Santa Claus, now in his 1,747th year, reveals for the first time how his part-time Chief Financial Officer helped Christmas Inc. claw back from near-disaster.
Last year we were hit by so many problems. Money problems. Health and safety issues. Capital funding problems. Bad PR. The lot.
“Someone posted a story on Facebook last August that said I hated mince pies and was allergic to milk. Dreadful business. I had bags and bags of letters from angry dairy farmers and retailers. And emails from worried parents asking what they should leave out for me on Christmas Eve if I didn’t want mince pies and a glass of milk. Some got a wee bit personal, a tiny bit sarcastic, which wasn’t nice. That went on for several weeks.
Not long after that another story appeared that said I mistreated reindeers. Someone started a Go Fund Me page for Rudolph and the rest of the gang and children across the world were urged to donate their pocket money. Luckily, the authorities tracked down the culprit before any money changed hands. That man was definitely Number One on my Naughty List last Christmas. Those two stories were really damaging. It wasn’t a happy time at Christmas HQ while all that was going on.”
Elf and Safety Issues
“Then we had a scare with compliance. One of the elves in the workshop slipped on some wrapping paper and broke his leg. We hired a Health and Safety inspector to help us prevent more accidents and she found that the workshop wasn’t fit for purpose. It’s a very old workshop and needed to be updated. We’d just added bits on as we grew so it was a bit higgledy -piggledy but we loved it all the same. Getting it modernized cost a fortune.
The Health and Safety Inspector hit the roof when she discovered that some of the elves were sleeping underneath their benches. I tried to explain that they do it because they love making toys and have such fun at work they don’t want to leave. But she said that it had to stop immediately. She insisted on staying in the workshop until we’d dismantled all the tiny beds and wardrobes. Some of the elves, who’ve worked with me for more than 1,000 years were heartbroken. They’d created little homes away from home underneath their workbenches.
That meant I had to create sleeping quarters for the elves and didn’t know where the money was going to come from to finance the whole thing. But then Mrs Claus read a blog about how you could hire a part-time CFO for the same amount you’d pay an office junior. She said he could help sort us out. I’d never heard such a thing but decided to try it.”
Our Part-Time CFO
“Hiring our part-time CFO David was the very best thing we’ve done. David helped us find funding for the elves’ sleeping quarters. And he sorted out our cashflow. This is the first year, for example, that we haven’t had a cashflow crisis. Every year, we employ thousands and thousands of elves to help make presents and that’s always thrown our budget so by January, the cupboard has always been bare. David stepped in and helped us arrange funding and so for the first time, we’ll be able to look forward to January. No more living on baked beans in January for Mrs Claus and I, I’m happy to say.
He’s also helped us move into new markets and made sure we had all the licenses we need. And in April this year he stopped a Mr Grinch from stealing our Christmas market franchise. That was the same naughty fellow who wrote those fake news stories last year. That’s all behind us now, I’m very happy to say.”
No Exit Planning
“David and I get on extremely well but there’s one thing we disagree on and that’s exit planning. David has been trying to convince me that I should start looking for a successor and thinking about an exit plan. But I don’t want to stop doing this. It’s what I was born to do. Retirement isn’t for me. Besides, Mrs Claus wouldn’t like me sitting around the house all day, making cups of tea and eating mince pies. So, David and I have agreed to disagree on this one matter. So, you can look forward to me popping around on December 24th for many, many years to come. Ho ho ho.”
The story of how LEGO, the family-owned toy company went from teetering on the brink of disaster and hemorrhaging cash to delivering the highest revenues in its entire history and being voted the 2017 Most Powerful Brand in the World makes for a truly inspirational tale…
Fourteen years ago, LEGO’s Head of Strategic Development, Jørgen Vig Knudstorp, delivered the kind of assessment that most managers would gladly superglue their own ears shut to avoid hearing.
“We are on a burning platform, losing money with negative cash flow and a real risk of debt default which could lead to a break-up of the company,” warned Knudstorp at that meeting.
He’d discovered during six months of examining the company that there was a lack of profitable innovation, according to David C. Robertson, author of ‘Brick by Brick: How LEGO Rewrote The Rules Of Innovation And Conquered The Global Toy Industry’.
“LEGO had plumped up its top line, but its bottom line had grown anorexic. All the creativity of the previous few years had generated a wealth of new products, but only a few were actually making money,” wrote Robertson. “To make matters worse, the LEGO Group’s management organization and systems, shaped by decades of success, were poorly equipped to handle a downturn.”
