Some of my blog writing time has been directed to fulfilling a request to provide articles for the American Express Open Forum®. The first one is titled “3 Components of Financial Clarity” and it went live on their website yesterday.
This is the tale of a mug, dry cleaning, and customer loyalty…
Ken Kaufman included in elite group for the growth of his CFO Services firm and general contributions to entrepreneurship and the business community
INTRODUCTION
Clarity in business has to do with three things – the past, the present, and the future. Where we’ve been, where we find ourselves today, and where we are going – our final destination. Like a three-legged stool, removing any one of these elements would damage our ability to see the whole picture of our business. When we achieve this clarity, here are the three main benefits we receive:
BENEFIT 1 – MINIMIZE ANXIETY
Anxiety in a business is usually associated with fear, worry, and uneasiness about potentially undesirable outcomes. For example, a business that is nine months behind with its financial statements may generate some anxiety in those who are running that business. They might know what the balance in their bank account is today, but they have no idea if they are actually profitable and if they can sustain the business in the future.
I was recently introduced to a business experiencing financial difficulties. It did not surprise me to learn that they had not received accurate or timely financial statements in years. They lacked any way to measure their performance historically other than the cash in their bank account, which is often a false indicator of how the business is doing. They lacked a way to measure their current productivity and success, and they had no clarity on where they were going and how they intended to get there. Anxiety in this business was high. It was not until they gained clarity in their past, present, and future that they could create a plan to turn their business around and return to profitability. Not coincidentally, this clarity, even though it painted a very grim picture, reduced everyone’s anxiety and reinvigorated the entire company as they worked together to save the business.
BENEFIT 2 – IMPROVE TACTICAL DECISION-MAKING
We obtain clarity in the past with timely and accurate monthly financial/managerial reporting. We obtain clarity in the present with weekly dashboard reports and other productivity and cash management tools. Our clarity in the future comes from a combination of short-term cash flow projections, an annual budget, a 5-year plan, and an up-to-date financial model. Knowing that tactical decisions involve the day-to-day functions in a business, here is an example from one of my clients on how we improved our ability to make tactical decisions with clarity.
In our monthly executive team meeting in which we discuss the past, present, and future of the firm, the President shared that one of our largest customers was requesting a new Request for Proposal (RFP) from all of its vendors for some of the services we provide. Included in this request was an entirely new tier of services for which we had never had to provide unbundled pricing. Within 30 minutes we constructed an entire financial model to determine the lowest possible prices we could offer without damaging our margins. This information was powerful, especially when the President realized that her competitors would likely have much higher prices than our minimums. The result – we won the business with prices that increased our margins but still came in at or below our competitors.
BENEFIT 3 – IMPROVE STRATEGIC DECISION-MAKING
In addition to improving tactical decision-making, financial clarity may bring its greatest benefit in terms of driving the strategic direction of a business. Here is just one example:
Another growing company for who uses our CFO services became dissatisfied with the performance of its distribution strategy. Sales growth had been less than stellar, to put it nicely. We began to explore different distribution strategies, desiring to be open to all options and suggestions. Because of our already-existing financial clarity, the process was quite simple – evaluate all of our options and find the distribution strategy that would add the most value to the shareholders. We modeled each option and eventually chose the one with the most promise. Although we are still in the development and implementation phases of this strategic change, we have already received several points of validation that we are moving in the best direction.
CONCLUSION
This post focuses on the benefits of financial clarity. I will be publishing another article with some tips on how to obtain clarity on the American Express Open Forum site shortly.
Start-Up companies do not need theoretical or impractical advice. They need tips and suggestions that they can easily and swiftly implement to improve their chances for success. In the spirit of this need, here are ten tips in the areas of accounting and finance that they should consider implementing in a hurry:
I just finished a biography on Charles Ponzi by Mitchell Zuckoff titled: “Ponzi’s Scheme.” This was a very interesting understanding of the psychology and motivations of a man whose name has far outlasted the name of many men more respectable than him. His legendary rise and fall, and his manipulation of financial instruments in the process, have made him legendary, in a very bad way.
Imagine swimming from one end of the pool to another in 30 seconds. Is that good or bad? How do we determine how we are doing, what is going well, and what we should try and improve? It primarily has to do with comparing our performance to ourselves and others.
This post is going to be more personal than most…I hope you never feel this pain.
Most businesses have at least some seasonality to them. Perhaps the first quarter of every calendar year is always slow, or your business comes to a stand-still every November through December. Here is an example of a business that slows dramatically ever summer:
I have long suspected that most business people cannot give a simple definition for the common term of “business model.” It seems to be a nebulous and vague term that escapes most. Most people think they know what it means, but when you ask them to define it, they usually can’t come close to verbalizing it. So I decided to see if a group of business students, those who are in the great business textbooks every day preparing to succeed in business, know what it means.
