himself. He no doubt believes that he will become a financial expert, and nobody can tell him anything.

His expectations of his staff are also generally unreasonable. With the limited numbers of staff, everyone is forced to wear several hats, and soon important matters start falling through the cracks. He judges his staff according to his own skills and abilities. His attitude is, "If I can write 1000 lines of code by Friday, why can't everyone else?" The staff gets very little mentoring.

Eventually sales reach the point where the company has to build more than one of each product. At that point, engineering has to direct the company. There is little or no documentation or complete designs, so manufacturing is directed from sketches, red-lined drawings, and verbal instructions. Engineering ends up running the testing as well as performing the quality control functions. They make hourly decisions, with no checks and balances, and no one does anything without asking engineering.

In this phase, proposals and manpower loading are done poorly, with no concern for yields or labor inefficiencies. Everything is programmed for success, and no contingencies are included.

The results? All vendor questions get directed to engineering, and they must handle heavy customer interface. Product designs are often finished in the customer facility. Unfortunately, this situation can't last for long.

With product available and the organization growing, the company desperately needs to secure orders beyond the original customer contracts. Sales must "feed the dragon," and it tends to do so with unilateral decisions on schedule commitments and continual pressure on the internal organization for lower pricing.

Sales pricing philosophy is based on large volume orders that often show up in small releases. The priority given to customers is based on the "loudest squeaks." Since sales doesn't know how to lose, they try to be all things to all people.

This is a dangerous phase for the company, and it can lose its focus grabbing at everything.

As organization and revenue grows, revenue becomes key for both profit and working capital. Sensitivity to customer needs drops as manufacturing takes over. Too much is expected from sales in getting orders and deliveries exactly as needed for planning purposes.

Manufacturing tends to optimize revenue dollars, ignoring the prototype and small dollar items. This can hurt the company down the road.

Under the continual threat of "falling off the cliff" (the end of the backlog), manufacturing makes all kinds of schedule promises in order to get orders, but the company doesn't have the material planning and production control skills to make it happen yet. Manufacturing tends to over-order material, building unneeded inventory, and the organization isn't yet ready to implement cost saving measures or industrial engineering, dangerously leaving these to the design engineers.

With a growing volume of shipments and limited controls, customers start to get unhappy with the poor quality. A quality control department gets established. Quality control becomes a major decision-maker, getting involved in just about all shipping issues. This includes becoming the customer interface. Quality control also decides the revenue schedule.

At first, this department is assigned to the manufacturing manager, who has a basic conflict of interest because he wants to ship anything that isn't tied down.

Soon, the "I'll stop the line if I'm not satisfied" attitude prevails, and "quality" gets overdone. It becomes a negative force without quality engineering and corrective action skills. Fortunately, this is usually a short phase in the cycle.

The marketing department evolves from internal technical people and generally starts with a heavy applications orientation. It includes poor listeners who talk down to customers. They have a "never lose an order" mentality, and sacrifice margins for volume. They believe that the solution to every problem requires a meeting with scores of people. The constant threat of a customer bailing out is used to win internal support. The customer becomes god, and all kinds of things are given as incentives such as free samples and field service.

As commitments get bigger, orders start coming in under poorly written contracts. The importance of planning is finally recognized, but while the company isn't doing this planning, the mistakes get bigger and bigger and the impact on performance increases. So does the disillusionment of the senior managers.

The organization starts to get heavily involved in financial decisions with little historical data, but everyone still expects precision. Engineering and manufacturing can't wait for accounting to respond to their needs, so they start up their own accounting functions out of frustration. Products planned because of engineering's ego fail to meet sales for return on investment expectations.

Finance starts to make unilateral decisions, getting the other departments up in arms. The emphasis on numbers increases, instead of the emphasis on credibility, and there is little concern for contingencies. Sensitivity to customers drops, and collection pressures create stressed customer relationships. A new MIS system is pushed through, but since the organization is not ready for this, the costs, time expenditures, and frustration grow proportionally. The lack of timely financial information related to cost/price relationships puts the company at high risk.

