BERKONOMICS – Business insights from Dave Berkus

Archive for March, 2011

Find your rock in Ensenada.

by on Mar.28, 2011, under Ignition! Starting up

Every entrepreneur has that moment of truth – the one that marks the decision to take the path to entrepreneurship or the path to job security with a larger employer.  And down the road a bit, most of us face another when deciding whether or not to go for growth, requiring new investment and increased risks.

My moment of self-confrontation came many years ago when deciding whether to leave behind the relative comfort of a good income from my one person operation or hire my first employee to allow me to spend my time in sales and in growing the business.  It was perhaps the most difficult decision of my young life.  Just out of college, managing a business that had paid my way through college and several years beyond, the cost of expansion would cut my take-home income enough to impact my life style and perhaps, if not quickly successful, cause me to put off my pending marriage.

Not a small decision.  So I got in my car with a small overnight bag, pointed toward Mexico, and headed to Ensenada, a place I had been to a number of times before, to find solitude for a short weekend just to think about the future.

[Email readers continue here...] Checking into an inn I had visited before located right on the beach, I walked out to the shore and found a large, smooth rock, perfect for a long,  hopefully productive sit.  And I sat.  I sat for five hours that night, thinking about the alternatives and what I really wanted for myself over time.

After that evening of isolated, quiet thought, it was clear to me that I wanted to take the risks, to go for it, to attempt to build a big business, to leave my
comfort zone.

The next morning, I returned to the rock and sat.  Planning ‘how’, now that I was comfortable with the ‘what and when.’  And after a few more hours, I had devised my personal plan.  I would hire one full time employee and one independent contractor for a start.  I’d take no bank loans or ask for any outside investment.  This would be entirely my risk to take unaided.  Satisfied, I left that rock, checked out of the seaside inn, and drove home excited and ready to execute my plan.

The story is true. The outcome was excellent.  I grew that company to over fifty employees, even taking it public after a number of years, and later selling my interest in that first company to get into the computer software business just at the right time to take advantage of its amazingly rapid growth.

But it all started with the decision on that rock.  If you have a life-changing decision to make – including whether to start your entrepreneurial journey – have you identified your rock in Ensenada?  Do you have a quiet place where cell phone, text and other distractions can’t reach you while you dig deeply into a problem or opportunity?

 

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Never use short term borrowing to cover long term debt.

by on Mar.21, 2011, under Hedging against downturns, Protecting the business

This insight is one that is so important to the continued health of a growing company that it cannot be overstated.  First, let’s be sure we know what is short in term and what is long in term.  Long term debt is taken on for the acquisition of fixed assets such as equipment, cars, facilities and acquisitions of companies or their assets.   Short term debt is often composed of accounts payable to the trade or employees for expenses, payroll liabilities, accrued but unpaid vacations, customer deposits, and the portions of any loans due to be repaid within one year.

Asset-based financing is common for companies with accounts receivable and / or inventories.  There are numerous lenders engaged in this practice, including most business banks.  Typically, companies may arrange to borrow between 70% and 80% of those non-government receivables that have not aged past 60 days from invoice, up to a maximum amount, or “credit line”.   Other companies have both the creditworthiness and relative size to be able to borrow from private and banking sources without collateral, with unsecured loans.  Many of these lines of credit require that the borrower “clean up the line” for one month out of every year, that is to be out of debt with the lender for that period to prove to the lender that the need for the cash is not permanent, used like a long term loan.

[Email readers continue here...] Numerous companies have gotten into trouble by using the easy availability of these short term lines of credit, meant for rising and falling working capital needs, to make payments upon long term obligations such as asset loan payments when due.  And worse, some even purchase assets such as equipment with money from short term loans.  Matching the term of a loan with the life of the asset is an important business principle.  Receivables are assets for only 60 days for the purpose of these lines of credit, and the available line can be reduced automatically as receivables reduce with payments by customers or aging beyond 60 days.  We all expect new receivables to be added to replace these, but a cyclic business; a disruption in the general economy; a reduction in the company’s revenues would each contribute to a reduction in the amount available for such borrowing.  To avoid the coffin corner of an over-borrowed asset-based line with no cash for working capital, remember that short term borrowings such as these should never be used to pay any long term obligations or to purchase fixed assets.

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Manage your mantra.

by on Mar.14, 2011, under Growth!, Positioning

I am constantly surprised when speaking with entrepreneurs and CEO’s who act puzzled and a bit flustered when I ask, “So what is your mantra?  Tell me about your company in ten words or less.”  Almost every one begins a long explanation of their business that is nearly impossible to follow, let alone recall a few moments later.

And each lost an opportunity to tell their story in a memorable way that has power and boosts their enterprise value in the minds of the listener.  I recently spent fifteen minutes in front of a table-top display, attempting to coach an entrepreneur who repeatedly tried to state why his business was better than a competitor (one I didn’t recognize) and never explaining what it was that he did.

In explaining what you do, and what you do better than the other company, you have seconds and only seconds to get your image across into the minds of your listener.  The best way to do this with a young company without name recognition is to appropriate the image of another, known company to invoke the quick mental understanding of what you do.

[Email readers continue here...] “We are the Skype of moderated Internet broadcasting”, evokes immediately the mental picture of a company that provides a platform for broadcasting town hall meetings or large group gatherings over the Internet, much as Skype does with one-to-one video connectivity.  Yet, if you took the time to describe the company with the longer description above, you’d lose many of your listeners with too much detail and too many words.  With the short description evoking the image of a known company, the listener immediately grasps enough to engage in a discussion – or at least walk away and be able to repeat to another the main thrust of the business.

That’s a mantra: a short, quickly understood picture of your business in just a few words, often using the name of a well-known company or process to complete the picture-story.

You have only seconds to make a first impression.  Your mantra is the ticket to entrance into a longer conversation.  It is often the most powerful but inexpensive marketing tool a young company has to offer.   And it is often extremely difficult to craft effectively in just a few words.  So what is your mantra?

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Hire ahead of need only when growth is stable.

by on Mar.07, 2011, under Growth!, Hedging against downturns

Many companies have made the mistake of using the forecast to plan and executive hiring of new employees so that they could be trained and up to speed when the demand arrives.  Although such a practice does add to overhead by bringing employees aboard before they become economic contributors to the bottom line, there is much to be said about service quality by having trained employees on the front line when the customers want and need them.

There are periods in any economy or industry segment when growth seems steady and there are few warning flags ahead.  In such instances, it is much less risky for a company to execute its plans for spending in coordination with forecast revenues.  But there are many more times in which the near term future is far less predictable, and when early hiring decisions may be just the wrong move, reducing flexibility and reserve resources.  It is during such more common times, that you should consider using temporary employees to fill demand as needed, even if brought aboard a bit early for pre-training.  And increasingly, there are off shore service providers able to contribute to production and service, expanding and contracting at will, with some sacrifice in control and sometimes in quality.

Further, a company suffers in its reputation with its employees when hiring and firing in short cycles to meet short term needs, unless those brought aboard are hired as temporary or seasonal workers.  Every employee wants a stable work environment and does his or her best work in a culture of mutual trust as to continued service as a reward for good work.  Constant interruptions in the chain of command, changes within the ranks and threats of impending layoffs together combine to form one of the greatest impediments to efficiency and a strong corporate culture.

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