The company’s management team—twelve senior vice presidents who oversaw six market regions as well as such traditional functions as the direct-to-consumer business and the global supply chain—didn’t collaborate but instead operated in their own silos.
The result was that the LEGO Group was expected to suffer a thirty percent fall in sales with $250 million in operating costs. It had a negative cash flow of more than $160 million.
By the end of the year, it was likely to default on its outstanding debt of nearly $800 million. Its net losses were likely to double the following year.
Knudstorp’s stark assessment should have come as no surprise. Something was going badly wrong at LEGO HQ Denmark: in the years from 1932 through to 1998, the company had never made a loss but from then on, the losses had increased year by year. First there had been a little loss in 1998 but by 2003—the year of Knudstorp’s no-holds barred assessment—that had grown to something deeply worrying.
Much worse results followed a year later when the company recorded its biggest ever loss of about £217 million. By then, Knudstorp had been appointed CEO.
“In 2003, we pretty much lost thirty percent of our revenue in one year,” he told Diana Milne in ‘Business Management Magazine’.
In 2004, the company had a further ten percent fall in revenue. “So, one year into the job, the company had lost forty percent of its sales. We were producing record losses and cash flows were negative. My job was how to stop the bleeding.
“We had to stabilize sales and cut costs dramatically to deal with the new reality of selling forty percent less than we had done two years earlier. We had too much capacity, too much stock. It was sitting in the wrong countries. The retailers were very unhappy.”
Knudstorp, a former McKinsey analyst, told James Delingpole of the ‘Daily Mail’, “We had a dress rehearsal of the world financial crisis: a strong decline in sales and a massive increase in our indebtedness.”
The losses were partly a result of the company’s attempt to diversify in the late 1990s, in the belief its brightly coloured building bricks were losing appeal and were under threat from computer games and the internet.
It was coming under pressure from other toy manufacturers since the last of its plastic toy brick design patents had run out in 1988 and the monopoly it had enjoyed for so long in the plastic toy brick market had begun to erode.
LEGO’s diversification saw it expand the number of theme parks it owned in a bid to help increase visibility of the LEGO brand across key markets. This was despite it having little hospitality experience. Unfortunately, these capital-intensive developments didn’t provide anywhere near the expected returns.
And the company had dramatically expanded the number of products in its portfolio, according to the ‘Brick By Brick’ author. In the years 1994 through to 1998, it had tripled the number of new toys it produced.
“In theory that was a good thing: experimentation is the prelude to real progress,” wrote Robertson. … “Problem was, the LEGO Group’s once-famous discipline eroded as quickly as its products proliferated.
“Production costs soared but sales plateaued, increasing by a measly five percent over four years,” Robertson said.
The company had little idea which products were making money and which were failing to produce an adequate return on the sometimes-heavy tooling investment, according to a case study from John Ashcroft and Company.
LEGO had even created its own lifestyle clothing range and brand shops and launched its own TV series, DVDs and video games.
So, by the time Knudstorp delivered his assessment, the company was in serious trouble.
The Turnaround Begins…
Which is why with the help of Finance Director, Jesper Oveson (former Chief Financial Officer of one of the largest banks in Scandinavia, the Danske Bank), Knudstorp began to make sweeping changes.
Oveson discovered there was an inadequate degree of financial analysis within the company. While there was a profit and loss account by country, there wasn’t product analysis or line profitability, according to John Ashcroft and Company. In other words, the company didn’t know where they made or lost money. Likewise, the theme parks were a massive cash drain but no one knew why.
The two men decided on a short-term life-saving action plan rather than a long-term strategy for LEGO, which would involve managing the business for cash rather than sales growth. Key moves included:
Setting financial targets. Ovesen introduced a near-term, measurable goal of 13.5% return on sales benchmark and established a financial tracking system—the Consumer Product Profitability system. It measured the return on sales of individual products and markets so the company could track where it was making and losing money. Every existing or proposed product had to demonstrate it could meet or surpass that benchmark.
Cost-cutting (including cutting 1,000 jobs)
Improving processes (many processes were outsourced which meant employee numbers could be cut by another 3,500)
Managing cash flow
Introducing performance-related pay
Reducing the product-to-market time.
Selling the theme parks and slowing retail expansion.
Cutting the number of components from almost 7,000 down to about 3,000.
The result of these and other changes was that LEGO recovered and went on to become the most profitable and fastest-growing toy company in the world. During the worst of the recession in the years 2007 through to 2011, for example, LEGO’s pre-tax profits quadrupled. Its profits grew faster than Apple’s in the years 2008 through to 2010.
