Hire a consultant; ignore the advice.

At one time or another, most all businesses use consultants to fill the gaps in knowledge or to provide guidance for management.  Consultants are good in that you can sample their work with short projects, change to other consultants quickly, and stop using them when a project is completed.

I have a partner in a consulting practice that specializes in the travel industry.  Several years ago, we were hired by one of the largest companies in the industry (yet another Fortune 50) to perform a top-to-bottom audit of their processes across 27 facilities, and recommend measures to increase efficiency, increase income, better the customer experience, and of course, decrease costs while also increasing the quality of service.  We were quite confident that our services would yield great, measurable results.  The work continued for about eight weeks between the two of us as we visited the 27 locations and worked with employees in departments across all disciplines within each location and at central offices that performed services for all locations.

Finally, at the end of the project, we had identified nineteen specific issues, each of which would, if implemented, accomplish one or more of the goals outlined at the start of the project. The sum of the savings and increases in revenue were worth multi-millions annually, well worth the implementation of most or all of the recommendations.

[Email readers, continue here…]  On the final day of our assignment, I was responsible for the “reporting out” to the assembled twenty or so executives in the large conference room of this major corporation.  I started my presentation, which had been carefully documented in handouts and PowerPoint, with this story…

“I want you to all imagine that it is tomorrow morning, looking back upon today’s reporting of these past months of work by your consultants.  Imagine that today I build for you a beautiful sand castle exactly at the water line of the ocean nearby.  Tomorrow, we both will visit that beach and look at the water line, and find not a beautiful castle, but just smooth sand, just as it had been the day before building our beautiful sand castle.  In other words, I would not be surprised if you accept our report today with enthusiasm, but then in the overwhelming rush of daily business, fail to implement few if any of these recommendations that you so enthusiastically received.”

The story is true, and the results were as I predicted.  A few of the recommendations were implemented over time, one with great effect and even a national advertising campaign behind it (that you surely saw on TV).  But most were just ignored.  I imagine that our report sits today on someone’s shelf, filed with others from past and from following months and years.

Unfortunately, it is human nature to enthusiastically ignore to act upon recommendations of third party consultants. There are many, many exceptions, but far more instances of this in the business world.  Not all consultants give advice worth taking, of course. But when they do so, it is only as good as that which you implement.

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Bankers: love ’em or hate ’em. They may affect your future.

Let’s get right down to it.  Your banking relationship can be like a great marriage or a bad trip to the DMV.  In most cases it is strictly your choice.  But the results of that choice will reverberate for what could be years.  For a start…

How did you open your first bank account?  Did you just walk into a branch, fill out the forms, take your first ten checks from your newly-opened account and leave?  Do you even remember the name of the bank employee who helped you with that transaction?  Well, that would have been your first mistake.  As I’ve found in numerous companies over the years, the initial visit sets the stage for an entire relationship to follow.

But why bother with a relationship if all you want is a checking account?  Well, it’s time to tell a few true stories to illustrate why you should cultivate a relationship with a banker.  And it is never too late, even if you opened that account years ago.

Here’s an example – an unintentional overdraft in your checking account.  Most of us have suffered this at least once if not more often.  Whether caused by sloppy accounting or bad cash control or by a third party taking money from your account for a recurring charge – or even by a PayPal purchase not recorded in the books, people or companies with marginal checking balances will someday be hit with an overdraft.  Today, many banks charge $35 or so for each check paid with insufficient funds.  One of my companies was recently hit with ten such charges in a single day before they realized the error, resulting in $350 in overdraft charges in a single day.  So? Here are two alternative responses.

[Email readers, continue here…]  Relationship banking: If the CEO or CFO had no relationship with the banker in charge of the account, there is little chance of receiving a waiver and reversal of the charges, even if your history with the bank is flawless.  On the other hand, a good relationship and established history could and would usually result in a call to the banker, a short and rational explanation, followed by your banker’s immediate promise to reverse the charges.  Yes, if this habit becomes routine, all bets are off, sometimes including whether the bank will keep your account open for you in the future.

And there are more important issues.  Most business banks will grant a $50,000 line of credit through a bank-issued credit card, often requiring a personal guarantee.  That is an expensive alternative, with costs for amounts carried over even for a few days beyond the due date running between 8% and 24% when annualized.   With a good banking relationship, your banker can help with a line of credit at reasonable rates, fitted to your needs, and established in a way that will not drain cash each month affecting business health and growth.  Yes, most banks will require a personal guarantee for such lines of credit, and even for equipment, receivables or other secured loans.

