Finance Does Not Live In Isolation

Finance does not live in isolation, an interesting concept. There are two important ramifications to that concept, first, you cannot look at your company’s numbers just for now, or just for this year. As a matter of fact, not even just for this year and last (unless, of course, you just started last year). Rather, you need to look back at least three years. You do so in order to see the trend lines of how you arrived where you are now. Are you improving or declining? If for example, your cash cycle is 145 days, what was it three years ago, better or worse? If better, work to understand what you have done right. If worse, dig down to find out what is going wrong.

The second ramification of the opening statement above is a question: what is your competition or industry doing? You need to know how you compare to your competition, whether you are a local or national player, dig out information about the rest of the industry. From the example above, what if the industries cash cycle average is 95 days? Can you see how you may have trouble competing in an industry that is far more efficient than you in keeping cash flowing through your organization? A longer cash cycle will mean that you must tie up more cash in working capital, rather than investing in other ways to improve business.

There are any number of online researchers that can provide you with industry information for you to use in viewing how your business stacks up against the competition. I prefer Bizminer, an online research company, because they break down their research in ways that are very useful for a small business. For example, you can do research on a statewide basis, and many of their reports are narrowed down to a small area, such as a county. In addition, their reports are broken out into different revenue categories, allowing you to narrow down your comparative information to your industry sector.

A last word, when comparing your company to your industry, do the comparison over the same timeframe that you are using for your company review. That is, if you are going back three years to see what your trends are, it is important to look at industry trends for the same period, to see if you are trending in the same way. This can give you another important clue on how your financial picture is shaping up.

Never leave your numbers all by themselves!

Filling the Entrepreneur’s Skill Gap

In a past Blog, I have written about making sure that you surround yourself with a team that covers any areas that are not your strong point. As an entrepreneur, you have many skills and the drive to succeed, but rarely do you have it all. Therefore, is crucial to find people to help you with those areas. Many entrepreneurs find this difficult, for different reasons. One reason that is often cited is lack of funds to hire employees.

The reality is that you do not need full time employees to do everything that has to be done, and hiring contractors for critical elements of your business process can work, and often are less expensive than you might think. While it might be a challenge to come up with funds to pay the contractors, it is well worth the effort when you see the outcome.

For example, I am engaging in a sales campaign for another enterprise in which I am involved. We are doing it the old fashioned way, sending out letters with a real ink signature and following up with a telephone call. I do not engage a full time person to do sales for this particular company, at least not yet. How did I find my sales caller? In this case, I used the site Elance and found a person that had the skills that I needed. I then interviewed her by phone (a great test of someone’s phone skills), and finally had her do a few test calls. Based on the results, she has been making sales calls for 9 months now.

Another example would be using a service to make your work look professional. Last year, I conducted a survey in the same industry as the company mentioned above. The results were significant and very interesting, but the resulting white paper looked kind of blah. I then used a graphic artist who took the content and formatted it with typesetting and graphics that brought immediate attention to crucial information and conclusions of the report. I never could have done that on my own.

The lesson taken is that an entrepreneur/small business owner will never have the skills to do it all, so don’t be afraid to hire a contractor to fill in those skill gaps.

Question: do you have any examples of how you used outside help fill in skill gaps. Also, do you have any suggestions on where to find the help you need?

Did Someone Say Competitive Advantage? A Great New Book on Strategy

Did Some Say Competitive Advantage? A Great New Book on Strategy

“Did someone say competitive advantage?” In a booming voice, Dr. Chuck Bamford started his class on strategy, a capstone piece in the Notre Dame Executive MBA program. I was fortunate to follow this class with Dr. Bamford, and it has made a big difference to me.

Now Dr. Chuck has written a book entitled, “The Strategy Mindset”. In creating this pared-down tome, Bamford has distilled his wisdom on strategy to its essence. The book is easily read, but more importantly, presents a clear, logical and winning formula for doing strategy right. I know, because I have used this formula with several companies, always to great success. I have been waiting for Dr. Chuck to create this volume for some time now.

The author is a straight talker, and begins with some myth busting. He pulls no punches when he takes issue with a number of ideas about strategy, including some of the more common myths of the day, such as trying to be the low cost leader. He not only takes issue with these myths, but cogently explains why they don’t work.

In the rest of the volume, Dr. Chuck takes you step by step though strategy, presenting an overview of the model that is both strong and easy to understand. He begins with the importance external analysis. Many a business has been started with an idea, but if that idea is not based on a sound understanding of the market, its’ players and dynamics between them, the idea will probably not come to fruition.

