Thursday, December 31, 2009

2009 Top Blog Posts

Based on total number of unique visitors to each of my blog posts through the year, here are the most popular 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.

2.   LESSONS LEARNED AFTER 1 YEAR 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!

Saturday, December 26, 2009

Lessons Learned After 1 Year on Twitter

I created my Twitter account @_KenKaufman 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.

Monday, December 21, 2009

2010 Trends for Entrepreneurs

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.

Monday, December 14, 2009

The Problem Is...

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.

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!

Friday, December 4, 2009

Working Capital, is Less Actually More?

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:
CFO University 12.02.09 - Working Capital Mgmt

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.  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.