Topic: entrepreneurship

Some of my blog writing time has been directed to fulfilling a request to provide articles for the American Express Open Forum®.  The first one is titled “3 Components of Financial Clarity” and it went live on their website today.  You can view the article HERE.  I could have also titled this article: “What flying an airplane has to do with financial clarity,” or “The clarity that comes when understand your past, present, and future.”

I hope you enjoy the read.  If you do, feel free to share it or Retweet it.

I asked many on LinkedIn.com and here on my blog to contribute ideas to improve my young aspiring entrepreneur’s chances over his toy sale a few years ago. He had decided that his project for this year would be to sell something again. We really appreciated all the ideas.

Ultimately, we talked about where to go for heavier traffic in the country and realized that most skiers heading to the Pomerelle Ski Resort pass right near our home. We requested permission from the farmer who owned the field (happened to be my uncle) and set up at the base of the Albion grade.

We started with market research. My boy called Pomerelle to ask how much they charged for hot cocoa. Mid-conversation he hung up the phone and exclaimed, “ONE DOLLAR AND FIFTY CENTS FOR ONE CUP!!”

He and I searched the Internet for good recipes and he went to town with his Mom to purchase the ingredients. The cups and lids were harder to come by as they were sold in 600 to 1000 packs on the web and would run over 100 dollars together. Too risky. Luckily, when we attended a cousin’s reception, he asked the owner of the Sweetheart Manor in Burley if he could buy a few cups. He grinned from ear to ear when he walked away with 60 cups and lids for free, a donation to young entrepreneurship.

We all decided that 3-5pm, when the night skiers were headed up and the day skiers were headed down, would be the best time to sell. As repetition would catch those who drove by repeatedly, we planned to sell for 2 hours every Saturday in February.

The signs, which were made out of silage plastic, required more work than we thought they would, but they showed up very well and were strong enough to leave outside for the month.

I was impressed with how much he grew over the four weeks. He went from standing their quietly waiting for someone else to initiate the conversation, to jumping up and down to get people’s attention as they drove by.

He also learned, after selling mostly regular chocolate cocoa, that he could get more people to purchase his Strawberry Valentines cocoa if he encouraged them by saying, “this one is my most favorite in the whole world.”

This is the tale of a mug, dry cleaning, and customer loyalty…

Earlier today I pulled one of my favorite mugs from the cupboard and filled it with water.  I looked at it and remembered it was a gift from a company that has helped me in my business.  I couldn’t help but think of all the times I had picked up the cup and not thought of this company.  In a way, I was taking them for granted.  I even found myself wondering if this was really the most effective use of their resources and if it would actually make me any more or less loyal to them in terms of my ongoing patronage of their services.

Two weeks ago I had a horrible experience with a local dry cleaning operation.  I will spare you the details, but when the words of “three strikes and you’re out” come out of my mouth it cannot mean they were exceeding or even meeting my expectations!  After several days and all problems were resolved I picked up the dry cleaning and was prepared to let them know they had lost my business forever.  Just before I could express it the store manager said: “For all the trouble we put you through I’m going to credit your account for the cost of this order.”  She effectively defused me and I graciously accepted the credit.  And then I realized how brilliant she was.

Notice that the store manager did not waive the costs of my current order, but she credited my account for future orders.  I will have to continue to go there if I ever want to use the credit, which may give them one or two more opportunities to keep my business.  Brilliant!

So what do these two stories have to do with each other?  Sure giving your customers a mug with your logo on it is nice and maybe even appropriate.  Marketers might call it great branding as they think of all the people who might see me use it, including my 3 and 5 year-olds who have no idea what the company even does.  But is it really effective?  Is it going to keep me coming back for more?  My argument is probably not, especially since I have used it enough to where I don’t even think of the company when I pick it up.

Even though I had a terrible experience with the dry cleaner, I am going back so I can use my credit.  And, if they do a good job, they will likely keep my business.  Now that is an effective use of company resources to engender loyalty.

So, what is the most effective use of your resources to create customer loyalty?

Raise your hand if your life has been improved by an entrepreneur. (everyone’s hands better be up!)

Now raise your hand if that entrepreneur DOES NOT have ties to immigration if you go back 5-6 generations. (pretty much no one’s hand should be up!)

We have a problem in America in that entrepreneurs, smart and motivated entrepreneurs, want to move here and start companies here and solve problems here and CREATE JOBS here, and we can’t get our damn visa program together to faciliate that. So what do they do? Unless they have their own capital (find me an entrepreneur that does), they try to start those companies somewhere else.

The Startup Visa is trying to solve that:

StartupVisa.com was created by Eric Ries, Dave McClure, Shervin Pishevar, Brad Feld, Paul Kedrosky, & Manu Kumar to help raise awareness and change policy around the EB-5 visa, which enables investors from other countries to get a visa in exchange for starting a business in the US with $1M in capital (or $500K for economically targeted areas) and the creation of at least 10 US jobs.

StartupVisa would like Founders to be able to come to our country and start companies if they can raise capital here to do so. Sounds logical to me.

Click on the “Tweet Congress” button below the capital and tell Congress to support this initiative!

You can read more here:

Startup Visa End of Year Update
Let’s Give Visas to Startup Founders
The Startup Visa And Why The Xenophobes Need To Go Back Into Their Caves

INTRODUCTION

Clarity in business has to do with three things – the past, the present, and the future.  Where we’ve been, where we find ourselves today, and where we are going – our final destination.  Like a three-legged stool, removing any one of these elements would damage our ability to see the whole picture of our business.  When we achieve this clarity, here are the three main benefits we receive:

BENEFIT 1 – MINIMIZE ANXIETY

Anxiety in a business is usually associated with fear, worry, and uneasiness about potentially undesirable outcomes.  For example, a business that is nine months behind with its financial statements may generate some anxiety in those who are running that business.  They might know what the balance in their bank account is today, but they have no idea if they are actually profitable and if they can sustain the business in the future.

I was recently introduced to a business experiencing financial difficulties.  It did not surprise me to learn that they had not received accurate or timely financial statements in years.  They lacked any way to measure their performance historically other than the cash in their bank account, which is often a false indicator of how the business is doing.  They lacked a way to measure their current productivity and success, and they had no clarity on where they were going and how they intended to get there.  Anxiety in this business was high.  It was not until they gained clarity in their past, present, and future that they could create a plan to turn their business around and return to profitability.  Not coincidentally, this clarity, even though it painted a very grim picture, reduced everyone’s anxiety and reinvigorated the entire company as they worked together to save the business.

BENEFIT 2 – IMPROVE TACTICAL DECISION-MAKING

We obtain clarity in the past with timely and accurate monthly financial/managerial reporting.   We obtain clarity in the present with weekly dashboard reports and other productivity and cash management tools.  Our clarity in the future comes from a combination of short-term cash flow projections, an annual budget, a 5-year plan, and an up-to-date financial model.   Knowing that tactical decisions involve the day-to-day functions in a business, here is an example from one of my clients on how we improved our ability to make tactical decisions with clarity.

In our monthly executive team meeting in which we discuss the past, present, and future of the firm, the President shared that one of our largest customers was requesting a new Request for Proposal (RFP) from all of its vendors for some of the services we provide.  Included in this request was an entirely new tier of services for which we had never had to provide unbundled pricing.  Within 30 minutes we constructed an entire financial model to determine the lowest possible prices we could offer without damaging our margins.  This information was powerful, especially when the President realized that her competitors would likely have much higher prices than our minimums.  The result – we won the business with prices that increased our margins but still came in at or below our competitors.

BENEFIT 3 – IMPROVE STRATEGIC DECISION-MAKING

In addition to improving tactical decision-making, financial clarity may bring its greatest benefit in terms of driving the strategic direction of a business.  Here is just one example:

Another growing company for who uses our CFO services became dissatisfied with the performance of its distribution strategy.  Sales growth had been less than stellar, to put it nicely.   We began to explore different distribution strategies, desiring to be open to all options and suggestions.  Because of our already-existing financial clarity, the process was quite simple – evaluate all of our options and find the distribution strategy that would add the most value to the shareholders.  We modeled each option and eventually chose the one with the most promise.  Although we are still in the development and implementation phases of this strategic change, we have already received several points of validation that we are moving in the best direction.

CONCLUSION

This post focuses on the benefits of financial clarity.  I will be publishing another article with some tips on how to obtain clarity on the American Express Open Forum site shortly.

Start-Up companies do not need theoretical or impractical advice. They need tips and suggestions that they can easily and swiftly implement to improve their chances for success. In the spirit of this need, here are ten tips in the areas of accounting and finance that they should consider implementing in a hurry:

1.  Entity selection – I am asked about this a lot. It is always wise from a cost-saving perspective to run as a sole-proprietor when you first get started. However, it is not wise to remain that way for too long. Some of the potential triggers to incorporate or organize an LLC include:

bringing on partners or investors

gaining your first and subsequent customers

adding employees and/or contractors

protecting intellectual property and personal/other assets

planning for taxes.

One other point to make in entity selection – creating an entity is about setting up a legal structure and, in my opinion, does not mean you have created a business.  Getting customers to accept your promises and then receiving payments from those customers when you keep or deliver upon your promises constitutes a real business.  Focus on getting customers, then you should spend more time worrying about your legal entity.

2.  Record Keeping – There are plenty of software options for record-keeping, but we need to be clear about what we are after.  Why are we bothering to keep records?  Is it to be compliant with taxes, our bank, or some other entity, or is it so that we can review and use our financial performance strategically – to improve our performance and build competitive advantages?

A start-up must first focus on record keeping for compliance.  This may mean an outsourced bookkeeper or your CPA looks over and corrects your information quarterly or annually.  My recommendation is to move towards establishing your record keeping system for strategic reasons.  You may need to have someone working on this information daily.  Depending on your volume, number of transactions, and overall complexity, the most economical but highest impact structure can be designed for your business.

3.  Banking – Yes, please set-up a separate bank account from the first day of the business, even if you are a sole-proprietor.  This makes record-keeping much easier and it helps you initially manage your business cash flow better.  I recommend a bank that has a high-level of online banking features to keep you or your staff from going to the bank very often.  Once you set-up the bank account, you may not need to ever return.  With remote deposits, online bill-pay, and so many other services available, your time can be focused on more important things, like getting your start-up going.

In addition, have a separate credit card for your business purchases.  This simplifies tracking your expenses.  You may also get a credit card in the name of your business, but it will based on your personal, not business, credit score and you will have to personally guarantee it.

4.  Billing & Collections – Be very careful to whom and under which terms you extend credit to your customers.  Resist the temptation to extend your customers an extra 30 days to pay at their request.  You are running a business and your cash flow is your life-blood.

Establish your invoicing practices under the premise of receiving payments from your customers as early as possible, even before you deliver your products or services, if possible.  Why do you think so many monthly subscription companies are willing to discount their subcription fees if you pay for an entire year in advance?  Because they know that cash flow is the life-blood of their business and 10 months of subscription cash in their hands today is worth more than receiving small monthly subscriptions over the next 12 months.

If your customers are delinquent, cut them off from your product or services.  This is hard to do, especially if they are a large and/or very profitable customer.  However, the risk of not getting paid is potentially far more damaging than trying to keep that customer happy.  Stick to your guns.  If they still don’t pay, then charge them late fees and send them to collections.  Yes, collection agencies are expensive, but they will report the delinquency to the credit bureaus as well as give you your best chance of getting paid.

All of this implies having a policy and procedure for invoicing and collections.  For more information on establishing these, you can refer to a prior blog post I wrote Collections – The Pleasant Nuisance Theory.

5.  Payroll - Do you have employees or independent contractors?  If you answered yes to the independent contractor part, then you need to know about a potential liability you have.  Are they really independent contractors?  I will not go into detail here, but I have seen companies assessed penalties in excess of $200,000 for improperly classifying their contractors.