In a classroom of a well-respected business school today I asked: “Please define business model.” I received the same initial reaction I do from most – some blank stares and a few who started to raise their hands but then realized they didn’t really have much to offer. Finally a brave soul took the plunge with something like this: “It’s the way a company runs and operates.” That sure seems to be part of it, but aren’t we missing something? A few more students offered suggestions that were similarly vague and generally lacking.
My definition is simple – a business model is how your business makes money. Period. It is the accumulation of all of the sales, marketing, operations, administration, R&D, finance, and everything else that goes into a business – all the strategies and tactics – that determine if the company makes money or does not make money. Most definitions are like the ones above – mentioning different parts of running a business but failing to describe it as the company’s overall plan for making a profit.
Understanding this simple and quick definition, here is my two-pronged philosophy for entrepreneurs and their business models:
First, every entrepreneur can pick whatever business model they want. Second, eventually our efficient market will determine the superior business model for each industry. Those who innovate the best model for their industry will most likely win. Those who quickly adopt to this model will likely survive. And those who stay entrenched in their out-dated and archaic models will die.
In our competitive business environment, the best entrepreneurs are the ones that innovate the best business models in their respective industries. I don’t know how many of them can give a quick and precise definition of the term business model, but one thing is for sure – they get it!
Business partnerships are one of the most unique and trying relationships we will ever enter. Some work, but most fail. I did a quick test. I searched Google for “business partner problems” and found about 169 million results. Compared to only 143 million results for what I assumed would be the more common term of “business partner,” I think it is clear that many struggle to make these arrangements work. Here are four warning signs that our relationship with our business partner(s) may be headed for failure. Please note that this article assumes that business partnerships are in the common form of a Limited Liability Company (LLC).
1. No Operating Agreement - many states do not require an LLC to have an operating agreement, and, therefore, many business owners and entrepreneurs do not understand the importance of this legal document. The operating agreement is the agreement between all of the owners, or members, on how the business will run, who will be in charge, and so much more. Let me share one brief example to portray the need for an operating agreement.
While at a social event recently with my wife, we connected with one of her friends from college. He has started a business and his product is starting to sell and pick up some nice momentum. He spoke for quite some time about how excited he was, how much fun he was having, and his new-found joy in finally pursuing his passion. I asked if anyone else was involved with the business, and he said he had two partners. The entire tone of the conversation changed as he described how his “partnership” had evolved, or perhaps a better description would be disintegrated. It started with three friends getting excited about an idea. They decided to split everything three ways and they failed to put anything into writing (namely, an operating agreement). As time passed the expectations, time commitments, investment, and basically everything else related to these “equal” partners fell completely out of balance. Arguments replaced friendship and greed supplanted a desire to share everything equally. The problem – they never created an operating agreement that defined all of the important legal, financial, management, and time issues for their business. The lack of an operating agreement has sent this budding partnership into a death spiral that will likely end in a painful and expensive divorce.
Please know that I have many more examples like this than I do of successful partnerships. One thing all of the successful partnerships have in common – they have an operating agreement. While certain online resources can help entrepreneurs organize their entities legally, special care and consideration should be paid to the operating agreement. It is very wise to seek appropriate legal counsel as well as have healthy and lengthy discussions with your partners before you finalize this agreement.
2. Partner Pride -This is something that usually shows up when a partnership begins to have struggles and accelerates its demise. Here is one real-world example of partner pride. Two men started a business, each owned about 45%. The remaining 10% went to other key employees. As the business grew and became quite successful, one of the 45% owners took great pride in the success of the company. He began to tell his family and close friends that it was his company and that he was the major contributor to its success. His pride allowed him to minimize his main partner and falsely establish himself as something he was not. When this partnership began to fall apart and his partner extended a very fair offer to buy him out, he refused. Why? In his mind, he could not communicate to all of his family and friends that the business could exist after he left. He was so infatuated with his fictitious position that he could not make reasonable or logical decisions. The matter was finally resolved, but not without great distractions and damage to the business.
The best way I have seen to keep pride out of a partnership is to regularly review the contributions of all involved as well as discuss how each partner can improve. If done correctly, this serves to keep everyone grounded and grateful for each other.