Fortunately, throughout the cycle, improvements are taking place, and good leadership can force the company through these phases faster. In spite of all the hazards, many companies survive this process, and eventually go on to great things!

Growth is a very exciting way of life, but under many circumstances it can mask many problems along the way. Unfortunately, managers who are very good at growth often collapse when a stall occurs, and it can kill the company if he or she is not able to respond in a timely manner. Many growth companies have taken wrong turns, or even disappeared, along the road to success because they were unable to respond properly when business leveled off or took a turn for the worse.

When a business has hit a problem time, the most difficult task for many managers is letting people go. There is an inherent resistance to reductions, and all kinds of rationales can be created to delay the inevitable. The trouble starts when the management doesn't want to recognize and acknowledge that the downturn is real -- when a situation requires objective and timely actions to minimize its impact on profitability and survival.

Reducing expenses, and more importantly, reducing staffing levels, are tasks most managers are uncomfortable with and find distasteful. However, every business will eventually see a slowdown or downturn, and the mature manager must take the necessary steps when they need to be taken, or risk the spiral to oblivion.

In a market downturn, the first thing the manager must do is recognize the changes and understand their ultimate impact on profitability and cash flow. There is a normal lag in the profitability drop off, and it is often delayed even further by creative accounting.

But why, oh, why does it take some managers so long to realize that without the bookings and revenue as projected and budgeted, any profit plan will fall apart? Most likely, the answer is that managers are reluctant to make any changes, particularly those changes that are not popular and require gut-wrenching decisions, such as staffing reductions.

The most obvious sign of trouble is a book to bill ratio that has fallen below one. In this situation, you must act. If bookings are down the organization must be restructured to reflect the lower booking level. Lower bookings (new orders) compared to recent or past levels (adjusting for cyclical variations) are another indicator that the situation requires corrective action. Ignoring a book to bill ratio below one is usually justified by statements like, "This is a one-time thing, and it will pass," or "This is typical of our cyclic business," but it can be fatal. When the book to bill ratio falls below one, it indicates that the level of new business coming in is less than the shipping and billing level. One of the laws of management physics states that revenue levels will eventually reach the level of bookings.

Perhaps no action should be taken in the first month when this ratio falls below one, but it is a warning signal that should not be ignored. Sometimes it is helpful to plot the book to bill ratio on a monthly rolling average. This can help smooth out the one-time glitches and prevent overreaction.

Even when the organization is balanced with man-power at the present shipping level, an adjustment must be anticipated when the booking level is consistently less than the shipping level. Eventually, action must be taken to balance the organization and resources to the new level of business -- as dictated by the booking level.

For example, a company that has been shipping at a rate of $1,000,000 per month and booking at a rate of $400,000 per month must recognize and accept that it is no longer a $12,000,000 company. It must make adjustments, and fast.

Other signals, such as weakened cash flow, increased pricing pressures, inventory growth, and more subtly, product returns and slowed collections, are also good indicators, even when revenue appears to be holding up.

Even when it is obvious that the supporting revenue will not be there, many managers rationalize their inaction and will fight making the needed corrections. This delay, no matter how difficult or distasteful the tasks may be, will drive a company down the spiral to oblivion. If management ignores the signs and resists making changes in a downturn, the spiral is underway.

Step 3: As the retention of excessive resources continues, the impact on profitability becomes more severe.

Firstly, the lower billing level will not cover the costs of supporting the higher-than-needed shipping level. The problem is compounded when excess personnel, besides costing the company money directly, create inefficiencies, spend too much money, and tend to create more scrap, playing real havoc with the bottom line.

If an organization is really determined to fight cutbacks, their strategy will include getting new business at any price, and the company will take on low-margin business, including those jobs no competitor wanted.

Actions taken too late in the cycle create a push-pull problem, resulting from an imbalance in inventory and management skills. This increases management pressure even more, resulting in decreases in efficiency and increases in scrap.

At this point, upper management often finds that it has been relegated to oblivion, as the company is now out of control.

