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.
“Ten Accounting & Finance Secrets for Start-Ups” will debut on March 10th, 2010
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
During the past few years as we’ve experienced a downturn in our economy, I’ve noticed many of the business owners I work with have become so conservative it is beginning to hurt their industry. The current economic conditions have caused consumers to spend less, banks to no longer lend, card issuers to reduce credit lines and have left many feeling like it’s time to curl up in a hole and wait for winter to end.
I can’t help but wonder if we’ve lost sight of what has made us successful in the first place. The past few weeks as I’ve watched some of the Olympic competition in Vancouver I’ve been inspired by athletes willing to take risks in order to win. Most notably, I’ve been impressed by USA skier Lindsay Vonn, who despite injuries in her career and, most recently, a painful shin injury, pushed thru her pain to ski toward a gold medal.
As business owners we need to recognize that, like Olympians, our profession is filled with risk, but if we move forward with confidence and energy we will rise above our competition and find success!
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.
Unparalleled training offered by and to all Partners and CFOs of growing CFO Services firm
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.
I recently came across an article in the Harvard Business Review that I found to be very interesting. They did a survey among managers to rank the impact on employee motivation among workplace factors which were considered most significant: recognition, incentives, interpersonal support, support for making progress and clear goals. The managers ranked recognition for good work as number one. However, employees actually ranked that factor dead last. Workers ranked “progress” as the number one factor in being motivated.
I have come to realize that people are the happiest when they can solve their own problems. Making progress in one’s work, even incremental progress, is more frequently associated with positive emotions and high motivation than any other workday event.
As employers/business owners, what are we doing to allow our employees to make progress in their job? Are we giving them enough space to allow creative freedom to help them solve their problems, or do we hover and involve ourselves inhibiting solutions and progress to be made by themselves?
Part of making progress includes knowing where you are going. If employees don’t have clear projects with milestones identified by themselves and the company, it is hard to make progress to the end goal. It is critical as the business owner to make sure everyone knows where the company is going so that progress can easily be identified and employees can continue to be motivated in their jobs.
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?