The author then turns to an internal analysis of the company in order to understand what about the company makes them stand out in the marketplace. This is not a “My people are my advantage exercise.” Rather he seeks an understanding of what within the company creates the advantage, in order to focus resources on those facets.

The next stage of Dr. Chuck’s process is the creation of a one-page strategy map that make crystal clear what each person in a company must do for all to achieve success. To those that protest at the simplicity, Dr. Bamford insists that with proper preparation, if the exercise of creating a strategy takes more than two days, you are doing something wrong. The elements of the strategy map are:

  • The Value Driver: what creates value for the customer.
  • Stakeholder Statements: what you want the stakeholder to say about the company.
  • Need from the company: what we need to make this happen.
  • Must do individually: what I need to do to make this happen.
  • Metrics: how we will measure success.

I don’t often make endorsements, but I cannot speak highly enough of this book. You need to acquire a copy of The Strategy Mindset by Dr. Chuck Bamford today!

Be Thankful for What We Have

Several days ago, my wife was sworn in as an U.S. citizen in a ceremony in Chicago. Having dealt with the government bureaucracy throughout, we did not have high hopes for the occasion, but were pleasantly surprised by the ceremony that took place. Along with the 140 other new citizens and several hundred friends and families, we sang the national anthem and recited the pledge of allegiance. We watched a video about immigrants and also a music video with the song, “Proud to be an American”. The new citizens recited the oath to their new country.

For me, the highpoint of the ceremony was when the new citizens came forward to receive their certificate of naturalization. Of course, this is the digital age, so there were several new citizens taking selfie-videos of themselves receiving the certificate.

The person that impressed me the most was a gentleman in his 60’s, who really looked the part of an immigrant; neatly dressed but somewhat grizzled, with the rough hands of one who had done manual labor for many years. When he received his certificate, he held it aloft in both hands as high as he could reach to show it to friends and family across the room, and then began jumping up and down in a dance of sheer joy, a wide smile on his face. This was an important moment in this man’s life!

Of course, bureaucracy was on display that day as well. It took longer to check in the 141 prospective citizens than the actual ceremony. The Bulldog noted several quick changes in process that could have cut the time in less than half, but I kept my peace that day.

Afterwards, my wife told me about a comment that one of the bureaucrats made during the checking in lineup. Seeing the long line waiting to check in, she asked how many were there. When she was told that it was 141, she said, “Wow, why so many? Are they giving something away for free? I want some!” My wife had the right thought, but she did not verbalize at the time. I will now, “Ma’am, you’ve already got it, and you don’t even know!”

What the bureaucrat had was the liberty and blessings of being an American citizen. Unfortunately, at least at that moment, she seemed to have forgotten that fact. Many do, including myself from time to time. The freedom to live as I would like, to be an entrepreneur and build a business that supports my family and my community. The freedom to express myself and my ideas. We often take these things for granted, and often it is immigrants who remind about these freedoms.

To quote Churchill, “”Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” (From a House of Commons speech on Nov. 11, 1947).


Do You Appear Too Powerful to Your Employees?

A number of years ago, I did some work for a large service corporation, one with over 10,000 employees. While I was there, I got to know a young person who worked there. This was his first job in a large corporation and he was frustrated. He felt that he could not get along with his manager and that his manager did not like him or treat him fairly. From everything I could see, this person was doing a good job and I did not understand why he felt that way.

I made a recommendation: before doing something that could have a significant and possibly negative effect on his career, I recommended that he sit down and talk to his manager, and tell him how he felt. I suppose that there are those who think that my suggestion was foolish, but I had not seen any sign from the manager that he felt this way about the young person.

The conversation took place, and the result surprised the young person. The manager apologized to him for the misperception. The manager’s remedy was also a great one. Starting the following week the manager and the young person would have breakfast together once a week and they would not discuss business. Rather, they would take time to get to know each other better.

The weekly meetings ensued, and in this case, they worked out very well. The manager and his employee actually became good friends, which they remain today. But even more importantly, the young person was able to use the mentoring he received from the manager to make significant growth that I know helped him enhance his career. The young person also learned an important lesson in management.

What is the lesson in this for us? Not that as a manager you need to be every employee’s best friend, but that you be open to understanding how you come across to other people in ways that you may not even realize. In particular, if you are the owner or head of a small business, you may be perceived by employees as being very powerful and hard to approach, in particular among your junior staff. Be aware of this when you are managing people, and be open to listening to your staff, and it will help you grow a business of loyal employees.