There is usually one exception:  Some banks, especially those known as “venture banks,” will recognize the issue of a company with multiple investors, especially with a venture capital company as one of those.  By substituting a small number of warrants to purchase stock in the company at a reasonable price for what would have been a personal guarantee, those banks will eliminate the need for the founder or CEO to sign such a guarantee, trusting instead the relationship with the VC company as of overriding importance.

There are many types of bank loans, including those guaranteed by the Small Business Administration (SBA) in which the bank and SBA share the risk for the loan.  It is worth spending time with your relationship banker to discuss cash management, banking needs, and various opportunities.

But what happens when something goes wrong?  Sometimes you get into a cash bind and cannot make a payment or even need to restructure a loan.  This is the time when your personal relationship with your banker makes or breaks a company.  Sound a bit dramatic?

Ever hear of the “workout” division of your bank?  I hope not. That is the group your banker turns to when your account has shown signs of being too high a risk for the normal banking relationship.  Your banker is removed from the process once that divide is bridged, and you are introduced to a “workout specialist” who dictates your banking future, typically by establishing new rules requiring accelerated repayment, perhaps sale of assets, direct bank collection of receivables to pay down loans, and other mild to draconian efforts to protect the bank and reduce its exposure.

You do not want to be sent to workout.

On the other hand, if you have been communicating your progress both positive and negative to your banker on a regular basis, that person can mitigate the more draconian moves if she or he understands the reasons for a temporary setback, having history and confidence in your abilities to work through the problem.

So, it is all about the relationship you establish when first walking in the door of your bank.  And it is not too late if you failed to do this back then.  You may not know who to call, and a cold call or visit to the local branch is a good start to establish that relationship and begin or reinforce the positive aspects of the banking experience.

It is just one more of the things a good manager does to ensure the ultimate success of an enterprise.

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Posted in Depending upon others, Surrounding yourself with talent | 6 Comments

Take only “smart money” investments

This statement could be considered controversial.  We have previously made the case that professional investors demand more in the form of restrictive covenants and lower valuations.  Now we explore the other side of that coin.  Professional investors usually bring “smart money” to the table, defined as money that comes along with good advice and great relationships for corporate growth.  Often, that money is worth more than the cash invested, because the investors who often become members of the board, bring a wealth of experience, insight, relationships and deeper pockets to the table.

I have served on the boards of several companies with just such VC talent at the table,  partners in firms that made subsequent investments in companies where I either made early investments or led a group of fellow investors in early rounds of finance.  Each of these companies needed more cash than professional angel investors were willing or able to provide, and we turned to the venture community for larger investments.

[Email readers, continue here…] Attracting a VC investment means finding a partner in a VC firm who is willing to champion your opportunity before his partnership and then represent his firm with a seat on the board once the investment is made.  In a number of cases, these VC partners have made the difference between success and failure or at least growth vs. stagnation.  These VC partners have relationships with later stage investors further up the food chain, with service providers, with potential “C” level senior managers, and with other CEO’s with great timely advice or partnering opportunities.

In one such recent case, the angels were tapped out at $6 million invested, an amount far above their usual taste, but for a company we thought had a billion dollar potential.  The VC’s subsequently invested $18 million, well beyond what angel investors usually are able to project from their own resources.  Without the VC guidance there would have been little opportunity to even dream of a billion-dollar valuation goal.  There is no question that the company took smart money and leveraged it for maximum growth, using the money, guidance, contacts and more from these large VC investors.

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How to cheat legally on your tax return.

When do you cross the line between honesty and dishonesty in tax planning?  Is it ethical to allocate income between periods to take advantage of tax breaks?  Can expenses be put off until the next period to increase income, or accelerated into this period by prepayment to decrease net income?  Where do you draw the line, assuming no intent to defraud?

First, corporations are usually on an accrual accounting basis, meaning that income and expenses are accounted for as earned, not when the cash is received.  (You, on the other hand, account for your individual income on a cash-accounting bases, counting the cash not the date of your earning or accrued expense.  The difference:  If you earn pay due December 31st and it is paid January second, you pay income tax on those earnings in the following year.  But the corporation that pays you accrues the expense and takes the deduction in the year in which the income was earned or expense actually incurred.)

[Email readers, continue here…]  It is perfectly legal to hold delivery of goods until after the start of the next period and take the income next year rather than this.  It is a bit murky if you accelerate payment for incomplete services or even for products not yet received into this year to take the deduction from income early.  In either an IRS audit or an accounting review or audit, the accelerated costs and payments will show as an accrual – a balance sheet item – that does not change income, just cash and an asset.

