Would you want to invest in an U.S. industry that despite receiving billions from the federal government, lost $35 billion and got rid of 66,000 employees last year?
Not likely.
But that what’s happening.
The first new U.S. air carriers in 14 years are using timing and innovation to enter the market as air travel starts to rebound from its worst downturn in history.
Breeze Airways and Avelo Airlines are the two new airline start-ups and David Neeleman, founder of Breeze, said “There couldn’t be better timing for what we’re trying. People want to get away. They want to see new places. They want to experience new things.”
They are not alone, aircraft leasing firm Avolon estimates the new U.S. carriers are among more than 100 airline start-ups worldwide.
New Markets and New Customers
Neeleman said “There are new markets and new customer behaviors. Whenever things change dramatically, it creates great opportunity.”
He should know, because Utah-based Breeze is the fifth airline he has started, including JetBlue Airways that he launched in 1998.
The pandemic’s disruption and the recovery from it has created opportunities for both start-up and existing airlines as evidenced by the fact the TSA recently screened more than 2 million daily passengers, the most since the start of the pandemic. Market analysts did not expect that type of recovery until at least 2023.
An existing airline taking advantage of the current situation is Frontier Airlines, which recently announced a planned doubling of its flights based out of Atlanta, Georgia along with Atlanta becoming a new flight crew base.
Unique Opportunity
This unique opportunity was created by:
- A huge amount of idled airplanes – so they are cheap to lease
- A reduction in the number of flights being offered by other U.S. carriers
- Large numbers of skilled pilots, mechanics, flight attendants being available
- Available airport gate slots being offered at discounted rates
- Major airlines being preoccupied with their own survival, so they are slow to react to the new competitors
The keys to these new start-ups and Frontier being successful is the use of innovation to:
- Keep their overhead costs low
- Deploy their limited capital in the most advantageous way
- Maintain the ability to pivot more quickly than their competition
All three of these requirements fall within a company’s Finance & Administration Area.
In conjunction with the release of my 4th book, Work Less, Make More and Have Fun in Your Business in September 2022, the past five newsletters have looked at our foundational, game changing business growth and scaling methodology, the Structure of Success™, and how it is the underpinning of effective innovation.
Using our Structure of Success™ methodology I would like to explore how to apply innovation to your business’ (whether it is a start-up or an existing company) Finance & Administration Area.
The below diagram shows where your Finance & Administration Area fits in your overall company structure.
Your Finance & Administration Area
The diagram below shows the four elements that comprise an organization’s Finance & Administration area:
At a high level, let’s examine how innovation can be applied to your Finance & Administration. Each of these elements is discussed in detail in my upcoming book Work Less, Make More and Have Fun in Your Business.
Profitability
Profitability is almost the sole determinant of whether a company is successful, making it the most important part of your business’s Finance & Administration area! Abundant profitability can cure a large number of evils throughout an enterprise. If you have a wildly profitable business, you can make a ton of mistakes in various areas and still be successful because you have a large cushion for error.
There is a difference between the terms profitability and cash flow. It is not profitability by itself that can cure a large number of evils throughout a business, but profitability coupled with a positive cash flow.
There are seven main tools that you can use to measure and gain insights into a company’s profitability:
- Gross profit analysis
- Net income or loss calculation
- Owner’s discretionary cash flow
- Industry comparisons and ratios
- Budget versus actual reporting
- Break-even analysis
- Use of metrics
Asset Structure
The next element in your Finance & Administration area is your asset structure and, along with financing sources (the following area), provide you with a snapshot that indicates the financial health of your business as of a certain date. The accounts in your Chart of Accounts that include your asset structure area and the financing sources area appear on your company’s balance sheet.
Your balance sheet lists the assets, liabilities, and equity of your business. Your balance sheet shows the relative health of your enterprise’s finances, and it functions somewhat like a lab-work report that is part of a periodic “physical” for your company.