3. Compensation and equity are confused -Let me be as straight-forward as I can with this topic. Too often I see entrepreneurs, founders, and business owners that confuse equity and pay/compensation. These two items must be separated in order to set your partnership up for success. A few years ago I was introduced to a business with 50/50 partners. 12 months earlier one of the partners had become permanently disabled and unable to further participate in the business. The partner remaining in the business was frustrated that the other partner put zero time into the business yet was still getting 50% of everything the remaining partner generated. This partnership was about to fall apart until we set a fair and reasonable wage for the partner still working in the business. The other partner’s wage was reduced to zero since he was not working in the business, although he was still entitled to 50% of the profits based on his ownership stake in the business. Problem solved.
Ownership does not mean you should receive a wage or guaranteed payment. Ownership means you participate in profits after all expenses are paid, including the wages of those working in the business. In the spirit of understanding the difference between equity and pay, each partner’s compensation should be reviewed at least annually. In this scenario, it would not be uncommon for one partner to receive a higher salary than another, especially if there is a difference in the amount of time put into the business. Please note that the legal and tax structure of the business may determine the best ways to receive both wages and profits, but that should not dictate the separation, at least mentally and emotionally, of the two.
4. Beginning without the end in mind -perhaps all of these points lead to this one – the need to contemplate every way the partnership will need to end or be dissolved. Here is just a brief list of the different life events that could impact a partnership: death, disability, lack of interest, relocation, new opportunities, family changes, and more. How will each of these situations be handled by the partnership? An operating agreement and potentially a buy/sell agreement should contemplate these events.
In addition, beginning with the end in mind implies that a partnership will have planned exits as well. Selling a business can be very rewarding, and a partnership needs to look down the road to how each of the partners will exit. For example, one partnership for which I serve as the part-time CFO consists of three partners under forty and the fourth partner is almost 65. The younger three want to stay in the business for a long time while the older partner is hoping to exit the business and retire in a few years. Orchestrating this partner’s exit while not hurting the business from a cash flow and leadership perspective take thought, consideration, and planning.
The point is this – if a partnership does not properly plan for expected and unexpected exits, it will likely fail.
Do any of you have good or bad partnership experiences to share?
Based on total number of unique visitors to each of our blog posts through the year, here are our top ten blog posts of 2009. Enjoy!
1. TOP TEN 2010 TRENDS FOR ENTREPRENEURS - We received a lot of very positive feedback on this blog post as well as a radio interview request. Listen to Ken Kaufman’s radio interview HERE.
2. CFOs ON TWITTER - This blog post was updated throughout the year as we met more CFOs on Twitter. Yes, there are some CFOs that have not only engaged in social media, but who are also pretty good at it.
3. STAFFING THE ACCOUNTING/FINANCE DEPARTMENT IN START-UPS - This post offers insight into how a start-up should scale into its accounting/finance department.
4. I CANNOT PREDICT THE FUTURE – BUDGETING IS WORTHLESS! - Predicting the future is actually easier than most think, and what you learn in the process makes the whole experience invaluable.
5. WORKING CAPITAL – LESS IS OFTEN MORE - A different twist on cash flow management and liquidity improvement techniques.
6. KEY BUSINESS METRICS EVERY ENTREPRENEUR MUST KNOW - Dashboards and business intelligence are becoming more critical for entrepreneurs. Here is a roadmap for how to get started.
7. HOW TO SPEND $195 INSTEAD OF $30,000 TO FILL A NEED - We received a lot of personal attention to this blog post – This gives us some insight into one business lesson learned from a family vacation.
8. THE PROBLEM IS… - Be a problem solver, not just a problem finder.
9. 3 REASONS YOUR QUICKBOOKS STATEMENT OF CASH FLOW IS WRONG - Some technical information, but very necessary to understand if you are using QuickBooks.
10. DOES TOO MUCH CAPITAL & SUCCESS TOO EARLY HURT START-UPS? - Interesting thoughts on what each business learns in its early bootstrapping days!
All the best for a prosperous 2010!
CFO WISE founder, Ken Kaufman, discusses his Top Ten 2010 Trends for Entrepreneurs with Kenneth Darryl Brown
PLEASANT GROVE, Utah, Dec 30, 2009 – CFO wise founder, Kenneth A Kaufman, was interviewed as a guest by Kenneth Darryl Brown on his Blog Talk Radio Show that aired on December 30, 2009 at 10:00am MST. Mr Brown was impressed by Ken’s recent blog post, Top Ten 2010 Trends for Entrepreneurs , and they spent the entire show dicussing each of the ten trends.
