Wednesday, December 28, 2011

Most Popular Posts in 2011

With 2012 just around the corner, here are the most popular CFOwise blog posts viewed in 2011. Please note that the year of original publishing is listed in parentheses after the title.

1. 3 Reasons Your QuickBooks Statement of Cash Flows is Wrong (2009): It's clear that plenty of folks are trying to figure out why their statement of cash flows is wrong. Every business owner should be looking at this report on their business' financial performance every month, along with the balance sheet and profit & loss statement. This article gives some tips to make sure QuickBooks users get and accurate cash flow report.

2. The Key Business Metrics Every Entrepreneur Must Know (2009): Moving up from the fourth most popular post last year, entrepreneurs are starving for better data, information, and knowledge about their business performance to gain strategic competitive advantages.

3. Please Define Business Model (2010): Jumping from number 11 last year, I wrote this post as a follow-up to an experiment I conducted in a class full of college business majors. I was shocked when they failed miserably to clearly and concisely answer the question.

4. Crisis Management--Lessons Learned from my 2-year-old (2011): Tackle the issue head-on with the truth. There is just no better way to address the situation so that it will not come up again. Be comprehensive, honest, and diplomatic. It worked with my two-year-old, and she's the toughest sell I've had!

5. Top 11 2011 Trends for Entrepreneurs (2010): I did really well on some of my predictions (struggling economy) and not so well on others. Still, some of my predictions may take several more years to develop. Either way, it was a fun article to write and I cite great sources on each trend listed.

6. 4 Signs Your Business Partnership Will Fail (2010): Dropping from the top spot in 2011, I am still on a mission to communicate the principles outlined in this blog post. I see these mistakes being made all the time, yet they are avoidable with a little education, perspective, and honesty!

7. What is Your Definition of Success? (2010): Success is relative, a matter of one's perspective within the context of where they have been and what they are trying to accomplish. No matter what your definition, the reflective question mentioned in this article will help you determine if you're on the right path.

8. Why Accountants Make Horrible Business Leaders (2011): The only thing more fun than authoring this post was all the flack I caught from accountants who failed to read past the title. I'm not just picking on accountants, but identifying attributes and skills of great leaders from which we all can learn. I don't know if the concerned accountant from California will ever forgive me, even after a long string of email communication.

9. Staffing Accounting/Finance Department from Start-up to Medium-Sized Company (2009): So many business owners struggle to understand what they really need from the accounting and finance functions in their business. This article identifies those expectations and explains how to staff these mission-critical roles in various sizes of organizations.

10. I Do and I Understand (2010): Slipped from number 9 last year, the title of this post is actually a quote from Confucius. Experience is an effective teacher, and is often required to successfully navigate the treacherous waters of entrepreneurship.

11. What's a Cap Table and Why Should I Care? (2011): During an entrepreneurial finance lecture at a University, I walked a class through several rounds of equity financing, emphasizing each round's impact on a company's capitalization table, or the structure of its equity. I even included a snapshot of the grid I created on the white-board, with pre and post-money valuations included among many other things.

I hope you enjoy visiting, or revisiting, some of these articles and wish you all the best in the new year!

Tuesday, December 20, 2011

Manage Your Inventory Before it Manages You

Just last week I spent an hour at the corporate offices of Fishbowl Inventory, a software firm that specializes in helping small and medium-sized businesses better control, manage, and optimize the ever-elusive asset of inventory. I call inventory an asset because any inventory sitting in any business needs to be considered as cash, and, more specifically, precious working capital. I am going to write about inventory and share some of the things I learned during my visit, hoping it will help you.

Inventory has three major impacts on cash flow. First, you have to use cash to buy inventory, which you don’t get back until you get paid for selling the inventory. Second, the difference between what you paid for the inventory and what you sell it for is gross profit, another boon to cash flow. Third, the more times you can “turn” your inventory over in a year means more gross profit generated using the same cash invested in inventory. Missing one inventory turn per year is often the difference between a profit and a loss for an entire year!

Software like QuickBooks and other low-cost, off-the-shelf and software-as-a-service (SaaS) accounting packages are generally terrible at handling, managing, and accelerating inventory. Relying on those systems is neglecting your vital working capital, a sure-fire formula for failing in business. On the other end of the accounting/ERP software spectrum are big, expensive, complex systems. These solutions require significant training, which may end up costing more than the system itself, and a robust accounting staff to correctly set-up and manage the day-to-day transactions in the system.

Fishbowl Inventory has several products to address the gap between these two ends of the spectrum. They integrate with QuickBooks, replacing its weak inventory system with a very affordable product that will solve all of your inventory issues and empower you to track, manage, and optimize this critical use of your working capital. Rather than list all of the features, you can check them out here: Fishbowl Inventory 2012.  Fishbowl also has a product that competes very nicely with the large Enterprise Resource Planning (ERP) systems, yet costs a lot less--Fishbowl Enterprise. It’s modeled after the QuickBooks integrated version, with all of the great features and easy-to-use functionality, but it’s got so much more in terms of the running your entire business. Depending on the size and inventory complexity of your business, one of these two systems will likely address most small and medium-sized business needs.

Tying up your cash in inventory is a strategic business decision. You will only squeeze the maximum return from that investment in inventory when you control, manage, and optimize your inventory according to best practices. Although there are many inventory and accounting systems on the market, Fishbowl seems more capable than most to get you exactly what you need at just the right price.

[Author’s Note: I did not nor will I receive any form of compensation for writing this post. The product is good enough to merit my positive feedback, and it can make a big enough difference for businesses with inventory that I feel it is worth sharing.]

Tuesday, December 13, 2011

No More Great Ideas Please, We Need Execution

At the Dental Trade Alliance Meeting last month I listened to Ram Charan, highly-sought after consultant to Fortune 500 CEOs and author of several best-sellers, talk about converting ideas into innovation. In every company I've ever worked or with which I've been associated, we have never lacked for great ideas. However, we have always been slower than we wanted at turning those ideas into tangible and value-added innovation. Ram addresses this problem, which seems to be present in most companies, with a story about Steve Jobs...I'll attempt to paraphrase it.

One of the times Steve Jobs returned to leadership at Apple he was presented with 26 "great ideas" for new products. The existing team was excited about all of them, but Jobs insisted the company only take on 4 of them, leaving the other 22 to languish with neglect. When questioned on his logic for leaving so many great ideas behind, he explained that he didn't have 26 people who could execute on everything it took to turn the ideas into meaningful innovations, products and services that could add value to the world.

The next time you find yourself pontificating on all of your and your company's great ideas, stop and ask yourself who in your organization has the leadership, vision, and execution skills to actually make those ideas a reality. Instead of focusing on trying to develop ideas with little hope of being anything, it's probably better to focus on hiring, training, and empowering a generation of leaders who possess the resilience, creativity, and guts to get things done.

Wednesday, December 7, 2011

Make the Uncontrollable Work Out Better for You

Last week I shared a story told by Cal Ripken, Jr. that illustrated how mentors can improve outcomes. Here's one more story that Cal shared to explain how he used Life Management to break the "unbeatable" record of consecutive games played in the Major Leagues, one of 8 elements outlined in his book Get in the Game: 8 Elements of Perseverance that Make the Difference.

Cal adopted a motto early in his career that goes something like this: do little things to make the uncontrollable things turn out better for you. The profession of baseball has lots of uncontrollable things in it. For example, spring training is a very "uncontrollable" time of year. With the new guys trying to earn a spot, the old guys trying to keep their spots, and the coaches using every lineup combination possible to evaluate all of their prospects and talent, a player has to wait until the day of a game to find out if he would play. Add to that chaos the revolving door of Managers for whom Cal played in Baltimore, and his world was in constant upheaval thanks to things beyond his control.

But he decided to do a little thing every year at the beginning of Spring Training that would help him turn the uncontrollable events into a better situation for himself. On the very first day he would enter the Managers office, usually welcomed him to the club, and then would ask one simple question: "How do you see spring training working for me?"

This one question would launch into a discussion wherein expectations by both parties would be shared. Most importantly, Cal would help the Manager create a very predictable schedule for him so he could prepare for the season effectively and proactively, rather than reactively on a day-to-day basis. Rather than allow his conditioning and preparation to suffer while he wondered if he would play the next day, he knew ahead of time and created an effective workout program that flipped the uncontrollable nature of spring training upside down, and it worked out better for Cal.

While this is a powerful principle, here was Cal's most interesting observation. For years other players would ask how he garnered so much special treatment from the coaching staff during spring training. Without hesitation Cal would share his single question and strategy for managing his personal spring training schedule. He would even encourage these inquirers and fellow teammates to approach the Manager with the same question and strategy. Over the course of many years of such encouragement, guess how many players took him up on that challenge? NONE!

