Is That Dashboard Enough?

“You’ve got to be very careful if you don’t know where you are going because you might not get there.” – Yogi Berra

Over the years, I have been amazed as to the number of entrepreneurs I encounter that use shortcut methods to get a feel for how their business is doing financially. Many today explain they have a “dashboard”. I believe a well-designed dashboard can be an invaluable tool for an owner but it should not be an excuse for not having timely, complete and accurate information. Without that, you can end up like Yogi said. A quick story.

Years ago, I was auditing a small but well known public company. The chairman was a sharp businessman, but the market had gotten away from his company and for the first time in years, they lost money and were in debt. I had my typical closing meeting with him and was told in no uncertain terms, the numbers were wrong. He asked, “If we lost $1 million, why do we have cash in the bank?” Though taken aback, I quickly showed him the balance sheet with $2 million of debt. He looked at it, thanked me and gave his “blessing” to the numbers.

Recently, I had the same experience where an owner of a business I knew asked me to visit because his numbers did not seem right. He had cash but his CFO indicated he was losing money. I quickly looked at his financials and did a back of the envelope calculation showing how the changes in receivables, inventory and payables had actually generated cash though he was in fact losing money.

Both had used a version of dashboard reporting (in this case, cash on hand) to assess their financial results. These shortcuts have their drawbacks. The other issue is that in an early-stage company today, there are non-financial type measures that an owner must manage. Unique visitors to a site, return visitors and costs to acquire customers are not in the financial records but can be a solid indicator of the health or future health of an enterprise.

So some simple advice. You should work with your internal or external financial staff to determine what data works best for you to run your business. If you are a more mature business, you need a balance sheet and cash flow statement (they are easy to create) to go along with your income statement to better understand your financial workings. Just using cash balances or average order size (another client used this) is not enough and can be short sighted.

If you are emerging and pre- or early-revenue, develop those metrics that provide the right insight into your business. Those who are in this space can help you and while that data is important, keeping track of how your cash is used (your “burn rate”) is also a critical piece of information.

You may hear from colleagues that they do not waste time on such mundane matters and getting a “quick read” on your results is the path you should follow. While I agree that timely information is paramount, insufficient information is not acceptable. And if your competitor is doing a better job of obtaining and acting on solid information, you may lose in the end. So don’t just settle for dashboard reporting because it is fast and easy; make sure it really can tell you what road you are on.

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Go to the Light – Start Exit Planning Now

“I don’t know where I’m going, but I’m making good time.” – Quote from a former client.

I just completed a series of discussions with some mature business owners on potential exits from their businesses. As usual, I tend to take away common themes and I thought of this quote from a former client. He used it to describe people he had encountered who were so absorbed in what they were doing, they thought they were making progress.

Through his eyes, he thought they were lost. The latter tended to describe these owners. Each had a valid reason to address the need for exit planning – age, paradigm changes, timing – these were all present and culprits in raising the very thorny question as to “What’s next?” There is an abundance of tools to help an owner through the exit process, but getting started – now there’s the rub.

I hear loads of excuses as to reasons to delay. Many who advise in this space have what are perceived of as ulterior motives – money managers who want owners to sell so they can manage their liquid assets, life insurance sales people who want to make sure owners and their families have the annuity or insurance to cover them as they go on their journey, etc. Unfortunately, while well intended, they give the owner an out by raising questions regarding true intent. I have had some success in this space because I do not care what the result is, I just want to make sure that an owner has all the facts before they make their decision. But I will admit, it is a tough battle.

Having said that, I believe the major reasons for delay are psychological. Fear is often downplayed and yet I think it is one root cause of most owners becoming part of the majority who either have no exit plan or start to plan too late. In his 2000 Year Old Man albums, Mel Brooks cited fear as the great motivator for everything from transportation to the development of the handshake and dancing. One problem for the owner is often the absence of someone they can confide in to discuss their fears. Often seen as the patriarch or matriarch, showing fear is often perceived by them as a sign of weakness. So, they seek solace in finding a solution. This keeps them busy and avoids the need to discuss the obvious – starting an exit plan.

