Monday, December 27, 2010

Eleven 2011 Trends for Entrepreneurs

As we launch into the new year, here are the top 11 trends that entrepreneurs need to be aware of, think about, and for which we should all prepare:

1.  Economy will still Struggle: This is the biggest question on everyone's mind. If experts in public relations and marketing were coaching me to write this blog to be popular, they would tell me to speak positively about the economic trends for 2011. But I just don't see it on a macroeconomic level, and I refuse to sugarcoat things for the sake of writing a popular blog post. I know of some entrepreneurs who are thriving and some who are struggling or who have already shut their doors. But most are treading water. And this will be the same news come the end of 2011. I'm saying it, even though you probably wanted to hear something differently.

In his post Yet More Evidence of Hunkering Down Among Small Business, Jeff Cornwall expresses concern that if entrepreneurs aren't positioning their enterprises to expand, a full economic recovery seems distant at best. But there are plenty of strong niches and unique opportunities that will continue to thrive at the hands of adept entrepreneurs.

2.  Working Capital will be King: Yes, the saying usually says that cash is king. But tough economic times have taught many entrepreneurs that their working capital is sacred, primarily because it is the key to immediate and short-term cash. Those who make it more efficient (see Working Capital - Less is Often More) will out-perform their competitors. Those who protect it from being used on capital expenditures, excessive owner compensation, and other outflows not helpful to generating immediate and near-term gross profit, will find the empowerment it brings to succeed regardless of almost any external or economic pressure.

3.  Results-Driven Marketing will be one of the biggest Difference-Makers of the Year: What happened to measuring marketing performance? Many entrepreneurs are so infatuated with marketing that they have become soft in measuring the results it generates. Some have justified spending more in marketing as a strategy to overcome the recession, and most of them are out of business now, having bled their working capital dry without a tool to measure if it was actually paying off. Marketing metrics will come back into fashion, and cost per lead and cost per customer acquisition will be numbers that successful businesses drive as low as effectively possible. John Donal Leavy has a lot more to say on this topic here: Outcome-Based Marketing in 2011.

4.  Capital Expenditures will be up: Most businesses have held off on necessary capital expenditures in 2010 for two reasons. First, they were concerned they would not get the expanded Section 179 tax deduction for 100% of their purchases, and, second, they were concerned about over-spending in a tough economy. With the Section 179 deduction increase extended through 2011 and a still-shaky economy, most entrepreneurs are deferring that pent-up demand to 2011. Don't be fooled by it, because capital expenditures will likely drop again in 2012. You can read more about this in an article I wrote for American Express OPEN Forum--Five Finance Trends Every Entrepreneur Needs to Know.

5.  Going Green will no longer be a trend--it will be an Expectation: A little ahead of this trend, in my opinion, the folks at Willoughby Design wrote: Going Green is not a Temporary Craze-It's an Expectation. If you haven't accepted this fact, your competitors will gain more traction and sustainability than you. Period.

6.  Fixed Fee and Flat Rate will win more business: Whatever it is you sell, have a fixed price for it. If your customers feels, in any way, that their cost for your product or services is variable, it will decrease your chances of getting the business. Figure out how to price your products and services and deliver what your customers need. The argument that every customers' needs are different is becoming obsolete, and so are those who base their entire business model on it. Here is just one example from an attorney who wrote about how Customers Love Flat Fee Billing Based on Defined Deliverables.

7.  Mobile, Cloud, and Social Technology will continue to converge: As these three technologies mature, they will continue to converge and become the future of how we think about and use technology. You can read just one of many opinions on this here: Convergence of Mobile, Cloud, and Social.

8.  Entrepreneurial Borrowing will move further away from Traditional Sources: It will get harder and less attractive to get traditional loans from banks. Increasing an Entrepreneur's opportunities to adequately fund his or her business is a topic of heated debate, but few seem to really get it. You can expect more innovation in getting entrepreneurs access to the funds they need in 2011.

9.  Compliance Enforcement will Increase: The IRS has $300 million more to spend in enforcement programs in 2011, and many state and local tax and other compliance agencies are spending more in enforcement as well. Plan for it, and then you'll be ready when it comes. It's becoming more likely that it will.

10.  Social Security Temporary Tax Cut is a sign of things to come: One provision of the Tax Relief Act of 2010 left me scratching my head. Everyone knows the social security system is underfunded and will be bankrupt in a few decades unless the program is overhauled. So why did Congress reduce the amount paid into the fund by two percentage points, or up to $2,136 per worker? It just doesn't make sense, unless the long-term plan is to wipe-out the cap, currently set at $106,800, altogether, to match the same way the medicare tax is currently treated.

11.  Hiring will focus on value-add, regardless of position or responsibility: Most studies and surveys say that hiring will be stagnant among entrepreneurial companies in 2011. But those who do hire will focus on the value each new employee and position will bring to the company. They will be Improving Your Business Hiring Practices and only hire when an employee is the only way to advance towards their goals and objectives.

Hopefully these trends and tips will help all of us turn 2011 into a year of prosperity and growth. To see the report card of my 2010 predictions, visit Report Card for Top 10 2010 Trend for Entrepreneurs.

Sunday, December 26, 2010

Report Card on 2010 Entrepreneur Trend Predictions

Here is a look at the predictions I made for 2010 at the end of 2009 so you can see how I did. Of the ten identified trends, I gave myself 4 As, 4 Bs, 1Cs, and a D, for an overall GPA of 3.1.

1.     The recession will not end, regardless what anyone says: GRADE=A

Although economists say the recession is over, every entrepreneur is still feeling its effects and carries some concern for an unstable economic future.

2.     Bootstrapping will be king!: GRADE=A

Many Bootstrapping-focused specialists and consultants have emerged in 2010, a bit of an oxy-moron but relevant nonetheless. Bootstrappers do just fine when capital is tight because they still know how to get customers and grow organically, which makes them the most likely targets for investment capital. 2010 proved this to be true.

3.     Solving lots of customers' needs will raise capital: GRADE=B

This was not entirely true, since companies like Twitter, who still struggle to find a sustainable revenue model, raised $200 million in funding. Other than a few of these blockbuster and very risky deals in 2010, almost all of the professional/sophisticated investments went to firms with lots of customers and the ability to solve those customers' needs in a value-added way.

4.     Business Lending requirements will increase: GRADE=C

Looking back, most of the added complexity and loan covenant tightening was in place by the end of 2009. I could only give myself a C since I was a little off on this trend, although getting loans was still very difficult for most entrepreneurs who even bothered to try.

5.     The cloud will continue to gain a share of all things computer: GRADE=B

Things continued to move that way, but not at the pace I expected. The most common, everyday manifestation of this ongoing trend was watching several entrepreneurs struggle to give up email client Microsoft Outlook only to tell me how much better Google Apps was just a few weeks later. The cloud is making it even more possible for entrepreneurs to go toe-to-toe with their much larger competitors, and win.

6.     Social media overload will drive users to the best content sources and filters: GRADE=B

This is happening, but we're still waiting for the next content sources and filters to emerge.

7.     Health insurance will continue towards high deductibles and consumer-driven care: GRADE=F

Health Care Reform had everyone concerned about making any significant changes in 2010. I missed on this one, with little change in the mix of high deductible versus more traditional health insurance plan designs.