What can we learn from this? Take every opportunity to be proactive in how we run our business. Why not approach a big customer and ask: "How do you see our relationship working out this next year?" I guarantee a valuable conversation will ensue. Even if your customer expresses their plan to terminate your services in six months, at least you know and have six months to either repair the relationship or find some new customers.

So, here's the take-away...decide what is the most uncontrollable in your business, and then build a plan to do small things that will make it work out better for you.

Wednesday, November 30, 2011

How Mentors Can Help

Earlier this month I enjoyed listening to a baseball hero of mine, Cal Ripken, Jr., talk to a room full of business executives. He shared the eight principles that helped him beat the "unbeatable" record of consecutive games played in the Major Leagues, outlined in his book Get in the Game: 8 Elements of Perseverance that Make the Difference.

He shared the following experience that portrays how business mentors can make a huge difference in outcomes. Several years into his career his team drafted a hot-shot pitcher with a fastball that put fear into even the greatest hitters and a curveball and changeup that, when they were working, were unhittable. With as much hype and attention this new pitcher attracted, he fell far short of expectations having struggled for the first half of the season. With runners on base and a tough hitter coming to the plate, the rookie catcher approached the mound.

After a few seconds, Cal joined them at the mound from his position at shortstop, a rare occurrence, and asked what the meeting was about. The pitcher looked at Cal and explained he had no idea what to do in this situation. Cal looked at the young catcher who shrugged his shoulders, clarifying that their meeting was going nowhere. Cal told the pitcher what pitches to pitch along with when and where to pitch them. Three pitches later the batter walked back to the dugout, frustrated after striking out. The young pitcher and catcher had found their mentor, someone with experience and perspective that could make all of their talents, efforts, and enthusiasm as effective as possible.

Cal went on to explain that for the rest of that season he called a lot of pitches from his position at shortstop, giving signs to the catcher who then relayed them to the pitcher. This was, and still is, unheard of and unprecedented. But it worked amazingly well as this pitcher turned his career around and the Orioles were all but unbeatable the second half of the season. In business, we have to be humble and hungry enough to seek out those with more wisdom and more battle-tested experience than we have to tell us what pitches to throw, who to throw them to, and when to throw them!

Thursday, November 17, 2011

How to Use Revenue per Employee

How do you know if you are over or under-staffed? If sales are increasing, are you hiring too quickly or slowly to keep up? If your sales are dropping, are you cutting too many or not enough employees?

These are tough questions to answer, and every business owner needs to carefully consider quantitative and qualitative information to make the best decisions. Let me explain how this works and then give a couple of examples.

The most common quantitative measure to determine if you have the right number of employees is revenue per employee. Your industry has a benchmark that you can get from others in your industry or from a service that provides such metrics. For example, certain medical device manufacturers average about $250,000 per employee. Just take your total sales revenue and divide it by your total employees or full-time equivalents (FTEs). You should also consider your total salary, wages, payroll taxes, and benefit costs as a percentage of revenue relative to your industry averages and your historical performance.

The qualitative measurements include walking throughout your business and trying to determine how busy  your employees appear, listening to your employees complain about how they need more help if you expect them to keep up with the growing demand for your products, and more.

For example, your employees appear busy, but your sales are dropping meaning your revenue per employee is dropping, too. These two are not consistent, so you investigate to find out that your employees are taking longer to do the same work. In this example, the quantitative analysis wins and you know you need to "right-size" your staff.

Here's another example. Your sales are flat, yet your employees are increasingly complaining about being overworked. You investigate this inconsistency to find that the manufacturing function you used to outsource but then brought in-house is taking three times longer than anyone expected. Your analysis leads you to conclude you actually need to hire more employees to handle the extra work. When you compare the cost for the extra employees and the savings you generate from in-sourcing, you find you are actually more profitable than before, even though revenue per employee dropped.

A careful consideration of both qualitative and quantitative measurements will bring to the most effective staffing conclusions. Don't be afraid to ask the tough questions, and never depend exclusively on just the numbers or just subjective opinions.

Wednesday, November 9, 2011

The Rolling Forecast Adds Value

Have you ever felt frustration as you try to plan your company's performance for the next twelve months, only to suffer even greater frustration when you try and measure your actual performance to that plan? The source of that frustration is usually a common issue small and medium-sized businesses (SMBs) experience. You see, SMBs are even more volatile than larger businesses, and the assumptions made in the forecasting process are even less accurate and more likely to change during the twelve-months for which you are planning.

In my recent American Express OPEN Forum article Why You Should Reconsider Your Business Forecasting Strategy, I give some tips on how to use a rolling forecast/budget to overcome this issue, which will ultimately help you make your business more successful. It requires discipline once per month or quarter to update your projections based on everything you have learned about the assumptions you are making, but you'll get so much more value from the efforts you take to plan and budget. A static budget just doesn't make sense for SMBs.

Wednesday, November 2, 2011

2 Reasons Small is Better than Big

I am reading The Machine that Changed the World, which tells the story of how Toyota innovated the from the mass production methods to lean manufacturing, disrupting the automotive industry to become one of its most dominant players. One of the most notable discoveries of lean manufacturing was that small production batch sizes, as opposed to large ones, were better for two reasons-- (1) Reduction or even elimination of the carrying costs associated with needing to stock large quantities of finished parts, and (2) Low quality and mistakes are discovered much more quickly, saving significant labor and resource cost while increasing efficiencies.

These same advantages can apply to why being a small business has its advantages to being big. First, being small requires entrepreneurs to be more creative and resourceful...basically, get more done with less. While big companies have excess inventory to try and be efficient and keep all of their workers busy, small businesses know exactly what inventory they need, always quickly adjusting to the demands of their customers. In addition, the employees of entrepreneurial companies are accustomed to wearing many different hats. For example, a large manufacturer may employ 10 welders. Even if the products that require welding are not in demand by the customers, some companies will have the welders building parts anyway, just to try and keep them busy. Small companies, on the hand, seldom employ people who can only weld. Their employees can probably also machine, temper, and do most, if not all, of the other manufacturing functions.

Second, catching mistakes and "pivoting" the business is so much easier when you're small. It can take years for big companies to change, yet today's business environment requires more dynamic, nimble business initiative than before. In fact, when large companies like Google, GE, and others want to innovate, they acquire companies that are innovative, paying a premium for that which they cannot do themselves. Advantage...small business.

So, the next time you feel overwhelmed by bigger companies with what you perceive to be a superior competitive business, remember you have more going for you than you may initially think! Small is the new BIG when it comes to maximizing resources, meeting customer needs, and innovating.

Wednesday, October 26, 2011

Bad Ideas or Bad Entrepreneurs

There is a lot of chatter about how small businesses and entrepreneurs are the backbone of the economy, and many have commented on how both are the best chance we have at regaining economic strength as a country and throughout the world. Most universities now offer, through their business schools, areas of emphasis in entrepreneurship. The up-and-coming generation is bombarded with the message of working for yourself, thanks to books like the 4-hour work week and so many others.

When you sort through the hype and get down to what's really going on, it seems like all of this focus is not creating any more commercially viable businesses than before. A lot of research suggests that start-up failure rates have not improved. So are there no more good ideas that can be turned into successful businesses, or do we generally lack enough qualified entrepreneurs, or "A" performers, to create successful ventures?

In my opinion, the world generally does suffer from a lack of good ideas. In fact, more of the people around you than you might think have good ideas rattling around in their heads that would solve problems for customers in such a valuable way that the customers would be willing to pay for the solutions. What the world lacks are "A" entrepreneurs and "A" teams that can really make the most of good ideas, turning them into successful businesses.

Where is my proof? Just look at all of the incubators, mentor-driven startup groups, and other similar initiatives that have become so popular in the last few years. If each of these organizations were honest, they would tell you that all of the startups they have sponsored are founded on great ideas, but most of them lack the entrepreneurial leadership required to make them successful. These entrepreneurs can only be mentored and "incubated" for so long. If they fail to take and implement the advice they get, and if they lack the battle-tested experience needed to run a non-theoretical business (meaning it's no longer a business plan worked on in a class or a bunch of concepts read in a text), the great ideas they are trying to commercialize will never materialize.

So the need is clear--we need "A" entrepreneurs and teams. The solution is not as clear. As universities, angel groups, incubators, and start-up generators struggle, they'll find the best results if they focus on creating "A" entrepreneurs with the right blend of experience, education, humility, desire, work ethic, and so much more.

