Numbers Talk!

And when they do, they speak the language of business. Whether you're opening a branch office or identifying your next customer, here's everything you need to know to become fluent in finance.

The new economy has inspired a whole lexicon -- terms like knowledge worker, free agent, and Web-site stickiness. But one part of the corporate dialect remains unchanged: The native language of business is still numbers; a company's history is written in its financial statements.

Whether you're working in hr or marketing, whether you're soloing or flying tandem with a global titan like GE, your performance affects your organization's bottom line. Either you're generating revenues or realizing savings. If you're doing neither, you'd better start looking for a new gig.

So why don't more people take numbers into account in their day-to-day work? There's no single answer, but it's not a stretch to argue that some people are simply finance- phobic. "We're all a bunch of liberal-arts majors here," says Bruce Benidt, 49, chief learning officer (CLO) at Shandwick International, a big-time public-relations firm whose client list runs from Microsoft to Hormel. "We're even more afraid of talking about money than we are of talking about sex."

When Benidt took over the CLO post in July 1998, after 10 years of counseling and training employees for Shandwick, he resolved to help his colleagues think more like MBAs. He organized an in-house "university." One of the courses, "Business Literacy I," is a two-hour class about the agency's basic finances that every Shandwick employee is required to take. He also helped launch a "master's" program, a series of workshops for higher-level employees.

"I thought these classes would cover the basics of accounting," says Diana Harvey, 33, an account supervisor in the Minneapolis office, who concedes that she knew nothing about the agency's finances before she took the business-literacy class. "But the course really focuses on how our company makes money -- and has the potential to lose it -- on a daily basis."

As for Shandwick, its experience suggests that learning the numbers is good for your company: If you know what makes figures move in the right direction, you can do your job differently and push them in that direction. Your customers will also appreciate your fluency in finance. But the biggest payoff may well be in your own career.

"One critical component of evaluating people is whether they understand the ins and outs of how the agency makes money -- and that requires an understanding of business finance," says Mary Jeffries, 42, chief operating officer at Shandwick. She's not alone. Your boss, like Jeffries, must nail your company's financial goals, and you have to help. As always, the bottom line in business hasn't changed: You can't get ahead if you don't know how to work with the numbers.

Recently, I spent a day with 20 senior staff members at Shandwick, as they grappled with three vexing problems: managing cash flow, the economics of hiring, and identifying the most profitable sales prospects. Think you know your numbers? Then test yourself by working through the following scenarios that are based on real-world situations.

Managing Cash Flow: The branch office that's profitable ? and penniless

"Cash is king." It's a maxim in corporate finance, but it doesn't say much. Many people who toss that cliché around can't explain exactly why cash flow is so vital to a company's financial health. Here's the short answer: If a company doesn't have enough cash on hand, it can't pay its rent, meet its payroll, or fund its day-to-day operations. A company may have contracts that guarantee enough sales to make it profitable, but if that revenue hasn't arrived in the company's coffers, the company may not be able to pay the light bill.

Cash flow is so crucial at Shandwick that its chief financial officer, Kelly DiGrado, 33, teaches the concept in "Business Literacy I" at the Minneapolis office. "I try to explain cash flow by comparing it to a checkbook," says DiGrado, who has spent her entire 11-year career at Shandwick. "A checkbook tracks personal cash flow in the same way that a corporate cash-flow statement tracks the money that moves in and out of a company."

DiGrado asks Shandwickers to assume the role of the company's check writer. She then unveils the case of the branch office that managed to run out of money on $3 million in sales a year. Here are the specifics:

You're a vice president for an established agency, and you've been given $500,000 to open an office in southern California. Right away, you land a $3 million account, worth an average of $250,000 a month in revenue. You're off to a great start.

You hire several people to manage the new account. Salaries for your first month end up costing $100,000. Rent is $20,000, and you pay $30,000 to suppliers for furniture, new stationery and business cards, and other operating expenses. By the end of the month, the cash balance is down to $350,000. But you still haven't billed the client, because the billing software hasn't been installed yet.