8.     Being big will become less advantageous to being small: GRADE=A

I had the privilege of watching many small, no-name companies take on one or more of the big boys and do very well for themselves. The playing field is becoming more level, and entrepreneurs are capitalizing on these opportunities.

9.     Focus on relationships will pay: GRADE=B

This has and will always be a true business principle. Building relationships, whether online, face-to-face, through re-seller channels, or some other means, fostering and building relationships will always bring commensurate rewards.

10.    Knowledge workers will take more contract and less full-time work: GRADE=A

With Tim Ferriss' 4-hour Work Week still topping the charts, more and more knowledge workers are becoming independent. And most entrepreneurs appreciate the flexibility and focus that contractors bring to their organizations.

If you are interested in my predictions for 2011, please visit Top Eleven 2011 Trends for Entrepreneurs.

Monday, December 13, 2010

Ownership and Employment are Separate

Most business owners and entrepreneurs co-mingle their ownership of and employment at their businesses. But they are really separate things. And the more they can understand this concept, the more effective they usually are at running their business.

I was recently impressed by a story I read in the USA Today about an entrepreneur who understands the difference between employment and ownership better than most. Lola Gonzalez laid herself off to save the jobs of the rest of her employees. She still owns the business, but she no longer reports for work every day. She even found another full-time job.

How much do you earn from your business because you are employed by it? How much do you make from your business because you own it? Yes, each question should have its own answer.

One of the reasons these concepts are confused relates to the way owners pay themselves. With pass-through entities, especially s-corps, commonly used by entrepreneurs, earnings for employment and profit-taking as an owner are often combined, or at least not looked at in terms of a fair market wage for an active owner.

Here is what every business owner should do--figure out how much you would have to pay someone to replace yourself. If you are currently making less than that, then its time to figure out how to grow your business or make it more profitable so that you can at least earn what the market is willing to pay. If you're making only that amount, then you're really not getting any benefit for being the owner, other than the fringe benefits of owning a "lifestyle" business that provides employment. If you are taking home more than your wages, then you are getting the best of both worlds--a good-paying job and some financial reward for risking everything you have, including your time, to build your business.

Monday, December 6, 2010

Budget 2011, but be ready with Plan B

2010 is coming to a close, and its time to get serious about having your 2011 plan in place. And I'm not just talking about a revenue target or a net income budget. You can do so much better than that, and you'll be surprised how much it will make a difference in your business!

If you are looking for some tips on how to create a budget for 2011, then I recommend you read my recent article on American Express OPEN Forum: 10 Tips for Creating Your 2011 Budget. I'm going to expound on Tip #10 and the Bonus Tip, both of which have to do with creating alternate plans in case your Plan A doesn't work out, then making mid-year adjustments based on your best and worst-case scenario plans.

In these uncertain times, chances are better you'll either under or over-perform against your plan than you actually hitting your target right on. Of the entrepreneurial companies for whom CFOwise® serves as the CFO, their 2010 results prove this point. Even with careful, thoughtful planning, only about 15% of them varied from their revenue and income projections less than 5%. 55%beat their projections, and the remaining 30% came in below their plan for the year. So why bother to budget if it is so hard to get it right? Have I ever mentioned I love that question?

My initial answer is that if your year is any different than you planned, you have already thought about what changes and adjustments you would need to make. Just the exercise of planning for it gets you one step ahead of your competition, and it helps you understand your business model, which elements are flexible and which are not and what parts you can and need to change if your business is beating or falling short of its plan. That's why I always recommend three budgets for the year. Your realistic plan, and then your best and worst-case scenario as derivatives of that realistic plan.

So, let's imagine your company is under-performing on its budget. You initially planned to hire one new employee each quarter of the year, but sales are falling short of your plan. By referring to your worst-case scenario and your realistic budget, you will quickly determine how many employees you can hire and the best possible time to hire them.

Conversely, let's imagine you are beating your revenue projection by 20% after just the first few months of 2011. When you consider your best-case scenario would require you to purchase additional equipment to handle the increased demand, you can quickly react to your better-than-expected performance and be ready to handle the volume and take advantage of the opportunity. One entrepreneur I know calls that "making hay when their is hay to be made."

So, by having three budgets you are forced to think about a myriad of what/if scenarios and plan to accommodate them. Then, by analyzing your variances from your realistic budget each month, you are ready to make quick adjustments to maximize your results, regardless of if your year is going better or worse than you planned.

Monday, November 29, 2010

Entrepreneurs are Pioneers

A good friend of mine loves to talk about the commonality between pioneers and entrepreneurs. He feels he is constantly under attack for the innovative and cutting-edge ways he is shaking up a pretty antiquated industry.

To paraphrase, he often has said something like this to me:

"You know, Ken, entrepreneurs are like pioneers. Pioneers are out there, leading the charge, finding new opportunities, and forging new trails. But a lot of the Pioneers receive resistance. In the early days of America, the resistance sometimes came in the form of arrows being shot at them. If a Pioneer was ever hit, it was almost always in their back. You'd never see a pioneer with an arrow in his chest, always in his back."

Interesting perspective, and he always sounds bitter when he mentions this topic. But there is something inside him, maybe deep down, that loves the adversity. That's right, he loves the challenge, and he accepts his critics as proof of concept. Yes, the fact that they oppose him is the very validation he needs to prove that he's on the right track. He actually views the figurative arrows in his back as proof he's headed toward the best untamed, uncharted territory.

Perhaps thinking about the alternative to being a pioneer would help put this in perspective. After all, you could stay home, where it is relatively safe, and keep doing things the way they've always been done. But isn't that becoming more risky, with the business climate changing at an increasingly fast pace? At the risk of being left behind, perhaps some of the adversity pioneers face doesn't seem as daunting.

Wherever you are at in your entrepreneurial venture, you already know the risks and rewards of being a pioneer. But you should keep charging on and moving forward, not turning around long enough to expose the front half of you to competitors and naysayers alike.

Tuesday, November 23, 2010

Paralysis by Analysis

I get to work with numbers and analyze a lot of businesses, business models, and opportunities based on their financial impact. My experiences have taught me that you can quantify just about anything.

For example, a business is about to crumble. You can put the numbers together to figure out of the business is savable, and if it is, know exactly what you need to do to turn it around. Or, you may be considering adding a new partner or buying a new piece of equipment. Again, using the numbers you can put together a pretty good story about whether or not you should move forward with those plans.

But sometimes entrepreneurs can fall into the trap of paralysis by analysis, or as others refer to it, analysis paralysis. It is possible, and it happens often, that we can spend too much time and effort analyzing and not enough time doing, testing, and trying. It can even be possible to become so overwhelmed with data and analysis that we can't move forward with a decision, stifled by too many options, assumptions, and conclusions. Here are some quick thoughts on how to avoid this happening to you.

First, realize that if making the right decisions were easy, then everyone would be a successful entrepreneur, right? Too much and too little information are much more common than entrepreneurs getting just the right amount of information to make the best decisions possible.

Second, feed whatever information and analysis you have into your intuition. Process it. Flesh it out, either mentally by yourself or verbally with your team (this is almost always the best option).

Third, once you have a grasp of the options in front of you, put the data aside and listen to your gut. If you're still unclear on the best direction, go back and see if the analysis can answer any of your doubts or questions.