In other words, for the usual accrual-based business, there are fewer ways to affect the outcome than for a cash-accounting individual.  There are lots of caveats here and certainly if the issue is critical to you, an accountant (rarely a bookkeeper) should guide you to the action that is both legal and strategic.

Please feel free to comment on this post in the field below. -Dave

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Posted in Protecting the business | 2 Comments

Accounting: What kind of bean counter do you need?

Accountants are trained, certified and usually quite experienced in financial analysis, both creating and reviewing data.  Bookkeepers are often trained on the job although sometimes more formally and handle the physical work of accounting for the transactions.  To expect a bookkeeper to provide analytical planning is to ask for something they often cannot provide, except in a cursory way.

We need to repeat this distinction on occasion, because there is a considerable difference between the cost of a bookkeeper and an accountant.

Why bother with this? Many early stage founders and CEO’s believe they can delegate design and creation of metrics, flash reports, analytical reports and more from their bookkeepers.  And at some early stages, a bookkeeper can prepare such information.  It does not take long for a growing business and a knowledgeable CEO to quickly outgrow the lack of depth and sophistication such reporting usually offers, looking instead for deeper analytical tools.

On the other hand, many early stage CEO’s are not trained and ready for such tools even if available.  The lesson here is twofold.  There is a benefit to using a good accountant to help devise critical reports for a corporation; and CEO’s must quickly become financially savvy in the analysis of financial statements and metrics that measure the health of a business.  To fail to have this skill is to reduce the corporation’s capability to discover problems early and take advantage of growth opportunities.

Please feel free to comment on this post in the field below. -Dave

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Can your lawyer destroy a good business deal?

Over the years in business and as a member of over forty boards, I have received good advice from corporate attorneys and on occasion bad advice as well.  There is a line that should be drawn in a relationship between corporate attorney and CEO or board.  Attorneys are paid to protect the corporation, not to give business advice.  Some are experienced enough to provide great business advice.

But the law degree they earned does not assure that, even though most CEO’s respect the advice they receive from their attorney highly enough not to doubt the conclusions or the experience behind the conclusions offered.  And since attorneys are paid to protect, often they will give a litany of warnings about what could go wrong when accepting a contract clause that they have been trained to challenge.

There comes a time when a CEO must decide to reject what may seem like important good advice from the attorney and chance acceptance of terms within a contract that may cause risk, but controllable risk or risk that is so remote as to be worth the acceptance of the business represented by the contract at hand.

[Email readers, continue here…]  I was chairman of a company that had been offered an investment by a Fortune 500 company offering to make a strategic investment in our business, which would be capable of driving new demand to the large company through a series of new web services creating a greater need for the large company’s products.

The business terms had been agreed between the business development officer of the investing company and our board, as both companies turned the details over to their respective attorneys for documentation.  The attorney for the investor was a member of a large, respected law firm in Silicon Valley, and certainly was full of himself as sole legal protector of the rights of his very significant investor.  As drafts of the otherwise standard investment agreements passed from him to our attorney and our management, we immediately spotted a significant number of terms we not only had not agreed to but were contrary to the spirit of the investment.  The attorney held fast defending every challenge, stating that “these terms are standard for our client and cannot be changed.”  We appealed to the business development executive, who deferred to the attorney restating that the terms were unchangeable as far as the big company was concerned.  After conferring between our attorney and board, we walked away from what would have been a fine strategic partnership, killed by an attorney who probably understood the client requirements but was unwilling to offer flexible solutions to problem areas.

That attorney had made what we considered business decisions on behalf of his client.  By the way, we immediately found a willing replacement that had an attorney not quite so full of himself and quickly concluded a similar deal to the acceptance of all.  And to this day, I caution my CEO’s not to deal with that Fortune 500 firm because of the experience we had with its attorney.  You never know how much far reaching an action can be, given the speed and extent of communication between CEO’s today.

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What’s a company board good for, anyway?

Some of you have gotten along forever without a board of directors, or used your spouse as the “other” board member from the start.  But there are some very good reasons to build a great board composed of some outside members.  And good board members can add real value to you and the company.

In other posts, we cover legal responsibilities of a board, how to pay board members, the limits of their responsibilities, dealing with under-performing or “noisy” board members, and more.  Today, we cover an ideal board’s collective mindset.