Month two dawns, and you immediately siphon off $160,000 for salaries and various operating expenses, such as head-hunting fees, equipment rental, travel, and insurance. Then, a surprise: The office computers need upgrading. The cost: $10,000. (That's what accounts for the second month's capital expenditure on the cash-flow statement.) You send the client the first bill, but you allow 60 days for payment. After all, you don't want to come off as being too demanding. After you pay the rent, the office is down to a cash balance of $160,000, and has yet to generate any revenue.

Month three: You have no time to solicit new business because you're giving the client your undivided attention. The client questions some items on the first bill but eventually agrees to pay the full $175,000 per month, and you finally get a check for that amount. After rent, salaries, and payments to suppliers, the office has a cash balance of $150,000.

Month four: It all comes crashing down. The client's monthly check for $175,000 arrives, but you need a big job printed, and the local printer won't give you credit because you're a new customer. Printing the materials in another city isn't cost-effective, so you suck it up and lay out the $250,000 for the job. You're embarrassed by your failure to anticipate credit problems, so you don't ask the client to pay the expense up front. But once the rent check goes out, there's just $20,000 for the monthly payroll, which is up to $190,000 because of some recent hires.

Now the agency is faced with a dilemma: What to do with an office that can't manage its cash flow? The moral of this real-world story? Don't front cash for your customers' expenses. Send them their bills on time. Don't let them pay late. Make sure to bill for all of the work that you do. And above all, never lose track of cash flow.

These are basic lessons of cash management, but that's exactly the point. In the heat of opening an office, building a team and taking on a big-time client, it's not hard to overlook the nuts and bolts of cash flow. But you do so at your peril.

"The story proves," says Krista Forsberg, 25, an assistant account executive in Shandwick's Minneapolis office, "that companies can be profitable and broke at the same time." That's a good thing to remember, no matter what industry you're in.

The Economics of Hiring: Who's worth more: a $35,000-a-year rookie or a $60,000-a-year veteran?

Ask CFOs to identify their company's biggest expense, and they'll all give the same answer: You. Last year, Shandwick spent 57% of its public-relations revenues on its employee salaries and benefits. So when Mary Jeffries thought about what she wanted to teach in her "master's" class on finance, she decided to include a case study about hiring.

The prevailing view at professional firms and service companies is that younger employees are more profitable than older ones. The source of that notion? Probably resentful junior staffers who work obscene hours while their bosses are off entertaining clients. "I remember thinking that too," says Jeffries, who began her career doing five years of hard time on the audit line for Peat Marwick. "They paid me a pittance and billed me at rates that seemed awfully high, so I thought that younger people were the firm's most profitable employees."

To test that argument, Jeffries posed the following scenario to her group of 20 staffers at Shandwick: You've just landed a new client, and you need to add one full-time employee to your staff. Given the choice of hiring someone with two years of experience at $35,000 a year or hiring someone with five years of experience at $60,000 a year, what would you do?

Here's how you might go about tackling that problem. Assume that both employees would put in about 1,900 hours over the course of the year. The more experienced candidate would do more administrative work for the agency, and therefore would bill just 1,615 hours to the client (a productivity rate of 85%); the other account rep would bill 1,805 hours (a rate of 95%). At this point, the less-experienced worker has the edge.

Next, you have to account for the rates you can charge for each employee per hour. Here, at $130 an hour, the more experienced candidate has the upper hand; whereas the younger worker commands an hourly rate of just $75. The veteran candidate would bring in $209,950 over the course of the year, significantly more than the rookie's $135,375. Although the junior employee is the more efficient hire by one measure, bringing in 3.9 times more in billings than the agency pays in salary, the more experienced worker delivers more than 50% additional gross profit.

So is hiring someone with more experience always the smarter thing to do? If you work for a service company that bills by the hour, the answer, in most cases, is yes. That came as quite a surprise to Kelly Cusinato, 29, who works on Shandwick's General Motors account in Detroit. "I assumed that hiring junior-level people was always cheaper," she says, "since they may be more willing to work longer hours for less money in return for a chance at getting their foot in the door and proving themselves."