The entire downward process, brought about and perpetuated by inaction, can be seen in deteriorating cash flow and expanding inventory. The cash flow problem becomes clear when receipts (collections) are compared to expenditures. No sophistication is needed. What comes in must equal or exceed what goes out. Eventually expenditures will exceed collections as the rate of input material, services, and payroll is far more than needed to support the bookings and committed shipping levels.

The alert manager can prevent this spiral from beginning by focusing on the staffing levels and controlling the inflow of materials.

The payroll is clearly and easily measured against both the company's need and what it can afford. Management must reassess the roles and numbers of personnel that will be required to support the anticipated amount of business. Personnel reductions are difficult, and it is natural for people to feel that it is the other department that should take the hit. This is one time democracy cannot prevail in the running of a company, and top management must make these reduction decisions. It helps to develop a "theme" to prevent any suspicion of unfairness or favoritism. For example, "We will cut out project X and those associated with it," or, "We will forego our European activity for now."

Following that, management must set a target dollar amount of savings from this reduction. This ensures that it is not only lower salary people who are let go, which might happen if the target was in numbers of employees only.

Most importantly, once the decision to reduce staffing has been made, it should be implemented immediately (as soon as the paperwork is complete). There is no need to "wait until next Friday afternoon."

Staffing reductions can be visibly detected, but while so much energy goes into wrestling with these reductions and the resulting shock waves, it is also important to make sure that some forces aren't spending unneeded money. Expenditures must be heavily controlled, or better yet, stopped altogether.

Building unneeded inventory is probably the most obvious warning flag. A company is overbuilding if it’s producing inventory not covered by orders. At first, inventory might not show the pulling ahead and catching up if inside forces are perpetuating the spiral and their activities haven’t been detected.

Ironically, with inventory builds the profit and loss will look much better because of over building. Excess labor costs and overhead are being absorbed into the inventory, giving a false impression of profitability. Even under normal circumstances, a manufacturing manager can play havoc with the profit performance by over building inventory, but in a down turn, this can be devastating because the company cannot pay for the difference.

In almost all turn-around situations faced by a manager, cash out vs. cash in is the first problem that must be resolved. All kinds of controls are set up to reduce cash, related first to the payroll and generally to all expenditures for indirect material and outside services, but off in a corner somewhere, someone continues to buy direct material for shipping product. It continues to amaze me that in many companies there are extensive signature controls for capital items, but manufacturing can commit hundreds of thousands of dollars for anything classified as "direct materials."

Therefore, the next major area that must be controlled is material. Good control and discipline can be put in place to control material expenditures, starting with a forecast of sales at the new levels of business. Once this forecast is scrutinized and approved, there is a benchmark set for the levels of material needed to keep near term shipping commitments.

The manager must track the commitments and movement of material throughout the system. The trick is to make sure the commitments to buy are consistent with what is already in inventory and what requirements are projected for upcoming shipments. Keep in mind that it is the nature and culture of purchasing personnel to buy material at the lowest price, to overbuy in order to gain a lower price, to always be sure that materials are available, and to force deliveries ahead of time if needed.

Many activities require very careful monitoring: projected COGS, the material already available in inventory that can be used, the purchase orders with planned receipts aged, and material received. Ordering more material than needed or receiving it too fast should be spotted and stopped in time.

By enforcing manufacturing limits according to shipping forecasts, you can prevent extra labor and material expenditures and keep the business going through the downturn. Cash becomes even more important here. The company going through a downturn must have the cash available to weather the storms ahead. As sales go down, the accounts receivable (still higher from past sales levels) can throw off extra cash -- if the operating levels can be lowered quickly enough.

Managers must know what to do in case of a problem. Time is of the essence in spotting a downturn. The manager must have the maturity to respond properly when the warning signs come: book to bill ratios under 1.0, poor cash flow, excess inventory, material flow, and profitability problems. Responding promptly in these situations will not only prevent a further slide down the spiral into oblivion, but they will also prepare the organization to react quickly to an upturn -- the fun part of running a business.

Clients have often asked me to help interview candidates for key, senior positions in an organization. This can be a good idea, because I will usually look for different things in an applicant than they would. I have different experiences, and I am not under pressure to hire someone in the near term. However, before I accept such a task, I make sure the client understands that I will expect certain things of the process and that I will have a number of biases right from the beginning. I will be very selective.

