Friday, November 27, 2009

An Entrepreneur's Dilemma--Grow with People or Technology

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.

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.

Wednesday, November 18, 2009

Staffing the Accounting and Finance Department

CFO WISE - How Properly Staffing the Accounting & Finance Function Will Help Entrepreneurs Solve Problems

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.

Friday, November 13, 2009

Can a Lifestyle Software Business Really Exist?

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?"

Friday, November 6, 2009

Budgeting is Worthless Because I Cannot Predict the Future

I have heard this statement more often than I care to admit: "I cannot predict the future so a budget would be worthless for my business."

An article entitled How to Create a Budget in BusinessWeek prompted me to recollect some of my experiences with helping people who have the above attitude towards budgeting gain a new appreciation for the process and, more importantly, the results the process can generate.

I have and will continue to make this guarantee to any business in any industry anywhere in the world: if you follow the "best practices" steps to creating a financial plan and operating budget for the next twelve months and you track your monthly progress against that plan, you will know more about your business than 80% of your competitors know about theirs.

Why can I make that promise?  Because the things learned in that twelve months are so revealing in terms of the most effective business model and other competitive advantages that the company cannot help but begin to develop and implement the right strategies for making the business more successful.

Why do most businesses fail to implement this process? I have found that the two main reasons are lack of discipline and lack of resources. This process requires a great deal of disciplined time, including the discipline to review your results against your budget EVERY month. The budget is worthless if we do not do this.  The focus of this monthly analysis should be on the variances in the budget. We need to know WHY we varied from our budget. What can we learn from that?  What can we change to improve our performance in that area?

Some companies lack the resources to be able to analyze their historical data and then easily track their progress. Perhaps they do not have an accounting system in place, or perhaps they do not have anyone that knows how to properly operate their system. The accuracy of the numbers is certainly a critical element to making the budgeting process a successful experience. So, having the right staff and a functioning accounting system are critical to this process. Even QuickBooks allows its users to enter in budget information and then run reports to track the monthly progress and variances.

If anyone reading this post doubts me, I challenge you to try it for 12 months. In my experience the value derived from the budgeting and variance analysis process has improved the bottom-line dramatically. I think you'll experience similar results.

Monday, November 2, 2009

Build Your Business Model Around People

This is a real situation experienced by a real emerging company.  Names and figures have been altered to protect anonymity.

A company has a new opportunity and they create a financial model to try and forecast how their general assumptions for this opportunity will materialize.  Specifically, they made significant assumptions about the direct labor costs of the opportunity based on the historical performance of their other product lines.  Less than two months into receiving real data against which they can either validate or invalidate our assumptions, they began receiving feedback that the employees were under-paid and that their competitors had better compensation programs available.  How was this missed in the model?

First of all, let's be clear that this is not the first or last time something has or will be missed in a financial model.  They are based on assumptions, not fact, and, therefore, are subject to error.  The most inaccurate assumption made was that the number of units per direct labor cost was off by a large margin.  We could break it down to show that on average during the first 2 months 1.33 units were produced per person per day.  The model assumed that a minimum of 2 units would be produced per day.  With a piece-rate structure to the compensation program, this meant the employees of the company were taking home about 1/3  less pay for the same amount of work as the company's other products.

This company quickly made adjustments to the business model, and realized that even with a change in the production rates the new opportunity would be very profitable.  As such, they changed the compensation program, the employees were happy again, and the company is profiting from their new product line.

So, what take-away can we gain from this story?  Labor is almost always one of the two most expensive inputs into a business.  It, unlike any other asset of the firm, is often the most critical of all of the inputs.  If we want the best output, then we need to make sure to help our employees win within the structure of our business and financial model.  If our employees cannot win in a model that helps only the company win, then the company should not pursue the opportunity.