There are less expensive ways to fill a vacant spot than hiring a veteran. The group in Jeffries's seminar came up with a couple of options that could work in any organization. If you're staffing a short-term project, bring in some free agents. They may charge more per hour, but you don't have to keep them employed year-round or pay for their benefits, which can add 10% to 15% to an employee's salary.

Another option is to promote someone to fill the new slot, and have entry-level people pick up the slack further down the line. Although you'll pay out one big raise and spend a bit more for entry-level staff, you would still spend less than if you hired an additional full-time employee. But no matter what solution you opt for, remember the bottom line: Run the numbers before you make any assumptions about which employees will bring in the most money.

Gauging Potential Revenue: Which prospect will deliver the most profit?

One of the most critical financial skills for anyone in business is being able to target the right customers. Which customer makes the best match for your team? What type of customer do you want to be known for serving? Your company will make more money working with some customers than with others, but which are the right ones?

Mary Jeffries came up with the following drill to help her pr specialists answer those questions. Here, too, the lessons apply to just about any industry.

The scenario: Your office has generated some great prospects for new business -- seven to be exact. Realistically, though, you can only gather or hire enough staff to take on three new clients. How would you choose among the following?

Client #1: A blue-chip, global company -- a new client for your office but not the agency -- with $70,000 in business annually. You'd be reporting to the client through one of your company's branch offices.

Client #2: A large, well-respected local company with a $300,000 yearlong assignment. Its business has been shaky lately, and it has a reputation for late payments.

Client #3: An existing client, a steady source of work, with a $64,000 contract for additional work over the course of a year.

Client #4: A prestigious national company in an industry in which you've had limited experience but would love more, with a $96,000 yearlong contract. The customer is known to be very demanding.

Client #5: An Internet startup that can afford to pay just $60,000 annually at first, though it has significant upside potential. You'd need to add $10,000 in technology to service the account.

Client #6: A well-known regional company with a $300,000 assignment. The company generally refuses to pay before 90 days, but the check is in the mail on day 91. Out-of-pocket expenses to serve this customer would be about $95,000 annually.

Client #7: A reputable regional company with just $60,000 to spend for the year and not much potential for growth.

The four teams of Shandwick employees who worked through this exercise in June agreed that the agency's first priority is client #3, the existing client that needs more help. The $64,000 contract is easy money. "You know the industry, and you know what the client expects," Cusinato says, "so you don't have to spend additional time and money getting up to speed."

But to grow at a reasonable rate, companies must chase some new business. And it's helpful for marketing purposes to have a few brand-name customers. So most of the groups agreed that it would make sense to take on client #1's $70,000 assignment. Finally, they all agreed that client #2 would be a good choice, assuming the agency collects its fees in advance. Whether you're selling software, machinery, or services, "the shakiest companies are often the ones where there's the greatest potential for proving your worth," observes Cusinato.

So Shandwick's work groups chose a combination of clients that represent a total of $434,000 in new business a year, even though other combinations from the list of seven prospects would yield well in excess of $600,000. But the other scenarios were less attractive: Over the short term, some of the prospects would have threatened the agency's cash flow; in the long run, there was considerable doubt as to whether the others had the potential to yield bigger assignments.

For example, although any agency would love to get a piece of the Internet action -- even for the relatively modest fee of $60,000 -- not every agency has the expertise to handle a high-tech account. If the agency took on client #5 and failed to deliver, it would risk getting a reputation as a firm full of Luddites.

No company gets to pick its customers. But that fact of business life makes it all the more important for companies with limited resources to pursue the customers that they can serve best. It's crucial to connect strategy and finance, and to put them in the context of your organization's everyday operations.

And that's the workshop's final lesson: Many of the decisions you make and the actions you take have financial consequences. In your rush to get ahead, don't forget to do your numbers.

Ron Lieber (rlieber@fastcompany.com) is a senior writer at Fast Company.

Action Item: Finance-at-a-Click

Need a 24-hour-a-day guide to corporate finance? Two years ago, a company called Strategic Management Group released a use-as-needed CD titled "Why Finance Matters!"