LEGO the Super-Brand
LEGO’s success has continued. Earlier this year, LEGO (now being run by Bali Padda, as Knudstorp has moved into a role where he can expand the brand globally) announced its highest ever revenue in the company’s 85-year history.
And it overtook Ferrari and Apple to be voted the world’s most powerful brand. Each year, Brand Finance, a leading brand valuation and strategy consultancy, puts thousands of the top brands around the globe to the test to find the most powerful and most valuable of them all. This year, LEGO won.
“LEGO is the world’s most powerful brand,” it announced. “It scores highly on a wide variety of measures on Brand Finance’s Brand Strength Index such as familiarity, loyalty, staff satisfaction and corporate reputation.”
Its appeal to children and adults in this tech-centered world also garnered praise from Brand Finance.
It continued, “The LEGO movie perfectly captured this cross-generational appeal. It was a critical and commercial success, taking nearly $500 million since its release a year ago. It has helped propel LEGO from a well-loved, strong brand to the worlds most powerful.”
Which goes to show that even when disaster seems certain, it is possible to revive an ailing company. Of course, it helps to have a top-level financial advisor working with you to ensure the changes you’re making are the right ones.
What To Do If Your Company Is Suffering A Cash Flow Crisis
If your company is in dire straits, take action now—don’t imagine you can wish the crisis away or continue to do whatever you’ve been doing in the hope things will get better. They won’t.
Until you identify and fix your cash flow problems then put systems in place for managing cash flow, your company is at a very grave risk of insolvency.
Without well-defined and well-managed strategies to avoid running into cash flow problems and a plan to improve cash flow if such problems should arise, your company will continue to flounder.
Fortunately, you don’t have to do it alone. The CFO Center will provide you with a highly experienced part-time CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO.
He or she will assess your company’s cash flow position and take the following steps:
Identify and address all the immediate threats to your business
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Instigate the use of regular cash flow forecasts.
Having control of your company’s cash flow will allow you to operate within your means, and move away from a ‘feast and famine’ situation that plagues even the largest companies.
Having the right cash flow management processes in place and being able to spot peaks and troughs in trading to improve cash flow is one of the most critical components of any finance function.
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“We have an allergic attitude to failure,” he says. “We try to avoid it, cover it up and airbrush it out of our lives.
“For centuries, errors of all kinds have been considered embarrassing, morally egregious, almost dirty.
“This conception still lingers today. It is why … doctors reframe mistakes, why politicians resist running rigorous tests on their policies, and why blame and scapegoating are so endemic.”
This notion of failure needs to change, he writes. “We have to conceptualise it not as dirty and embarrassing, but as bracing and educative.”
That’s because success in business (as well as in sport and in our personal lives) can only happen when mistakes are confronted and learnt from and there’s a climate in which it’s safe to fail.
It’s what the airline industry has done so successfully, he says. Instead of concealing failure, the aviation industry has a system where failure is inherently valuable and data-rich, says Syed.
In fact, his ‘Black box thinking’ refers to the black box data recorders that all aircraft must carry to provide information in case of accidents. One box records instructions that are sent to all on-board electronic systems and the other records the voices in the cockpit.
“Mistakes are not stigmatised, but regarded as learning opportunities,” he says. After a crash, an independent team investigates.
“The interested parties are given every reason to cooperate since the evidence compiled by the [independent] accident investigation branch is inadmissible in court proceedings. This increases the likelihood of full disclosure.”
What’s more, after an investigation into an accident is completed, the report is made available for everyone.
“Every pilot in the world has free access to the data,” writes Syed. “This enables everyone to learn from the mistake, rather than just a single crew, or a single airline, or a single nation.”
Syed gives the example of United Airlines Flight 173 which took off from JFK International airport in New York on December 28, 1978, bound for Portland Oregon.
Just before the airplane went ito land, the flight crew became convinced the landing gear hadn’t locked into place. They then spent so long trying to fix the problem that they ran out of fuel and had to crash-land into a residential area, killing eight people onboard.
An investigation discovered that the flight engineer hadn’t been assertive enough in telling the Captain the fuel was running low. The Captain meantime was obsessed with trying to fix the landing gear problem and avoid giving passengers a bumpy landing.
As it turned out there had not been a problem with the landing gear in the first place.
Afterwards, new protocols were put in place and training methods were revised. As a result, nothing quite as bad has happened again.
So much so that flying on airplanes is now safer than any other form of travel because the industry investigates and learns from its mistakes.
“Openness and learning rather than blaming is the instinctive response – and system safety has been the greatest beneficiary,” Syed told Director magazine.
Dyson Vacuum Cleaners
Sir James, the designer, inventor and entrepreneur, is another committed to learning from failure.