Payroll compliance is complex and, in many instances, it makes sense to outsource it.  First, you need to be aware of it.  I know several companies that, when they started, were unfamiliar with the payroll tax laws and codes.  It did not take long before they got in trouble and one of them went out of business because they could not cash flow the back-payments, penalties, and interest.  The IRS is the worst and most expensive potential creditor for your business. Second, there are many on and off-line companies capable of the task for reasonable fees.  If you run payroll in your company, I recommend you seriously consider outsourcing this task.

6.  Taxes - Most start-up companies have losses initially.  While a start-up experiences losses for tax purposes, it is beneficial to have those losses off-set income from the highest tax bracket possible.  This may be beneficial to you, or it may be able to benefit someone else, like a close relative, even more.  There are some strategies worth exploring in the early days of your start-up.

Once the business becomes profitable, a few issues arise.  First, how you and the other owners are paid.  You can be paid through payroll, profit-taking (aka distributions, dividends, draws), and reimbursements.  There are critical tax consequences to each, and they should be explored to keep as much cash in the business as possible.  Second, the entity type will become crucial to taxation.  And third, business deductions and credits should be maximized that might include: home-business deductions, section 179 for equipment purchases, R&D credits, hiring credits (thanks to President Obama), and many others.

7.  Staff – I have written in detail before on staffing issues from start-up to medium-sized company.  Outsourcing usually makes sense at first, and then every start-up reaches a point in growth, volume, and complexity that merits bringing the function in-house and building it into a core strategic competency.  Every business has to deal with this, and when it is handled correctly, it can be a tremendous competitive advantage.

8.  Professionals – You will need a good tax CPA, a business attorney, and other professionals to help you be compliant.  You will also need professionals to help you strategically grow and succeed in your firm.  One example of professional services are the CFO services we offer to our clients.  I recommend three things for you to consider as you engage and work with professionals in your business.  First, interview at least two or three to find the right fit for your business.  Do they have experience in your industry?  Do they have contacts or other connections that could help your business?  Do you get along with them?  Do they listen well and help you understand things in a way with which you are comfortable?  Interview and find the one you like.

Second, remember that you are their boss, and not the other way around.  They work for you and you pay their bill.  You need to question their recommendations and, ultimately, the buck will stop with you even if something bad happens because you followed their advice.

Third, you want to work with professionals who have the right blend of hunger, experience, empathy, energy, initiative, and honesty.  This is tough to find, but they are out there.

9.  Financing – The very best way to finance your business is to bootstrap it and use your internally-generated cash.  Besides watching expenses, you can improve cash flow through vendor credit/trade terms, customer pre-payments, and other strategies.  If you do not have enough cash and you are sustaining operating losses, you will need to finance those losses with personal credit cards and signature loans/HECLs or equity.  When the business needs to make capital expenditures, these can be financed with leases and loans secured by the equipment.  If the company needs capital to fund an aggressive growth trajectory, then some debt and most equity instruments will do the trick.  Remember that most forms of debt require a personal guarantee from the owner(s).

10.  Benchmarking - In my recent blog post 5 Ways Entrepreneurs Improve Cash Flow with Benchmarking, I identify that benchmarking is usually free but few business owners utilize this powerful concept.  Compare your performance to yourself, your industry, and to other businesses as well.  The accounting/finance function usually facilitates this, but in a start-up it is usually the owner that initiates and follows-through on benchmarking.  Your benchmarking should include both quantitative and qualitative data.  Make this a regular part of your business, and you will quickly find competitive advantages to improve your cash flow and profitability.

11.  Payment Priorities – BONUS TIP!  I recently spoke with a man who started his business 26 years ago.  He has been through many cash flow “valleys” wherein he did not have enough cash to meet the financial demands of payroll, vendors, etc.  He taught me his payment priorities when such emergencies come.  First, he pays his employees.  Second, he pays the government.  Third, he pays the landlords of all of his locations.  And finally, he pays all other loan payments, vendors, suppliers, and others – including himself.  This is not a bad way to prioritize.

Do you have any other suggestions?

I just finished a biography on Charles Ponzi by Mitchell Zuckoff titled: “Ponzi’s Scheme.” This was a very interesting understanding of the psychology and motivations of a man whose name has far outlasted the name of many men more respectable than him. His legendary rise and fall, and his manipulation of financial instruments in the process, have made him legendary, in a very bad way.

Lesson 1 - While the press and mainstream media are often polarizing,  their effect is always attention and fame – for better or worse. Ponzi was on the front cover of the most relevant newspaper of his time two days in a row, one story praising him and another offering a much more skeptical perspective.  Believe it or not, both articles pushed his fame to even greater heights and, as a result, his company (called the Securities Exchange Company, interestingly) continued to grow in the short-term.  Many referred to him as the “wizard of finance” even though the second article gave many reasons to doubt.  The lesson – take what you read and hear about others with a grain of salt and help your business use the powerful tool of exposure through the media to improve your business.

Lesson 2 – Don’t let greed, pride, and ego drive how you run your business. Ponzi was very motivated by his greed, pride, and ego.  He had a great idea to arbitrage off of currency and postal reply coupon mechanisms, but he was never allowed to actually use those mechanisms in his business.  He got some investors promising a 50% return in 90 days, then tried to use the mechanisms but was not able to.  He kept getting more investors as his fame grew, but he was never able to actually invest in these mechanisms and make the 200%+ profit he hypothetically could earn to pay his investors a 50% return on their money and still make a significant profit.  Although his profits were hypothetical, his spending habits were quite literal.  It was more important to him to gain fame and prominence by over-spending than to actually run a viable business and live within his means.  If he could have checked his pride, ego, and greed at the door, he would have put a stop to it all right in the beginning.  But he couldn’t, and now he’s a legend who ultimately died broke and alone.  The lesson – we all need to stay grounded and humble.  Whatever you need in your life to remind you to be that way, then get it into your life and keep it there. When convicted to five years in prison, Ponzi penned (translated to english) “Thus passes worldy glory.”

Lesson 3 - Put your money where your mouth is. Ponzi’s first verbal critic of any influence was Clarence Walker Barron, one of the most respected financial journalists and authorities of his time.  Ponzi had taken a great deal of money out of his growing company and invested it into bank stocks, bonds, and real estate.  He spent a great deal on fancy cars, big houses, and every luxury imaginable.  Barron took issue with Ponzi on several fronts, but the most important was this – why was Ponzi investing in so many low return, relatively speaking, investment opportunities that were far from offering a 50% return in 90 days.  If Ponzi really believed in what he was doing, why would he be so heavily diversified into such discouraging alternatives.  The lesson – if the person selling you something isn’t using it, then that is your first sign you should not buy.

Lesson 4 – Success fosters lawsuits, whether merited or or not. In the beginning of his scheme, Ponzi owed a furniture dealer some money and paid him off with one of his investment securities.  The man, assuming Ponzi used his money as the seed capital to fund his new firm, saw the company begin to succeed (at least it appeared to be succeeding) and sued Ponzi for 50% of the company.  Even in the 1920s success bred pointless legal battles.  The lesson – make sure to reserve adequate funds to defend and protect yourself and your business.

There are certainly more lessons to be learned, but those were the most poignant to me as I experienced the amazing rise and fall of such an interesting character in the financial history of the United States.

I’ve been thinking a lot lately (perhaps too much?) about business, strategy, growth and other big picture decisions that can help push a company forward towards lofty goals ($100MM+ in annual revenue).  I’ll be the first to admit, my mind gets a little mushy sometimes when I think about all of the moving pieces it takes to get to that level of annual revenue.  There are a few revenue related milestones that are significant in an entrepreneurs career.  The first is the almighty $1 million dollars (in Dr. Evil style voice).  Some readers are starting companies or own a business and have high hopes to generate $1M in annual revenue in 2010.  It’s not an easy thing to do.  I realize that revenue can eventually mean little without profit, but for the purposes of this blog post, I’m focusing on revenue goals.  We’ll assume we all know how to control expenses enough to stay in business (or can raise enough money to afford losses until we hit profitability), and as such, the discussion will stay focused on the top line number.

So what kinds of things do you do when building a company from $o to $1M in sales?  All of the really scrappy, dirty, I-wanna-hire-someone-else-to-do-this kind of stuff. This stage is the scariest in my experience because it feels the most risky.  You don’t have revenue to fall back on if you screw up bad, and you are likely taking financial risks that you aren’t getting a return on (i.e. putting money in, not taking any out).  Also, its a time when you are certainly more lonely then at other stages of revenue growth.  There are some really cool parts.  You make lots of fast decisions, your team is really close (because it is small!), and you get to really celebrate critical ‘wins’ that propel the business forward.  Also, energy is perhaps at an all time high here as you are so completely consumed by your new shiny idea that you cannot sleep.  Every extra minute is spent thinking about new features, benefits, revenue models and ways to sell more, add more, and find more users and customers.

The next step up in revenue seems to be around $10M in annual sales.  Surely between $1M and $10M some incredible things have to happen.  I have been fortunate enough to experience this stage a few times in my career.  There are a lot of things that happen during this stage of growth that are entirely different then the previous stage ($0 – $1M).  A lot.  The company undergoes drastic change in almost every area.  The team gets a lot larger.  So do the offices.  So do the bills.  Hopefully so do the profits!  But not always.  A lot of what happens depends upon how fast you go from $1M to $10M.  The longer it takes, the more the companies are likely to feel and act totally different.  Case in point; if you go from $1M to $10M in sales in a year, is it likely you are a technology/internet/viral consumer business?  Yes.  If it takes you seven years to do it, are you more likely to be a ‘traditional’ type of business that acquires customers in ‘old school’ formats?  Yes.

Let’s assume you are trying to build a business that will go from $1M to $10M in less than seven years.  Heaven knows, every business I have been involved with certainly fits into this assumption – although only a few have actually been successful in doing it.  If you want to grow your business at a brisk pace, and get into the double-digit millions, you have to take some pretty decent risks.  There is no way to sludge your way to $10M in sales in under three years, it just doesn’t happen.  You have to go at a bit of a break-neck speed.  There are always exceptions, but I’m talking about the rule, since 9 times out of 10 that is what I seem to relate to most.  Anyhow, I digress.

So your sprinting towards $10M by adding employees, customers, financing, products, services and square footage.  You are also likely adding partners, debt, complaints, stress, turnover, and hours.  There is a lot of trade off as you can see.  It’s worth it though if you manage it right.  What does ‘manage it right’ mean you say?  I don’t know.  I’m not so sure I’ve figured that out yet.  I can say this though – it’s different for everyone.  I’ve done a pretty good job at making it ‘worth it’ for me and my family – with emphasis on the phrase ‘pretty good’.  I can do better and it seems that over time, for the most part, I improve.  Be prepared for the biggest challenges you will ever face though in terms of tough decisions.  You will likely have to fire some friends, put some stress on your personal life and go thru some frustrating choices all in the name of revenue.  Does that mean it isn’t worth it?  Of course not.  It’s totally worth it.  Why?  Because you are going to have a bunch of crappy stuff happen to you whether you hit $10M in revenue or not, so you might as well just do it.

This is the part in the post where  I have zero experience to call upon.  Going from $10M to $100M in sales is something I have never been a part of.  I have been a ways north of $10M before, but not even close to $100M.  Everything that happens from here on out is based on several things in my opinion (in no particular order):

• Quality of people that we hire – they know their stuff and are a great fit within our company culture
• Expanding direct sales and adding channel sales
• Potential VC’s on board to accelerate growth, help with key hires and strategic decisions
• Maintaining momentum, culture and energy amidst great change
• Not getting lost in too many new ideas – find that balance of focusing on core competencies while still being innovative

I know there are a lot more things that should be on this list.  Care to add any?  I welcome them in the comments.

Wikipedia defines Energy as:

“In physics, energy (from the Greek – energeia, “activity, operation”, from – energos, “active, working”) is a scalar physical quantity that describes the amount of work that can be performed by a force, an attribute of objects and systems that is subject to a conservation law.”

Over lunch yesterday, I ended up having some discussions about where entrepreneurs get their energy. More on some of my thoughts around this later, and also on things I’m trying to do (like LaunchUp.org) to provide a spark of energy to entrepreneurs here in Utah.