The program walks you through the books of an imaginary company, offering lots of insightful lessons in corporate metrics along the way. The CD is highly customizable: You can load video footage from your own finance executives, and add real numbers from your organization's annual report.

Coordinates: $495. Strategic Management Group, www.smginc.com

Sidebar: A Study in Cash

Can an office be both profitable and penniless at the same time? It doesn't sound possible, but the following cash-flow example proves that it is. Because you're allowed to enter money in your accounting books as revenue as soon as someone agrees to pay it to you, this office is profitable, on paper at least. But because it didn't begin to collect on its bills until the third month of operation, it was setting itself up for trouble. Sure enough, when an unexpected bill showed up in Month Four, the office ran out of cash.

Month One Month Two Month Three Month Four
Opening Cash Balance $500,000 $350,000 $160,000 $150,000
Cash Receipts 0 0 $175,000 $175,000
Payroll $100,000 $125,000 $130,000 $190,000
Payments to Suppliers $30,000 $35,000 $35,000 $250,000
Capital Expenditures 0 $10,000 0 0
Rent $20,000 $20,000 $20,000 $20,000
Closing Cash Balance $350,000 $160,000 $150,000 -$135,000

Sidebar: You've Got a Friend in Finance

Need a finance mentor, a whiz who can answer any numbers-related question you have? Then make a friend in finance. Here's how Joe Burton, director of financial operations at Young & Rubicam Advertising Worldwide in New York City, would advise a team leader at a high-tech factory to cozy up to a numbers type.

Seek out someone at your level. For example, two vice presidents will probably have the same kinds of pressures from above and below. You may have a lot more in common than you might think.

Learn the lingo. Management focuses on several financial drivers. Understand them, and you'll speak the same language as your ally in finance.

Keep connected. Identify a few bits of financial information that are critical to your team's performance, and arrange to review them monthly with your contact. Your friendship won't be profitable if you don't leverage it.

Coordinates: Joe Burton, joseph_burton@yr.com

Sidebar: Account for Your Hiring

Conventional wisdom holds that service companies make the most money off their youngest workers, because presumably they work the longest hours and yet their employers bill them at high rates. But does conventional wisdom hold in the real world? Compare a rookie employee who earns $35,000 a year with a veteran staffer who takes in $60,000 annually. (Although the ratios are from actual financial statements, the salaries are not taken from actual pay scales.)

Level of Experience Two Years Five Years
Salary $35,000 $60,000
Total Hours Worked 1,900 1,900
Productivity (1) 95% 85%
Billable Hours Worked 1,805 1,615
Billable Rate per Hour $75 $130
Total Billings $135,375 $209,950
Billings Multiple (2) 3.9 3.5
Gross Profit (3) $100,375 $149,950

(1) Productivity: Percentage of hours worked each day that can be billed to the client

(2) Billings Multiple: Total billings divided by salary

(3) Gross Profit: Total Billings minus salary, before taxes and administrative expenses

Sidebar: How to Read Finance

You can find plenty of textbooks that will march you wearily through 300 pages of accounting marginalia. But if you want the short course on how to approach an annual report, your best bet is a 50-page booklet from Merrill Lynch, titled "How to Read a Financial Report."

This slim volume explains every accounting term that shows up in ordinary annual reports, and it does so in language that's clear, concise, and utterly jargon-free.

Among the booklet's many pointers is a lesson on calculating the most common financial ratios, which gives you a good indication of how a company is actually performing. What's a good debt-to-equity ratio in most industries? It should be less than 1.0. (This ratio is sometimes higher in banks and other service companies.) Don't try to come up with a similar benchmark for inventory turnover; that ratio varies wildly among industries.

But the best thing about this booklet is that it's free, as long as you don't mind receiving a follow-up letter from Merrill Lynch, asking you to invest money using its brokers.

Coordinates: Merrill Lynch, 800-637-7455. (Press 2, and then ask for extension 1745 and request a copy of the booklet.)

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