He made 5,127 prototypes of his bagless vacuum cleaner before he got it right. This practice has obviously paid off because Sir James is now worth more than $3 billion.
“Creative breakthroughs always begin with multiple failures,” says Sir James. “…True invention lies in the understanding and overcoming of these failures, which we must learn to embrace.”
Without them, innovations won’t happen, he says. “Failures feed the imagination. You cannot have the one without the other.”
Great inventors always develop their insights not from an appraisal of how good everything is, but from what is going wrong, Sayed wrote in the Daily Mail.
Using Failure To Grow Your Business
Obviously, failure is only useful if it’s acted upon. “You can build motivation by breaking down the idea that we can all be perfect on the one hand, and by building up the idea that we can get better with good feedback and practice on the other,” says Syed.
Some of the world’s most innovative organisations like Pixar, the Mercedes F1 Team and Google “interrogate errors as part of their strategy for future success.”
Take Google’s decision to test which shade of blue in its advertising links in Gmail and Google search worked best, for example.
Rather than ask its designers to choose the shade of blue for those links, Google decided to run tests known as ‘1% experiments in which 1% of users were shown one blue and another in which 1% of users were shown another blue. Then Google went further and ran 40 other experiments showing all the shades of blue.
It paid off: Google found the perfect shade of blue (the one that users were more likely to click on) and made an extra $200 million a year in revenue.
Why Don’t Companies Embrace Failure?
One of the biggest problems in business is the collective attitude we have to failure, says Syed.
“We love to think of ourselves as smart people, so we find mistakes, failure and sub-optimal outcomes challenging to our egos,” Syed said in an interview with Director magazine. “But the reality is, when we’re involved in complex areas of human endeavour—and business is very complex—our ideas and actions not being perfect is an inevitability.
“If we’re threatened by our mistakes, and become prickly when people mention them, we don’t learn from them. We need to eradicate the idea that smart people don’t make mistakes.”
To really be successful, businesses need to encourage a company-wide failure-embracing culture which in turn will create a “process of dynamic change and adaptation”.
“Success happens through a willingness to engage with, and change as a result of, our failings. Get that right and everything else falls into place,” he says.
If you would like to download the CFO Center’s report on Risk you can do so here
You can also arrange a complementary 1:1 Finance Breakthrough Session with one of USA’s top CFOs here
Colin Mills – Founder & CEO, The FD Centre Limited (www.thefdcentre.co.uk)
So, to be a highly effective FD in your business, you have to be up to date on all the latest accounting standards, be really up to speed on the latest developments in tax legislation and spend long hours in your office reviewing reconciliations and signing off VAT returns. That’s right isn’t it?
Our experience over ten years suggests that highly effective FDs need a rather different set of skills to be effective and “make a difference” in the businesses they work for. With over 100 FDs providing FD services to a number of SME’s each on a part time basis, we understand what it takes to be a great FD!
Here are the top 7 Habits for effective FDs:-
1. Competence 2. “Bean Growers” not “Bean Counters” 3. Build a team outside the business as well as in it 4. Manage up as well as down 5. Communication is everything 6. Passionate 7. Sharpening the Saw
Competence There’s no getting away from it that an Accounting qualification and experience gained being a real life FD counts for a lot. FDs will be judged initially on how well they keep the score, solve financial problems in the business and direct management attention to the things that matter financially. Although it starts here, this is not where it stops! Other key habits are:- Bean Growing, not Bean Counting Highly effective FDs should come with Business, Commercial and Strategic skills that are super strong. Super financial skills are merely a pre-requisite.
Team Orientation Teamwork is key for the modern day FD. As well as the ability to build their own team, highly effective FDs must be able to work effectively with the management team of the business and develop relationships outside the business to provide a strong network of support professionals.
People Skills “Soft skills” are the hard skills these days. Managing down, across and most importantly up to MDs and business owners is key. Being a great FD and doing the FD “stuff” is not sufficient in adding real value to the business. People need to be brought with you. Communication The way you communicate and get your point across is critical to making a difference. Influence and persuasion skills are massively important to be highly effective.
Passionate Yes “passionate”. High energy levels and having some fun is an important factor in effectiveness. What FDs do is a serious business, but it doesn’t have to be dour, and nobody likes a bore!
Sharpening the Saw
Keeping fresh and finding time to keep up to date is vital in this fast moving world. This relates to all the effectiveness habits not just technical skills!
FDs who want to make a difference to their businesses should work on these habits to become highly effective. Those that can master all these skills will find themselves in very high demand!