Fourth, once your intuition is fed with data and analysis and your gut is telling you what you should do, follow it. Even if there is more data to process and more information to analyze. Entrepreneurs have a keen sense of what will be best for their businesses if once they gain clarity through the right amount of information and analysis.

The reason paralysis by analysis happens is because entrepreneurs don't trust their intuition. So, they think they can replace needing to use their intuition with more data. And all that will do is keep taking you in circles. Get the data, analyze it, interpret and feed it into your intuition, or gut, and then pull the trigger. Your decision may be to do nothing, but that's probably the best decision if that is what your intuition is telling you.

In an effort to avoid paralysis by analysis I have seen some entrepreneurs just make 'from-the-hip' decisions without taking the appropriate amount of time to analyze, discuss, and let their intuition drive their decisions. Yes, there is a difference between making decisions on the fly and using intuition. So finding the right balance is the key.

Wednesday, November 17, 2010

Innovation and Marketing, the Two Driving Business Functions

I have met a lot of entrepreneurs recently who have told me how superior their product or technology is compared to their competitors. But their competitors have far more customers and market penetration.
As a result, in the last several months I have found myself sharing some or all of the following quote from the great management thought-leader, Peter Drucker:

"Because the purpose of business is to create and keep a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of business."

This may be a painful realization for some, but the best product or service doesn't always win. In business, usually the best marketer wins. So, here are some general recommendations for any entrepreneur who thinks their infatuation with their product is blinding them from being the best marketer among their competitors.

- Complete a market analysis relative to your competitors and your product, preferably with clear recommendations on the best segments of the market and the most valuable positioning in that/those markets

- Get someone on your team now who has marketed and sold to the same customers. This addition to your team should also get the hands-on, roll-up-your-shirt-sleeve mentality your entrepreneurial company was founded upon.

- Care more about how best to solve your customers' needs than your technology or product. Many entrepreneurs really struggle with this one, thinking that they know what's best for the customer. The challenge is always getting the customer to believe that. So get their feedback throughout your product life-cycle and be willing to shed features and design elements that you're holding onto because of your love affair with the product, not because of what is best for the customer.

- Have fun. Marketing is one of the most exciting parts of business. When done correctly, it is quantitatively based and often more measurable than many other things you do in your company.

This is just a 'starter' list. Does anyone want to add any more to the list?

These thoughts don't apply to products only. The same concepts can help in marketing services and can help in marketing you if you are looking for a new job or need to position yourself for a promotion.

Monday, October 25, 2010

The Jerk Employee

There seems to always be one employee that no one in the company can stand. They are usually rude and often condescending toward others and they seem to create problems and conflict with everything they do. But the entrepreneur keeps them around for some reason, regardless of how bad the complaints from the other employees get.

Why? Because the jerk is usually really good at something and the entrepreneur is willing to put up with the collateral damage for their behavior. But what does it do to the culture? How does it affect the other employees? Is it possible that the jerk is costing you more than any value they are bringing?

I have a lot of examples I could share, but I'll just give a couple of scenarios I've commonly seen.

SCENARIO 1 - The sales manager for a quickly growing outsourcing company rubs everybody in the company the wrong way. Nobody wants to work with the customers she sells because she always over promises, usually way beyond the capacity of the company and its employees to deliver. But she can bring in business like no one else, and the entrepreneur needs that productivity to help his company grow.

SCENARIO 2 - A product company does its own R&D in house. The lead engineer is a bit quirky, but a brilliant engineer with even a little bit of design capacity in him. But his bedside manner is sub-par and no one can stand to be around him. And if they are, he is always quick to remind them how smart he is and how the company would be nowhere without him.

So, have you ever experienced the jerk employee? How did you handle it? What would you recommend others do?

Monday, October 11, 2010

Ten Lessons Learned in Entrepreneurship

I spoke at the Entrepreneur Lecture Series course at BYU today. Here is what I spoke about:

  1. Be in a position of ownership - my first startup, a baseball umpiring business, taught me this when I tossed my first coach from a game and I took serious heat for the behavior of the other umpire.
  2. Know your customer - my second entrepreneurial venture bombed because I failed to do this. And I'm talking about getting into their head and knowing what they think, what their problems are, and so much more.
  3. Become an advocate for your customers - now that you know them, become a voice to which they can look for guidance, advice, and more
  4. Experience + Education - One or the other is good, but both is powerful and improves the chances for entrepreneurial success
  5. Know you numbers - without the clarity that comes from numbers, every business is missing out on strategic competitive advantages it could gain
  6. Know you partners - I learned this in my second startup failure when a prospective partner turned out to be someone much different that anyone suspected. Please refer to 4 Signs Your Business Partnership will Fail for more on this subject.
  7. Don't be afraid of the big boys - startups can do it faster, better, and usually cheaper. Never let a big competitor scare or intimidate you.
  8. Caution: Family Business - Please read 3 Rules Every Family Business Should Live By.
  9. Services are difficult to scale - time is a limited resource, and selling it has a finite capacity.
  10. Turn services into products - Read Built to Sell for more information.

Monday, October 4, 2010

Bootstrap for Slow Growth or Raise Equity to Accelerate

There is a lot of talk and content on the internet about "bootstrapping." I had an interesting experience with this just last week. A company is looking to roll-out an innovative business model in a very competitive online business space. One partner in the business wants to grow slowly, gaining customers slowly and using the revenue generated to fund future growth. Another partner wants to raise millions of dollars, throw it all into aggressive marketing plans, and accelerate growth exponentially.  I don't think either plan is fundamentally flawed, but I favor the slower growth plan, and here is why.

The partner in favor or raising millions of dollars and using them primarily in a marketing campaign is afraid of competition. He wants to blow the doors off of every potential competitor, mainly motivated by the fear that others will do what is commonly called "rip-off and design." His is a first-mover-advantage mentality. In some scenarios I think the fear is justified, but not in this one. You see, the business is so different from the traditional model that is it highly disruptive. And highly disruptive businesses are usually ignored by bigger competitors with deeper pockets because they initially discount the new-comer with rationalizations rather than consider them a serious threat.

This provides a great opportunity for the company to focus on retaining its equity and slowly gaining proof of concept and a loyal customer base. Is there a risk to this strategy? Of course there is. But the risk of giving away most of your company on marketing, in this situation, is far greater with significantly reduced opportunities for return.

Tuesday, September 28, 2010

Entrepreneurial Benevolence

Small and medium-sized businesses are struggling to survive in this tough economy, right?  Entrepreneurs are fighting to make payroll and advance their companies to the next level, aren't they?  Yes and yes... and some of these business owners are even growing their companies and their market share in these difficult times!

What's even more amazing is a trend I commonly see within these entrepreneurial companies.  Here is a conversation I had yesterday morning, paraphrased and altered to protect confidentiality:

Oh, Ken, there's one thing I need to tell you about our payroll.  You see, there's this guy named Fred that we have on payroll to try and help him out.  He can't find a job and I'm trying to help his family - he's a good friend and neighbor of mine.  He helps us out here and there, and he tries really hard, but I could think of a lot more qualified people to hire.  But I feel like I need to help him out.

Amazing, especially when you consider this entrepreneur is investing all of his resources to adjust his business into a more profitable and sustainable model.  But he wouldn't stand for letting Fred go.

If this happened once or twice, I wouldn't bother to write about it.  But I can think of five companies I have met in the last two weeks with which I have had a similar conversation.  I've decided to call it Entrepreneurial Benevolence.  If you meet an entrepreneur, I'll bet there's a good chance he/she has someone in a less fortunate situation on payroll that is mainly there to help that someone.