To begin with, I recommend using a professional search firm, even though at first, my clients usually think they are too expensive. "After all," you might ask, "who can do a better job of finding and interviewing than those with a vested interest?" What you may not realize is that looking for referrals or advertising in the newspaper cost far more in time, energy, and hidden costs than the out-of-pocket costs of a search firm. The winners you are looking for are rarely the kind of people who read the want ads, and in fact, one of the tasks you should give the search firm is to go after specific people (Give them names!) who are doing a good job for competitors or have a great image in the marketplace. You are out to hire someone who will have to be pulled away from their present job, and expect their present employer to do everything possible to keep them.

A newspaper advertisement will bring in all sorts of resumes, each of which must be read. Additional time is then spent making the phone calls to check references, and all these things are taking your time away from your main duties. This is doubly wasted time when the search firm is better equipped to do the reference checking than you are. Newspaper advertisements for senior positions often bring hundreds of responses, but out of these will usually come only two or three candidates worth talking to more than once. Meanwhile, you have already spent many hours and considerable expense -- even before you've started looking closely at those two or three.

I insist that, before anything else is done, the position and expectations be well-defined. Often the written job description and the actual job responsibilities are very different. The search firm can help you define the role this new person will play in the organization, listening to what you say you want and then playing it back to you in written form. Once the search firm clearly understands your needs, they will most likely present you with several candidates that all meet the established criteria and leave it up to you to select the one that would fit best into your organization and where the chemistry feels good.

In addition to their basic role of finding candidates, they can then serve as an excellent go-between when you've gotten down to the negotiating phase. Unlike newspapers, search firms can provide candidates that are currently employed by competitors, and therefore good sources of enemy intelligence. The search firm can then help you access that information, either from their data gathering efforts for the candidates or from direct interviews by them or by you.

The chemistry of how the person would fit into the organization is crucial, and the early meetings should cover this issue. It's a very good idea to introduce the candidate to your staff as those who will work as peers and those who will be the candidate's "inside customers."

During the second phase, you should explore the candidate's capabilities and complete the reference checks. The better you get to know the candidate, the better you can assess how well they will fit into your organization. Phases one and two can both be conducted more successfully if they take place in a relaxed atmosphere, such as over a meal or in a hotel lobby.

The final interview process should include several meetings with the candidates by you and selected key people in the organization. This process is very important to both you and the candidate, so don't apologize if it becomes tedious for both sides.

During phase three, it becomes important to make sure the candidate gets to know all the subtleties of the position and all the cultural issues that will affect their success. This is the time to explore all the issues and doubts you may have. For example, the candidate from a important big company position with all the fringes might have trouble making the change to your "do-it-yourself" environment. It is extremely important to be candid in this phase, and you should direct much of the conversation as if the candidate is already in the job as you envision it.

On the positive side, if the candidate is the potential superstar, then try not to let the relationship break down over compensation issues. Bear in mind that if there is a real need for someone to fill the position, and if the candidate is the right person for the job, then yielding to a few dollars difference will be long forgotten before very long. The new hire also presents a good opportunity to change the culture if this is needed. Hiring a strong new key person with an entirely different viewpoint will expand the company's operating styles.

On the down side, make sure that this person is far more capable than any candidate inside. I have seen large companies where a good inside person who is competent, loyal, has a good understanding of what is needed, and a high probability of success was passed over because those making the hiring decisions were aware of and focusing on the candidate's weaknesses. However, because the outside candidate is unfamiliar to them, they are not aware of the outside candidate's weaknesses. This hiring decision then becomes a morale problem when others in the company realize that the new employee was selected from a two-page resume and a two-hour interview.

I believe that it is very important that the candidate's future supervisor do the reference checking for the final one or two candidates personally. This is too important a step in the overall process to delegate to

others. He or she should be asking questions about the candidate's reactions under various conditions, not about whether they work hard, or are loyal, etc. Obviously the reference is often on guard to avoid saying anything negative, so that is why the questions need to be more open-ended. Don't make them answer simply "yes" or "no." Most people will not make negative comments about a candidate even if you prod them that the candidate cannot possibly be perfect.