Wednesday, October 19, 2011

Government Cannot Solve Unemployment

In my new position as President & CFO at Aribex, I attended the Mountain West Capital Network's Utah 100 awards ceremony. The Governor of Utah, Gary Herbert, addressed the unemployment "problem", stating about 100,000 workers in the state are unemployed. Then he issued a challenge for all 83,000 businesses in Utah to hire just one more worker over the next couple of years, almost eradicating unemployment entirely.

"Did he really just say that," I thought to myself. That is ridiculous, on so many levels. But here are the two main reasons why government will never solve unemployment:

First, it's impossible to make unemployment go away. There will always be a percentage of the population that is unemployable due to issues of their own fault--they can't pass a drug test, they can't show up on time, they have a significant criminal record, and so on. A call to employers to hire these folks is unreasonable and wasteful. People's poor choices cannot be solved by government, and asking the employers to try and solve them is a faulty political move--one that entrepreneurs, business owners, and CEOs can see right through!

Second, government should not be focused on asking employers to hire more people. Employers should be responsible for that. Much of government struggles to manage its own budgets, now its trying to make budgetary recommendations to business? Unacceptable. Instead of this nonsensical request, why doesn't the government ask, and then help, businesses be more profitable. Profitable businesses hire people. Businesses that are dumb enough to hire an employee or two because the governor told them to are going to go out of business, making the unemployment problem worse, not better.

So, how can government help businesses be more profitable? That's a question many others have attempted to answer, and I'm sure you have your own opinions of this as well. Perhaps I'll cover that in a future post.

Government needs to stop trying to solve unemployment and start trying to make businesses more profitable. Then unemployment will solve itself, at least as much as is reasonably possible.

Wednesday, October 12, 2011

Is it time for a Finance Executive?

Controller. VP of Finance. Director of Accounting. Accountant. Chief Financial Officer, or CFO. No matter what title you give the position, someone in every company wears the executive hat of finance and accounting. This person "deals" with the taxes and tries to keep up with financial reporting, performance improvement, planning, budgeting, treasury/cash management, payroll, AR, AP, collections, contracts, and so many other duties. Most small businesses let this part of the business slack, viewing these functions as necessary evils of doing business, ignoring them as if they might go away.

Just like you know how to make your product or deliver your service better than anyone else, there are others who do all of the things I mentioned above, and more, for a living. They are experts in these things, and they've dedicated their entire career to these things. Even if you know your way around accounting and finance, your most valuable contribution to your business is likely developing new products, innovating service models, and building key relationships to help your business grow.

At some point every business reaches a point where leaving all of the things mentioned above to yourself or other non-executives is no longer acceptable, meaning it will do more damage to your business than the money you think you might save paying a finance executive to help you run your business, maximize your cash flow, and become more profitable.

In a recent article for which I was interviewed by Entrepreneur Magazine, How to Know When to Hire a CFO, I detail the three main criteria every business owner, entrepreneur, and CEO can use to measure when its time to pull the trigger on making all that admin, accounting, and finance stuff a strategic competitive advantage, not a necessary evil of doing business by hiring an executive that manages and leads all of that stuff as his or her profession.

Wednesday, October 5, 2011

How I can Guess Your Company Values

Do you have company values? How did you decide what they are? Are they an idealistic view of who you want to become, or do they represent who you are today?

If I want to understand what a person values, I look at where they spend their time and money. Most people are protective of both and mindful of how they use both, and they are very quantifiable. The same is true with a business. If you want to understand what your company values are today, just make an honest accounting of where your company consumes its and its employees' time as well as how it spends its money.

If you don't like what you learn about what you value, then you can certainly change. But it will take discipline. Your employees, customers, and other stakeholders have become accustomed to doing business with you based on your values.

Key Take-Away:
You can make a conscience decision to allow your values to define you. But beware that most companies write their values based on who they want to be, not who they actually are. Those companies are letting their values determine who they are. With discipline, focus, training, and systems, you can define your values and, eventually, become them.

One you establish values and act in alignment with them, here are 7 Ways to Get More Value from Your Values, a recent article I wrote for American Express OPEN Forum.your small business as successful as it can be.

Tuesday, September 27, 2011

Can Small Business and Finance Co-Exist

Small businesses usually resist everything they hear about the best practices and things they should do with the finaincial and accounting matters of their business. Why? Common excuses include:
'It takes too much time'
'It costs too much money'
'I'll just give all my receipts to my accountant at the end of the year'
'Only big companies can afford to accept credit cards from their customers'
'I'll just pay my taxes later, I'm sure the IRS will waive all the interest and fees'

In my recent article on @SmallBizLady's blog, 5 Finance Secrets to Make Your Business More Successful, I make an effort to explain why these excuses are not valid. They are myths, really, all of which will keep you from making

Monday, September 19, 2011

Know Your Customer or Die

With four young children in tow more than five years ago, my wife and I gave a child-themed haircut establishment a try. It seemed like letting the kids play video games during a routine haircut was a great idea, and our older boys loved it. However, amid the chaos of loading up all the kids and making our way to the store, one of my boys forgot his shoes.

When he needed to use the restroom and one of the employees saw his bare feet walking across the floor, she yelled: "Don't walk on our floor without shoes!" He started to cry, and the employee began to lecture my wife, in a not very kind way, about why letting her shoeless child engage in such a crime was a felonious act. My wife picked him up and returned to the waiting area.

Rather than jump in, I watched for another minute to see what would happen. This employee walked over to the other employees who were working with other customers. She began complaining about our poor parenting skills, talking, then pointing at us, then talking more.

"We're not staying here," I said to my wife. "Let's gather up the kids and leave. I've never seen someone treat you so disrespectfully. They'll never get our business--not today, not ever."

Yelling at the children of the people who pay you is not good business. Belittling, both directly and indirectly, the person who is parting with their hard-earned money for your services contradicts everything I was taught in business school. But the real problem is this--that employee did not know, and, therefore, did not care about the customer. What parent of four young children, all under the age of 8, doesn't feel a little frazzled, lucky to get them all into the store successfully? Rather than hammer an already-overwhelmed mother, why not help her succeed. Maybe carry the child across the floor. Have an extra pair of flip-flops for such an occurrence.

Notice I am not suggesting that an employee should deviate from a policy that exists to protect the customers and the employees. But how about a little creativity to help the customer succeed? With a little kindness, my wife would have frequented that business for a long time. A total of six kids, each needing a haircut every 6-8 weeks, for their entire childhood--any idea what the lifetime value of my wife, the customer, was when she walked out the door, never to return? Clearly they didn't, and I'll bet that has something to do with why they're no longer in business.

My point is this--every business needs to know their customers, intimately. Know what their challenges are, what makes them tick, what helps them succeed. Become an advocate for them. If you do so, it's pretty unlikely your company's fate will be likened to past, present, and future businesses too focused on their company, their policies, and their procedures to notice, and know, their customers.

Tuesday, September 13, 2011

Software Doesn't Solve Problems, People Do

Having attended a well-run Corporate Performance Management Conference by CFO Magazine, I heard almost every business leader, CFO, and finance executive present talk about being “tool agnostic.” This phrase references the need to define what metrics and data your organizations needs, figure out where it will come from, and then you can find a tool to help you accomplish the task.

This supports a long-time philosophy I’ve always followed: software (the tool) doesn’t solve problems, but people do. I have seen many companies that buy expensive ERP, accounting, project management, and other kinds of software, thinking that the purchase and tool alone would magically fix the much deeper-rooted problems.

For example, a manufacturing company could not close its financial books within 15 days of the end of the month. They recently bought a new accounting system, hoping their flawed processes would somehow correct themselves with new software. No such luck. The expensive purchase only exacerbated their internally-flawed processes.

Here’s another, much more effective example. Another manufacturing company was having issues with its ERP system. It just didn’t do everything they needed it to. The company did everything it could to improve its processes to solve the problem, but the ERP was truly the limitation.

This is where your people come in. You hire smart people to solve problems. Before you buy software, make you and your team have solved the problems. Then, build a process to keep that problem fixed. Then, and only then, do you deploy technology and software to automate the process. From here your team can monitor and tweak your processes as your business adjusts and pivots according to its strategic plan, after which they can update the way they are using technology to automate the process.

Key Take-Away: 
Do not rush out and buy software or other technology until you have analyzed exactly what your needs are and you are confident you have diligently vetted your processes, finding them rock solid. Only then should you invest in the appropriate tools to automate the processes and deliver the results you desire--the most cost effective yet high-impact method to manage and improve your business performance.

Monday, September 12, 2011

Clarity and Fear, an Inverse Relationship

Guess what I did to commemorate 9/11? I got on an airplane and flew somewhere, specifically to CFO Magazine's Corporate Performance Management Conference (search Twitter for #cfocpm to catch the string of updates throughout the day). The 9/11 terrorists were far less concerned with the destuction and tragedy they caused 10 years ago than they were with instilling fear into those of us who were left pick up the pieces, trying to make sense of it all. What better way to remember and honor those who made sacrifices 10 years ago than to make sure the perpetrators did not accomplish their desire? Getting on an airplane, as insignificant as it was, seemed like a good way to honor them.