Wednesday, September 8, 2010

Resilience Required for Entrepreneurship

An entrepreneur started his company over 20 years ago.  He had built it up to several locations with a strong, recognizable brand.  I won’t go into all the details of why his business failed, but what amazed me the most was how, on the brink of financial and professional ruin, he was figuring out what his next business was going to be.  The word I use to describe this attribute, which I find among so many business owners and entrepreneurs, is resilience.

From the moment you decide to start a business you are signing up for adversity, problems, and challenges.  Many will tell you your idea is horrible.  Resilient entrepreneurs accept such criticism as proof of concept!  You will make many mistakes, but resilient entrepreneurs call that experience and improve themselves as a result.

So, is resilience just trying to shed a positive light on negative things?  Absolutely not.  It is much more than that.  My definition is that no matter how hard things get, no matter how dark the scenarios, not matter how painful the process, those that are resilient figure out how to overcome and thrive.  Entrepreneurship is really problem-solving on steroids, isn’t it?  Only it’s legal and arguably even more productive, in the short and certainly the long-term.

In looking through a few online resources, here are some words and phrases that many associate with resilience: rebounding, springing back, buoyant, returning to its original or better form, recovering readily from illness, depression, adversity, or the like.  Sounds like entrepreneurship to me.

The example I shared above has a happy ending.  That entrepreneur went on to build another successful business, and he continues to be an example of entrepreneurial resilience.  I'm not sure if you can teach it, but it sure is an admirable trait.

Feel free to share any examples of entrepreneurial resilience or your thoughts on resilience as a necessary attribute of all entrepreneurs.

Monday, August 9, 2010

Business Lessons from the Highest Peak in Utah

2 weeks ago I was one of 26 14-18 year-old boys, youth leaders, and fathers that embarked on a 63-mile 5-day backpacking trip in the Uinta mountains.  King's Peak, the highest mountain in the state at over 13,500 feet in elevation, was just one of the many challenges of the week.  Here are some important lessons we learned, and how they apply to our businesses:

Lightweight Business Model
When I prepared my pack for this grueling adventure, every ounce counted.  And trust me, by the last day I felt every fraction of an ounce.  I started with the staple needs - tent, sleeping bag, stove, water filter, headlamp, etc.  Regardless how many days I would be gone, I would need the same amount of these items (one tent, one sleeping bag, etc.).  These are like the fixed costs in your business.  We want them to be as light as possible, because we will be adding more weight to them per day we are gone - changes of clothing, food, fuel, and more.  A lightweight business model is one that does not over-burden the business with heavy fixed costs and tries to structure itself to function, as much as possible, on variable costs.  The lighter the fixed costs, the lower the break-even point and the more flexible the business will be to change its course and take advantage of the right opportunities as they come along.

Foundation Determines Success
I quickly learned that feet, the foundation of the body, were the most important part of the body on this trip.  One person bought a new pair of shoes 2 weeks before the trip and had several blisters after just the first day of hiking.  He was plagued by these and the rest of the blisters that appeared thereafter throughout the duration of the trip!  He had to go much slower than the rest of his body wanted because of the pain from these blisters.  Those who experienced the least amount of pain and enjoyed the most comfortable experience were those with the right shoes and socks and they worked to keep their feet dry while hiking (we were rained on every day, with the worst torrential downpour I've ever experienced on Friday) and warm at night (temperatures dropped into the thirties each night).  In business, we have to strengthen and take-care of our foundation, which is usually a combination of working capital, the best employees, and our customers.  Without these three things we are in for a very painful business experience.

Difficulty is in the Eye of the Beholder
We hiked 12 miles on Monday, 15 miles on Tuesday, 7 miles on Wednesday, 13 miles on Thursday, and 16 miles on Friday.  Before Monday, the youth would complain before a 5 mile hike.  By Wednesday morning, after days of 12 and 15 miles, respectively, 7 miles was the easiest thing they had ever heard of.  Comments like, "Oh, we only have to go 7 miles today," and "Today is going to be a piece of cake," became the opinion.  The business application - what may look difficult today is likely not nearly as difficult when put into context.  You may be going somewhere you and your team have never been, but few challenges end up as hard as they might initially appear.

Snapshots are Less Valuable than Overall Perspective
Kings Peak is not all that intimidating when you are next to it.  On Wednesday night we camped just south of Kings Peak in Painters Basin, only about 2,400 feet lower elevation than the peak - it would take a hike of just over 3 miles to summit the next morning.  What was interesting was the reaction of the youth.  "That doesn't look like the tallest mountain in Utah," one young man offered.  How quickly they forgot how far and how high we had to hike just to arrive at that point.  Just two days later we would finish our adventure at 7,800 feet.  The point is this - our perspective is often limited to the immediate surroundings of that at which we look.  We need to broaden our perspective so we can see the whole picture of our business.

One of the leaders on this trip frequently said that it would not be an adventure if we knew the outcome.  Starting, owning, and running a business is, therefore, an adventure.  With these four lessons learned, we can hopefully create the outcomes we desire!

Monday, July 26, 2010

Improve the World

I recently saw this video and enjoyed its message.  I think its message is clear - entrepreneurs are changing and improving the world.  Many people incorrectly think that entrepreneurs start businesses for money.  Money is a means to an end, while the challenge of building something that makes a difference is the reason they get up in the morning to pursue their passion.  Kudos to the entrepreneurs of the world - enjoy this video!

Monday, July 19, 2010

Tax Planning to Minimize Taxes

Compliance is not very interesting or fun according to most entrepreneurs or business owners.  That's why they usually put off discussing taxes until the very last moment possible.  Not only does this usually cost them more in taxes, but the entire process can be one of the most compelling things they do, if they do it right.

In a recent article I wrote for the American Express OPEN Forum, I share 4 Tips to Get the Most From Your Tax Planning.  In addition to using the right professionals, defining objectives, forecasting, and the right timing/frequency, I want to address one more element that underlines why so many fail to properly plan to save taxes - complexity.

Most businesses are complex organisms with many dynamic and ever-changing components to them.  It is hard enough to build a business in this difficult and extremely competitive and often litigious economy.  Most business owners and entrepreneurs are juggling many priorities, initiatives, and tasks to try to maintain or maybe even grow their businesses.  Adding another complexity, planning for tax, is often neglected with one of the following statements:

"Why should I plan for tax?  I will just pay what I owe, and planning cannot change how much income I make."

"I cannot understand why I have to pay more in taxes every year than I have brought home from my business.  But I just pay it because my CPA tells me too."

"Every year is a big question mark on what amount I will put on the check to the IRS.  I don't understand it, but I pay it and hope the IRS does not audit me."

Just typing those often-uttered sentences makes me cringe.  If you don't understand taxes, then it's time to start.  I'm not suggesting you become an expert, but the principles are not complex in theory, just in practice.  Understand the theory and take ownership of your tax situation.  It needs to be a priority to you because it is one of the major cash outflows of every business (and business owner).

Sorry, that was a little bit of a rant, but claiming ignorance is not a valid excuse, in my opinion.  Rely on your tax CPA and/or advisors to help you understand.  If you cannot understand them, then fire them and hire some who you can understand.  The point of all of this is that shying away from taxes and tax planning because they are complex is not acceptable.