If you are responsible for forming a board, managing it, or evaluating its collective performance, consider these three important modes of engagement as you guide…

Generative thinking:  Do you have board members who often ask “why?” or “What if…” Or “What are the alternatives?” Or the important one: “Is this idea on mission?”  These are generative thinking questions.  Hmm. Generative. Now there’s a word perhaps you have never heard, and should be added to your corporate toolset and vocabulary.

[Email readers, continue here…] Generative thinkers are relentless in asking questions that get to the core of an idea, often making the originator think more deeply about the effects over a longer period of time.  Some ideas sound unbelievably creative – and may be that.  But sometimes there is a barrier, an impossibly high cost not considered, a social backlash never thought of, or competition already covering the idea that is unknown to the originator.  Which leads us to the second class of creative board thinking…

Strategic thinking:  Board members who ask: “What is the competitive landscape?” or “How about the public relations impact?” or “Does this idea move us toward our goals?” or “Is this just too little value for too much money?” – are adding to the dialogue in valuable ways and should be encouraged, not just tolerated.

Most of us in management have too little time for strategic thinking.  “Ah ha” moments are too few when there are lists of urgent things to do that never seem to be completed.  Good board meetings allow time, and the chairman encourages members to ask strategic questions to help focus the board on its best use of that time.

Fiduciary thinking:  Most board members, especially those composed of members from larger businesses, are good at the fiduciary questions.  “Is this legal?” “Is it feasible (financially, with our resources, with our capabilities?)” “Can we afford to do this?” “Is this idea sustainable?”  These are typical fiduciary questions.  Importantly, these also help a board to cover the legal “duty of care” for the health of the company. But that, too, is the subject for another time.

The punch line:

Investing in the creation of a governance board is not enough.  We must encourage a constant use of generative, strategic and fiduciary thinking from  board members, encouraging this most appropriate mindset.  And we must present our ideas in board meetings or documents in such a clear manner that such questions will be asked, and discussion allowed.

Most importantly, we must leave enough time in a board meeting for these discussions. Which means reducing the time spent in routine reporting, delivering materials well in advance when possible, and encouraging participation from all board members.  This is not easy. But the potential for great results leads to the board giving “macro governance” and not delving into the micro details that management deals with on a daily basis.  A better company is the goal.  And what CEO or board wouldn’t want that?

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Posted in Growth!, Surrounding yourself with talent | 1 Comment

What if you come across juicy competitor information?

Many of us belong to industry associations and find ourselves at conferences and trade shows with time to spend with competitors.  Some of these are old friends; some even former associates.  It is natural to want to associate with these people for many reasons, certainly socially. Most CEOs want to obtain information about their competitors in the most subtle and non-obvious ways.  And of course, most are willing to trade information to get information.

In my former industry, I became an informal centralized source for knowledge about the revenues of each of the many competitors, with a special skill for asking just the right questions to obtain the information.  How many employees does the firm have today? Are you profitable yet?  Can you guess what percentage your revenue comes from recurring sources such as maintenance revenues?

In return for the answers to these several questions, I was usually able to guess a company’s gross revenues within a few percent and would state my guess to the CEO.  His reaction would guide me to increase or decrease my estimate appropriately.  He’d be a bit amazed with the quick fancy math work, and I would have yet another piece of the puzzle helping me to gauge the total size of the industry in annual revenues and the growth and size of competitors.

[Email readers, continue here…] All of this was immensely helpful in strategic planning and marketing, even though to this day I do not think those CEOs were aware of the value of the information so easily given.  And none of this is especially considered a trade secret, violating the unspoken covenant between competitor CEOs that there is a limit to such exchanges.

On the other hand, often a sales person or marketing manager would show up at my office door with a complete package of a competitor’s materials, including price lists, a proposal with discount percentages clearly shown and a list of feature functionality meant to reinforce the proposal.  The source of this information was typically the purchasing decision-maker for a friendly customer or candidate customer.  The question is one of ethics, since the competitor certainly did not volunteer any of the information, which would have been the competitor employee’s violation of confidentiality and cause for being fired.

What does a CEO do with this wonderful, rich information dropped at his door at no cost or obligation? Few would destroy it and ask all to forget that it was ever in their hands. Most would absorb the information and then admonish those who had seen it to not repeat to anyone that it was in their hands.  If you’ve been in business for long enough, you’ve seen your share of this gray market information.  My advice is to be very careful, think of the golden rule, never use this information publicly, and certainly never reproduce it, let alone disseminate it internally.

As to sharing information to get information, CEOs and executives are bound by a duty to their corporations not to share trade secrets with anyone who has not signed a confidentiality agreement, including consultants to the company.  For CEOs on the corporate board, it is a large part of the “duty of care”, a legal requirement of board members to protect the assets of the corporation first and foremost, one of those assets being the trade secrets of the corporation.