Was I afraid? No, not really. Fear is debilitating, but so many of us, especially those who are trying to make a go with one or more entrepreneurial ventures, allow fear to cripple our ability to make the right decisions. Let me explain...

Business analytics, business intelligence, corporate performance management, scoreboards, dashboards, etc. all lead to one thing if they are done correctly--clarity. The more clarity you have about your future, the less anxiety and fear you will feel as it relates to your business. You may not like the outcome you see in the future, but that creates a positive kind of anxiety and fear, the kind that drives you to overcome obstacles, solve problems, and make your business a success.

A major theme at the conference today was the best practices employed by CFOs to accurately forecast and plan for the future. Thomas Davenport's list of Performance Management Nirvana had this at the very top: "We'd have predictions of future corporate performance, not reports on the past." It's not just a state of nirvana. It can be accomplished in every business.

The other major theme that came out of the various meetings and workshops was the trend toward rolling annual plans, or budgets. Rather than create a 12-month budget only to see the number of forecasted months tick off, resulting in 1 fewer month forecasted as each one passes by, many organizations are moving to a rolling forecasting process. The static, one-time per year budgeting process is being set aside in favor of a dynamic forecast that adjusts and upates, sometimes as frequently as monthly but never less than quarterly, according to changes in your assumptions and the key drivers of your business model.

To validate this paradigm shift, John O'Rourke asked a room full of CFOs who among the group was adopting this new philosophy. He estimated 50% raised their hands, a pretty powerful testimony--CFOs take a lot of convincing to change, so obviously many are seeing positive results from the rolling forecast process.

Your competitors want you to be afraid. Your lack of confidence in your own abilities will make you feel afraid. The doubts of family and friends will generate some fear. Customers and employees leaving will create some fear. The way you face these fears and refuse to let them control you is to devote the resources necessary (a combination of staff, processes, and technology), which is usually much more affordable than you might think, to use the analytics of your business to improve performance and better understand the future. This brings clarity and reduces the anxiety and fear so many business owners experience.

Tuesday, September 6, 2011

When Good Habits Become Bad

Starting and running a small business (less than $1 million in annual sales) is a lot different than running a bigger business. A founder that breaks through that $1 million in annual sales barrier often finds many challenges waiting for him or her on the other side, and parting with old habits to embrace a new way of doing and seeing things is harder than it originally appears.

In a small company, the founder has to do everything and be involved in everything. Letting go of every detail is required to grow. In fact, failure to do so can actually hinder growth (see my recent AMEX article 5 Ways to Stop Stunting Your Growth).

When the company is small, it is easy for the founder or business owner to keep all of the details of the company in their head, elimating some of the need for timely financial and operational reporting. However, as the size and overall complexity of the business increases, reporting has to replace being involved in every detail of the day-to-day operations.

You need to grow and evolve as your business does, or else you need to hire someone to run your company while you focus on bringing it value in the most effective way possible.

Monday, August 29, 2011

Everybody Outsources

It seems like every day I see at least one article trying to convince a business to outsource some process or function rather than do it in-house. Here the reality--every business outsources something. No business owns the entire supply chain. A painter doesn't make his own paint or manufacture his own paint brushes and paint clothing. Every business has inputs that it does not create itself.

So, it's never about if a company outsources, but when. So why do some outsourcing relationships work well and others fail? Here's the reason: Failure to clearly define roles, responsibilities, and cost-benefit value.

Think about it this way. Wal-Mart wouldn't exist without all of the independent inventors, brands, and product manufacturers who give them things to sell. They make the products, Wal-Mart sells them (roles). They have a contract that clearly defines the relationship (responsibilities). And both sides independently determine if the relationship is worthwhile or not (cost-benefit value).

Here's another example. Law firms go through a lot of paper. Yet I don't know of a single law firm that has invested in forests, paper mills, and distrubution channels so it can own the entire paper supply chain. Most buy their paper from an office supply store--yes, they outsource their paper.

I could go on with many more examples, but I have one that I recently addressed on Melnida Emerson's blog at Do-It-Yourself, In-Source, or Outsource Small Business Accounting is an article evaluating when it's best to outsource and when its best to in-source your accounting functions. Outsourcing bookkeeping is like any other outsourcing relationship. Roles and responsibilities need to be clearly defined and the cost-benefit value needs to exist. If you're not happy with your current outsourced solution, then it's in one or more of these three areas. It may be repairable, or it may not. If you think outsourcing might be right for you, then you need to manage these three elements of the outsourcing relationship to maximize success.

Don't go into an outsourcing relationships without clearly defining expecations, roles, and responsibilities.

Monday, August 22, 2011

Impress or Scare Your Banker

Let's pretend you're the banker and you're scheduled to meet with two different companies, back-to-back. You get to decide which one you should loan money to. The CEO of both businesses will be male to ensure your judgment is gender neutral. Here we go:

The CEO walks in wearing casual clothes, has a dark tan, and appears more like a beach bum than a business owner. He struggles to articulate why he needs a loan and has failed to come with the documents requested. His bookkeeping is handled by his daughter who also serves as PTA President and has five children, among other civic and church priorities, he explains, and she didn't have time to get everything together as requested. You recall sending the request three weeks earlier and wonder if they'll ever be able to produce the tax returns, financial statements, and corporate documents requests. The CEO spends a lot of time talking about how great his business is and how amazing the potential for his business will be, painting a picture of the next Google just one loan away from going huge. When you probe, he cannot articulate the key driving metrics of his business, like lifetime value of a customer, cost per customer acquisition, and other efficiency and financial ratios.

The CEO walks in wearing work clothes and it is apparent he's been working in a manufacturing facility. He explains how he spends one day per quarter working on the production line with his rank and file employees to stay close to them and his operations. He humbly approaches you with an organized binder, assembled by his well-trained and properly educated accountant. He speaks directly about his business, his passion for his customers, and he displays a strong knowledge of why his customers buy his products and what motivates their purchasing decisions. You can sense he's not making assumptions, but he knows his target market intimately. You open the binder to find labeled tabs for each separate document requested, and you turn to the first tab called Summary Metrics. The page is covered with charts and graphs demonstrating that this business owner knows what makes his business tick and what drives his cash flow. He even points to the bottom to something called a Fixed Charge Coverage Ratio, also referred to as the One Ratio No One Talks About--Except Your Banker. He explains that his financial consultant has taught him that bankers use this ratio to evaluate his ability to pay back the loan he is seeking.

After thorough analysis (once Company A finally produces the information you requested, although you see some warning signs that they may not be accurate), you find both businesses appear on paper to be the same level of risk. Quantifiable information says you can make the loan to either one with the same likelihood for being repaid. But your bank's lending limits will only allow you to lend to one. So which do you choose?

Every banker I know would pick Company B. They see a business owner without ego, willing to do whatever it takes to make his business successful. He knows his customers and runs his business by the numbers prepared by someone who treats the timely and accurate bookkeeping and accounting functions a top priority. So, which CEO are you?

Thursday, August 11, 2011

When is the Right Time to Sell Your Business?

One thing is certain when you start a business--you will exit it. Your exit may be voluntary or involuntarily, well-planned and executed or a fire-sale to try and avoid disaster. This implies that if you follow a proper path, you might be able to make it a very successful exit for yourself and everyone involved. It also implies that it could go miserably wrong.

Planning for your exit should be part of the discussion when you start your business. While no one can predict what will happen, considering options and scenarios is very important, especially if you have partners.

So, when is the right time to sell your business? This really depends on your overall strategy, both personally and professionally, for yourself, your family, and others potentially involved in or impacted in some way by your business. However, just like everyone would like to fetch the highest price possible when they sell their home, I'm going to assume you approach your business the same way. The best time to sell your business is when you can get the best price for it.

Selling your business at its maximum value will have something to do with timing, just like the sale of home at the peak of the housing market. Just like a home, however, you have a lot of control over maximizing the value of your business, as well. John's Warrillow's book Built to Sell is one of my favorite works discussing this and other topics related to maximizing the value of a business. I recently wrote an article on American Express OPEN Forum teaching 5 Ways to Boost the Value of Your Business.

The main point is this: if you take a passive approach to preparing to exit your business, it will probably not work out nearly as well as if you plan at the beginning and throughout your business lifecycle for your inevitable exit.

Monday, August 8, 2011

Crisis Management Lessons from my 2-year-old

I have a very cute, curious, and high-energy 2-year-old daughter (pictured below), and this is what she taught me about handling bad, negative, or even crisis-level situations.