But my main takeaway is this: Entrepreneurial energy is very different than that described by Wikipedia about energy in physics. Physical energy is subject to laws of conservation: “In physics, a conservation law states that a particular measurable property of an isolated physical system does not change as the system evolves.”

Entrepreneurial energy is not subject to the fixed nature and inability to grow. It actually grows and grows as you have more if it being shared. As the system evolves, the energy available to entrepreneurs keeps getting larger and larger, and the more individuals involved in local ecosystems of entrepreneurship share this energy, the faster energy spreads and the greater the available energy is. It’s a perfect example of the snowball effect. Some places are doing a hell of a job evolving their system, and from the outside looking in, I can see their entrepreneurial energy breaking the laws of conversation.

It’s about sharing and connecting. About being open. About getting all amped up on entrepreneurship and making sure everyone else knows it.

Finally, where do you think (generally or specifically) entrepreneurs get energy from?

Imagine swimming from one end of the pool to another in 30 seconds.  Is that good or bad?  How do we determine how we are doing, what is going well, and what we should try and improve?  It primarily has to do with comparing our performance to ourselves and others.

Staying with the swimming analogy, what if 5 other people swam from one end of the pool to the other at the same time as you?  In the context of the others, you can measure your performance.  What if you made the exact same swim 100 times before, and you knew each of your times?  Now you could understand your performance in the context of your past.  What if swimmers all over the world made the same swim every day and you could compare your time to theirs?  Again, this gives you another perspective on how you are doing.

In sports we seem to track every number and every statistic feverishly.  It seems like every night some individual or team is breaking an obscure record of which I have never heard.  Maybe tomorrow a college basketball team will break the winning streak for a team’s consecutive wins in January when there is a full moon

In business, we sometimes forget to use our numbers and stats to measure our performance.  That’s where benchmarking comes in, and, generally speaking, entrepreneurs tend to under-utilize this tool.  With this in mind, I am writing on some of the ways that entrepreneurs have and will continue to use benchmarking to improve their businesses and, ultimately, their cash flow.

First, here is a sample report that can be used in benchmarking.  If you would like a copy of a report like this for your industry, please click on the report below and complete the request form.

How can we gather this and other information, both quantitative and qualitative, to make a difference in our businesses?  When approached with an attitude of humility and genuine desire to improve, here are five suggestions to use benchmarking to help you take your business to the next level:

1.      Refine Key Performance Indicators (KPIs) – Some companies aren’t sure what they should be tracking and benchmarking.  As a general rule of thumb, there are main categories of data that need to be addressed.  I wrote about these at length in my blog post: The Key Business Metrics every Entrepreneur should know.  As we research industry data and talk to others in our industry, we typically find new numbers and/or ratios that make sense to track.  For example, after doing some benchmarking at a trade-show with companies from around the world, one CEO learned that these other companies were tracking some operational efficiencies down to the level of daily employee activity.  This CEO quickly implemented this KPI into his dashboard and now feels he has a much better handle on productivity, which is a major driver of both cash flow and profit in his company.

2.     Enhance the Business Model –  Benchmarking means we mine through a lot of data and information, find what is relevant, and then try to use it in some way to make us better.  This process inherently leads to insights into improving the business model a company currently employs.  For example, one company that uses our CFO services learned through benchmarking that it was taking much longer than others in its industry to collect on its receivables.  With a little more information and the discovery of some “best practices” it has overlooked, the company accelerated its collections, which had a significant impact on cash flow.

3.     Emphasize Internal Benchmarking – When we discuss benchmarking, we traditionally think about comparing ourselves to others.  Sometimes some of our most helpful information actually comes when we compare ourselves to ourselves.  As sales grew in one company, the CEO failed to keep an eye on her inventory relative to the growth.  Once analyzed against the company’s historical data, the CEO learned that inventory crept way too high relative to sales.  Empowered with this information, the company quickly addressed the issues causing the problem, inventory returned to regular levels in context to the history of the company, and cash flow increased.

4.     Mobilize & Harmonize Improvement Initiatives- This is often the trickiest part of benchmarking – actually implementing positive change.  We have found that when managers and key employees are included in the benchmarking process they tend to take more ownership of the ideas for improvement that arise from such efforts.  They work together to bring about positive change, which means it gets done more quickly and effectively than if everyone continued to work in their relative “silos.”  While with a Fortune 500 company with over 300 branch locations throughout the world, benchmarking between branches was encouraged.  The branches that benefited the most from benchmarking were those that involved more than just their General Manager in the process.  Not surprisingly, those same branches were also consistently among the best-performing business units in the entire company.

5.     Make it an Ongoing Part of Your Business – Benchmarking is not unlike anything else that requires consistent attention to makes its biggest impact.  Benchmarking once and trying to implement a few new ideas will create minimal, if any, sustainable results.  By making benchmarking a part of monthly, quarterly, and annual conversations and meetings, it will become more and more meaningful and helpful.

CONCLUSION

Whether you are a swimmer, entrepreneur, or into something else, numbers tell a story about our performance and they help us know what we need to do to improve.  Benchmarking is a critical ingredient to a well-run business.  Chances are your cash flow will benefit if you do it.

SOURCES:

FINANCIAL BENCHMARKING TAKES ON NEW IMPORTANCE

WHAT IS BENCHMARKING

BENCHMARKING SMALL BUSINESS PERFORMANCE

State of the Union Response: Full Text

Jan 27, 2010

Good evening. I’m Bob McDonnell. Eleven days ago I was honored to be sworn in as the 71st governor of Virginia.

I’m standing in the historic House Chamber of Virginia’s Capitol, a building designed by Virginia’s second governor, Thomas Jefferson.

It’s not easy to follow the President of the United States. And my twin 18-year old boys have added to the pressure, by giving me exactly ten minutes to finish before they leave to go watch SportsCenter.

I’m joined by fellow Virginians to share a Republican perspective on how to best address the challenges facing our nation today.

We were encouraged to hear President Obama speak this evening about the need to create jobs.

All Americans should have the opportunity to find and keep meaningful work, and the dignity that comes with it.

Many of us here, and many of you watching, have family or friends who have lost their jobs.

1 in 10 American workers is unemployed. That is unacceptable.

Here in Virginia we have faced our highest unemployment rate in more than 25 years, and bringing new jobs and more opportunities to our citizens is the top priority of my administration.

Good government policy should spur economic growth, and strengthen the private sector’s ability to create new jobs.

We must enact policies that promote entrepreneurship and innovation, so America can better compete with the world.

What government should not do is pile on more taxation, regulation, and litigation that kill jobs and hurt the middle class.

It was Thomas Jefferson who called for “A wise and frugal Government which shall leave men free to regulate their own pursuits of industry ….and shall not take from the mouth of labor the bread it has earned…” He was right.

Today, the federal government is simply trying to do too much.

Last year, we were told that massive new federal spending would create more jobs ‘immediately’ and hold unemployment below 8%.

In the past year, over three million Americans have lost their jobs, yet the Democratic Congress continues deficit spending, adding to the bureaucracy, and increasing the national debt on our children and grandchildren.

The amount of this debt is on pace to double in five years, and triple in ten. The federal debt is already over $100,000 per household.

This is simply unsustainable. The President’s partial freeze on discretionary spending is a laudable step, but a small one.

The circumstances of our time demand that we reconsider and restore the proper, limited role of government at every level.

Without reform, the excessive growth of government threatens our very liberty and prosperity.

In recent months, the American people have made clear that they want government leaders to listen and act on the issues most important to them.

We want results, not rhetoric. We want cooperation, not partisanship.

There is much common ground.

All Americans agree, we need a health care system that is affordable, accessible, and high quality.

But most Americans do not want to turn over the best medical care system in the world to the federal government.

Republicans in Congress have offered legislation to reform healthcare, without shifting Medicaid costs to the states, without cutting Medicare, and without raising your taxes.

We will do that by implementing common sense reforms, like letting families and businesses buy health insurance policies across state lines, and ending frivolous lawsuits against doctors and hospitals that drive up the cost of your healthcare.

And our solutions aren’t thousand-page bills that no one has fully read, after being crafted behind closed doors with special interests.

In fact, many of our proposals are available online at solutions.gop.gov, and we welcome your ideas on Facebook and Twitter.

All Americans agree, this nation must become more energy independent and secure.

We are blessed here in America with vast natural resources, and we must use them all.

Advances in technology can unleash more natural gas, nuclear, wind, coal, and alternative energy to lower your utility bills.
Here in Virginia, we have the opportunity to be the first state on the East Coast to explore for and produce oil and natural gas offshore.

But this Administration’s policies are delaying offshore production, hindering nuclear energy expansion, and seeking to impose job-killing cap and trade energy taxes.

Now is the time to adopt innovative energy policies that create jobs and lower energy prices.

All Americans agree, that a young person needs a world-class education to compete in the global economy. As a kid my dad told me, “Son, to get a good job, you need a good education.” That’s even more true today.

The President and I agree on expanding the number of high-quality charter schools, and rewarding teachers for excellent performance. More school choices for parents and students mean more accountability and greater achievement.

A child’s educational opportunity should be determined by her intellect and work ethic, not by her zip code.

All Americans agree, we must maintain a strong national defense. The courage and success of our Armed Forces is allowing us to draw down troop levels in Iraq as that government is increasingly able to step up. My oldest daughter, Jeanine, was an Army platoon leader in Iraq, so I’m personally grateful for the service and the sacrifice of all of our men and women in uniform, and a grateful nation thanks them.

We applaud President Obama’s decision to deploy 30,000 more troops to Afghanistan. We agree that victory there is a national security imperative. But we have serious concerns over recent steps the Administration has taken regarding suspected terrorists.

Americans were shocked on Christmas Day to learn of the attempted bombing of a flight to Detroit. This foreign terror suspect was given the same legal rights as a U.S. citizen, and immediately stopped providing critical intelligence.

As Senator-elect Scott Brown says, we should be spending taxpayer dollars to defeat terrorists, not to protect them.

Here at home government must help foster a society in which all our people can use their God-given talents in liberty to pursue the American Dream. Republicans know that government cannot guarantee individual outcomes, but we strongly believe that it must guarantee equality of opportunity for all.

That opportunity exists best in a democracy which promotes free enterprise, economic growth, strong families, and individual achievement.

Many Americans are concerned about this Administration’s efforts to exert greater control over car companies, banks, energy and health care.

Over-regulating employers won’t create more employment; overtaxing investors won’t foster more investment.

Top-down one-size fits all decision making should not replace the personal choices of free people in a free market, nor undermine the proper role of state and local governments in our system of federalism. As our Founders clearly stated, and we Governors understand, government closest to the people governs best.

And no government program can replace the actions of caring Americans freely choosing to help one another. The Scriptures say “To whom much is given, much will be required.” As the most generous and prosperous nation on Earth, it is heartwarming to see Americans giving much time and money to the people of Haiti. Thank you for your ongoing compassion.

Some people are afraid that America is no longer the great land of promise that she has always been. They should not be.

America will always blaze the trail of opportunity and prosperity.

America must always be a land where liberty and property are valued and respected, and innocent human life is protected.

Government should have this clear goal: Where opportunity is absent, we must create it. Where opportunity is limited, we must expand it. Where opportunity is unequal, we must make it open to everyone.

Our Founders pledged their lives, their fortunes and their sacred honor to create this nation.

Now, we should pledge as Democrats, Republicans and Independents–Americans all—to work together to leave this nation a better place than we found it.

God Bless you, and God Bless our great nation.

This post is going to be more personal than most…I hope you never feel this pain.

A few weeks ago I woke up not feeling well.  I could not ignore an annoying pain in the left side of my back.  I prepared for and began my day hoping it would quickly pass (no pun intended…you’ll get it a little later).  When I sat down in my second meeting at 9:30am I found I could no longer concentrate on anything except the pain.  I excused myself only to find it difficult to make it to my vehicle.  I began the most painful 30-minute drive of my life, which ended at the emergency room, knowing that something was seriously wrong and I needed help.