The absence of a “life” after the business is gone is also an issue. Often left with little time to develop hobbies or other interests, the lack of something to go to leads the owner to complacency about staying where they are. Making the business stronger is a great defense and considered “progress” perhaps ignoring at times risks like the paradigm shift which may be too great to overcome.

So, to owners, I say start the process now. Have others tell you it is too early, but I never think it is. My advice has always been not to get into a business without knowing how you will get out. Also, find an advisor you can trust. They do not have to be skilled in the exit process, but they have to be capable of listening and telling you things you may not want to hear. With some guidance, you will know where you are going and have a successful completion to your journey.

You Have to Be Fiscally Responsible

“Friends don’t do this to friends.” – quote from a new client CEO when told his CFO was “taking” money.

For those of you who follow this blog regularly, you know my background as a long-time audit partner with EY. That experience has allowed me to be a trusted advisor to many business owners of all types and to see first-hand the issues I use as content here. I use few, if any, “geeky technical topics” and I usually leave the ugly side of the business out. But there is a disturbing trend I see with too many of this generation’s entrepreneurs that I feel is worthy of exploring. First, let me provide some background.

There is a popular acronym called KPI (Key Performance Indicators) that many owners today rely on to gauge the health of their business. KPIs may include average sales per day or employee, days of sales in receivables, unique users to a site, etc. Many come into favor as early-stage companies may not have revenue but need some objective data to monitor progress. All understood. But this tool is not so new. As a young manager (yes, before the internet but not quite when people used quill pens), I was always interested in what data owners of established businesses used to manage their company. Interestingly, while some referred to monthly financial statements, most used daily information on shipments, cash collections and weekly payroll. As to the last item, even the most unsophisticated owners always knew their weekly “nut” or payroll. They would leave the full accounting and finance function to the CFO but they always had a handle on KPIs. So why the trip through accounting history?

I notice more and more a bifurcation of tasks and responsibilities by today’s entrepreneurs. Once a financial manager of any type is hired, it seems everything finance related is delegated to that hire. Someone in an owners’ blog somewhere must have said this is the right thing to do; that administrative tasks just bog you down and you should abdicate your fiscal responsibility and only spend time on activities that bring value (product development, team and customer building, etc.) to make your venture a success. Not true.

So, the genesis of this quote. We recently landed a new early-stage client and as part of our process did some simple diagnostics. The CFO was a close friend of the CEO founder with complete charge for finance and a few other functions. Without going into details, the CFO was paying himself unauthorized bonuses. No accounting tricks; they were right there on the payroll register; the CFO just felt he deserved more money. We were astonished to find the founder never reviewed payroll; did not know what his nut was. He was devastated. In addition, the bond company is giving them a hard time about covering the shortfall citing inadequate supervision.

So, a simple lesson for owners of all businesses. It is perfectly fine to leave the core of the finance function to others but always have some minimum KPI type of checks and balances in place as your predecessors did. Take the advice from Chris Anderson as relayed in David Kidder’s “Startup Playbook” – “engage in the whole process.” Because in the end, it is a real challenge to be a success if you are not fiscally responsible.

Change of Control – Revisited

Cardinal Ximinez: “Nobody expects the Spanish Inquisition! Our chief weapon is surprise, surprise and fear, fear and surprise. Our *two* weapons are fear and surprise, and ruthless efficiency. Our *three* weapons are fear and surprise and ruthless efficiency and an almost fanatical dedication to the pope.” – Monty Python “The Spanish Inquisition”

I have seen my fair share of situations where change in control provisions in agreements resulted in unintended consequences. Until recently, I thought their sole purpose was as the name implies and as Curly said in “City Slickers,” “One thing; just one thing.” But maybe as the Cardinal suggests, there is more than one thing. Let’s look a bit more closely.