When you're two, mom leaving for a few hours can be traumatic--a true crisis. The first few times my wife left me in charge at home and my daughter began to cry, I thought my job was to distract here. She wanted to know where mommy was, and I would try to color a picture with her, watch a cartoon, go on a walk, or anything else to get her mind away from her mother. Inevitably, she would remember mom wasn't home and start crying all over again.

Then I tried a different tactic--tackling the issue head-on. What did I have to lose?

When she started to ask where mommy was, rather than ignore the question and go into my distraction efforts, I told her exactly where mommy was. She went shopping, she's visiting her sister, she went to the church, etc. What ensued surprised me. My daughter wanted to talk more about what mommy was doing, and, after five minutes, without shedding a single tear, we would move on to something else with little mention of mommy until she came home. Crisis averted :-)

When something bad happens in your business, don't ignore it and hope it goes away. If a customer gives you a negative review, don't go into depression and wish it would go away. Face it head on. Be honest. Answer the real questions. Don't skirt around the issue, because, ultimately, those who care will realize you never answered their real questions or took their concerns and issues seriously.

Certainly addressing a crisis or other negative event requires diplomacy and communicating with the right parties, but those two cannot replace the truth. And, the great thing about tackling it head-on is that there will be no more questions. You can move on, and so can everybody else.

Wednesday, August 3, 2011

Lawsuits Don't Solve Many Problems

The moniker "litigious society" has become synonymous with the American system of justice in the 21st century. You've been wronged, and somebody has to pay. But will legal action really produce the result for which you hope?

While you are the only person who can answer this, it would be wise for you to consider 3 Reasons Your Business Shouldn't File a Lawsuit, an article I wrote for hoping to help business owners think through all of the ramifications inherent to taking an aggressive position like a lawsuit to reconcile their differences with others or to try and right any wrongs or injustices they've suffered. In most instances, legal action is best as a last resort, not a way to get things started.

In a recent visit with a well-respected CPA and business advisor, this battle-tested entrepreneur explained that he regularly counsels his clients to budget and plan for increased legal costs as they grow, primarily because it's likely sometime during the years of business operations that someone or several someones will decide to pick a fight with them, potentially causing irreparable damage to their business.

If his advice is true, and I think it is, no wonder many entrepreneurs become more and more risk averse as their companies grow and prosper.

1. Seek to resolve disputes and problems with other means before determining if a lawsuit will yield the optimal results for which you seek.

2. Prepare your own business for and protect it from those anxious to jump into a legal battle with someone they perceive as having deep pockets (or an insurance policy that could give them access to an insurance carriers deep pockets).

Monday, July 18, 2011


Freemium is a business model buzzword that has become quite popular in the last decade. The concept is simple--it even has its own Wikipedia listing under Freemium--give away a subscription or a "lite" version of your product or service, and convert as many of them as possible to a premium version. The premium version has advanced features and/or funtionalities that create a tangible increase in value received by the customer, so much so that they are willing to switch from the free version to access these value-added enhancements.

I don't have any challenges with this model conceptually; it has been successful for many great companies. I do, however, take issue with companies that try to mimick this practice but fail in one of two ways--weak freemium version or lack of differentiation with the premium version.

Entrepreneurs who endeavor to use this business model have to play a careful balancing act, making the free version compelling enough to get users to go through the hassle of signing up while not giving away all of their valuable features in the basic version, holding back enough to motivate their free-users to upgrade. The model definintely backfires when the free version fails to provide any value to sustain the interest of the users, and it becomes devastating when the free version is too good and the premium features don't really add any value to the users.

This is the dilemma, or quandry, of the freemium model. I recently wrote an article wherein I mention 10 Free Tools/Resources an Entrepreneur would be crazy to not use. These are some good examples of products or services that give a lot value, maybe too much in some instances, for free. That being said, it seems like some of the most effective freemium models are the ones that get you hooked, then as your utilization of the product requires more users or more memory storage, they convert you to a paid version.

Here are some great articles and resources on this topic:

- Mark MacLeod, also known as StartupCFO, writes on this subject often. This is one of my favorties posts: Freemium Summit Notes

- Michael Pricess is adamantly against Freemium in this article

- An article about revenue earned from freemium and premium mobile apps

Thursday, July 14, 2011

Invest in Record-Keeping, Reap the Rewards

Even for the most lean, bootstrapped business, it can be expensive to keep your doors open. Expenses rack up pretty fast, and it becomes difficult to spend on anything that is directly related to getting and keeping paying customers. That's why many entrepreneurs and business owners don't allocate adequate resources to the accounting and finance function of their businesses.

But keeping your books and reporting up-to-date is more than just an expense--it's actually an investment that can generate measurable, tangible returns if it is done effectively. In a recent guest blog post I authored for titled 4 Reasons Your Financial Statements Keep you from Getting Funded, I share just one of them many benefits--effective debt and equity financings.

But the real benefits stem from the clarity that you will gain about the performance of your business, and this clarity paves the way to making to sustainable improvements to in your cash flow and profitability. These benefits do not come, however, by simply hiring a bookkeeper to handle the accounting transactions. That is part of the solution, but the result needs to be Insightful, Meaningful, Precise, Accessible (both through SaaS and intellectually), Comparative, and Timely (IMPACT Acronym) reports that deliver real clarity in the past, present, and future.

Empowered with the right quantitative data in the right format and context, you will be in a position to make the best decisions possible and maximize the potential of your business.

Monday, June 13, 2011

Cash or Accrual-Based Books

Unless you have zero employees and are very small, chances are you will get the most benefit by keeping track of your books on an accrual basis. Why? Because accrual is about managing and improving performance, profit, and cash. Cash-basis accounting cannot help you do that.

Rather than take time in this post to discuss the differences between and the pros and cons of cash and accrual-basis accounting, please read my guest post on Melinda Emerson's Succeed As Your Own Boss website: Why You Need Both Cash and Accrual Books.

In this post I recommend you keep your books on an accrual-basis and then let your tax CPA convert your information to cash-basis when he or she does your annual tax return (this presumes you are filing on a cash basis, which is consistent with most small and emerging businesses). In very simple terms, all the CPA needs to do is remove the accounts receivable and accounts payable balances from the balance sheet with off-setting entries on the profit and loss statement to convert accrual books to cash books. It can be more complicated, which is why you want to have a very good tax CPA on working for you.

Businesses that use Quickbooks may be aware of the ability to switch between cash-basis and accrual-basis books by modifying the profit and loss or balance sheet. In essence, all Quickbooks does is remove the AR and AP from the balance sheet with off-setting entries on the P&L. In a perfect world, that works, but Quickbooks-users will often find balances still show up in those two balance sheet accounts after switching to cash-basis. This is a common problem that can be a little complicated to fix, but there are some good instruction on the web if you google it.

If you are serious about understanding and improving performance, then accrual accounting is going to help you obtain the clarity you need to maximize your efforts and accomplish your goals and objectives.

Great post.  I completely agree with the need for business owners to use accrual accounting to accurately measure performance.  Without accrual accounting it becomes difficult to match income and expenses to accurately analyze items such as sales margins.  As you know, it is an education process for the non-accounting types to understand accrual accounting.  An important part of converting from cash to accrual accounting is process changes.  For example, I see many business owners that stick their vendor invoices into a file folder and don't enter it until it is time to pay.  Getting in the habit of immediately entering information into the system will pay long term benefits for those business owners that want to get to more real time reporting and decision making.

- Scott Grossfeld, CPA, CFE

Monday, June 6, 2011

Forecasting will Eliminate Cash Flow Suprises

Have you ever felt the sick feeling in your stomach associated with not being able to cash flow a payroll that is due in 24 hours? If so, you are not alone. In fact, most entrepreneurs I know have experienced this, usually more often than they care to admit.

Rather than reacting to cash flow emergencies on a last-minute basis, there is a better way. I recently wrote about this on the American Express OPEN Forumm website: How to Put an End to Cash Flow Surprises. Because of the complexity of how and when cash flows into and out of a business, cash flow can be intimidating to project.

Monday, May 30, 2011

Starting a Business is Flat-Out Hard

Hats off to the entrepreneurs of the world. Starting a business is just flat-out hard work, full of adversity, anxiety, ego, regulation, and so much more.

To do a start-up right, it is hard. There is no easy way, shortcut, or silver bullet to starting and building a successful company. And, when I say start-up, please note that I am speaking specifically about getting paying customers, not about creating a legal entity.

If you've ever started a business from scratch, you know what I'm talking about. If you haven't, please don't discount my words until you try it for yourself. You'll be glad you did, but you'll probably end up agreeing with me.