After a diagnosis of kidney stones and another 48 hours of pain my situation resolved itself…hopefully permanently.  Yet something troubled me throughout this experience.  You see, everyone who helped me focused on reducing my pain, not on removing the cause of the pain (the stones).  My situation only allowed for such treatment, but it sure was a helpless feeling knowing that nothing could be done to solve the real problem.

Then I realized this is why entrepreneurs like pain.  Pain is a signal that something is wrong, that something needs to be fixed, improved, tweaked, or otherwise reconfigured to solve a problem and remove the pain.  I want to be clear – entrepreneurs do not just solve or mask pain, they solve real problems in a sustainable and usually a commercialized way.

When I arrived at the hospital, I would have done anything or paid almost any amount of money to have someone solve my problem, my pain was so significant.  You see, my perception of value was directly correlated to my level of pain.  This is no different than the customers of any business – their level of pain has a lot to do with how much they are willing to pay and how quickly they are willing to make a decision to pay for the solution to their problem causing the pain.  No pain results in very few customers.  Lots of people with pain results in lots of customers so long as the cost of your solution exceeds the pain of not resolving the problem.  Marketing and sales needs to be about identifying customer pain points and helping customers understand how you will remove their pain.  Operations needs to be about actually solving customers’ problems.

My pain was obvious and dominant in contrast to the pain that many entrepreneurs remove by solving a real problem.  Often customers don’t realize they feel pain and have real problems that need to be fixed.  Consider the progression of the mobile phone.  We certainly survived without cell phones, but their development has increasingly solved problems for more and more mobile users.  Many felt the pain of not having access to email and the Internet on their mobile device, and the smart phone solved that problem.  Then the I-phone revolutionized the way we think about mobile technology.  The integration of over a hundred thousand (and growing) applications that each solve a specific problem has created a very sustainable and scalable business model ripe with opportunity.  Solving problems that remove pain is the name of the game.

The conclusion is this – entrepreneurs love pain.  Well, at least the kind of pain that has a solvable root problem.  Entrepreneurs also like to help customers understand their pain and how to remove it.  Do you understand the pain that your customers experience?  Are you solving their problems in a way that removes their pain?  Perhaps most importantly, are you solving their problems better than your competitors?  The entire value proposition of your firm hinges on these points.  The better you fulfill this, the more cash flow your business will have the opportunity to create.

20 years ago when I started my first company, I wrote code. (Quickbasic and Turbo Pascal – nothing fancy.) In fact, my partner sold our products and I developed them, for about the first 4 years. As our company grew, we hired developers and I haven’t really written code since. (I did a little bit of HTML a few years back but in all my companies have relied on employees who were much better coders than I was.)

I’m feeling rusty. And today, for the first time in years, as I watch my team of engineers get really excited about all the things in the FamilyLink product roadmap, I also started feeling envious. I loved writing programs, testing them, and running them. There’s an amazing feeling of satisfaction when you build something that works – and better yet, something that is used by thousands of people.

Of all the hats I’ve ever worn, the only one where I ever felt “done” with work, was when I did accounting for Infobases, again back in the early days, using Quickbooks of course. When you closed out a month, your work was actually done, and that brought a nice feeling of satisfaction. But as CEO or VP Marketing, and in most other roles I’ve had, you are never done, because there are always a million more things you could be doing.

Writing code is kind of in-between. You know what is required, you write the code, you test it, it works, and you’re kind of done. You always know that there is another iteration or version just around the corner, but you do get a feeling of satisfaction when the program works as designed. Even if the next features are already on the drawing board.

Tonight I spent a half hour with some Javascript tutorials. Pretty fun stuff. Truth is, we are short on front-end coders at FamilyLink and short on QA engineers. Our backend development team is awesome, and we have another tremendous programmer starting in February. But we need a couple Javascript/CSS gurus badly. We have had enough talent to develop FamilyLink.com into a top 100 web site – design, front-end, and back-end – but we have way more plans and ideas than we have coders to pull it off.

For the next 30 days our development team is planning a pretty-continuous hackathon, since Facebook has announced changes that will have an impact on all their app developers, including us. We’ve reorganized the office so that all the devs and product team are working in 2 huge adjacent offices. I may join them if there is enough room. I may find myself doing a bit of QA in the next month. That won’t require learning Javascript as much as it will require understanding our customer experience and maybe getting up to speed on our development environment. But who knows, maybe I’ll have time to do some additional Javascript tutorials and find myself contributing to FamilyLink.com – if not by writing code, then by searching for Javascript libraries (I found a great one tonight that cartographers can use on top of Google Maps) that my team ought to be aware of.

I recently read that Mark Zuckerberg has always loved coding, but even he has given it up recently,  according to VentureBeat, to focus on company culture and strategy. From what I have heard, the fact that he is a coder and hired coders created an amazing culture at Facebook.

I have always felt Bill Gates was an amazing CEO because he mastered both programming and business. And I think it is hard in a high-tech company, to be a successful CEO if you only master one of those two things. There will be things that a non-technical CEO will never understand.

Can you think of any CEOs who still code, and who claim that it helps them be a more effective CEO?

Just got a notice last week that they were accepting nominations for the v100. I think it’s a great program, kudos to vSpring Capital for putting it on.

It’s a community-nominated and peer-selected organization for entrepreneurs in Utah.

I’ve been selected for the last 3 years running. Having said it’s great, it seems like when I go to the annual event or get the directory, it’s the likely suspects each year. I think that is backed up by that it’s been around for 7 years (100*7=700) however, there are only 260 members to date.

Anyway, like I said, it’s a great program and great idea.

To help it out a bit this year, I purposefully ignored my usual suspects, and nominated 15 early entrepreneurs that fit the definition of this program spot on. I’ve been lucky to meet most of these folks through LaunchUp.org, and am really amped to see who else I’ll meet through that this year.

In the spirit of openness and transparency (and to support Mark Zuckerberg’s claim that Privacy is Dead) here’s my list of nominees:

I hope some of them make it to the actual final list, as they all deserve to be there based on the criteria as set forth.

Good job vSpring keeping the program running for going on 8 years!!

I’ll be doing the same by posting those I vote for in the final voting once that is set.

About the v100
The vSpring Capital top 100 Venture Entrepreneurs, or v100 is a community-nominated and peer-selected organization of the top venture entrepreneurs with ties to the state of Utah. With over 260 members to date, the v100 was created when the vSpring partners noticed the need for an organization that could offer recognition to the state’s talented entrepreneurs and provide them with opportunities to partner, collaborate and maximize the chance of success. It is designed to help locate and cultivate relationships among top CEO and CTO talent. 2003 was the inaugural year of the program and thanks to participation and input from people like you, the program has been an amazing success. Our vision is that this will be integral in helping to develop and mature Utah’s startup ecosystem and in building trusted and informal relationships with top executive and technical talent in the region.

Hah! That’s quite a dream isn’t it?

Not many beginning entrepreneurs realize how tough it is to make money being a startup junkie. Sure, you hear the stories about exceptional people who’ve beat the odds – Microsoft’s great Bill Gates, college dropout becoming one of the richest men in the world. A personal contact, Jon Radoff of GamerDNA dropped out of college too after his freshman year and started a company that IPOed. GamerDNA, his third startup is now VC-backed and continues to grow. But entrepreneurs like Gates and Radoff are few in number. Most of the noise in the entrepreneurship space is hype and positives.

Admittedly, it is very difficult to become an all-star entrepreneur who creates a $100 million company, and even if you do, the likelihood of you having a net worth of $100 million within the first few years will be tough, especially since you’ll likely have investors, partners, costs, lower margins, etc.

photo credit: AMagill

When Blank Label really started developing into a decent company early in the summer of 2009, Fan Bi and I, as second-time entrepreneurs, still novices really, had big dreams of making this company the next biggest thing in retail apparel, selling suits and dress shirts (now we only do co-created dress shirts).

We had misconstrued dreams of becoming millionaires within just a few years, and building this massive network of sales representatives who would work on a commission-basis to basically put money into our ever-deeper pockets.

Hyper-growth startups that make hundreds of millions, perhaps billions, in annual revenue will make you the millionaire you wanted to be with a fancy mansion and several sports cars.

But when you look at how much some of today’s hot startups are sold for, you realize that your chances of making a ton of money are slim.

Reddit.com was sold to Conde Nast for single-digit millions, as did Going.com to AOL. I’m sure the co-founders and their investors loved the fact their companies were acquired by such big media empires, but for the price the companies were bought at, consider how the money was split up.

When you have a few co-founders and institutional funding, all that money’s not going in your pocket. It’s even doubtful that you’ll ever see half that money either.

But being an entrepreneur isn’t always about getting rich quick. In fact, a lot of times that’s just a myth. Running a business takes a lot of hard work AND time. But I’m not an entrepreneur because I dream of sleeping in beds with $100 bills covering my sheets (although I do dream occasionally). I’m an entrepreneur because I can be my own man, be deeply involved in something that’s a little bigger than me, and truly pursue my passions without any in-place constraints.

Don’t bet on making $10 million in two years. You’d be lucky if you made that in 10 years. Do it for the adventure and intellectual and personal development. Those intangibles are well worth the opportunity cost of perhaps a six-figure salary elsewhere.

This guest post was written by Danny Wong, Lead Evangelist for Blank Label, a provider of men’s dress shirts online. Check out the men’s fashion blog for more of his musings on fashion and entrepreneurship.

Most businesses have at least some seasonality to them.  Perhaps the first quarter of every calendar year is always slow, or your business comes to a stand-still every November through December.  Here is an example of a business that slows dramatically ever summer:

Notice the valley from June to August between the peaks of April and October.  The same thing happens every year in this business – it is fairly predictable.  Even though it is predictable, this seasonality can still create financial stress every year.  Let me be even more clear – this seasonality causes gyrations in cash flow that are difficult to stomach.  Let me explain this phenomenon, then I will share a few steps every entrepreneur can take to reduce such financial stress.

CASH FLOW AND SEASONALITY

Let’s start by talking about July, the lowest level of revenue all year.  The company shows a significant net loss every July because its low revenues and gross profit fall way short of covering the overhead and fixed costs of the business.  Yet, counter-intuitively, this is usually when the balance of cash in the bank account is the highest.  Why?  Because in July the company is collecting all of the April and May receivables but paying out very small amounts of variable costs (because the revenue volume is so low in July).  Although this may not sound all that stressful, it is when we talk about August through the rest of the year…

You see, as the volume of the business goes back up, there are very few receivables to collect from the summer months but variable expenses sky-rocket.  This is a huge cash drain on the business, and July is stressful because the entrepreneur is wondering if they will have enough cash to handle August through the end of the year.  Ultimately, this expansion in the working capital cycle returns to more efficient levels and the cash inflows catch up with the outflows by the end of the year.  The business returns to more steady cash flows until the next summer.  Please know that when I say stress, I am referring to the worries and concerns about making payroll, servicing debt, and meeting any other financial obligations that we worry about when our cash flow is not steady.

WAYS TO REMOVE THE FINANCIAL STRESS

1. Have a Budget and Review it Every Month -At the beginning of every year we implement a well-thought-out and planned budget for the entire year.  This takes into account the seasonality of the revenues and costs as well as projects the total overhead and fixed costs of the business.  This also projects the balance sheet and statement of cash flows so we can understand how all of this will impact our cash.  We review our budget after every month to make sure we are on track.  We also usually implement a “break-even” budget so we can ensure that if we are under-performing on our plan for the year we can still see that we will not lose money when the year is over.  This is especially useful to know when the slow times come – even though the business is not profitable during this time we can see whether or not we are still on track to make a profit by the end of the year when revenues come back up.

2.     Short-term Cash Flow Projections -We always keep at least 90 days of cash flow projected based on our current receivables, payroll, and other items as well as our revenue projections for that period.  This is updated weekly and reviewed by the management team.  It is amazing how few entrepreneurs fail to implement this simple yet often overlooked “stress-reduction tool.”