Some tax planning strategies require adding some complexity to a business, and this is OK as long as the tax savings are far in excess of any extra costs to handle the additional complexity.  Embrace the complexity of taxes and tax planning and you will see your cash flow improve!

Monday, July 5, 2010

Are Your Numbers as Deceptive as an Eclipse?

[Author's Note: This post is not about the Twilight Series' release of its third movie.  I do, however, admit that my wife took me to the first two and will likely take me to the third soon.]

At 4:17am on Saturday, June 26th 2010 I saw the beginning of a lunar eclipse.  I was on an early-morning (or more like a middle of the night) hiking trip and we stopped to watch this rare occurrence (this was the first of only two this year).  What we initially saw was unimpressive.  At first, a dark cloud seemed to cover the upper arc of the moon.  The earth's shadow was barely beginning to interfere with what appeared to otherwise be a full moon.

As the morning carried on, the eclipse continued to black-out a quarter and then an entire half of the moon.  I have never seen anything like this before - it was amazing to watch.  If I was not aware that we were expecting a lunar eclipse, I may not have even noticed this phenomenon.  I wondered how many people, not knowing it was supposed to be a full moon, might have looked at the moon in those early morning hours without realizing what they were seeing.

Then, I couldn't help but relate this to one of the common business problems I see.  Many businesses will occasionally look at their numbers (in the form of financial statements or some other form of dashboard/KPI data) but the data and information they are looking at is not meaningful and is not helping them improve their business.  Why?  Because they lack context and comparison.  I took several "snapshots" of this event throughout the morning and ultimately I could comprehend what was happening.

Just as I grew to appreciate the eclipse as I saw it progress, others who perhaps only briefly looked at the moon once at any time that morning likely missed out on the eclipse altogether.  So, how do we solve this?  We have to put the numbers of the business into context against where we have been, where we are going, and what our competitors and industry are doing.

We refer to this as comparative analysis, and it works as simply as this.  If we generated $250,000 of sales this month, is that good or bad and what can we do to improve it?  First, we should understand what we have done in the past (last month, last year, same month last year, etc.) to understand if we are growing or shrinking.  Then we should compare it to what we were hoping to accomplish that month and if those sales are helping us to or hindering us from getting where we are headed.  Here's an example: if we had sales in the same month of the prior year of $200,000, and last month we had sales of $230,000, and we were planning on $240,000 to achieve our goals for the year, then we can call $250,000 in sales a very good month.

While this revenue example may seem very simple and like most businesses do some type of similar analysis, we need to consider if they are doing the same analysis on their lead generation, conversions, operational efficiencies, and other financial metrics.  This will truly put the entire month into perspective in terms of our performance with one exception - industry benchmarks.

How are we doing relative to others in our industry?  As much as we may claim to have an innovative business model, the truth is that business models have been around a long time and there is very little innovation possible (although there is at least a little).  Even if we feel we are better than our competitors, we can still learn from their numbers and we can use them effectively as benchmarks for our own performance.

Are your numbers deceptive like a lunar eclipse?  Avoid the deception with comparative techniques that will make your numbers more meaningful.  Ultimately, the more meaningful your numbers are the better decisions you will be able to make, which will help you improve your cash flow and profitability!

Monday, June 28, 2010

Lessons Learned from a Lemonade Stand

As my children split the earnings from their first lemonade stand just a few days ago, I couldn't help but take the opportunity to teach them a little about entrepreneurship.  Here is their grade in 5 critical areas of running a business, with some application for all business owners and entrepreneurs to consider:

Not only was it a sunny and hot Saturday afternoon, but several people in the neighborhood (including me) were also just returning from a 12-hour, 14-mile hike to a peak of over 11,000 feet.  They were tired and thirsty as were many of the other neighbors.  I bought a few glasses myself as I pulled into the neighborhood, and it was a welcome refreshment.  But then I started wondering why I was paying for lemonade a second time....

Yes, they get an "F" for this critical business discipline because they failed to consider how much they needed to "reimburse" their supplier for their material inputs - primarily lemonade mix.  The surprised look on their faces was priceless when I asked: "How much are you going to pay me for purchasing and storing your supplies, allowing you to 'rent' my pitcher and cups, covering  the maintenance costs to clean what you have made dirty, and so on?"  Somehow they thought that everything they needed to run their business would magically appear.  We settled on a payment that was very much in their favor (I am their father after all).  Although the example is somewhat simple and may even seem immature, you would be surprised at how many entrepreneurs and business owners really don't know what it costs to run their business.

Since they didn't understand their costs, let alone the difference between their variable and fixed costs, they had no idea how many cups they needed to sell per pitcher to break-even on the pitcher.  As I helped them figure this out, they realized that one of their pricing options would possibly make them lose money...

Their price for one cup, $0.25, was well-researched.  They had seen competing lemonade stands charge about this much, and they felt confident their product was at least as good as the competition.  Where they fell short was their pricing strategy for customers who bought two cups.  They would charge only $0.30 for 2 cups, a great deal for their customers - in fact, most upgraded to the two cup option.  However, once they learned about their break-even point, they realized that the number of cups per pitcher they would need to sell just to cover their costs was dangerously close to the total number of cups each pitcher would generate.  Pricing can be a tricky thing, always trying to balance between offering a good value and trying to be more profitable than the market will allow.

Perhaps the most entertaining part of this experience was hearing a conversation between two of the kids.  One said to the other: "You don't deserve to make as much as me because I sat out in the hot sun selling the lemonade."  The other kid responded: "Yes I do.  I've been handling the money and that's just as important as what you are doing."  It took them a while to work out their differences, but they eventually did.  And we need to learn two things from this - first, partnerships usually don't get into trouble until there is money or something else of value to fight over.  Second, compensation, equity, and contributions need to be clearly defined and all parties need to be held accountable to them from the commencement of the business.  Simple to say, very difficult for most to implement - but it goes a long way toward creating a framework within which all can succeed.

If the saying that you learn more from your mistakes and failures than your successes is true, then what my kids learned was well worth an "A" for effort and humility.  One son commented: "I'll never make those mistakes again."  Perfect - let's hope he lives up to that.

Saturday, June 19, 2010

Experience is the Best Teacher

Confucius taught: "I hear and I forget.  I see and I remember.  I do and I understand."

I was reminded of this quote while recently reading a blog post by Mark MacLeod of startupCFO.  In Traits of Successful Founders Mark suggests that one of the common traits of Founders who are finding success are the ones who don't just know their industry - they understand it from years of experience.

Not only do I think his assessment is correct, but I also struggle to get excited about a new venture when the Founder has little or no experience in the space he/she is trying to occupy.  For example, several years ago I met an entrepreneur who wanted to create a certain kind of vitamin supplement that could be injected into a home's tap water - supposedly improving absorption and utilization.  As I inquired into his idea, he explained that he had no experience in vitamin supplements, water supply, or distributing such products.  He sensed my concern over this and tried to assure me that he was a fast learner and that it wouldn't take him long to get up-to-speed.  He was confident he did not need any help and that he could do it all himself.

His effort to subside my concern only fueled its flame.  And that's where Confucius comes in - I do and I understand.  My recommendation to him was to go and get some industry experience by working in the space, attending trade shows and conferences, subscribing to industry periodicals and newsletters, and doing anything else to immerse his thoughts into the space.  Even with just a couple of years under his belt he could vastly improve the chances of success for his idea.