Almost everything and everyone you encounter will try to bring you down. They may not mean to, but they will likely be counter-productive to what you want to accomplish. Yet you have to keep pushing forward, finding value where you can along the way.

KEY TAKE-AWAYS: Be ready for lots of hard work, build a resilient, positive attitude, and do everything you can to help others trying to forge the same start-up path.

Thursday, May 19, 2011

What is Your Business Worth

Do you know the value of your business? More importantly, do you know how to maximize its value?

Here is the bottom-line when it comes to caclulating the worth of almost any business--how much cash flow can your business generate in the future, and how much risk is associated with it's ability to generate that cash.

In my recent article on American Express OPEN Forum, I list the three main ways a business is valued. Interestingly, the two that are weighted much heavier than the third have to do with cash flow generation and an assignment of risk through a discount rate or a multiple (please read the article for more information on how discount rates and multiples work).

So, if cash flow and risk are the drivers for valuation, then the best way to maximize the worth of a business is to build it into an optimal cash flow machine with as little risk as possible associated with those cash flows. Based on your industry and business model, there is likely something you can be doing today to improve the value of your business.

Thursday, May 5, 2011

Why Businesses Fail

I have recently done some research on what makes businesses fail. There are a lot of books, articles, and even academic research on the subject. And there are also lots of blog posts with catchy titles like "Top 5 Reasons Businesses Fail." It's a popular topic, but I have to admit most of the information I've found focuses more on symptoms than on root causes.

I think business failure boils down to one root cause: POOR DECISIONS.

Here are some of the common reasons business fail, selected from a variety of sources:

  • Not taking care of customers: is really just a series of bad decisions
  • Running out of money: another set of poor decisions
  • Not pivoting properly: bad decisions written all over that
  • Poor planning: bad decisions to not plan is the real culprit
  • Inadequate financial management: more bad decisions to neglect
  • Failure to innovate: decisions were made to not innovate
  • Customer concentration: this was a series of conscious decisions
  • Natural disaster: we can't even pass all of the blame on this one, especially since some decisions can be made to minimize the impact a natural disaster can have on a business
  • Recession: if we stop and think about this one, we'll realize we could have done a lot to minimize the impact of the recession on our businesses.

So, if poor decisions is the root cause of business failure, how can decision-making be improved? In my recent article on American Express OPEN Forum, I explain how the Proper Use of Numbers Can Improve Decision-Making and give businesses the best chance for success.

Key Take-Aways
1. Take responsibility for your failures and successes, don't point fingers of blame.

2. Evaluate your decision-making process and find ways to make it as successful as possible with the right numbers in the right format in the right context at the right time in the hands of the right people.

Monday, April 18, 2011

Entrepreneurial Excess

My recent article 4 Indulgences Your Business Can't Afford must have really struck a chord with the readers of American Express OPEN Forum®. It ranked in the top five of all articles for the week in total visits, unique visitors, and more. The point of the article was that too much focus on 4 specific parts of your business, without being balanced by other important things, will hurt or even kill your company. Here is a quick analysis of what you need in place to properly discipline an attitude of "excess" in the areas of product, marketing, overhead, and competitors.

Product Infatuation, or focusing only on how great your product is, must be balanced with an even greater focus on the needs of your customers.

Marketing Worship, or becoming consumed with a lot of spending on "branding" activites that do little or nothing to actually help your business grow, needs to be disciplined with rigorous ROI calculations to determine which marketing activities bring the most customers per dollar spent, not which activities stroke your entrepreneurial ego with unnecessary exposure. I refer to "Branding" in quotes because the entire concept of branding is something big companies with big marketing budgets do. Entrepreneurs don't have time to wait for branding pay off, they need to spend all their marketing resources on getting customers now.

Overhead Abundance, or spending lavishly on unnecessary, non-revenue-generating activities, must be countered with displined, exacting controls on the growth in overhead spending. For example, if your company grew 20% last year while your overhead spending grew by 50%, you probably have some abundance in your overhead. I'm not suggesting you don't invest in the systems, infrastrucutre, people, and processes of your business, but I am suggesting that some entrepreneurs have a tendency to allow their overhead growth to get a little ahead of what it should be.

Competitor Obsession, or spending too much time thinking about and stewing over your competitors, needs to be put in check with a focus on improving your own company. Strengthening your points of differentiation, your unique selling proposition, and the breadth and depth of the needs and buying motivations of your customers will always bring more value to your company than spending too much time wondering what the competition is up to.

The most interesting observation I have from this brief analysis is that all of these tendencies have to be kept in balance, avoiding extremes one way or the other. For example, trying to keep overhead too low can hurt the company's ability to grow just like not putting any thought into the competitive landscape of your industry will hurt you as well.

Monday, April 11, 2011

The Capitalization Table

Jeff Hall and I have almost finished teaching another semester of Entrepreneurial Finance at UVU. We've come a long way since the first time I taught the class, which was the first time any such class was ever taught at this University. The students have been diligently building business models and plans all semester, building up to the climax at the end--the capitalization table, or cap table.

When forming, planning, building, and growing a successful entrepreneurial venture, entrepreneurs need to be very familiar with their cap table. It is not enough to assign that to your legal counsel. The cap table will make all the difference in whether or not you maximize your chances for success, both personally and for the business as a whole.

Before I talk about why it is so important, here is the cap table we built during class while going through a series of ficticious rounds of funding:

The rounds of funding included seed, angel, series A, series B, series C, and then an Initial Public Offering (IPO). We assumed it was a C-Corporation with only common shares and no stock options to keep the example simple. With each round we valued the shares, determined the pre and post-money valuations, allocated the appropriate shares for the new round, and re-calculated the percentage ownership for each shareholder.

To make it interesting, I purposely made it so that we did not have enough shares authorized to complete the Series C round so we could discuss the corporate governance issues surrounding authorizing more shares. Up rounds, down rounds, cash-on-cash returns, and more were hot topics of conversation.

Not including all of the legal, accounting, and regulatory reasons for properly tracking and knowing your cap table, the most important reason for it is so that the entrepreneurs can understand if raising equity is really their best option for growth.

I often hear business people say things like this: owning 20% of a really big company is better than owning 100% or a really small one. Conceptually this makes sense, but the cap table proves it. A financial model without a cap table is incomplete. Why? Because the whole purpose of modeling is to figure out which choices will prove the most beneficial for the stakeholders. Without the cap table, the benefits to the stakeholders is usually not apparent, meaning the analysis and decision-making is not as good as it could be.

The key take-aways: have a cap table, keep track of it, and use it to analyze the potential returns for all of the funding strategies you consider.

Saturday, April 2, 2011

Knowledge Manifest in Numbers

Business owners should continually improve the way they are using, analyzing, and presenting numbers that represent past, present, and future business performance. I have consistently found that the right information in the right hands at the right time in the right format empowers entrepreneurs to make the very best business decisions possible, maximizing chances for success.

I was recently re-reading How to Measure Anything: Finding the Value of 'Intangibles' in Business and was reminded of how numbers can play a critical role into gaining knowledge about a problem, situation, or task at hand. The author, Douglas W. Hubbard, quotes Lord Kelvin in the very first chapter of the book:

“When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind" (emphasis added).

Interesting how he feels that being able to express information in numbers constitutes knowledge where the lack of numbers in expression weakens or maybe even invalidates knowledge. Not only do I agree with this concept, but I also have seen how a knowledge based in numbers improves decision-making and vision.

Next time you want to express your knowledge on something, challenge yourself to express that knowledge in numbers and see if you are more persuasive and can have more impact.

Tuesday, March 29, 2011

Two Flaws Lowering Your Valuation

I listened to an amazing web programmer talk about the features of the Software-as-a-Service (SaaS) product he will have ready for launch in a couple of months. He's been working on it for years, and he is very passionate about what it can do. After seeing what the product can do, I believe there are potentially several commercially-viable applications for his product.

Admittedly, he explained that he has neglected the "business-side" of his product, and he's secretly hoping a larger software company will absorb his technology for some outrageous price. So he has two flaws in his thought process:

FLAW #1: He is not a viable acquisition target until he can prove that his software works and it has "raving fan" users.

FLAW #2: He will command the highest valuation possible if he develops the most repeatable and scabable way to sell his product and executes on that bsuiness model as much as possible. This includes all the pivots that come with a start-up SaaS product. The more pivots, the better--meaning he is closer to perfecting the model.

Do you want to improve your valuation? Get more customers and hone your business model into the most repeatable and scalable way to generate cash flow. For once, stop talking about how great your product is and invest some time in figuring out the benefits (not features and advantages) your customers will receive from using your products and find the vertical of customers that are most likely to be early-adopters. From there, only make improvements to the features of your product if you can validate the improvements within the context of your business model.