Every smart business owner knows his most valuable assets walk out the door at the end of each day. Most owners like to retain key employees and enter into employment agreements that among other things, provide for incentives (many of which vest over a period of time) that are protected, should the owner or owners no longer be around. This standard solution is known in plain English as a “change in control” provision. What this normally provides for is the acceleration of any vesting or even liquidity provisions of any incentive provisions for the key employee in the event the current owner no longer has more than 50% (usually) of voting control in the company. Everything seems fair so far; what is the problem?

In case one, I was asked to consult with a company that had a key employee that was promised an incentive payment in the event of a change in control. That provision was triggered when the Company was sold to a “strategic” but the Company took the position that they had accepted a lower sales price in return for the key employee being offered a position with the acquirer, thus they did not owe the incentive. While both sides believed their case had merit, the ambiguity created years of turmoil until we helped to resolve it.

In the second situation, an acquirer had issued an LOI for the purchase of one of my clients. During due diligence, they realized that the resulting change of control provisions would substantially “enrich the lives” of all the key management members, and they were sufficiently concerned with their motivation after the deal that they almost walked away. Fortunately, a solution was crafted which all found acceptable.

So just when I thought the key provision in an employment agreement with an incentive was a change in control, I have come to realize that it should be accompanied by a well-defined “continued employment” provision so both the team member and the company do not suffer unintended consequences when there is a change in control. Negotiating them at the start when both sides are not under the pressure of an impending transaction is also very helpful. I am starting to see these provisions in some recent transactions and strongly encourage their use. As the Cardinal said, the two key provisions are…

Your Business Plan; Are You Making a Living or a Killing?

“Go ahead. Make my day.” Harry Callahan (Dirty Harry) – from the movie Sudden Impact

I get the opportunity to see a good number of business plans / pitch decks each week and I focus on the section of the plan I believe is most critical. While some may believe it is the management team or barriers to entry; to me it is the financial projections. So at this point, you have to be saying, “Of course; he is a CPA. What is so surprising about that?” The truth is, there is no other place in a pitch where one can get a better picture of the “directional indicators” of a plan. Please allow me to explain.

Years ago, a colleague of mind was tired of working the long hours at our firm and wanted to become his own boss. He bought a Basking Robbins franchise. He accomplished his objective; he still worked long hours but now he was working for himself. However, at the end of the day, all he did was replace salary with small business income; from a financial perspective he was still just making a living.

If you are doing a pitch before investors, remember they are focused on high rates of return; getting their money back in multiples of what they invest. They are looking at what we euphemistically call “making a killing” and they are looking for you to “make their day” by showing them how. So where does the projection fit in to all of this?

First, what is the size of the opportunity in your eyes? If your projections show that in five years, your revenues will be $5 – 10 million, you cannot make enough money to attract most investors. Please do not get me wrong; growing a business to this size is a real accomplishment and can be financially rewarding. It is just not a killing.

Next, does the financial model follow the plan? If the plan is a SaaS model with monthly subscription payments, revenue is simple; multiply the expected users by the planned fee and that should be revenue. So now I can see how many users you expect to have (market share) as well as the monthly payment (market price). I can also look at how you plan to get to that level of users.

Finally, are the projections logical? If your margin or operating costs are substantially different from competitors, do you explain why or are you just plugging numbers to provide a financial result some online advice indicated was what investors want to see? It is a simple logic test that many fail on a daily basis.

Shakespeare said, “The eyes are the window to your soul,” and I think your financial projections serve the same purpose as it relates to your plan. So after you get done “crunching the numbers” please step back to see what they really say. There is nothing wrong with creating a nice profitable business model that might allow you to make a very good living for a long period of time. I have had hundreds of successful clients who have followed that path. Just keep in mind how this approach has to “step up” if you are looking for that investor who wants you to make their day.

How Do I Learn To Be a Better Entrepreneur?

“God grant me the serenity to accept the things I cannot change,

The courage to change the things I can

And the wisdom to know the difference “ – The Serenity Prayer

I have had the chance to reflect on some articles about a recent survey conducted by The Alternative Board. The survey appears to be pretty robust.  They question some 500 entrepreneurs on very relevant topics.  My purpose here is not at all to take issue with the survey (I think it is great), but to focus more on my view as to what an entrepreneur can really learn and change based on these findings.