One technique that often works is called wait time. Ask an open ended question or a leading comment, and then simply wait silently for them to respond. If they offer a very terse response, just say, "I see," or "Yes . . ." and then wait some more. The person on the other end of the phone will most likely feel that they need to fill the silence, and end up saying much more than they would have otherwise, or in response to a directed question.

You would also be surprised what you can learn by listening "in between the lines". I personally do not like to acknowledge negatives in such situations, in fear of the obvious possibility of a lawsuit, but the caller can draw a lot of conclusions by responses such as, "My daddy always told me that if you can't say anything nice about someone, you shouldn't say anything at all."

Before we begin the search and interview process, my client needs to believe that they are the best game in town. Our objective is to find the best person available -- the superstar. Therefore they should not begin compromising before they begin by putting a financial cap on the position. After the person with the "right stuff" is found they can determine a suitable salary. If the client is truly looking for the best possible person, they should expect to have to pull him kicking and screaming out of another company, and should expect their current company to make counter offers and produce other incentives to try to get the candidate to stay.

Finally, I tell my clients that if they're the best game in town and they want me to help them find a superstar, they need to buy into my hiring biases.

1. Don't hire someone who is currently unemployed. While this won't sit well with the millions of unemployed, remember, we are looking for a superstar. The person has to be in demand. If laid off due to unfortunate circumstances, the person in demand will have no trouble walking into another position.
      
2. Don't hire someone who has jumped from job to job too soon. Instability is a drawback in any position.
      
3. Don't hire someone who has followed their boss from job to job. You will seldom find a leader among those who have followed all their careers, and the superstar is a leader, not a follower.
      
4. Don't hire someone who isn't focused. This person is generally responsive to any job and doesn't make it clear what they are interested in. They don't really know where they are going.
      
5. Don't hire someone who made more money in two previous jobs, and don't hire someone who will take a significant pay cut. There may be some sound reason the candidate wants to join the company, but if you are paying less than in two previous jobs, the mind set of your candidate is wrong. Someone who isn't ambitious on their own behalf will probably not be ambitious on yours either. Anyone should be able to see that this is not a good fit.
      
6. Don't hire someone who has done no research on the company before the interview. Why hire someone who is not interested enough in the company to find out something about it?
      
7. Don't hire someone who has not been with a winner. Once a person has had a taste of being on the winning team, nothing else will do -- they must get there again.
      
8. Don't hire someone who doesn't seem basically intelligent, who has no common sense. It is amazing how good a person sounds when they know all about the specific job they have done. However, you need to make sure they can walk across the street without jeopardizing traffic.
      
9. Don't hire someone who has failed to achieve success in their previous (current) company. Do you really want to hire a CFO from a company going bankrupt? Or an engineering manager who hasn't released a newly designed product in years?
      
10. Don't hire someone who will accept any job available -- barber to brain surgeon. This just demonstrates how dangerous a person is.
       
11. Don't hire someone who was fading in their previous company. In the reference check, find someone to decode all the fancy titles.
       
12. Don't hire someone who has worked in the industry for several years, consistently earning far below the norm. This strongly indicates that the person has a problem you'd be crazy to inherit voluntarily.

Searching for someone to fill a key position requires patience. Having nothing for an extended period of time is often better than settling for something much less than what is needed. Remember, it is important for this person to hit the ground running, and not require training -- or rehabilitation. If you conduct an intelligent and patient search, you can find a superstar.

Management reports are a necessary evil of running a company. Unfortunately, they are also the weakest and most inefficient tool I have encountered in my consulting activities. Often, the initial phase of my work at a company is severely hampered by the lack of factual and sufficiently detailed reports. Especially in struggling companies, proper reports that supply the information needed to run the company are scarce, and those that do exist are generally weak and untimely.

