Friday, August 31, 2012

Don't Hide Mistakes, Especially the Funny Ones

In recent weeks I have been thinking about humility and its role in effective business leadership. Being open about our weaknesses and recognizing and reminding others that we don't know everything seems counter-intuitive to many, yet it is often one of the main difference-makers between effective and ineffective leadership.

David Williams, a very effective business leader and CEO of Fishbowl Inventory, posted the following on FaceBook this morning:

Dave wrote three leadership thoughts he's been contemplating. Do you see what #1 is? Show you're human, selectively revealing weaknesses. Yesterday I used my weekly email to all of the employees at Aribex to follow this advice (before I had even read Dave's FaceBook post) and share two embarrassing moments that reveal some of my many weaknesses while traveling earlier this week. For your enjoyment and amusement, here they are:

Embarrassing Moment #1
So, my first embarrassing moment came when I was speaking during the press conference announcing the donation of the 10,000th NOMAD handheld x-ray system to a humanitarian outreach group. I was sharing some details from a humanitarian mission one of the NOMADs went on to a small village in Panama (so that you can understand why this is so embarrassing, I need to make sure that you know that Panama is a small country on the south end of Central America…remember learning about the Panama canal in school? Apparently I forgot.). It is a compelling story with amazing photos of the village chief in a loin cloth carrying the NOMAD in a hard-shell case and all! But, here’s the problem…when I was speaking, I somehow combined three different humanitarian trips into one. I explained about the hand-dug out canoe that carried the NOMAD over 4 hours to a remote village, but then I said the canoe traveled the Amazon river (please note that the Amazon river runs through the middle of South America and never comes near the country of Panama) in Cambodia (Please note that Cambodia is not in Panama, nor is it anywhere near Panama, or even South America for that matter. It is its own country on the other side of the world about 11,000 miles away!). Not my most brightly shining moment, by a long shot. Luckily everyone was good spirited about it and they teased me mercilessly for the entire luncheon after the press conference. We had a good time with it.

Making the speaking gaffe at such an important press conference was gut-wrenching. I initially wanted to run and hide, hoping no one noticed. Instead, I sucked up my pride, took full responsibility for it, and I think it was actually very effective at helping me come across as human and approachable in front of a group of people I had never met before...and my employees got a great kick out of it, too.

Embarrassing Moment #2
My second embarrassing moment came at the security check at the airport in Knoxville later that day. Some of you know I’ve been nursing a calf injury for over a month. One of the results of that has been that my calf muscles tighten up and become very painful when I spend a day on my feet. My physical therapist recommended that I use a rolling pin to “massage” my calves by placing my leg on the rolling pin and then rolling my calf over the edge. It is actually extremely painful, but helping me make progress to overcome the injury. I am supposed to perform this exercise two times per day, so I took a rolling pin with me in my carry-on bag on the trip. The TSA agent that saw it in my bag when it went through the scanner didn’t like it. They pulled me and my bag to the side, had me open the bag, and they searched through it until they found the rolling pin. I was very embarrassed…after all, who carries a rolling pin with them in a carry-on at the airport. Mike Heyn, Director of Sales and Marketing at Aribex, saw it all happen and was seriously considering denying any association with me. The security agent waved it around a little bit, then had a small conference amongst his co-workers. I caught quite a few “suspecting” glares from them and some of the other passengers. Finally the security person returned and told me I would not be allowed to carry it onto the plane—it could be used as a weapon and they would not allow it. Now I am out a rolling pin, I can’t keep up with my physical therapy regimen, and my wife isn’t thrilled about me using hers…I guess I’m in the market for a new rolling pin. Let me know if you know someone who can help :-)

In today's world of leadership, transparency and humility (I can't imagine these two existing independently in a leader) are critical ingredients for leadership success.

Lessons Learned:

  • When you make a mistake or a weakness is inadvertently revealed, resist the urge to try and cover it up or inaccurately sustain within others a sense that you are perfect or invulnerable.
  • When you make a mistake, swallow your pride and laugh at yourself. I've found you actually get over it a lot quicker, and people respect you more for it.
  • Don't try to take a rolling-pin on an airplane!

Friday, August 24, 2012

The Dichotomy of Leadership

Yesterday's presentation by Dr. Tim Clark at the annual joint event sponsored by four entrepreneur and business-centric groups in Utah highlighted one of the greatest challenges of leadership, and really why many struggle to be great leaders. You can read the twitter feed under hashtag UVEF, or #UVEF.

Among other things, according to Dr. Clark, identified the two main jobs of leaders. Job #1 is to maintain the status quo, keep everything running smoothly, and maintain the existing business. Job #2, on the other hand, is to disturb the status quo, to push the organization to new, innovative levels. Finding people that are good at just one or the other is tough enough, but someone who can prioritize and fulfill both roles are the leaders who have the greatest impact and add the most value.

Saturday, August 18, 2012

How Much Working Capital Do You Need?

When the bank asks why you need that high of a limit on your line of credit, or when you want to do a little scenario planning to make sure you'll have enough resources to handle growth, I recommend you turn to a ratio called Days Working Capital (DWC).