He ending up struggling for several years to gain traction, and finally gave up on his idea and commented that he couldn't seem to break-into the industry and make the right connections to get his venture off the ground.

For fear someone may misunderstand what I am saying, I am not suggesting that a Founder must have gray hair in a particular industry.  I'm only suggesting that even a couple of years will make a huge impact on the viability of the idea and hopeful venture.  It is always easy to sit on the "outside" of an industry and think how easy it is.  The reality is that no business is easy, every industry has its unique challenges, and the thought leaders for each industry are grounded in the day-to-day challenges of that space.

When Confucius says I hear and I forget, I think back to the last seminar I attended.  I remember less than 15% of what I heard.  When Confucius says I see and I remember, I think back to hearing my father teach me about the importance of hard work and then seeing him live his life in congruence with his teaching.  When Confucius says I do and I understand, a flood of memories and lessons-learned come to mind, with particularly acute attention to the failures and mistakes in my past.  There is just no replacement for experience.

Monday, June 14, 2010

The Two Biggest Problems with Dashboards

There seems to be a lot of buzz around businesses having a dashboard.  Even Intuit has jumped on board and tried to provide this functionality in QuickBooks with its Snapshot Center.  For those unfamiliar with this concept, a dashboard is one place a business owner should be able to look to see all of the key metrics and performance indicators of their business.  To learn more about this concept, please visit my blog post: The Key Business Metrics Every Entrepreneur Must Know.

I need to preface what I am about to say with the disclaimer that I think every business should have a dashboard that outlines the key business metrics every business should measure, with some customization by industry and company, in a timely and accurate fashion.  I take no issue with the concept of dashboards - in fact, I fully endorse it.  My issue is related to programs and tools that are built to fulfill the dashboard function and how they are deployed.  Most dashboard programs and tools are totally ineffective and fall far short of the sales pitch that caused them to be purchased in the first place.  Why?  Here are the two main reasons, as well as my suggestion for how to get the most value out of the "dashboarding" process.

Regardless of how well you think you know your business, your model, or your key metrics, I guarantee you will not get the needs of your dashboard right the first time.  An inevitable part of the "dashboarding" process is you quickly learn what information is helpful and what information is not.  It also forces you to ask additional questions that leads to better and more effective metrics.  The challenge with most SaaS and off-the-shelf "dashboarding" programs is that they all require time, effort, and energy to set them up so they will work.  It is hard to make any changes without feeling like you have to start all over again.  Yes, I hope there will be some dashboard companies that will dispute this statement, but I have yet to see any of them fulfill on the commitment that the dashboards are easy to change once they get up and working.

Once you know what you need to track, the next challenge is getting the information into the dashboard in a timely and accurate manner.  Most dashboards pull data from the accounting or ERP system the businesses uses, and that information is usually only updated and reconciled monthly, and that information is usually not completely accurate until the 10th of the following month or later.  The purpose of the dashboard is to get real-time feedback, so 10 days late is the equivalent of a year late in dashboard time.  If the information is not right, then the dashboard will not be right, which will lead to bad decisions.  If it is not timely (meaning pretty much real-time), it is useless.

The solution to these challenges is really quite simple, but it takes a little thought, discipline, and effort.  Here are the steps to get an effective dashboard up and running for your company:

First, don't buy a dashboard.  This step needs to wait - remember, software does not solve problems.  People and intelligence solve problems, then software automates and simplifies the solution.

Second, make a list of what you think will be important to track each week.  There should be key metrics from marketing, sales, operations, and finance on your list.

Third, create and excel spreadsheet, or a google doc spreadsheet for those of you living in the cloud, and list each of the things you want to track across the top to create several columns.  Then, list the Friday of each of the following 52 weeks down the left-hand column titled "Week Ending."

Fourth, coordinate with your team where all of the information will come from for this document.  It may need to come from several people, so commit them to get the information to you on time and in the format that will work best for you.

Fifth, start tracking for four weeks and see what everyone thinks.  What information do they like?  What information do they still wish they had.  Then repeat this process for the next three months.

Sixth, once you feel you have your list of items you want on your dashboard pretty well-defined, start to investigate the best ways to automate the collection of this information into your weekly dashboard.  The information will likely come from many different software application, including your accounting system, your CRM, and more.

Seven, start to investigate dashboard SaaS tools based on their ability to pull data from all of your sources (which may include some manual input).

Eight, purchase a dashboard that solves the highest number of issues in terms of automation, timeliness, and accuracy.

Nine, spend the time and resources it takes to get your new system set up the right way.

Ten, sit back and enjoy the fruits of your labors with the critical information you need to run your business right at your fingertips.

I could give countless examples of the benefits that companies reap when they have the right information on time.  The point of this blog post is that business owners should refrain from making any type of "dashboarding" purpose until they get to step 8 of this process.  If you don't wait, you will likely end up with the wrong solution giving you inaccurate information that will be useless and waste the company's resources in terms of the procurement, set-up, training, implementation, and ongoing support.

*Author's Note: Please note that for the purposes of this post I chose to step out on a liberal limb and turn dashboard, which is usually only used as noun, into the verb "dashboarding."  I have surrounded each occurrence of this with quotation marks as a sign that I realize "dashboarding" is not a word, but it helps me communicate my point.  Thanks for understanding!

Tuesday, June 8, 2010

Getting Your Business Ready to Sell

I recently read John Warrillow's book Built to Sell: Turn Your Business Into One You Can Sell.  It is a great resource for anyone that is building a business that they plan to exit by selling it. The book focuses on 8 steps for helping business owners maximize the value of their businesses when they sell.

There is obviously a lot that goes into getting a business ready to sell and maximizing its value in the process.  In my opinion, the first four steps are the hardest for most entrepreneurs and business owners that I know.  Here is why:

Step 1 involves determining which service is the most 'scalable' and creating a replicable process for it.  This is an exercise that most entrepreneurs fight, primarily because they struggle to be objective about selecting and then building a system to replicate one of their services.  Sometimes it is driven by fear that the service will lose its value, and sometimes entrepreneurs just don't want to figure out how everything works and create a system around it.  This requires a lot of mental energy, and most entrepreneurs refuse to engage in this activity - and it costs them a lot of time and money in the short-term and a poor exit as a result.

Step 2 involves charging in advance for this "Standard Service Offering."  Most business owners and entrepreneurs like the sound of this but hesitate to change this delicate part of their relationship with their clients.

Step 3 involves hiring a sales team to sell it.  This presents several challenges, including figuring out the model and compensation program for sales reps and cash-flowing the sales cycle.  This requires a leap of faith, and even when most entrepreneurs take it, they often do not hire the right sales reps who end up costing a lot of money but do not produce desirable results.  These challenges can certainly be overcome, but most either avoid this step or have lost money trying to do it in the past.

Step 4 requires the business to stop doing all other services except the one included in the "Standard Service Offering."  This is a very large leap of faith.  This means saying goodbye to some long-time good-paying clients and it means cutting the revenue of the firm in the short-term to hopefully come back bigger, stronger, and more scalable.

Mr. Warrillow's book is worth reading, and I especially enjoyed the realistic fiction setting that seemed to make the 8 steps more real and applicable.