Companies create data from all directions within the company, but at the same time, provide very little in the way of useful reports until they learn how to convert that data into meaningful information. Even in companies with sophisticated MIS systems, reports may be plentiful but useless. Many operating managers have complained to me that they are embarrassed because the reports are piling up unread. There simply isn't enough time to read them all, but they are afraid to complain for fear that it will be perceived as a negative reflection on their management abilities. However, the more serious problem is the fact that most of those reports are useless because they do not provide the timely information needed to run the department.

Many times, inadequate reporting results from the fact that the accounting and MIS managers are deciding what reports they think others will need, so that’s what they produce. This thinking is completely backwards. Accounting and MIS need to produce an accurate and timely product that serves their customers, the department heads. In order to do this, they should begin by asking each department head what reports they need to support their work and run their department.

It is astounding how many MIS managers will talk for hours about the vast quantity of reports their department turns out but have no idea how (or even if) they are used. They don't know whether or not the information is useful; they haven't learned that a few reports containing meaningful information are far more valuable than many reports full of useless data.

Reports are generally more useful when presented graphically, and when the data is plotted against other relevant information such as the budget or last year's performance. In the manufacturing company environment, I have found that several graphs, a balance sheet, a profit and loss statement, and a cash flow statement provide sufficient information to run a profit unit, be it a division or an entire company. These graphs should include revenue, profit, inventory, accounts receivable, accounts payable, bookings, and backlog.

A more subtle aspect of the art of reporting is that when you demand a report from your organization, you can be sure that those who prepare it have to review the situation in the process. In addition, reports are also the tools that support management controls, and a report that combines information with recommended actions provides the President/General Manager with a basis for making decisions without the inefficient effort of having to dig and probe for information.

The following demonstrates how basic accounting data can be expanded and transformed into useful information that can help management make tough decisions. This is not to imply that all the accounting additions are made by different individuals, but rather by the different disciplines of accounting. In a small company, these additions may all be made by one person.

As data flows from accounting to management, it gets molded, expanded, and adapted until what results is a report combining meaningful information presented in a meaningful way with recommendations for action. These financial reports start in the accounting department, and have different slants depending on who prepares them and for what purpose. That report may pass through bookkeeping, the controller, the financial analyst, and the head of finance before it becomes a useful management tool.

Initially, financial accounting was a product of the need to report tax liabilities. The accounting department still performs these tasks, but far more is required to manage a growing company. What used to be a basic procedure has developed into an art, with multiple depreciation methods, reserves for many expense accounts, accruals such as payroll, and several ways to report inventory, leading to absorbed and unabsorbed overhead.

With financial reporting such a subtle and complex process, how is a general manager to make sure that the "goesinnas" continue to exceed the "goesouttas"?

To make it even more difficult, accountants have created a report referring to the sources and uses of funds. I have yet to attend an operations review or board of directors meeting where the group didn't get bogged down trying to review the source and use of funds report. Adding insult to injury, accountants inevitably use brackets instead of good old pluses and minuses, always requiring further explanation. I am sure this report helps accountants increase their job security, but it drives me crazy, especially when I'm left in a room to figure it out for myself.

What is really needed is a "real cash" report. First, it should lay out all cash that comes into the company from customers, investors, banks, or the sale of assets. Then, it should lay out all cash going out of the company by major categories, including payroll, materials, rent, purchase of assets, dividends, interest, and principal repayment. Finally, get the calculator out and subtract the "goesouttas" from the "goesinnas."

If you subtract the "goesouttas" from the "goesinnas" and consistently get a negative number, you'd better get into the system and figure out what action is needed to make it positive. It doesn't matter if the profit and loss statement shows a positive profit, the law still holds: "The goesinnas MUST be greater than the goesouttas."

To overcome the accounting mumbo jumbo, the general manager or president must think cash and cash flow. In small companies driven by cash, all departments and functions should be summarized in a convenient and easy-to-understand format. In more complex situations with departments and divisions, each unit's cash should also be summarized to aid the management staff in their responsibilities.

In the following example, for simplicity, several small accounts have been combined and all department accounts have been summarized so they have one set of numbers.

Step 1 / Table 1

Step 2 / Table 2