Here is what you'll need:
  • Accurate balance sheets for the past couple of years. These need to be prepared on an accrual basis.
  • Validated assumptions about how your growth or shrinkage impacts changes in all of your current assets and current liabilities. This includes accounts receivable, inventory, accounts payable, prepaid assets, short-term debt, deferred revenue, etc.
  • Validated assumptions on your revenue and profit/loss for the forecasted period.
  • Forecasted capital expenditures (CAPEX) and other investments for the period.
Now, let's jump into the seven steps to know how much working capital you need.

1. Calculate DWC historically.
The formula is actually quite simple. Multiply your working capital (from your balance sheet subtract your current liabilities from your current assets to find your working capital) by 365 days, then divide that total by your annual sales revenue.

Average Working Capital x 365
Annual Sales Revenue

Do this for the last 24 months, making sure to annualize sales revenue. The result is a decent historical range of your DWC. It might look something like this:

2. Benchmark your DWC to others in your industry.
Once you understand how your DWC has worked for the last two years, compare your findings with industry averages. DWC is not commonly published, so you'll likely need to apply the same formula to the financial information available for your industry and competitors.

3. Determine an acceptable range within which your DWC may fluctuate given your best and worst case scenario projections (OPTIONAL BUT RECOMMENDED).
To be done as accurately as possible, this next part requires the use of a financial model for your business, complete with full balance sheet modeling. If you do not have that, then you can merely estimate based on your industry averages and your own historical performance. Based on the chart above, your have experienced a 2-year low DWC of 36 and a 2-year high of 62.

If you do have a financial model, plug in your best and worst case scenarios in terms of growth, slower/quicker customer payments, and "sticky"/lean inventory. Then you can use the low and high scenarios from what you think will actually happen, whereas you will be handicapped by the assumption that nothing material in terms of your working capital cycle will change if you are only able to use historical information.

4. Subtract net CAPEX (add back any financing used for the CAPEX) and planned investments from today's working capital balance.
Next you need to analyze any future draws on working capital outside of your normal operations (for purposes of this post, I will assume our analysis will just comprise the next 12 months). This will include a subtraction of working capital funds used to fund CAPEX and other investments during the next 12 months. Your calculation should look something like this:

Working Capital Balance Today
     minus CAPEX not financed, or net CAPEX
     minus other investments
Working Capital available for next twelve months

5. Add anticipated profit margin or subtract anticipated losses during the period to your working capital balance today.
Whether or not your business is earning or losing money will have an impact on working capital as well. For the coming 12 months, either add your estimated profits or subtract your estimated losses to derive your estimated working capital available for the next 12 months. For this post, we will assume this equals $500,000.

6. Reverse the DWC formula to solve for working capital.
The next part is my favorite. By using a little algebra we reverse the forumla to solve for total working capital required, meaning the amount of working capital we think we might need during the next 12 months given our various scenarios. Here is what the formula looks like:

DWC x Annual Sales Revenue

For illustration purposes, let's suppose my annual sales revenue is projected to be $5,000,000. With a DWC as low as 36, my working capital required would only be about $493,000. If my DWC grew to 62, then I would need working capital of about $850,000.

7. Subtract your estimated working capital available the period from your various working capital required scenarios to determine your cash need or excess.
In the lowest working capital scenario, you would not need any additional cash during the next 12 months. ($493,000 - $500,000 = -$7,000). This seems to be cutting it pretty close. If your growth is concentrated in just a couple of months, you have some key customers take a little longer than usual to pay, or you have any other negative hits to your working capital, you likely will need more cash. In our highest required working capital scenario, we could need as much as $350,000 ($850,000 - $500,000 = $350,000). Since this analysis only looked at the high and low examples, it is very likely that the cash needs for your business during the next twelve months will fluctuate somewhere in-between.

Besides just using a single variable of DWC to run various scenarios, you may also want to run a few scenarios at different sales revenue levels and make appropriate adjustments to the rest of your assumptions as appropriate. Once you are done, you'll be able to clearly and confidently articulate exactly how much additional cash flow, if any, you need to keep your business properly capitalized.

Wednesday, August 8, 2012

2 Laws of Social Media

In preparation for a presentation I did yesterday about why and how people should use LinkedIn more, I thought about the governing laws that drive the why and how of my participation in social media. Here's what I came up with:

1. Social Media is just one medium to establish and build REAL relationships.
Many of the people to whom I am connected and with whom I communicate through social media are people I have met face-to-face. In many instances, they are people I associate with often in real life. The concept of buying followers that I don't even know feels uncomfortable, like paying people to be my friends. I would never do that. Everything I do on social media is to build relationships, mostly by trying to help and add value to those I'm connected to. After all, that's what friends and real business connections do, right?

2. You are the CEO of You, Inc.
I am surprised at how many people shy-away from having a an online presence. Some are humble, others afraid of the unknown. Whatever the reason, it does not discount this one point - you, and only you, are the most qualified expert on the subject of you. If you don't represent, then you're leaving a wide open space for others to do it for you. Or, even worse, little or no online presence could render you irrelevant altogether.

Every strategy or tactic as it relates to social media needs to adhere to these two rules. If they do, then you're on the right track!

Ken Kaufman