More Efficient and Productive

There are many small businesses that start out producing a product, and of necessity, sell their product in small quantities directly to consumers. This is the bootstrapping phase of a (hopefully) growing business. If the product catches on, there is a phase where growth is rapid, and the business may begin to acquire customers that want larger quantities, or even better, want to distribute the product themselves.

The small business may struggle to keep up with providing the product to all that want it. In particular, if the product is at all customized, it may be difficult to keep up with all the customizations that need to be made for individual customers while trying to ramp up larger scale production for large customers and redistributors. The question is, how do you decide where to put your energies and capital as you expand?

What some small businesses fail to do is consider the finances of the situation in order make a better, more informed decision. Other small businesses cannot consider the finances of a situation, because they do not adequately track cost properly. If you fall in to the latter group, you may want to look at a Blog that I wrote concerning cost, by clicking here.

For those that are tracking costs sufficiently, one way to consider the situation is by reviewing capital turnover. Capital turnover is calculated as sales divided by total capital. Capital Turnover is an activity ratio that will tell you how well you are utilizing your capital. For example, if a company had $100,000 in assets and $200,000 in sales, the calculation is:

$200,000/$100,000 = 2

In other words, 1 dollar of capital produced 2 dollars in sales. To use the vocabulary of the ratio, every dollar of capital was “turned” 2 times.

Once the company has established their overall capital turnover, they can use their knowledge of their costs to make an estimate of what portion of their capital is involved in the sales to different customers. Let’s say that they believe that roughly half of their resources are dedicated to each segment of the customers, small customers and large customers. However, the ratio of sales to each segment is not, with $150,000 going to the large customers and redistributors and $50,000 to the others. We could then do 2 calculations:

$150,000/$50,000 = 3
$50,000/$50,000 = 1

In this case, the large customer and redistributor segment is “turning” dollars at three times the rate of the small customers, therefore is using capital more efficiently. Now, this seems pretty obvious in this example, and working out the numbers is often more complex than this example.

In this case, the small business needs to consider ways to move towards putting more resources into the large customer segment and away from the small. Now, that brings up m=other questions, such as how to do so without alienating one set of customers. That would be the topic of another Blog. The important conclusion here is that having made this analysis, the small business now knows how well they are using resources and where they need to change to become more efficient and productive.

On the Origin of the Bulldog

My mother passed away several weeks ago at the age of 93. I spoke at her funeral, and as I thought about the stories I might tell, I reminded myself that my mother was the original Bulldog. This story illustrates the point quite well.

My mother drove well into her 80’s, and one day she was driving in the town south of where she lived when she was pulled over by a young policeman. It turns out that she had failed to mail in her registration renewal and it had expired. She accepted the ticket from the police officer, and then told him that she would drive straight home without any stops. He said that, unfortunately, she would have to have the car towed.

So, my mother pulled out her auto club card and started to dial to get a tow. This time, the policeman pointed out that she would have to be towed by the company that the town selected, at her expense. They waited together for almost (a silent) hour until the tow truck came. It was a massive tow truck, and this matters because my mother, at her tallest, barely brushed 4’ 11. I digress on this point for a moment. Lately, there has been a lot of talk about Google’s driverless car. Thirty years ago there was a whole group of drivers that were convinced that there was a driverless car already; they had driven behind my mother!

As my mother’s car was hooked up to the tow truck, she said to the police officer, “I can’t get into that truck, the steps are too high!” That was when the officer made his crucial mistake. He picked my mother up like a doll and placed her on the front seat of the tow truck. If looks could kill, I am sure the officer would have been struck dead on the site. My mother and car made their way home, and somehow, the driver helped her descend from the truck.

That was just the start! My mother began calling her friends and telling them what happened, eliciting much sympathy. The storm gathered and by the time it hit, there were articles in the newspaper, and even one of the state’s senators entered in the fray. When the court summons arrived for the violation, she pleaded not guilty, “I am going to tell the judge what he did to me!”

My mother attempted to talk to the chief of police in the town, but he would not take her call. She then began working on the mayor. After she finally spoke to the mayor, he called the chief and suggested that he take my mother’s call. During that conversation, my mother opened up on him with both barrels, forcefully asking the question, “Would you want your mother to be treated like that? Assuming of course, that you had a mother!” The chief assured her that the young officer would be counseled on his mistake. And, in the interest of peace, the ticket was cancelled.

My Uncle Bernie provided the perfect denouement to the affair, “There’s a police officer in that town that is very, very sorry he ever pulled over Ida Callahan.