Ken Kaufman stated, ”Kenneth Darryl Brown really is a passionate entrepreneur, and his show is focused on sharing knowledge about how to successfully maneuver through the sometimes difficult environment of entrepreneurship. It was truly an honor to be featured on his weekly radio show.” In addition, Ken mentioned that listeners to the program will have an opportunity to visit the CFOwise website to receive a free industry report.
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About CFOwise With over two centuries of senior-level executive experience, CFO wise is the premier provider of permanent part-time CFO services to start-up, emerging, and medium-sized companies in the United States. For more information, please visit: www.cfowise.com or contact Kim Waldron at 801-380-5615.
About The Passionate Entrepreneur This show is for passionate entrepreneurs who want to take their companies to the next level! It is for entrepreneurs who want to learn the best practices for sales, profitability, new ideas and strategies and who want to embrace technology to be more productive, efficient and profitable! It will inspire, inform, educate and connect you with other passionate entrepreneurs around the world! Kenneth Brown is The Passionate Entrepreneur.
I created my Twitter account (CFOwise) on December 26th, 2008. After one full year, this is what I have learned:
Twitter is like every other form of connecting with people (yes, I’m excluding all non-person driven Twitter accounts). Whether it be face-to-face, over-the-phone, through social networking, or via some other medium, connecting with people professionally and personally is about BUILDING RELATIONSHIPS. That’s it. No secrets or amazing revelations. But here are some thoughts on how Twitter has helped me to build more and better relationships during the last 12 months.
As my vision for my Twitter usage began to take shape, I found that there were some people with whom I wanted to connect that did not seem to feel the same way towards me. It did not take me long to realize that they had nothing against me, rather, they did not understand the need to create and foster relationships. They thought Twitter was a race to gain the most followers and that somehow that would be fulfilling. Let’s be honest…most of those people have gained thousands, if not tens of thousands, of followers only to find that they were getting a lot of noise, or tweets, but they really didn’t have anyone with whom they could connect and create anything of value. A lot of these folks have even written blog posts about how they have either unfollowed everyone to try and de-clutter their account and start building real relationships or they have started completely new Twitter accounts so they could start fresh with relationships, not numbers, as their focus.
Whether in business or in personal matters, just building relationships is highly ineffective. You end up knowing a lot of names but aren’t able to add much value to any of them. Building relationships of TRUST generates very effective relationships, the kinds of relationships we all want. Twitter is a tool; it is still up to each end-user to build the best kind of relationships. So, here is a brief list of the some of the key elements of building relationships of trust and how we can apply them to our relationships on Twitter.
Consistency- Be a regular, even if it is for a short time each day. Respond to your @replies and Direct Messages (not the sales-oriented and spammy ones).
Add Value – Do not just listen to the conversation. Jump into the fray and communicate. Add value to what others have to say. Say things that are valuable in the first place. Re-tweet the really good stuff you come across. Add value to the conversation.
Be Genuine and Real - There is no faster way to destroy trust than to fake it. Be yourself. If you do that, you will be happy with the relationships you have built. I sure am after my first year.
Stay Away from the Trash – Yes, there are certainly some undesirable Twitter accounts. Just block them and move on. Filter and flourish.
Help Others- Think about what others are trying to get out of Twitter and help them get it. If they want exposure, then help them with re-tweets and #followfridays and whatever else makes sense. This is an old concept, but it applies to Twitter just the same – help others get what they want and they will help you get what you want. Sounds a lot like building relationships, to me. If your only Twitter efforts are self-promoting, then you’re not going to attract many trust-based relationships.
Use the Tools- I love using Tweetdeck. The search tools help me stay on top of my keywords and accelerate my efforts to connect with the right kinds of people. There are many other applications and tools for making your Twitter experience successful. Find what works best for you.
In conclusion, let’s consider the many advertising and marketing initiatives we have seen on Twitter. Some have gone very well, and others have left a bad taste in our mouths. Just like any other broadcasting medium (by the way, all of their revenue models are built around marketing and advertising), the ones who are building relationships of trust are the ones we listen to and the ones from whom we buy. If that is true, then we need to try and be just like them.
With 2009 coming to a close, we look ahead to what we can expect and should plan for in 2010. Here is my list of the top ten trends founders, CEOs, and entrepreneurs of start-up, emerging, and medium-sized businesses should consider as they prepare for the new year.
1. The recession will not end, regardless what anyone says - There are just too many issues that still need resolution before this economy can rebound, like the write-down of ALL of the bad assets on the books of the financial institutions. The fact that they are still not lending much to existing or new customers should be a sign that they know they still have a lot to lose before they can begin to gain again. In addition, the new business models that are emerging in this recession are leaner and meaner than we have seen in a long time, meaning they aren’t going to help unemployment any time soon. The effects of this recession could last quite a while.