One principal finding of those surveyed appears to be that 60% would have raised more money.  While this sounds great, I have met only a handful of entrepreneurs (there are 4 leaf clovers) who have had the chance to raise more money but turned it down.

Another major finding is that 40% would have spent more time.  Now, I have been around entrepreneurs for 40+ years and when a bio break is a scheduled event, I am not sure how you accomplish this (unless someone comes up with a way to get more than 24 hours out of a day.)  I think for now we are all stuck with this model, so I’m not sure what can be learned to this point.

Let’s focus on what we “geeky accountants” call controllable costs.  The number one place entrepreneurs say they would have spent more time (and money) is sales and marketing.  Bingo!  In the plans I review, I often see a significant underestimation as to what it takes to get customers to see, understand and buy a product or service. The world is a crowded place and you need the dollars and a solid strategy to get (at least) your “15 minutes of fame.”

A final major finding: A total of 42% of those surveyed would have sought out better coaches and mentors. There is a lot written on the preponderance of male entrepreneurs and I think it is in our DNA to figure it out for ourselves.  Yes, that old image of not stopping to ask for driving directions when lost (thank you GPS) is alive and well.  My female clients have always been more collaborative and, I think, more effective in getting solutions to problems by involving others.  Just understanding that good help is worth its weight in gold is a great first step.  There are so many knowledgeable resources today it is almost foolish not to take advantage of at least some of them.

So, what lessons can we learn from these findings?  I think the key takeaway is to take the opportunity to learn from those who have gone before us and work on understanding what we can and cannot change and adjust our approach to make sure we are doing our best to take our businesses to the next level.

How Do I Know It Is Time To Get Out?

“Well come on an’ let me know

Should I stay or should I go” . . .  lyrics from The Clash

Many established owners in mature businesses confront this dilemma at least once in their business lives.  In many cases, they are hoping that others will make the decision for them but unlike this classic Clash song, usually there is nobody to tell them; it is a question they have to answer for themselves.

“Getting out” has a different meaning depending on circumstances.  If you are the owner of a successful business and have a functioning management team in place to take over, that is one scenario.  If that is not the case and you are just at the start of this decision cycle, that is a whole different ballgame.  I will leave the former case to another time; let’s talk about someone considering an exit and cover the more common reason for doing so.

In his 2000-Year-Old-Man character, Mel Brooks pointed out countless times how fear motivated individuals.  In fact, he attributed the origin of dance to fear.  What better way to neutralize a potential enemy; grab the hand so they can’t hold a weapon and keep their feet occupied so they do not kick you.  Mel may have been on to something as fear is what has driven many of my clients to “get out.”  Just a few examples:

  • Disruption – a new “kid on the block” who has a more effective and economical product.  I had an industrial products client who was a specialist in transistors until they heard of something known as solid state and sold out before the new technology came to dominate the marketplace.
  • Paradigm change – while I only saw a small portion of the impact, how do you think Borders and Barnes & Noble felt when this upstart called Amazon began to rear its ugly head in their market?
  • Succession plan failure – I have had the chance to nurse more than one client through the painful process of realizing they had no successor – – no family member or management leader who wanted to take over the business or worse yet, family members who the owner was convinced would lead their legacy right into bankruptcy. In many cases, those owners took an “offer they couldn’t refuse.”
  • Not fun anymore – many of my owners truly enjoyed the daily challenges and rewards of “working” their business and making those tough decisions. But when the fun went out of it and it became constantly stressful – – maybe even to the point of impacting their health, they made the call that it was time to do something different.

Let’s face it; this is not an easy decision.  If there is one tried and true piece of advice I would give, it would be to develop some outside interest (golf, grandkids, volunteer work, travel, etc.) that will give you something to “go to.”  The reason for this is simple; if you do not have something to “go to” you will never leave because “going from” something can feel like failure and as we all know, entrepreneurs do not fail.