The overall health of your business is determined by the amount of your profit or loss, the amount and type of assets your business possesses, the liabilities you have, and the amount of equity in your company. You want to consider the structure of the assets of your business, how they are deployed, and determine whether the structure of their distribution is a strength or a weakness. Listed below are the things that might be part of a business’s assets:
- Checking, savings, and money market accounts
- Investments by your business
- Accounts receivable
- Other receivables (e.g., employee advances, officer loans)
- Inventory
- Prepaid expenses
- Equipment and similar assets
There are three methods that can be used to analyze the deployment of your business’s assets:
1) Direct observation of and analysis of your asset items on your balance sheet.
2) Metrics that focus on your asset area
3) Ratio analysis
Financing Sources
Financing sources and their associated risks, along with your asset structure, reveal the financial health of your business. The liabilities and equity section of the Chart of Accounts in your general ledger comprise your financing sources. Just like your assets area, your liabilities and equity accounts are shown on your balance sheet, and they provide a key snapshot about how healthy your business is at a certain point in time regarding how you are funding your business’s operations.
Financing sources include the following general categories:
- Accounts payable
- Credit card, sales taxes, and other payables
- Payroll tax liabilities
- Unpaid payroll and fringe benefit liabilities
- Other liabilities
- Loans, mortgages and notes payable
- Investments in your business by its owners
- Retained earnings of your company
All but the last two are business debt owed to third parties.
You need to examine the inherent risks of how you are funding your business. Is the funding structure a strength or a weakness? Debt is double-edged sword; in profitable times it can be leveraged and used to magnify your net income, but in unprofitable circumstances debt can amplify your losses.
There are three methods that can be used to analyze the structure of your business’s financing sources:
- Direct observation and analysis of your financing sources on your balance sheet.
- Metrics which include financing sources data to monitor the health of your balance sheet.
- Use ratio analysis to scrutinize the financial condition of your business’s liabilities. By comparing your ratio results to industry ratios you can obtain insights into your company.
Financial and Administrative Controls
The last component for determining the strength of your finances are the financial and administrative controls you have in place. These permit all three of the previous areas (your Profitability, Asset Structure, and Financing Sources) to function properly and accurately. They also include internal and external communications systems and internal work-flow processes.
Proper financial and administrative controls and procedures ensure your business is operating correctly and smoothly, avoiding chaos, and crisis management that can so easily beset a business. Having proper financial and administrative controls produces an efficient business that can be easily operated by the owners or managers on an exception basis.
The key to having the proper financial and administrative controls in place is the use of systems or processes across all six areas of your business.
Where to Start
Because your Finance & Administration area is a critical part of your business’ three support areas, it is important to keep a keep close tab on it and use innovative thinking to improve its operation.
Since Profitably is a key factor in determining the success of your company, begin by utilizing the various tools that have been introduced to assess the strengths, weaknesses, opportunities, and threats to your organization regarding its profitability or lack thereof.
Next, analyze your Asset Structure to evaluate how your business is doing in properly deploying its assets.
Then, consider your Financing Sources to ensure you are using debt funding in the most safe and advantageous way so that you will be both successful today and in the future.
Lastly, ensure you have the proper Financial and Administrative Controls, systems, and metrics in place to track and monitor your entire Finance & Administration area.
If you could use assistance with applying innovation to your company’s Finance & Administration area, please contact us using the information below so we can be a resource to you in this crucial area.
Fountainhead Consulting Group, Inc. is an Innovation and Business Planning firm. During the past 17, years we have shown over 1,200 companies how to achieve their goals by using our unique, comprehensive, and systematic FastTrak Innovation Program™, Innovation Academy™, and Structure of Success™ methodologies. Using the components in these methodologies, each month we examine an aspect of how to transform your business or organization into a true 21st Century enterprise.
Office: (770) 642-4220
www.FountainheadConsultingGroup.com
George.Horrigan@FountainheadConsultingGroup.com
Tags: entrepreneur, front end of innovation, innovation, invention, small business consulting, small business planning, start a business