3.     Plan Financing for Cash Shortfalls -With the business mentioned above, it is a well known fact at the beginning of every year that we will not have enough internally-generated cash to handle the upturn after the summer.  So, we determine how much cash flow we will need and make sure to have a line of credit in place to cover the shortfall.  Even though credit is tough for entrepreneurs these days, there are plenty of banks willing to loan to this company.  The company has a proven track record, it understands its seasonality and can communicate to the bank exactly what will happen with its cash flow through the year, and it has an attractive asset (the receivables) and strong personal guarantor (the entrepreneur).  This company is very “bankable.”

4.    Resist the Temptation to Diversify into Non-Core Competencies - Some might look at the chart above and think it would be best to try and increase revenue during the summer months to solve the cash flow challenges of the business.  While this is great in theory, it is typically impossible in practice without compromising the core competencies of the business and, ultimately, hurting more than helping the company.  As entrepreneurs, we need to embrace the seasonality of our business as well as our core competencies and not deviate from them.  Understanding, budgeting, and planning are usually more effective than diversification.

CONCLUSION

The keys are summed up in the last sentence – understanding, budgeting, and planning.  The more you do of those three the less your financial stress will be in your seasonal business.  Reducing this stress will free you up to grow your business or spend time doing other things you love.

I have long suspected that most business people cannot give a simple definition for the common term of “business model.”  It seems to be a nebulous and vague term that escapes most.  Most people think they know what it means, but when you ask them to define it, they usually can’t come close to verbalizing it.  So I decided to see if a group of business students, those who are in the great business textbooks every day preparing to succeed in business, know what it means. 

In a classroom of a well-respected business school today I asked: “Please define business model.”  I received the same initial reaction I do from most – some blank stares and a few who started to raise their hands but then realized they didn’t really have much to offer.  Finally a brave soul took the plunge with something like this: “It’s the way a company runs and operates.”  That sure seems to be part of it, but aren’t we missing something?  A few more students offered suggestions that were similarly vague and generally lacking.

My definition is simple – a business model is how your business makes money.  Period.  It is the accumulation of all of the sales, marketing, operations, administration, R&D, finance, and everything else that goes into a business – all the strategies and tactics – that determine if the company makes money or does not make money.  Most definitions are like the ones above – mentioning different parts of running a business but failing to describe it as the company’s overall plan for making a profit.

Understanding this simple and quick definition, here is my two-pronged philosophy for entrepreneurs and their business models:

First, every entrepreneur can pick whatever business model they want.  Second, eventually our efficient market will determine the superior business model for each industry.  Those who innovate the best model for their industry will most likely win.  Those who quickly adopt to this model will likely survive.  And those who stay entrenched in their out-dated and archaic models will die.

In our competitive business environment, the best entrepreneurs are the ones that innovate the best business models in their respective industries.  I don’t know how many of them can give a quick and precise definition of the term business model, but one thing is for sure – they get it!

Bookmark It

Business partnerships are one of the most unique and trying relationships we will ever enter.  Some work, but most fail.  I did a quick test.  I searched Google for “business partner problems” and found about 169 million results.  Compared to only 143 million results for what I assumed would be the more common term of “business partner,” I think it is clear that many struggle to make these arrangements work.  Here are four warning signs that our relationship with our business partner(s) may be headed for failure.  Please note that this article assumes that business partnerships are in the common form of a Limited Liability Company (LLC).

1.   No Operating Agreement - many states do not require an LLC to have an operating agreement, and, therefore, many business owners and entrepreneurs do not understand the importance of this legal document.  The operating agreement is the agreement between all of the owners, or members, on how the business will run, who will be in charge, and so much more.  Let me share one brief example to portray the need for an operating agreement.

While at a social event recently with my wife, we connected with one of her friends from college.  He has started a business and his product is starting to sell and pick up some nice momentum.  He spoke for quite some time about how excited he was, how much fun he was having, and his new-found joy in finally pursuing his passion.  I asked if anyone else was involved with the business, and he said he had two partners.  The entire tone of the conversation changed as he described how his “partnership” had evolved, or perhaps a better description would be disintegrated.  It started with three friends getting excited about an idea.  They decided to split everything three ways and they failed to put anything into writing (namely, an operating agreement).  As time passed the expectations, time commitments, investment, and basically everything else related to these “equal” partners fell completely out of balance.  Arguments replaced friendship and greed supplanted a desire to share everything equally.  The problem – they never created an operating agreement that defined all of the important legal, financial, management, and time issues for their business.  The lack of an operating agreement has sent this budding partnership into a death spiral that will likely end in a painful and expensive divorce.

Please know that I have many more examples like this than I do of successful partnerships.  One thing all of the successful partnerships have in common – they have an operating agreement.  While certain online resources can help entrepreneurs organize their entities legally, special care and consideration should be paid to the operating agreement.  It is very wise to seek appropriate legal counsel as well as have healthy and lengthy discussions with your partners before you finalize this agreement. 

2.  Partner Pride -This is something that usually shows up when a partnership begins to have struggles and accelerates its demise.  Here is one real-world example of partner pride.  Two men started a business, each owned about 45%.  The remaining 10% went to other key employees.  As the business grew and became quite successful,  one of the 45% owners took great pride in the success of the company.  He began to tell his family and close friends that it was his company and that he was the major contributor to its success.  His pride allowed him to minimize his main partner and falsely establish himself as something he was not.  When this partnership began to fall apart and his partner extended a very fair offer to buy him out, he refused.  Why?  In his mind, he could not communicate to all of his family and friends that the business could exist after he left.  He was so infatuated with his fictitious position that he could not make reasonable or logical decisions.  The matter was finally resolved, but not without great distractions and damage to the business.

The best way I have seen to keep pride out of a partnership is to regularly review the contributions of all involved as well as discuss how each partner can improve.  If done correctly, this serves to keep everyone grounded and grateful for each other.

3.  Compensation and equity are confused -Let me be as straight-forward as I can with this topic.  Too often I see entrepreneurs, founders, and business owners that confuse equity and pay/compensation.  These two items must be separated in order to set your partnership up for success.  A few years ago I was introduced to a business with 50/50 partners.  12 months earlier one of the partners had become permanently disabled and unable to further participate in the business.  The partner remaining in the business was frustrated that the other partner put zero time into the business yet was still getting 50% of everything the remaining partner generated.  This partnership was about to fall apart until we set a fair and reasonable wage for the partner still working in the business.  The other partner’s wage was reduced to zero since he was not working in the business, although he was still entitled to 50% of the profits based on his ownership stake in the business.  Problem solved.

Ownership does not mean you should receive a wage or guaranteed payment.  Ownership means you participate in profits after all expenses are paid, including the wages of those working in the business.  In the spirit of understanding the difference between equity and pay, each partner’s compensation should be reviewed at least annually.  In this scenario, it would not be uncommon for one partner to receive a higher salary than another, especially if there is a difference in the amount of time put into the business.  Please note that the legal and tax structure of the business may determine the best ways to receive both wages and profits, but that should not dictate the separation, at least mentally and emotionally, of the two.

4.   Beginning without the end in mind -perhaps all of these points lead to this one – the need to contemplate every way the partnership will need to end or be dissolved.  Here is just a brief list of the different life events that could impact a partnership: death, disability, lack of interest, relocation, new opportunities, family changes, and more.  How will each of these situations be handled by the partnership?  An operating agreement and potentially a buy/sell agreement should contemplate these events. 

In addition, beginning with the end in mind implies that a partnership will have planned exits as well.  Selling a business can be very rewarding, and a partnership needs to look down the road to how each of the partners will exit.  For example, one partnership for which I serve as the part-time CFO consists of three partners under forty and the fourth partner is almost 65.  The younger three want to stay in the business for a long time while the older partner is hoping to exit the business and retire in a few years.  Orchestrating this partner’s exit while not hurting the business from a cash flow and leadership perspective take thought, consideration, and planning.  

The point is this – if a partnership does not properly plan for expected and unexpected exits, it will likely fail.

Do any of you have good or bad partnership experiences to share?

Based on total number of unique visitors to each of our blog posts through the year, here are our top ten blog posts of 2009.  Enjoy!

1.   TOP TEN 2010 TRENDS FOR ENTREPRENEURS - We received a lot of very positive feedback on this blog post as well as a radio interview request.  Listen to Ken Kaufman’s radio interview HERE.

2.   CFOs ON TWITTER - This blog post was updated throughout the year as we met more CFOs on Twitter.  Yes, there are some CFOs that have not only engaged in social media, but who are also pretty good at it.

3.   STAFFING THE ACCOUNTING/FINANCE DEPARTMENT IN START-UPS - This post offers insight into how a start-up should scale into its accounting/finance department.

4.   I CANNOT PREDICT THE FUTURE – BUDGETING IS WORTHLESS! - Predicting the future is actually easier than most think, and what you learn in the process makes the whole experience invaluable.

5.   WORKING CAPITAL – LESS IS OFTEN MORE - A different twist on cash flow management and liquidity improvement techniques.

6.   KEY BUSINESS METRICS EVERY ENTREPRENEUR MUST KNOW - Dashboards and business intelligence are becoming more critical for entrepreneurs.  Here is a roadmap for how to get started.

7.   HOW TO SPEND $195 INSTEAD OF $30,000 TO FILL A NEED - We received a lot of personal attention to this blog post – This gives us some insight into one business lesson learned from a family vacation.

8.   THE PROBLEM IS… - Be a problem solver, not just a problem finder.

9.   3 REASONS YOUR QUICKBOOKS STATEMENT OF CASH FLOW IS WRONG - Some technical information, but very necessary to understand if you are using QuickBooks.

10.  DOES TOO MUCH CAPITAL & SUCCESS TOO EARLY HURT START-UPS? - Interesting thoughts on what each business learns in its early bootstrapping days!

All the best for a prosperous 2010!

I’ll be there January 7, 8 and 9.  Please email me:  alex AT fundinguniverse DOT com if you are interested in potentially getting together to talk business in Las Vegas next week.  Should be an interesting show, I’ve got some good meetings scheduled but am always looking for more.

I created my Twitter account (CFOwise) on December 26th, 2008.  After one full year, this is what I have learned:

Twitter is like every other form of connecting with people (yes, I’m excluding all non-person driven Twitter accounts).  Whether it be face-to-face, over-the-phone, through social networking, or via some other medium, connecting with people professionally and personally is about BUILDING RELATIONSHIPS.  That’s it.  No secrets or amazing revelations.  But here are some thoughts on how Twitter has helped me to build more and better relationships during the last 12 months.

As my vision for my Twitter usage began to take shape, I found that there were some people with whom I wanted to connect that did not seem to feel the same way towards me.  It did not take me long to realize that they had nothing against me, rather, they did not understand the need to create and foster relationships.  They thought Twitter was a race to gain the most followers and that somehow that would be fulfilling.  Let’s be honest…most of those people have gained thousands, if not tens of thousands, of followers only to find that they were getting a lot of noise, or tweets, but they really didn’t have anyone with whom they could connect and create anything of value.  A lot of these folks have even written blog posts about how they have either unfollowed everyone to try and de-clutter their account and start building real relationships or they have started completely new Twitter accounts so they could start fresh with relationships, not numbers, as their focus.

Whether in business or in personal matters, just building relationships is highly ineffective.  You end up knowing a lot of names but aren’t able to add much value to any of them.  Building relationships of TRUST generates very effective relationships, the kinds of relationships we all want.  Twitter is a tool; it is still up to each end-user to build the best kind of relationships.  So, here is a brief list of the some of the key elements of building relationships of trust and how we can apply them to our relationships on Twitter.

Consistency- Be a regular, even if it is for a short time each day.  Respond to your @replies and Direct Messages (not the sales-oriented and spammy ones).

Add Value – Do not just listen to the conversation.  Jump into the fray and communicate.  Add value to what others have to say.  Say things that are valuable in the first place.  Re-tweet the really good stuff you come across.  Add value to the conversation. 

Be Genuine and Real - There is no faster way to destroy trust than to fake it.  Be yourself.  If you do that, you will be happy with the relationships you have built.  I sure am after my first year.