Monday, May 24, 2010

Feedback is a Gift

About 4 years ago I was approached by a man who wanted to give me some feedback - and none of it was positive.  He spent the better part of 30 minutes explaining and justifying how I had wronged him and why I barely deserved access to the oxygen I needed to breath (OK, he didn't say that specifically but that was about the tone of his message).  My initial reaction was shock - I sincerely had no idea he had such a problem with me.  As I listened to his rant, I was often tempted to jump in and defend myself and explain the apparent misunderstanding - but I refrained.  It was clear he needed to get this off his chest, so I took it on the chin.

In a recent training retreat I was reminded of this experience as well as the phrase that I kept playing over and over in my head to help me keep my cool while I was attacked: "Feedback is a gift!"  I honestly tried to appraise the situation and understand if there was some way I could learn and improve based on this feedback - the only way feedback can ever be a gift.  If you fail to try and learn and improve from it, then it will seldom add value to your life.

Once this man finished saying what he wanted to say, I communicated my surprise and I told him what I thought I might be able to do in the future to be better based on his feedback.  In fact, I swallowed my pride whole when I said: "Thank you for this feedback."  My response completely dis-armed him and we finished with a healthy conversation wherein he admitted he was at fault and we resolved to move forward and make things better.

The point of the story is this: whether it is good or bad, feedback is a gift.  If the feedback is neutral or you receive no feedback at all, then you really don't know where you stand and if you should be changing or improving something.  If you receive sincere positive feedback, then you will know you should do more of the same in the future.  If the feedback is negative, then you know what you should change in the future.  And, let it motivate you to make sure you never get that feedback again.

Either way, it is a gift of knowledge with which you can make the right decisions and take the right actions.  No feedback or insincere feedback (which, in my opinion, is the worst kind of feedback) is useless and should leave us wondering how we are actually doing.

When running a business, feedback should be the number one source of inputs you consider when crafting your strategic and tactical plan to build a successful enterprise.  You will take in qualitative feedback from conversations with and surveys of customers, employees, contractors, suppliers, and vendors.  You need to process quantitative feedback in the form of monthly financial statements, budget vs. actual analysis, daily and weekly dashboards, cash flow projections, and so much more.  Not receiving this information, whether good or bad, is crippling - you have no idea if you are doing well or n0t.

In my experience, the best entrepreneurs and CEOs are those who recognize that feedback is a gift.  They become empowered with real and actionable information from all of the appropriate sources.

So, why don't many people view feedback as a gift?  Because it is painful.  It is making yourself vulnerable and exposing your weaknesses and strengths to others, and sometimes they will come at you with more negative than you think you can handle.  But if you truly consider feedback as the gift that it is, it will always work to your ultimate benefit.

Monday, May 17, 2010

The Collapse of the Office Manager

When a business first starts, the founder is focused on getting customers.  Once that starts to happen and cash-in starts to exceed cash-out each month, the founder is quick to shed bookkeeping, cash management, and other administrative tasks to someone else.

The person hired to take all of this on quickly begins to wear many hats – receptionist, bookkeeper, accounting clerk, data entry clerk, assistant to the founder, customer service support, marketing support, human resources, sales support, and sometimes they even come in and clean the office on the weekends for a little extra money.  I have found that women are more often hired than men in this position because there seems to be an over-arching stereotype that women manage details better than men.  I neither subscribe to or deny the stereotype - I am merely acknowledging that it exists.  This person will end up with a title like office manager, meaning they handle a lot of the details no one else wants or has time for and they become a critical element of keeping the business running from an administrative stand-point.

As this person absorbs all of these activities their perceived value contribution to the business is high, although they wear so many hats and have to cover so many areas of the business that they really don’t master any of them.  In addition, they usually lack the experience and education to handle certain tasks they’re expected to do, especially when it comes to accounting and finance.

As a business progresses in its life-cycle this person does their best to keep the books in a spreadsheet or a low-cost off-the-shelf accounting software package, like QuickBooks.  While they have done their absolute best to make this effective, their lack of education and experience in accounting means that even with all their effort they are not able to provide much meaningful, timely, or accurate information/data to the people running the business.

This person becomes frustrated because they sense they are not doing enough, even though, considering the circumstances, they work long hours and care a great deal for the company.  Nobody likes a job where they feel inadequate or incompetent.  They may even try to get some training in accounting or the software package the company uses, but the training is usually so generic that it is hard to apply to the actual day-to-day operations and functions of the software in the business.

At this point the business owner is not getting the information he needs to run the business.  So he continues to trust his gut and makes far too many decisions based on the balance in his bank account instead of his actual business performance.  This leads to some bad decisions and the business struggles to grow as a result.  Yes, bad accounting can actually hinder the growth of a company!

The collapse of the Office Manager position comes as parts and pieces of the their responsibilities are peeled off and given to newly hired employees with more experience and expertise in those respective fields.  As this happens, the only work left is the low-paying duties like receptionist and data entry, and they are far over-paid for those functions.  Their position is ultimately eliminated, and very few of the people initially in the role survive with the company.  They were hired to be a "jack" of many trades, but the growth of the company has facilitated specialization and their master-of-none skills leave them without a job.

There is a way to avoid this tragedy, and I will discuss it in Solve the Mystery of Staffing Your Accounting Department on American Express OPEN Forum.

Tuesday, May 11, 2010

Servant Leadership Speech

On a recent stroll down memory lane, I came across the following speech I gave at the graduation ceremony for my MBA class from the University of Georgia.  The speech was delivered on May 9th, 2003, and here is it for your enjoyment, just as I gave it 7 years ago:

Believe it or not, getting an MBA degree is a lot like building a tree house.  Let me explain.  Two brothers, while in their childhood, spent an entire summer building a tree house in their backyard.  They experienced unforgettable feelings of joy and satisfaction when they finally were able to enjoy the fruit of their work.  The two brothers climbed into their finished masterpiece, and, after a few minutes, climbed down from the tree – and never returned.  The completed project, as wonderful as it was, could not hold their interest for even one day.  In other words, the process of planning, gathering, building, and working – not the completed project – provided the enduring satisfaction and pleasure they had experienced (Thomas S. Monson, “In Search of Treasure”, Ensign, May, 2003).

Tonight, at the conclusion of the MBA summer of our lives, we have completed what we set out to accomplish – graduation.  Interestingly, we will all climb onto this stage for a few minutes and then leave – and most of us will never return to this scene again.  Our graduation will not hold our attention for much more than the duration of this ceremony.  It is not the piece of paper that brings our feelings of joy and satisfaction – it is the very process we endured to get here and the relationships we formed along the way.  The process, not the product, has helped us grow and develop.  Moreover, our growth and development have been directly correlated to what we have put into, or given, to the program.

For example, everyone who worked with Dr. Hofer on national business plan competitions would agree that we worked harder and put more into that class than any other MBA class or project.  And each of us agrees that we learned more and got more from that experience than any other in the program.  As a bonus, all four teams enjoyed recognition and success on a national level, a tribute to Dr. Hofer’s commitment.

And herein lies a true yet often overlooked principle – when we focus on giving, not only is our experience more meaningful, but also the getting will take care of itself!  If we give of ourselves to our respective organizations, the “getting” will come.  If we look for ways to serve and give to those we lead, we will be successful leaders.  This principle applies to our personal lives as well.  By striving to give to, not get from, our personal relationships, those relationships will be more fulfilling.