[Author's Note:I realize I will take some heat for this prediction, but please know that I am only bearish on a macro-economic level. There are and will continue to be many businesses that grow and thrive through this time, and I applaud them all for it! If more businesses were like them I would be much more optimistic about an economic recovery.]
2. Bootstrapping will be king!- Usually you will hear me say that cash is king. In 2010 the entrepreneurs that have learned to boot-strap will be king – because boot strapping is the best chance for cash generation. Many of their competitors have gone out of business or are in some sort of a death spiral. Those who made changes early and are continuing to adapt to the changing economic market are going to win. I hear lots of businesses take the mentality of: “If we can make it through the recession will be poised to do well.” That attitude is just not going to cut it. Survival cannot be the only goal – those that can figure out how to generate positive cash flow in the tough times are the ones that will win when things turn around.
3. Solving lots of customers’ needs will raise capital- If you are starting a business and your whole focus is on raising capital, you will not get any in 2010. If, on the other hand, your focus is on getting and satisfying customers with a great product or service, then you have a much better chance to get the money you need (if you even need it). Ben Peterson, a successful entrepreneur and angel investor, identified one of the major sources of this problem. He said that the focus in business schools and entrepreneurial education is on teaching how to raise money, not how to grow a successful company that is actually worthy of investment capital. Get to work, and the money will follow you if you can take care of lots of customers and your need for capital will really add value to your efforts to serve your target market.
4. Business Lending requirements will increase – It got a lot tougher to borrow money in 2009, and it will continue to become more difficult in terms of requirements and complexity. For example, a business just obtained a small $125,000 line of credit and the legal documents the bank sent to their customer were over 150-pages in length. Even though the mean credit score in the US is on the decline, banks have raised their requirements on business owner credit scores and they are mandating more collateral (as a secondary source of repayment) than before, especially if it is real estate.
5. The cloud will continue to gain a share of all things computer- We are seeing more and more companies abandon traditional software and convert their operations to the cloud. This is a great trend for entrepreneurs who can accomplish just as much as big businesses for a lot less expensive cloud-driven solutions. Here is just one example: 2 years ago almost every business used Outlook or some other computer-based email client for its employees. Today we are seeing some companies, especially those with entrepreneurs under the age of 40, switch to web-based and SaaS applications. Google Apps seems to be the most popular for now, but the point is clear - the practices of purchasing expensive software to load on each computer and servers to host all of the company’s data are becoming antiquated and cumbersome.
6. Social media overload will drive users to the best content sources and filters- Even status updates in LinkedIn are tough to keep up with anymore. The flow of information through social media tools has grown so dramatically that most feel like they are on overload and like it is impossible to keep up. While providers are trying to figure this out, we are all going to be driven to the sources of the best and most reliable content, especially if it allows us to filter it quickly and effectively.
7. Health insurance will continue towards high deductibles and consumer-driven care - I have long been an advocate for high deductible health insurance plans with HSAs or other medical savings accounts. Yet such plans represent such a stretch from traditional health insurance that adoption rates have been very low. It seems like employers and employees alike are warming up to this idea and the popularity of these plans will continue to increase.
8. Being big will become less advantageous to being small – Big will no longer necessarily be better. There are many reasons for this, but here are the main two – small and medium-sized companies are often more flexible and more hungry to satisfy their customers and big-company economies of scale are becoming less relevant. For example, with its use of remote, flexible, and contract workers, Jet Blue is able to do more for its customers than any of its larger rivals – and that is in a very capital-intensive business. Service businesses may find even greater advantages as compared to their larger competitors.
9. Focus on relationships will pay- Relationships have been and will always be the key to building a successful business – mainly because they help us establish trust. I’ve included this on my trend list because it seems like to some the practice of building trust is a lost and fallen art. Obtaining more followers on Twitter and increasing your pool of friends of FaceBook are only relevant if we build relationships in the process. We will see relationships and trust-building come back to the forefront of business as filtering tools allow us to connect with those who matter most and with whom we want to foster and strengthen our relationships.
10. Knowledge workers will take more contract and less full-time work - This recession is helping to accelerate our economy to more of a knowledge-based worker model. These knowledge workers are finding more benefits in contract and part-time work. Some appreciate the flexibility, while others feel their value-added to and sustainability in these roles are more secure and potentially more profitable. Our CFO services business is just one of many examples of this trend.
I would love to hear any thoughts, concerns, questions, modifications, additions, or deletions you have for this list and how 2010 will impact you and your business. All the best for a prosperous 2010!