Stay Away from the Trash – Yes, there are certainly some undesirable Twitter accounts.  Just block them and move on.  Filter and flourish.

Help Others- Think about what others are trying to get out of Twitter and help them get it.  If they want exposure, then help them with re-tweets and #followfridays and whatever else makes sense.  This is an old concept, but it applies to Twitter just the same – help others get what they want and they will help you get what you want.  Sounds a lot like building relationships, to me.  If your only Twitter efforts are self-promoting, then you’re not going to attract many trust-based relationships.

Use the Tools- I love using Tweetdeck.  The search tools help me stay on top of my keywords and accelerate my efforts to connect with the right kinds of people.  There are many other applications and tools for making your Twitter experience successful.  Find what works best for you.

In conclusion, let’s consider the many advertising and marketing initiatives we have seen on Twitter.  Some have gone very well, and others have left a bad taste in our mouths.  Just like any other broadcasting medium (by the way, all of their revenue models are built around marketing and advertising), the ones who are building relationships of trust are the ones we listen to and the ones from whom we buy.  If that is true, then we need to try and be just like them.

I am writing down my New Year’s resolutions (actually, there my 2010 goals – but it’s easier to call them NYR) and thinking about all the different areas of my life that I want to work on in 2010.  Family, Church, Work, Friends and more.  I’m curious – what are you going to try and improve in 2010?  I have so many things on my list, I want to narrow it down.  And I’d love some new ideas.  Some of the things on my list are perpetual items and should likely be excluded for that reason.  Some of them are new and creative, as I have become more adept at being inept at new things.

Before I post some of the not-too-personal NYR here, chime in with some ideas.  What do you want to do better or differently in 2010?  What do you think I could do better or differently in 2010?  I’ve never solicited feedback for my NYR list, so this might be a fun (or lame if no one replies) experiment.  I will likely include some of your suggestions/ideas – so please do share!  Let’s Crowd Source my NYR list…

In the meantime, enjoy the very best holiday of the year – MERRY CHRISTMAS!!!

-Alex

With 2009 coming to a close, we look ahead to what we can expect and should plan for in 2010.  Here is my list of the top ten trends founders, CEOs, and entrepreneurs of start-up, emerging, and medium-sized businesses should consider as they prepare for the new year.

1.     The recession will not end, regardless what anyone says - There are just too many issues that still need resolution before this economy can rebound, like the write-down of ALL of the bad assets on the books of the financial institutions.  The fact that they are still not lending much to existing or new customers should be a sign that they know they still have a lot to lose before they can begin to gain again.  In addition, the new business models that are emerging in this recession are leaner and meaner than we have seen in a long time, meaning they aren’t going to help unemployment any time soon.  The effects of this recession could last quite a while.

[Author's Note:I realize I will take some heat for this prediction, but please know that I am only bearish on a macro-economic level.  There are and will continue to be many businesses that grow and thrive through this time, and I applaud them all for it!  If more businesses were like them I would be much more optimistic about an economic recovery.]

2.     Bootstrapping will be king!- Usually you will hear me say that cash is king.  In 2010 the entrepreneurs that have learned to boot-strap will be king – because boot strapping is the best chance for cash generation.  Many of their competitors have gone out of business or are in some sort of a death spiral.  Those who made changes early and are continuing to adapt to the changing economic market are going to win.  I hear lots of businesses take the mentality of: “If we can make it through the recession will be poised to do well.”  That attitude is just not going to cut it.  Survival cannot be the only goal – those that can figure out how to generate positive cash flow in the tough times are the ones that will win when things turn around.

3.     Solving lots of customers’ needs will raise capital- If you are starting a business and your whole focus is on raising capital, you will not get any in 2010.  If, on the other hand, your focus is on getting and satisfying customers with a great product or service, then you have a much better chance to get the money you need (if you even need it).  Ben Peterson, a successful entrepreneur and angel investor, identified one of the major sources of this problem.  He said that the focus in business schools and entrepreneurial education is on teaching how to raise money, not how to grow a successful company that is actually worthy of investment capital.  Get to work, and the money will follow you if you can take care of lots of customers and your need for capital will really add value to your efforts to serve your target market.

4.     Business Lending requirements will increase – It got a lot tougher to borrow money in 2009, and it will continue to become more difficult in terms of requirements and complexity.  For example, a business just obtained a small $125,000 line of credit and the legal documents the bank sent to their customer were over 150-pages in length.  Even though the mean credit score in the US is on the decline, banks have raised their requirements on business owner credit scores and they are mandating more collateral (as a secondary source of repayment) than before, especially if it is real estate.

5.     The cloud will continue to gain a share of all things computer- We are seeing more and more companies abandon traditional software and convert their operations to the cloud.  This is a great trend for entrepreneurs who can accomplish just as much as big businesses for a lot less expensive cloud-driven solutions.  Here is just one example: 2 years ago almost every business used Outlook or some other computer-based email client for its employees.  Today we are seeing some companies, especially those with entrepreneurs under the age of 40, switch to web-based and SaaS applications.  Google Apps seems to be the most popular for now, but the point is clear - the practices of purchasing expensive software to load on each computer and servers to host all of the company’s data are becoming antiquated and cumbersome. 

6.     Social media overload will drive users to the best content sources and filters- Even status updates in LinkedIn are tough to keep up with anymore.  The flow of information through social media tools has grown so dramatically that most feel like they are on overload and like it is impossible to keep up.  While providers are trying to figure this out, we are all going to be driven to the sources of the best and most reliable content, especially if it allows us to filter it quickly and effectively.

7.     Health insurance will continue towards high deductibles and consumer-driven care - I have long been an advocate for high deductible health insurance plans with HSAs or other medical savings accounts.  Yet such plans represent such a stretch from traditional health insurance that adoption rates have been very low.  It seems like employers and employees alike are warming up to this idea and the popularity of these plans will continue to increase.

8.     Being big will become less advantageous to being small – Big will no longer necessarily be better.  There are many reasons for this, but here are the main two – small and medium-sized companies are often more flexible and more hungry to satisfy their customers and big-company economies of scale are becoming less relevant.  For example, with its use of remote, flexible, and contract workers, Jet Blue is able to do more for its customers than any of its larger rivals – and that is in a very capital-intensive business.  Service businesses may find even greater advantages as compared to their larger competitors.

9.     Focus on relationships will pay- Relationships have been and will always be the key to building a successful business – mainly because they help us establish trust.  I’ve included this on my trend list because it seems like to some the practice of building trust is a lost and fallen art.  Obtaining more followers on Twitter and increasing your pool of friends of FaceBook are only relevant if we build relationships in the process.  We will see relationships and trust-building come back to the forefront of business as filtering tools allow us to connect with those who matter most and with whom we want to foster and strengthen our relationships. 

10.    Knowledge workers will take more contract and less full-time work - This recession is helping to accelerate our economy to more of a knowledge-based worker model.  These knowledge workers are finding more benefits in contract and part-time work.  Some appreciate the flexibility, while others feel their value-added to and sustainability in these roles are more secure and potentially more profitable.  Our CFO services business is just one of many examples of this trend.

I would love to hear any thoughts, concerns, questions, modifications, additions, or deletions you have for this list and how 2010 will impact you and your business.  All the best for a prosperous 2010!

Our family is actively pursuing adoption.  We would really appreciate it if you would keep us in mind if you know of anyone that is pregnant and might be considering adoption.  Please spread the word, although keep our names confidential at this time.  Email me – alex@theentrepreneursblog.com if you’d like to connect us with anyone.  Thanks so much in advance for helping us add to our family.  MERRY CHRISTMAS!!!!!

As I sat trying to explain the deal points of a transaction for one of my clients to a business attorney, I was amazed at how he began every sentence with: “The problem is…”  He spent my entire time with him explaining all the problems with the deal, so I invited him to share some solutions.  He offered none.   I’ll share how this story ends, but first I want to address the challenges that professionals who only focus on problems create for themselves.

Have you ever had an experience like this with a professional service provider like a CPA, attorney, insurance agent, banker, etc?  Were you as frustrated as me?  Please know that I have a lot of respect for all of the professionals I know and with whom I associate, but my philosophy on hiring a professional is more than just to define problems.

Sure I want them to use all their expertise, experience, and wisdom to help me identify existing and potential problems, but I am also looking to them to solve those problems.  The more people focus only on problems and not on solutions the less value they bring and the less we want to work with them.  I was once asked by someone unfamiliar with our CFO services if we were like all the consulting companies that come in and tell you how bad you are at everything but don’t ever really help you get any better.  I quickly explained a few of our drastic differences with this negative philosophy, but I was amazed at the bad taste this person had from their prior experiences.

My point is that only focusing on the problem leaves everyone with a bad taste in their mouth.  If a professional in any field dares to point out a problem, then they need to be ready and willing to design and implement the solution to that problem.  If not, then they will slowly lose their influence and they will have fewer and fewer opportunities to discover any problems at all, let alone solve them.

So, how did my experience at the beginning of this post end?  The attorney had done some work for the company before, but he was clearly not experienced in transactions.  After a brief discussion with the client, I approached another attorney with a lot of background in our type of deal.  After just 30 seconds with him he said he knew exactly how to draft the document and would have it done for us in a few days.  Did he think there might be some problems with structuring the deal correctly?  I’m sure he did.  But is he going to focus on solving all of them so this transaction can close by the end of next week.  You bet he is, and he’s going to get more business from us as a result!

Entrepreneurship looks easy, glamorous and fun from a distance. When you’re in the thick of it, risking your name and credit, things get a little less glossy. When you’re deep in The Dip, when everything seems to be going wrong, when the world doesn’t care, you start to think about quitting. After all, you left a comfortable job with great benefits. You get no vacation days now. Everything is shipping late and costs much more to make than you anticipated. Cash flow just isn’t materializing.  Quitting seems the reasonable thing to do.

Would you do it all again? I don’t mean doing everything the same way you did this time. You’ve learned some valuable lessons from your mistakes. I mean more deeply, does entrepreneurship still matter to you? When you have the next big idea, would you risk it all again?

If yes, you’ve given yourself permission to fail. There is great freedom in that. With whatever runway you have left or Plan B, you can behave with a touch of reckless abandon. You can go “balls to the wall.” You don’t need to be embarrassed by your crazy idea. Nothing can stop you now because, win or lose, you’d do this all over again. Funny thing, this posture increases your likelihood of winning.

I was contacted by Steve at techlifemashup to do an interview with him about my career as an entrepreneur. he’s a great guy and I appreciated the opportunity. Here is a link to the interview. Thanks again Steve.

http://www.techlifemashup.com/2009/12/interview-with-serial-entrepreneur-alex-lawrence/

Great things are happening on the FundingUniverse front.  It’s been a while since I’ve provided an update so I figured that I would talk about some of the exciting things that are happening lately.

1. Great team. As I’ve mentioned in previous posts, so much of a company’s success depends on the quality of talent that you can attract.  Thus far, we have a tremendous team in place and I’m excited about the results.  When you have talented individuals around you (we added a new addition within the last couple of months — see here) that surpass expectations on a regular basis, it motivates you to be at your best — that is happening right now with our team and it’s exciting to be a part of it.
2. Expanding product line. Over the past year, we have really rounded out our offering in order to be almost a full-service business solution for our customers.  What I’m most excited about is that we are constantly adding new funding resources to our model to help out more and more business owners.  Recently, we’ve landed a partnership deal with an aggressive SBA lender and now more than 70% of the clients that we send their way are getting approved for a business loan.  Instead of just helping on the angel/VC side of things, we can help a lot more entrepreneurs in a variety of ways.
3. Opening up new markets. Over the past few months, we’ve been pushing hard to open up new markets in Denver, CO; Phoenix, AZ; and Portland/Seattle.  We’ve got great partners in each of the region (including Amazon, GangPlank, NOW advisors, Jive Communications, SEO.com, Newswire, etc.) and it’s allowing us to do some fun things at our CrowdPitch & Speedpitch events in those regions.  Not only have we announced that all of our events will be FREE from now on (for everyone in attendance), we are also giving away a $15-$20k prize package for the winner of each event!  This has attracted the attention of ABC phoenix and others.