My father understood this concept while I was in my youth.  When our garage door needed replacement, my father saw an opportunity to spend quality time with his boys.  I called it free labor.  Even though our newly re-built garage door fell apart within days, my dad held firm to his decision: “I’m not building a garage door, I’m building men.”  Hopefully his “men” will last a little longer than his garage door!

The northwest entrance marquee of my undergraduate university reads: “Enter to learn, go forth to serve.”  That marquee stands as a poignant reminder that we should use our education to focus on giving, on serving.  Max De Pree, in his writings on servant leadership, made the same point when he wrote: “the first responsibility of a leader is to define reality.  The last is to say thank you.  In between, the leader is a servant.”  Whether in professional or personal environments, the person who focuses on giving, on serving first, will succeed in the long term.  President John F. Kennedy was really inviting the American people to focus on giving when he implored: “Ask not what your country can do for you, ask what you can do for your country.”

Ralph Waldo Emerson understood the need to give.  He penned: “What wouldst thou have from life?  Then pay the price, and take it.”  Whatever price you had to pay to be here tonight, you now take your degree, your education, your relationships, and your experiences with you.  While we each have our own unique ambitions for our lives, the formula to achieve those ambitions is the same - we need to pay the price of giving of ourselves to our organizations and our relationships in order to obtain our ambitions.  So I ask, What wouldst thou have from life?  Then pay the price of giving of yourself, and the getting will almost always come in greater portion than you hoped.  May God bless us to be successful in our various endeavors, and may those endeavors improve the world in which we live.  Thank you.

Tuesday, May 4, 2010

The One-Sided Effect of Healthcare Reform

Entrepreneurs, by their very nature, are usually very skilled at figuring out how to create opportunities out of even the most dire of circumstances.  They regard health care reform no differently.

Now that the dust has settled on this new legislation and employers are waiting to see what else transpires between now and 2014, let me shed a little perspective on how small business owners and entrepreneurs are planning to comply with the reforms.  Interestingly, the people that will feel the brunt of this impact are the employees, not the employers.

Businesses with over 50 employees will be subject to a penalty of over $2,000 per year for not covering their employees.  This is steep, and amounts to a 5% increase in labor costs for an employee that makes $40,000/year.  In a recession in which double-digit percent margins have almost become extinct, how will these businesses survive such an increase?

The answer is quite simple.  The objective is to render the increased health care costs neutral to the firm’s overall labor cost structure.  I have heard many employers that will be impacted by this explain that it will have to be the employees who pay for it, primarily through wage and other benefit decreases.  So, it ultimately comes out of the employee’s pocket, not the employer.

Although businesses with fewer than 50 employees will not be subject to a penalty in 2014, they will be eligible for significant tax credits for covering their employees with health insurance.  Certainly the tax credits pale in their monetary benefit when compared to the cost for small employers to cover their employees, which means the business owners and entrepreneurs will figure out how to make the employees pay for at least the difference.

My point is that the average hard-working American will pay for this health care reform, not businesses.  We will see wages and other benefits decrease to offset the costs of health care.  I doubt this is the result legislators wanted, but it will certainly be the reality.

There are two common reasons these employers are not offering health insurance.  First, their industry's business model does not have enough room in it.  Second, the employees do not value health insurance offerings from their employers.

By forcing employers who have operated their businesses without offering health care to their employees, this legislation is trying to tinker with proven business models and employee compensation packages that were not broken.  As we approach 2014, most businesses will prepare for implementing health care reform by "tweaking" their overall compensation programs to create a zero-sum result for the company rather than trying to absorb the costs into their business model with no additional value perceived by their employees.

Saturday, April 24, 2010

How Do You Define Success?

I was recently asked this question - "What is your definition of success?"  I thought back to a few conversations I had with an entrepreneur a few years ago and his issues with the word "success."

This entrepreneur had built a nice business that was growing.  He was also struggling with cash flow and many of the pains of owning and running a business.  He regularly had people around him comment that he was successful.

"Ken," he would say to me, "these people must have no idea what success is.  I can't sleep at night.  I am out of cash.  I have no idea how I'm going to make my next payroll.  I had one of my best employees quit last week, and one of my best customers is on the brink of leaving.  If this is what success is, then I want nothing to do with it!"

It seems success is relative and has a lot to do with perception, regardless of how close it is to reality.  I think the definition is just a little deeper than we consider.

So, how did I answer the question?  I don't know how well I did, but here is a summary of what I said.

To me, success is about making a difference for good in the lives of others and in the organizations we support.  Helping people and organizations make positive changes is fulfilling work, and that is at the heart of success, in my opinion.  Perhaps the best measure of this comes from how much we would be missed if we were gone.  Wealth, fame, power, or stature do define success - making a difference does."

So, what's your definition of success?

Monday, April 19, 2010

Will the Economy Rebound Before Employment

I have seen it happen over and over again.  Entrepreneurs and business owners hire people and then they grow to like them.  They build a culture of family and they genuinely feel a sense of pride in and responsibility for providing employment and security for so many families.

Then, when times get tough, they struggle to let people go because of this same sense of pride and responsibility.  These same entrepreneurs don’t hesitate to sell equipment, downsize their office, or cut other non-human expenses.  So why can’t they just look at their employees as an asset or a piece of equipment to sell or dispose of when they need to lean-up their operations?

I know, this question sounds silly.  Obviously we don’t build much of a real relationship with a piece of equipment, and we don’t personally know of a wife and five kids that the piece of equipment is trying to support.  So, what does this have to do with our ongoing high levels of unemployment in this country?

We have all heard the statistic from the SBA that that just over half of private employees are employed by small businesses.  And I would argue that the small businesses are those that have more of a tendency to view their employees as real people and real families – in fact, sometimes a good portion of their employees are family members.  In this context, I submit that owners and executives of the small businesses of America are still wounded from having to let people go during the recession.

Where a few years ago it was common to see entrepreneurs hire a new person at even the prospect of the need, these same entrepreneurs, still bruised from some tough times, are much more hesitant to pull the trigger on new hires.  Phrases like: “Let’s hold off on hiring until we are absolutely certain we need another person,” and “I’m fine to authorize overtime until we can really justify adding to the staff,” have become the new norm.

Even though the Business Outlook Survey published in CFO Magazine is predicting double-digit rates of growth in both earnings and capital spending over the next 12 months, it is also predicting much slower employment growth.  When asked why employment would lag behind other positive trends, two of the top three responses highlighted the reliance on :

- 44% plan to increase productivity per employee

- 37% will increase production efficiency

Entrepreneurs are simply asking for more from their current employees and looking to technology and automation to grow.  They learned their lesson and, as a result, are accelerating our economy’s change to a more efficient playing field, relying on people to add high-level value than fulfill lower-level tasks.

So, as the economy rebounds, it only makes sense that employment will lag behind.

Monday, March 1, 2010

Customer Loyalty, a Mug, and Dry Cleaning

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.

Monday, February 22, 2010

The Benefits of Financial Clarity

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:

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.

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.

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 became dissatisfied with the performance of its distribution strategy.  Sales growth had been less than stellar, to put it nicely.   They began to explore different distribution strategies, desiring to be open to all options and suggestions.  Because of the 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.

Monday, February 15, 2010

Startups Need to Know These 10 Things about Accounting and Finance

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 accounting and finance for start-up to medium-sized companies.  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.