Entrepreneurs who follow this pattern will set themselves up to receive the best valuation possible for the stage of development and growth they have achieved.

Monday, March 21, 2011

Everyone Has Competitors

One of the quickest ways to lose credibility with anyone who knows anything about business is to tell them you do not have competitors. Everyone has competitors that would love to take business away. Acknowledging competition and differentiating oneself is the way to beat your competitors.

A couple of months ago my wife spotted a mouse in our house. He (gender assumed) darted across the floor and into the laundry room, disappearing behind the dryer. We now knew he existed, and it certainly would have been foolish for us to pretend he didn't. My wife (why is she always the one who sees him first?) next saw him on a shelf in her closet. He had found an old bag of halloween candy my wife had convinced our kids to give up in exchange for a toy. He knew my wife spotted him, and, with no where to run, he decided to stay still, thinking the bag hid him from view. But his entire back half, including a long tail, exposed the sneaky creature. I was called in to excercise my well-honed mouse-catching skills--after all, I had done this once before.

I found a tupperware container, quietly approached the bag, and placed the container over the top of the bag and the mouse. Then I slid a thin piece of carboard under the container, keeping all of the contents inside, and drove that mouse to a nice field far away from our house where he would have to work a little harder to find tasty halloween treats.

Pretending I did not exist proved a bad choice for the mouse, and it will not work out well if you do the same to your competitors. But I caution you about another transgression entrepreneurs make when it comes to competition. It is competitor obsession. If you find yourself so focused on your competitors that you are, even in the slightest way, distracted from improving your own business, then you have competitor obsession.

So, my advice is to be aware of your competitors but not obsessed with them. Focus on improving your business and differetiating and "niching" your products and services and you will find the most success.

Monday, March 14, 2011

When is the Right Time to Hire?

I've had this question asked of me a lot lately: "Is it time for me to hire another employee?" I also hear questions like: "Is it time for me hire?" or "When can I add another manager to take some of the load I have been carrying?"

This is probably a good sign that entrepreneurs are experiencing some business growth but are cautious about hiring too quickly or being over-staffed, especially if their business does not maintain its current levels of business with some promise for future growth. Whatever is causing their need to know, each one of them needs to carefully consider the 6 Steps to a Good Hire that I wrote for American Express OPEN Forum. In addition to those six steps, I have some additional thoughts for your consideration.

Each industry has benchmarks for labor costs, and there are also plenty of general guidelines to follow in terms of what your business can afford and what makes sense in your business model. You should collaborate with as many of these resources as possible to properly staff your business.

For example, I recently completed an initial 5-Year IMPACT Forecaster for a customer and we could easily see when the business growth would justify new hires. With input from the entrepreneur and several other resources, we were able to etermine which employees would be more critical at certain phases of the business growth and allocated the new hires to those departments at the most opportune and effective times in the growth cycle.

If you are starting to feel overwhelmed with your business growth and are wondering when you should hire either your first (besides yourself) or an additional executive to your team, your financial validation for the addition can come from several sources. First, you might find that your revenue per employee is higher than the average and you are confident that the added cost will not impair your cash flow or profitability. Second, you may find that your industry spends, on average, 4.5% of its total revenue on executive compensation. If you are lower than that, or will be soon, it may be time to make the hire. Third, if you look at the organization chart of other organizations like yours and find they have more executives and managers than you (relative to size of organization), then you may find value in getting more leadership help.

Monday, March 7, 2011

The One Bet I Hope I Lose

A little more than a year ago one of the companies for which I serve as the CFO was experiencing very good sales growth. In fact, about seven months into the year it looked like the company might hit its sales projections for the year by the end of the eleventh month, one month quicker than we forecasted. As we discussed this as an executive team, I launched a friendly challenge to the Director of Sales: "I'm not sure you can hit our projection for the year by the end of the eleventh month. I'll bet it takes you all twelve months to reach the target."

He stiffened in his chair and showed a competitive grin. "I'll take that bet if it means I can win a steak dinner."

Not intending for him to take me up on my teasing, I was left no choice. "Okay, you're on. But it will be the first time I root against myself, because it would be great for the whole company if we could beat our forecast."

For the duration of the year not an executive team meeting went by without that steak dinner being a major point of discussion, and the company reached record sales and beat its budget weeks before the 11th month was over--a victory for everyone. Yes, it was a victory for me, even though I was going to buy the Sales Director and his wife dinner.

We put a pretty aggressive growth plan in place for the next year, and the company came out of the gates well in the first month, handily beating the sales forecast. Before I had a chance to fulfill my commitment from the prior year, I was offered a double-or-nothing scenario, which I gladly accepted. It's becoming evident that I will be buying two sets of steak dinners in the near future, and I couldn't be happier about it.

How is this company achieving such amazing sales growth? From its inception, the company was created on the solid foundation of customer needs it could uniquely solve. As sales are dropping for others in the same industry, this company continues to grow impressively. And its technology is innovative enough that the competitors initially disregarded the company's products and have only made feeble attempts to mimic some of the features, still falling far short of delivering the benefits to which the customers are becoming accustomed. Really, it's a classic example of Clay Christensen's The Innovator's Solution.

I am not the type to gamble or bet. In fact, I don't think I've ever done either before. I'm about to be zero for two, and I couldn't be happier about it!

Monday, February 28, 2011

When You Pivot, Remember Cash Flow

I am a fan of movement toward the use of the word "pivot" to describe the key business model changes a start-up implements in its quest for the most effective and scalable way to deliver its products/services to the market. I am an advocate of making sure that each of the pivots improves the cash flow and working capital cycle of the venture.

In a recent article I wrote for American Express OPEN Forum, 10 Business Model Pivots to Improve Cash Flow, I detail some of the ways this can be accomplished. Here are a few examples of how this works.

Example 1: Lean Inventory
An e-commerce company warehouses all of the products sold through the website. The founder quickly realizes all of his cash is tied up in the inventory he is holding in his warehouse, and he doesn't have enough cash to grow at the pace he could. By getting the supplier of several of the products to start drop-shipping about 80% of the sales, the company could grow much more quickly for very little cost. The supplier was happy with the increase in business, and charged very little for the extra warehousing costs (shipping charges were the same).

Example 2: Master Marketing
Marketing needs to be a metrics-driven part of your business. Writing-off marketing expenses as "branding" is wholly unacceptable for start-ups trying to pivot to maximize cash flow and grow. we have to focus on qualified lead generation with the best chances to convert into paying customers. When a founder counts every dollar spent on marketing and tracks its efficacy, the founder is empowered to grow in the most cost-effective mediums available. Reducing cost per lead and customer acquisition cuts expenses and increases revenue, a double-jolt of cash into the working capital cycle.

Example 3: Variable Cost Reliance
Out-of-the-gate one entrepreneurial founder hired several employees and signed an expensive lease for office space. But when it came time to make a pivot based on customer feedback and demand, those fixed costs became a burden that ultimately sunk the business. Use contractors and stay out of long-term fixed cost agreements to give yourself the freedom to shift and pivot towards your most effective business model.

Example 4: Invoice Timing and Terms
One entrepreneur was afraid to invoice her customers too early. She would wait weeks after the delivery of her products to charge her customers. With a little research and a pivot, she now receives payment before the product is delivered, and her customers are just as happy as when she waited up to 45 days longer to get her cash.

Business is about cash flow generation. Every pivot you make should be directed at accelerating your cash flow, or you'll find yourself falling far short of your potential.

Monday, February 21, 2011

Why the 9-80 Schedule Does Not Work for Entrepreneurs

What is the 9-80 Schedule?
There has been a trend over the last couple of years to reduce the number of days employees have to be in the office. The 9/80 workweek reduces the number of days in the office by one per every two weeks. In most companies this means you get to take every other Friday off, and most employees love this idea. You still put in the same amount of time, but you work a little longer each of the nine days you are in the office during each two week period. It reduces travel to work, fuel, and stress and can bring some other benefits as well. But it doesn't work well in a lot of entrepreneurial companies. I'll outline the main reasons it fails and give some suggestions for making it successful, if you are willing to give it a try.

Key People Missing
Half the employees are missing each Friday. This can cause all sorts of complications from having no one to answer the phone to no sales person available to jump on a hot lead from a satisified client. Entrepreneurs and their companies usually pride themselves on being nimble and quick to serve their customers.

Key Processes Fall Off Track
With half the office missing each week, some critical weekly and monthly processes can fall apart. For example, if you have an important operations meeting every Monday morning, half the employees will have to finish their preparations for that meeting on Thursday. And perhaps some of the information they need will not be avalailable until Friday, when they are off. To make the 9/80 work, you have to build your meetings and other processes around the inconvenience of half your staff missing each Friday.