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Posted in Positioning, Protecting the business | 3 Comments

How well do you use your business time?

Forming business relationships at the highest level

As you follow these insights from ignition to liquidity event, you’ll detect a continuing theme, emphasizing the need for deep and wide relationships that the CEO and senior staff can call upon for advice and guidance.  This is the time to elevate those insights to the level of highest value for the corporation, one that cannot be listed on a balance sheet nor included in an appraisal of corporate worth.

And yet, such relationships properly used and never overused, can quickly and precisely help a CEO cut through delays in government agencies, speed the process of product planning and ultimate release, aid in positioning in the market and help the CEO avoid a myriad of mistakes that could prove costly in time and money.

Analyzing your commitments of time to business

Often, I am asked by young CEOs how much time should be devoted to various types of tasks by a good CEO in a small, growing enterprise.  Of course, the response depends upon lots of variables, including whether the company is in a fund-raising mode (in which case the CEO may be spending up to 80% of his or her time on this alone).

I am chairman of the Technology Division of the ABL Organization, a roundtable organization with multiple CEO roundtables of about twelve members each, meeting monthly.  Each CEO is asked to make a deep presentation once a year in which he or she starts with personal and business goals for the coming year followed by concerns as to how to reach these goals. Much of the rest of the presentation is devoted to explaining to the group the causes for the concerns and offering information for the group to use in the feedback session to help the CEO seek solutions and to provide resources to the CEO for that purpose.

[Email readers, continue here…]  The format also calls for the CEO to examine his calendar over time and report classes of activities by percentage of total time spent, so that the group may add comments about use of CEO time to the critique.  It is from over a thousand of these CEO presentations over the years that I attempt to make these generalities.

 How much time do you devote to each type of activity?

A good CEO spends at least 30% of his or her time dealing with customers, including meeting directly with customers and being involved in closing the largest deals, maintaining CEO relationships, and “sniffing” the attitudes of customers toward the company as well as exploring the needs of the customer that might be satisfied by new product development.  15% typically is spent on direct management issues such as supervision of next level subordinates.  15% might be spent networking with those in the CEO’s relationship circle, including the roundtable organizations.  10% is typically spent networking with board members, usually with frequent phone calls, and preparing for board meetings.  10% is typical in exploring strategic concepts, reading about new developments in the industry and just spending quiet time contemplating opportunities.

There are many other classes a typical CEO will list for that remaining 20%, some concentrating upon time spent in meetings of all kinds, lumped together as if all meetings are of some equal value. The group often pays close attention when this happens, since it is a sign that the CEO considers meetings of all kinds a drain upon available time, and few meetings of special importance.

How many hours do you spend on business each week?

Whatever, the spread of percentages to make 100% of a CEO’s time, the CEO is asked to estimate the average number of hours spent each week at or on work.  Most respond with between 60 and 80 hours a week, emphasizing what you already know, that CEO’s are not often 40-hour workers.  But then again, in this new world of always-on communications, who is?

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Several more real costs of taking outsider investments.

Let’s talk about the reality of taking money from professional investors.  It is not the first time we’ve covered this general subject nor the last. But this time, we concentrate upon governance changes.

Once a company founder has tapped the funds available from his or her resources and from friends and family, if the company needs more cash for growth, the most obvious next step is to look for money from angel investors and venture capitalists, typically in the $300,000 TO $3,000,000 range.

This money comes with restrictions a founder may not expect, including restrictions upon the sale of founder stock, clauses that require the investor be allowed to sell an equal proportion of stock upon any other person’s sale of stock, anti-dilution provisions that protect the investor from a subsequent offer of stock at a lower price, and much more.

Almost always, professional investors, including angel groups and venture capitalists, also require at least one seat on the corporate board.  The investor organization is granted the seat as long as the investment remains, and the documents often name the first representative assigned by the investor group to the position.

[Email readers, continue here…] In later insights, we will explore the legal and ethical responsibilities of board members.  But the intent of these “forced” placements of a representative on the board is obviously to watch over the company’s use of invested funds and to help grow the company in value.  The combination of restrictive covenants in the investor documents and the new dynamic of board members with an agenda make for a change in the culture of the corporation, certainly one for the CEO.

However, outside professional investor board members can be a very good asset to the corporation with the skills, experience and broad relationships many bring to the boardroom table.

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Posted in Depending upon others, Raising money, Surrounding yourself with talent | 5 Comments