Need your help: We are hoping to have 8-12 offices open throughout the US by the end of 2010 — if you live in an area outside of the above mentioned markets and are interested in being our local market rep (or know anyone that might be interested), please let me know!  We are always looking for good talent.

Those that work with me likely tire of my reference to MO’.  He (or she as the case may be) can be a good friend or a difficult enemy to a business.  MO’ is short for MO-MENTUM and I believe it is a significant factor in winning and losing at business.  It’s a simple concept really and I’m sure others have referred to it elsewhere.  Regardless, I have always looked at it as an important indicator as to how my companies are operating.  How?  By definition really.

The scientific definition of Momentum is:

A vector quantity (i.e. it has both magnitude and direction) that expresses the relation of the velocity of a body, wave, field, or other physical system, to its energy. The direction of the momentum of a single object indicates the direction of its motion. Momentum is a conserved quantity, it remains constant unless acted upon by an outside force.

That is a somewhat complicated way to say that if something big is moving in a direction, it is easier to keep it moving in that direction.  Conversely, if it stops, and gets pushed back in another direction, the same theory applies.  It’s tough to stop either way.  Hopefully you can see where this applies to business.  If your company is pushing a heavy object (it’s product, service, revenues, expenses, etc.) downhill, the speed will increase and it will be tougher to stop.  That’s a good thing if you are headed down the right hill, with the right object.  Suppose you are headed down the wrong hill, with the wrong object.  With each passing moment, the speed increases and the direction becomes more difficult to change.

With that in mind – what is MO’ doing for you?  Taking you in the right direction?  Or do you need to put some weight behind an energy shift?  I can tell you from experience that Momentum is a lot easier to manage when you are keeping it on a defined track as opposed to starting it down a new one.  That means that if your business is experiencing positive sales, decreasing expenses, improved attitudes or other positive things, make sure you keep your foot on the gas and push MO’ faster.  It can be tempting to sit back and let the ride carry you down the hill.  That’s dangerous though.  MO’ can shift on you like a bump in the road, and without the proper speed, you’ll be sent off track and now you are barrelling down the wrong direction.  BRAKES!!!!!

Where is your business at?  Are you pushing back and redirecting?  Are you hitting the gas and increasing your speed?  It’s probably one or the other, because MO’ doesn’t like to sit still for long.

Although the phrase “working capital” is common in business and finance circles, it is often very misunderstood.  Here’s an example: if I asked you if you would rather own a business with a lot of working capital instead of a little working capital, what would be your answer?  Most people would prefer the business with a lot of working capital.  But the answer is not that simple, and, in many cases, smaller working capital actually indicates better management and cash flow generation.  I will take a few paragraphs to discuss the two main reasons why working capital is misunderstood and then discuss the best measurement tool I know to monitor it.

WORKING CAPITAL DOES NOT EQUAL CASH

Working capital is often misunderstood for cash.  Working capital is the difference between all of your current assets (cash, accounts receivable, etc.) and your current liabilities (accounts payable, accrued expenses, etc.).  Notice that cash is actually only a part of this equation, and it is usually a smaller part at that.  So, what in the world is working capital?

The easiest way to explain it is in terms of the number of days difference between when you pay for things and when you get paid.  Here is a simplified example:

Cash goes out to pay for parts and labor to build a widget.  After 10 days the widget is ready to be sold.  It takes another 20 days to sell the widget to a customer on credit (net 30 terms).  The customer pays early – in 25 days.  The total working capital cycle is 55 days.  Hence, the business needs to have enough “working capital” to fund this transaction until it gets paid. 

WORKING CAPITAL IS A CYCLE OF CASH FLOW

Based on the example above, a business will need a certain amount of “working capital” to handle this 55-day cycle.  But what if the company can improve its manufacturing process and get paid a little earlier, reducing its working capital days to 42?  This means the company would need less working capital to fund its operations.  Since most people confuse working capital for cash, we think a bigger number is better.  But companies that run an efficient working capital cycle require lower working capital, the sign of a well-run and efficient business.

HOW SHOULD WORKING CAPITAL BE MEASURED?

There are lots of measurements that comprise working capital - days sales outstanding, inventory days, payables days, and more.  Trying to look at all of these and make sense of the company’s working capital progress is tough.  So, we use a ratio that measures working capital days – one number to illuminate the entire working capital cycle.  This puts the number into context and makes it easy to initially spot issues and challenges.

Very simply, the formula for working capital days is:

(Average working capital for a period/sales for the period)*(# of days in the period)

If I told you that you have a working capital balance of $500,000, it would be hard to understand if that was good or bad until you compare it to other periods of time in your business.  If you are growing or shrinking, it becomes more difficult to know if your working capital cycle is accelerating or decelerating, or if you are squeezing more or less cash out of your operations.  Here is a quick application of a real company’s working capital days:

HOW SHOULD WORKING CAPITAL BE FINANCED?

Financing working capital is actually quite simple once we understand the working captal days ratio.  At a company’s maximum efficiency, there is a minimum number of days in its working capital cycle – maybe it is 15 days, or maybe it is 60 days.  Regardless of the number, this part of working capital should usually be funded with permanent debt or equity. 

I have yet to see a business that can function at their most efficient working capital cycle for very long.  This is caused by spikes and drops in sales as well as new opportunities and new challenges that often arise daily.  The days in the working capital cycle above this most efficient level are usually best financed with lines of credit or other revolving debt facilities.  Sometimes it is financed with retained earnings or equity, but that may not be the most effective use of the firm’s capital.

CONCLUSION

Working capital is a measure of the firm’s ability to streamline its operations to generate cash as quickly as possible.  When understood in this light, less is actually more.  Our CFO services help companies get their arms around this concept and maximize their cash flow.  Business is, ultimately, about cash generation.  The working capital cycle of a business can either gobble up more than its fair share of cash or it can be managed as an efficient cash flow system.  If managed, it can become one of the company’s most significant competitive advantages.

AUTHOR’S NOTE: This discussion assumes that the company keeps a target balance of cash and cash equivalents and either invests the rest into fixed assets or growth or distributes cash in excess of the target balance to owners or other operating entities.  Target cash is frequently set at between 2-4% of annualized revenue, with many exceptions based on industry, growth/shrinkage rate,and several other factors.

I don’t know how to do too many things half way.  Exercise and eating I have seemed to master the 50% effort with, but generally speaking, otherwise I am kind of a 100% type of guy.  With that in mind, about midway thru the day on Monday of this week, I thought it would be [...]

Two different companies, each in a different industry, face the same dilemma.  Growth and success have created significant pressure on their business, specifically their people and their technology.  In order to solve the short-term constraints as well as build the most scalable solution for the long-term, how much investment should be made into new technology and how much should be made in people, or human assets?  

Both companies have found a shortage of “off-the-shelf” software to solve their technology needs, so they have built powerful databases and other platforms from which they run their business.  It seems that many entrepreneurs under 40 have the attitude that they should hire a full-time programmer and build their systems from scratch, which often ends up much more affordable in the short-term.  The spirit of bootstrapping is alive and well, even in young entrepreneurs.

The challenge, however, with this scenario is what happens after a year or two.  In both situations, the customized solution has already become antiquated and the company is beholden to the developer who, after some analysis, used non-traditional coding and programming language that is difficult to comprehend and unwind.  These developers often become a little lazy and create shortcuts and work-arounds that begin to rear an ugly head in the most inopportune moments.  What worked in the short-term may not be the viable long-term solution.  At CFO WISE, we have found this to commonly be the case.

Both companies are very conservative in their hiring practices, careful not to over-staff their operations.  Yet failing technology systems put so much pressure on their staff that the entrepreneurs begin to hear things like: “I’m going home at night and on the weekend and working several extra hours each day remotely to try and keep up.  We need to hire more people or I’m going to burn out.”  Often we hire more people to keep our staff happy, but we are actually perpetuating the problem created by insufficient technology.

I tend to operate under the following two premises when it comes to people and technology in a business.  First, use technology to automate as much of the business as possible so that the company can focus on hiring bright, smart, talented employees to help the company grow.  Second, do not buy or implement technology to solve your problems – your employees need to solve the problems first, then you can purchase and implement technology to automate the solutions they develop.  Each of these is worthy of a separate blog of their own, but we’ll let this serve as the basis whereby we approach this dilemma.

Obviously the answer to this dilemma will differ with each situation, but I challenge all entrepreneurs to think hard about the investment they are making into people and technology.  If we are confident that your technology can support the next five to ten years of growth in terms of scalability and relevance, then we are in a fantastic position.  If we are not confident in this and we are just doing the necessary things to “band-aid” our way through each day, month, and year, then ultimately we will probably have to scrap that system and start all over again, anyway.  And we’ll spend a lot of money on people trying to hold it all together in this process.  We should seriously consider getting it right the first time if at all possible.

In addition, we need to strongly consider which operations performed by employees could be automated, and we need to start down the road of automating those functions.  Our competitors are going to do it, and we will need to eventually, as well.  For almost 2 years I put myself through college in a call center for one of the largest investment companies in the world.  At the time, automated telephone systems were becoming popular and many of my co-workers thought they would lose their jobs to automation.  Not only was this not true, but we also found that instead of wasting our time answering questions and resolving concerns that the automated systems could handle we could focus on the more value-added elements of the company’s service mission.  The point – our knowledge worker society will progress only as fast as we automate the simple stuff and add more value to our customers with our human assets.

I found this post in some old archives tonight.  I thought perhaps it was timely to bring it back with RSL winning the MSL cup tonight.  As I recall, there were several readers who disagreed with me.  While winning the MSL cup doesn’t mean I am totally right, it does certainly help my argument.  What are your updated thoughts?  I believe this was from an old post several years ago…

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If Real leaves Salt Lake and is sold to another city outside of Utah, it will be a drag on the State.  Perhaps there will be an 11th hour deal to take the team to downtown Salt Lake or into Utah County.  Either one of those is a better option then losing the team.  Here is why:

• Utah has the Jazz, but that is pretty much it.  Although I don’t watch or like professional soccer that much, I realize a lot of other people do.  Besides, the more entertainment options the better and a professional soccer stadium is another venue for concerts and such.
• I don’t know if I think Dave Checketts is the greatest guy in the world, but I can guarantee you he and his financial backers have more financial knowledge then the Mayor of Salt Lake County.  I can also guarantee you that they will have a lot more money to lose in the deal then the County would.  With that in mind, I will always trust private enterprise and entrepreneurs before I will trust the government or politicians.
• The whole thing wreaks of bad politics to me.  It sure sounded like they had a deal a few months ago.  Ground breaking ceremonies, public pat on the backs and atta-boys made it seem like the deal was done.  Now that a private company evaluated the deal and said it didn’t pencil, the Mayor says it would be “irresponsible” to invest the money.  Really?  The decision to invest seems like it should be viewed thru a bigger lense then the results of one third party report.  Besides, according to the newspaper this morning, the third party reported a $7M shortfall which Checketts offered to cover himself – so if it is going to break even now, or better, why wouldn’t the county keep the deal?
• Salt Lake looks like a strange place to a lot of people outside of the State.  Sure, we have Sundance, we did the Olympics right and everyone loves our snow and Moab.  But for the most part, people think Utah is a weird state.  I couldn’t disagree with them more, but unfortunately it is what it is.  The fact that we can’t keep a major league soccer franchise does not help our reputation.  A lot of smart, talented people are really into soccer and having a franchise here gave them a team to cheer for and an opportunity to find more culture here in SLC.
• It will be good for the city.  It will make money.  I think it will be a financial success and a good investment.  Of all the CRAP that tax dollars are wasted on, a nice stadium that will house a professional sports team and great entertainment events (backed by a team of successful entertainment and sports executives) sounds like a good idea to me

What do you think???  I am curious what others feel about the direction the stadium might go…

I have had a lot of conversations recently about staffing the accounting and finance function in the company.  As companies grow and shrink, their needs in this area change.  We certainly do not want to be over-staffed, and we also want the most cost-effective staff doing as much of the work as possible.  For example, we typically do not want our Controller or CFO entering payables – this task can easily be delegated to a much lower cost employee.