Entrepeneurs and Executives Don't Adhere to It
The salaried, or exempt, employees and the founders, owners, and entrepreneurs never stick to the schedule for themeselves. These folks will usually make appointments and do work on their every-other-Friday off if it is convenient for the customers or other employees. They end up working longer on the first nine days and then working the entire tenth day as well.

If you want to implement the 9/80 schedule, you need to thinkn through these and other issues and make sure it will really benefit you and your business.

Monday, February 14, 2011

Why Accountants Make Horrible Leaders

Peter Drucker wrote: “Leadership is something that must be learned.” So when I say accountants make horrible business leaders, please know that it is primarily their choice--they could be great business leaders if they wanted to put in the work and discipline themselves to develop the key leadership skills. There are basically five areas of learned leadership that I’m going to discuss, each of them critical to being a great business leader.

Before I start, I need to share a couple of qualifying disclaimers. First, many accountants are actually great leaders in other areas of their lives, but fail to be successful leaders in business--which is one of the major angles of this article. Second, please put aside your pre-conceived ideas of what a great leader is. People of all genders, creeds, religions, political parties, and more can be and are great business leaders, and it often isn’t the smartest person in the room or someone that has one or two very visible perceived leadership attributes. In describing the varieties of effective leadership, Neal A. Maxwell said: “Trying to describe leadership is like having several viewers trying to compare what they see in a kaleidoscope when the mere act of passing the kaleidoscope shakes up the design.”

Leadership Skill 1 - Service
“Life is like a game of tennis--those who serve well seldom lose” (C.S. Lewis). Comparing leadership to life, the same holds true--those who serve others well are very effective leaders. But many accountants fail to apply this principle outside of their department and function. They get along well with their like-minded peers, but they clash with the marketing, sales, and operations departments regularly. Accounting and finance exist to serve the rest of the organization, but all too often they forget that and become too self-interested.

In his book The World’s Most Powerful Leadership Principle, James C. Hunter powerfully teaches the principles associated with servant leadership. The core of his message is that the leader exists to serve those he or she leads. And many accountants fail to take this attitude towards others around them, especially if they don’t understand debits and credits and can’t reconcile retained earnings to the prior year equity transactions.

If you are feeling a little guilty about this, that’s okay. This is fixable, and it’s about changing your perspective on everyone around you and what you are trying to help them accomplish (notice you’ve got to put your self-interest aside). It will take work and great discipline, but it can be done.

Leadership Skill 2 - Vision
In the same book, Mr. Hunter says that the first job of a leader is to set the vision, or course of direction, for the organization. Then the second and all-consuming job of the leader is to serve. But why do so many accountants lack the ability to have a business vision?

That’s a trick question. They don’t lack the ability, but they usually neglect it. And the reason is that they are usually so buried in the details of their functions that they don’t step back to look at, contemplate, understand, and embrace the bigger picture. If you are an accountant and you want to be a business leader, you have to train yourself to step out of the details and put the entire puzzle of the business together. And here’s the amazing payoff--the best business leaders I’ve seen are the ones that understand the accounting stuff but can apply it to the success of the entire organization.

Leadership Skill 3 - Communication
Yes, accountants are often accused of not being good communicators. The reason--they don’t listen well. In the famous Dilbert cartoon, the Dogbert character once said: “If yours are the only lips moving, a conversation isn’t actually occurring.” And just letting other people talk isn’t enough. It’s got to be sincere, concentrated listening. And if you ever find yourself thinking about what you’re going to say next instead of actually listening to what the other person is saying, then you might be able to improve your communication skills.

One’s ability to communicate effectively is at the core of that person’s ability to build trust. James Hunter  wrote: “Empathetic listening is one of the most effective ways to build trust.” In addition, the more accountants can effectively listen, the more they will build trust with others, which is essential to effective business leadership.

Leadership Skill 4 - Organization
While it is perceived that most accountants already have great organization skills, you’d be surprised how many don’t. They are often so focused on the past that they fail to think about and plan for the future. As such, they struggle to gain traction as leaders because leadership is as much about seeing and planning for the future as it is about understanding the past.

In business this can be particularly difficult since the accounting department is usually the last to hear about new strategies and changes in the business. Most accountants carry that frustration but do nothing to fix it. Become a thought-leader in your organization, serve everyone, and you’ll find you become part of those strategic discussions. Your ability to plan and organize the future will increase dramatically, making you an even more effective leader.

Leadership Skill 5 - Synergy
Why do so many accountants struggle to play well with others? Rather than always needing to be right and working feverishly to protect a reputation of flawless accounting prowess, accountants need to let down their guard and realize they will always be better in a synergistic team than left to their sole abilities.

To be effective business leaders, accountants need to work as a team and contribute to the trust of the team through their open communication. Yes, that means when you make a mistake, own up to it and don’t try to bury it or blame it on someone else. Believe it or not, your team will trust more for it.

I realize it may seem like I’m picking on accountants, but these principles really apply to everyone. I know from first-hand experience that accountants have what it takes to be great business leaders. If you’re an accountant, I hope some of the content of this article will help you in your progression to excellent business leadership!

Monday, February 7, 2011

The Best Way to Solve Your Cash Flow Problems

A friend of mine has said there is no such thing as a bad business or entrepreneur; it’s just that most of them run out of cash before they can figure out how to build a sustainable business model. Whether you agree or disagree, at the heart of that sustainable business model is paying customers.

The most common challenge I see with start-up ventures is product infatuation. The founders are usually pretty excited about their product or service, having invented it or been heavily involved in its design, engineering, or implementation. But their infatuation gets in the way of solving the cash flow problems common in start-ups--no paying customers.

I would classify start-ups into two categories--those with paying customers and those without. Those with paying customers are much more likely to succeed, having passed the proof concept phase and validating they know how to get at least prospects to take the plunge into their product or service. I authored an article on American Express OPEN Forum in which I identify the nine ways paying customers are The Silver Bullet of Cash Flow.

The best way to solve the cash flow problems of a business is to focus on getting and retaining paying customers. If not having paying customers feels like you are stuck in the middle of the dessert during a drought, then you'll be amazed at how paying customers will end that drought and land you in plush land wherein there are more water sources than you even knew existed.

Friday, February 4, 2011

Business Scoreboards

Running a business without understanding performance is a lot like watching a sporting event with no scoreboard--you find yourself wondering what the point is. Every performance measurement and statistic imaginable is employed in the world of sports, but too many business owners and entrepreneurs just don’t know how they are really doing. I find this particularly true in businesses that have grown beyond the capacity of one founder/entrepreneur to be involved I every detail of the business every day, which is usually once the company has a at least a few employees.

I spoke at an event in 2010 wherein I was given 5 minutes to cover 20 presentation slides--the event is called a Crunch Lunch wherein experts and specialists in different areas provide back-to-back information-packed training to those in attendance. Here is the video of my presentation, which discusses the Six Scoreboards Every Business Needs™ and the IMPACT they can have on a business.

Monday, January 17, 2011

The Entrepreneurial Dilemma of a Bird in the Hand or Two in the Bush

Entrepreneurs face a dilemma every time they make a decision. They are constantly weighing the present and the future, trying to benefit both but often sacrificing one for the other. But that’s what makes entrepreneurship so risky, right? The unknown outcomes?

In The Dilemma of Entrepreneurial Decision-Making on American Express OPEN Forum®, I make this one major point: we need to ask ourselves how each decision we make in our business will potentially impact our future. The more realistic and grounded we are about the future, the better decisions we will make today, and the better the chances that our decisions will benefit today and tomorrow.

Which brings me to the question I want to discuss in this post: Why does the saying “a bird in the hand is better than two in the bush” have to be so linear and definitive? Can’t we have both? Don’t we need to figure out how to have both if we want our businesses to survive?

I realize that one of the meanings of this saying is to help us be grateful for what we have, but entrepreneurs who spend too much time enjoying the fruits of their labors need to be careful. We are under constant attack by hungry, aggressive competitors who are frustrated they didn’t get the bird we got but are anxiously plotting to get the two in the bush.

Entrepreneurs need to take great care of the customers they have. We need to get clarity about why those customers are so happy to pay us and why our business model is being successful and ground our plans and projections for the future on that clarity. Then we will be able to make the types of decisions that will improve both–the bird in the hand and the two in the bush.

How do we do that? First, we need to consider our realistic vision of the future in every decision, like whether we should buy or build our next piece of technology or if we should over-promise a new customer. Then we need to continue to challenge our vision of the future with trends, market changes, new technology, and so many other factors to help us keep the birds in our hands while positioning our businesses for the opportunities of the future.