This is a simplified organization chart of the different accounting and finance functions in an organization.  The reality is that most start-up and emerging companies cannot afford all of these positions.  My purpose in this post is to explain how to fulfill all of these necessary functions throughout the life-cycle of a start-up company.  I am making the assumption that we all understand the purpose of the accounting/finance function as well as the assumption that the company has or will hire the appropriate outside professional(s), like a tax CPA, to help the company remain compliant.

Even at the earliest stages of a start-up, it is usually best to hire a part-time bookkeeper to fulfill all of the roles listed above.  They usually do not have the expertise of a high-level controller of CFO, and they will be slightly over-paid for doing some of the more clerical tasks.  But the bookkeeper gives an affordable and flexible option to start-ups.

As the company grows and has revenue, the company should begin to look to hire full-time clerical staff to handle most of the AR, AP, and payroll tasks while the bookkeeper remains part-time and delegates everything they possibly can to the in-house staff.  One of the major challenges that usually emerges during this process is that the part-time bookkeeper will begin to struggle to keep up, especially with the monthly financial statement preparation and analysis as well as other management reports on how the business is doing and what improvements should be made to maximize cash flow.

Often the next best step is for the company to consider engaging the services of a part-time CFO.  This individual will be a strategic direction to this department and may only be needed about a half-of-a-day per month.  As the company continues to grow, the part-time bookkeeper will need to be replaced by a full-time Controller or Accounting Manager.  All of the full-time accounting staff will report to this person.  In addition, this position will take direction from the CFO. 

The last full-time hire should be to fill the position of CFO.  Often companies can do very well leaning on the part-time CFO services to exceed $50 or even $75 million in annual sales.

Written by Kenneth Kaufman at CFO wise

A respected professional @chrisknudsen said something to me a few months ago that I have reflected on several times since that occasion.  We were discussing a company that has amazing, break-through technology with a wide-open market space.  Their leadership just does not seem to be in a hurry to seize the opportunity.  They’re growing at about a 7% rate through the first 10 months of 2009, which is not bad in slow economic times, but they could be doing so much more. 

Before I jump too far into this thought, let’s make sure we are on the same page about what a “lifestyle” business is.  Wikipedia has a great explanation of a lifestyle business.  In essence, it is a company that is not designed to grow much beyond the means or capabilities of the founder(s).  A small auto-mechanic shop or a 5-chair beauty parlor would possibly fit this definition along with millions of other businesses around the world.  These businesses do not take a lot risk, where software and technology businesses have to continue to risk everything with each change in the technological marketplace.  For example, the iphone has existed for less than 2 years, yet if your software does not have an iphone app, you are considered archaic.

Now, let’s get back to the software business.  The owners are running it like a lifestyle business.  They are not in a hurry to grow, and they are taking only a portion of their relatively minute profits and investing them back into improving their technology and infrastructure.  They have little sense of urgency in sales and they are happy to bring on a few new accounts each month.  Let me repeat – they have amazing technology that could completely redefine their entire market.  However, if they do not act quickly, they will lose their opportunity.

Technology is changing at light speed.  Every software company has a window of time to make their leap and make a run at their market.  If they wait too long or become too complacent, they will miss their opportunity.  In terms of a lifestyle business, if they only rely on their own means and they do not pull the resources together to take advantage of the opportunity, they will not only miss the opportunity but they will likely be out of business in 5 years or less. 

Technology is changing too fast and they will not be able to keep up.  The competitors will eventually find their way through the window of opportunity even though their technology is inferior and they under-serve the needs of their customers relative to the company’s technology.  These competitors will be rewarded with enough cash and resources to adapt and stay ahead of the changing technology. 

So, I ask this question: “Is there such a thing as a lifestyle software business?”  I haven’t found one, but I’d love your feedback on the subject.

Well, it’s official.  We formed an ‘old-new’ company, FundingUniverse, LLC – which is the amalgamation of my partners hard work in two different companies over the past several years that have now become a brand new entity using a familiar name, FundingUniverse. I have been a big fan of what they have been doing for several years. The opportunity presented itself to join with them in the creation of a new and exciting business, one that I am attracted to for many reasons. FundingUniverse offers every kind of financing for every kind of business. Debt help (LOC, USLOC, SBA, FACTORING, BUSINESS CREDIT, PATRIOT LOANS, ARC LOANS, AND MORE) as well as all of our well known equity help (VC’s, Angel Investors, Private Equity Groups). So far in 2009, these two businesses combined have funded nearly $40MM worth of deals.  That’s nothing short of amazing in the tightest financial market in history and a part of the reason why I wanted to join the partnership.  The main reason is the people though.  There is no finer group of talent that I have come across in my 15+ years in business.

I love our business model too.  We have a tremendous set of business products and services that our financing clients need. Some examples are websites, business plan writing, credit repair, incorporation and legal work, social media strategies, equity/debt coaching, PowerPoint presentations, logo creation and of course, our unique way of helping businesses get the financing they need. Also, as some of you know, FundingUniverse has some amazing CrowdPitch and SpeedPitch events.  We will be opening corporate offices all around the USA to host these events and bring our team of products and services.  We have recently signed leases in Phoenix, Denver and Portland, and will be coming soon to Seattle, California, Las Vegas, Boise, Dallas and then on to the East Coast. We will be leading the industry in FREE EVENTS for entrepreneurs – free to pitch, free to attend, free food AND 6-months of business expenses given to the winner of our events (rent, phones, SEO, financing, payroll, accounting, legal and more). We just did our first Phoenix event. ABC covered it, here is the video:

FundingUniverse In Phoenix – CrowdPitch Event

We have a great local representative in Phoenix that will be hosting 12 – 14 events a year. We will bring capital and other resources to the greater Phoenix area and will play an active role in the resurgence of the economy in that area. Multiply that same effort in 10 – 15 cities in 2010 and FundingUniverse will be a significant player in this space.  We are part of the solution for digging the USA out of the financial hole we are in.  Entrepreneurship is the answer!

In October alone we helped over 7,000+ businesses from all around the USA. That number grows every day. Imagine how many businesses we can help when we have 10+ events a week all around the USA? A lot.  And if you know me, or follow my blog, you know my passion is helping entrepreneurs. That is why I teach an entrepreneurship class at my Alma Mater – definitely not for the money (or lack thereof)!  That is part of why I blog and tweet.   That is why I accept speaking opportunities.  And that is why I am a partner now at FundingUniverse.  We help entrepreneurs with everything they need at all phases of their growth, from idea to sold.  It’s my life’s work, my true passion, and what I can talk about for hours without feeling like I’ve worked for a minute.  FundingUniverse is going to make an impact on the entrepreneurial ecosystem in America.  We are entrepreneurs ourselves, so building this business in and of itself is entrepreneurial as well.  So FUN!

I love entrepreneurship. Starting this ‘new’ business with really talented partners makes me very optimistic about our future. I will be blogging about our highs and lows (every business has both – if you don’t, your lying). We are trending in the right direction and the ink is still dry on our new deal.  If you have a business that needs help, WE ARE YOUR BEST RESOURCE. I believe that with all I have. Our products, services, events and consulting are second to none, and our pricing is awesome.  I can say this because I have spent a lot of money with other companies on the stuff we do, as have my partners, and we all know that our offerings are extremely competitive and provide great value.  And they work!  We get entrepreneurs funding, we give them the tools to get funding.  We are coming to a city near you.  In the meantime, visit our website to learn a little more (a redesign for the NewCo is coming soon, but it’s a good start). Please email me with any questions you may have about how we can help your business – my new email address is alex AT fundinguniverse DOT COM.

Wish us luck! Although we are far from a start-up, our new entity, newer business model (with combined new services and products) and new partnership structure all make for some of the feelings of a start-up. I LOVE IT!!!!

I’m opening the books tonight on my company, SocialToo.  I’ll be presenting tonight at Launchup, an event compared to be a “community barn raising for entrepreneurs”.  The event happens every couple months and has featured such Utah companies as TodaysMama (whom I am an Advisor) and Entice Labs.  The idea is to allow each company a short time to present (I have 7 minutes), expose themselves in as transparent a manner as possible, then let the community ask questions and provide advice and help in helping that business grow.

Tonight I’ll be sharing all the details most businesses won’t share about themselves with SocialToo – yes, it’s a risk, but I am a big believer in transparency. You’ll hear about how many users we have, how much revenue we’re bringing in per month, where I see our weaknesses and strengths to be, etc.  I’ll show you a demo about how you can get set up with a SocialToo account and DM spam filters for Twitter in under 2 minutes with just the click of a button.

This week Launchup will also start bringing these entrepreneur features to the world with Ustream.  You can watch anywhere in the world on Ustream at http://www.ustream.tv/channel/launchup or on the main website at http://www.launchup.org/live.  The event starts at 6pm, and will also feature presentations by MuseBuzz and PageMass (which I got a demo of yesterday – I think bloggers are going to like this one).  Launchup is organized by Jeremy Hanks, CEO and founder of Doba.com, another Guy Kawasaki Advisorship company (as is SocialToo).  Come join and say hi!

You can read a brief Q&A I did for them at http://www.launchup.org/2009/11/09/socialtoo-qa/.

My son has become interested in business at a very young age (he’s 6 right now) and I would like to introduce him to inspiring stories of young entrepreneurs to give him ideas.

A little background. My son, of his own accord, has successfully sold his jokes by giving 1 for free and charging a $1 for more. He set up a toy sale out by the driveway at 5. He asks questions about the difference between Walmart’s and Apple’s margins. He hires his sisters (with his Halloween candy) to do work for him to make more money. This is a greater level of interest than his Dad for his age.

I want to encourage his interests in business and need some help.

We recently read of James C. Penny (founder of J.C. Penny) who set up a watermelon stand near the fairgrounds (his Dad scolded him for taking advantage of those within the fairgrounds who paid for selling permits). We read of Orville Wright and when he partnered with his 8-year-old sister to collect scrap iron from the neighbors and sell it to the junk yard (they had a bully attach them when they took the metal to the yard). Great stories.

This morning it occurred to me that if we could read together inspiring stories of young entrepreneurs, then it would give us both ideas.

Particularly, he wants to sell something this year for a project and has discovered from his toy sale (that only earned him $0.25 because he did it on a country road with little traffic) that he needs to find something he can sell and a place with more people to sell it. He needs ideas.

So, what are your favorite child entrepreneurial stories that my son and I can share together?
- Something a famous entrepreneur did when s/he was a child (famous examples).
- Something someone close to you has done that was interesting (non-famous examples).
- Stories you’ve heard as alternatives to the lemonade or toy stand (perhaps ideas that could work for a boy who lives in the country).
- Any children who’ve created very successful enterprises.

Please answer on LinkedIn, via a trackback from a post on your blog or in the comments. We’ll both be grateful!

Come check out a cool event tomorrow.  It’s about social entrepreneurship, which is a unique subject.  Free to attend, free food, and some interesting companies presenting.  I’m going.  Hope to see you there!!  Click on this link to RSVP:

CrowdPitch – Utah – RSVP Here!

Posted over at www.launchup.org how my accident derailed LaunchUp for a few months.

We’ll be having our 3rd next week. Wednesday November 11th at 6:00 p.m. at Marketsplash/Logoworks in Lindon.

Companies presenting will be MuseBuzz, PageMass, and SocialToo.

Paul Brockbank (LogoWorks CEO) will be handling the entrepreneur amp session.

And we’re serving Pumpkin Pie with Whipping Cream!!

It’s going a great night of great entrepreneurial mojo, you won’t want to miss it! I hope to see you there.

Here are the glorious details: LaunchUp #3

Finally, we are also building a list of those that want to support first-time technology entrepreneurs in Utah. You can join the LaunchUp community. It will help us track those that want to help, and then we’ll be also publish everyone’s name on the LaunchUp community page soon.

Help spread the word!