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Dave Berkus

I had that thrill when a student at the Richard Petty Stockcar School of Driving at a motor speedway in California.  With a wide track, angled aggressively at the curves, and being told to hug the wall on the straightaways, there was little reference available to a novice driver as to speed.

How it feel to have no information:

I followed my instructor’s car closely, but still could not tell anything about my speed, so that I could neither compensate for lags behind the leader nor test my comfort zone at various points that matched the expectation of my instructor and my own increasing capabilities as a driver.  Upon conclusion of eight laps of this, after pulling into the alley and climbing through the window on the driver side (there are no doors in these cars), I was handed a sheet with my timings for each of the eight laps.  Only then, after when the information might have been useful, could I see how well I did.

Do you manage without a dashboard?

That’s how you would feel if you ran your company without a dashboard containing relevant metrics that drive your company.  If you cannot relate to this, then you probably have been driving without a speedometer from the start and need to pay particular attention here.

…and great, relevant metrics?

[Email readers, continue here…]   Metrics should be created by you and your managers to measure near real time progress of your enterprise.  Those deemed critical to you and your managers should be combined into a single page on your desktop screen or in printed form and available or circulated as often as daily.  These measures of progress must be fresh and meaningful.  Yesterday’s sales and returns compared to same day last week and last year for retail businesses; Units produced and units shipped compared to plan and same period last month for manufacturers;  Yesterday’s overtime hours by department;  Ratio of hours worked to units produced;  Backorders unshipped;  Customer service calls in cue or unresolved.

Your turn to think of your most critical measures

You can think of numerous critical measures for your business that must not be ignored, but often are neglected by senior management. It is not bad to manage by walking around, a term that came from another of the many business advice books of the ‘90’s.  But that method, although good for employee morale, is imprecise as a tool of measurement and should be relegated to a supporting role for you.  Financial information from last month compared to plan and same month last year is certainly relevant, but not part of a dashboard, since there is nothing you can do to fix a problem when numbers are as old as a week, let alone the typical several weeks required to prepare financial statements for review.

Act immediately upon variances!

Finally, what good is the information contained in a great dashboard if you ignore it?  Show that you value the information by acting immediately upon variances, even if only to question the numbers.  Everyone down the line will become aware of your attention to their work, your interest in the outcomes and care for their success.  And you will drive revenue and better control costs and the customer experience with quick reaction to the variances within critical metrics that best describe your immediate situation.

Continuing the process of planning…

So now we’re getting organized.  There are many ways to express the roadmap for your enterprise.  One of the most popular was used by the U.S. Army late in World War II and adopted by many high-profile businesses such as Texas Instruments after the War.  And I’s my favorite method of organizing a strategic plan.

There are two important elements.

The structure combines the listing of your goal with a series of strategies and then tactics, each designed to support each other, each measurable and made public throughout the organization.

Let’s call it “OST.”

The technique, “OST” (objective, strategies, and tactics), is a very good way to organize your effort to find guideposts and then develop metrics to measure progress.

What is a strategy? 

It is a medium range process involving senior management and departmental management as well, directing resources in ways that, as accomplished, lead the company toward the goal.  A typical small to medium business finds five sweeping strategies for the current year, many cross-departmental, and some carried over from the previous year’s plan and even from years before that.

[Email readers, continue here…]   Here are some example strategies from some of my companies over the recent years.

• Expand into at least three new continents through new distribution channels.
• Penetrate the Fortune 500 with at least five active accounts within two years.
• Create a hosted “software as a service” or “on demand” addition to our product line by end of (next) year.

Aren’t these just goals?

Note that these are expansive “junior” goals that, if achieved, would certainly move the company forward toward a larger financial goal.  Yet each is measurable if achieved.  In fact, the degree of progress toward achievement can also be achieved, such as “We did establish early profitable relationships with two of the five Fortune 50 accounts this year.”

Measurement is the key to success. 

Even at the strategic level.  Next week, we’ll look at the last major step in creating an OST plan for an entire organization.

Note the title and tone of these insights.  Short, to the point.

Mark Twain said, “I didn’t have time to write a short letter so I wrote a long one instead.” He cogently encapsulated the problem.

It is more difficult to reduce your thoughts to a few core sentences, but that is what you should do for maximum effect.

Taking this advice literally:

Gun shots, drunk drivers, mayhem, and even curfews qualify as just some of the things that could bite in the early morning.  And heck, soon I found myself the father of a teen-age female driver, and truly understood my Dad’s admonition.

But how does this have anything to do with our business lives?

Think of our midnights: time and money.

Take deadlines for example.  We often miss them, sometimes by a long shot. Every day a deadline for development, rollout, marketing campaign or even corporate reorganization is missed, we burn fixed overhead – money.  And we know that there is only so much available to burn at that.

Time management:

[Email readers, continue here…]    Companies have gone out of business from a lack of time management, especially when additional capital is not available when most needed.  Time management is a critical element in an early-stage business for this reason.  The sense of urgency senior management must create is a real and necessary skill.  Like most management skills – not easy nor pleasant.  But necessary.

Money – the asset we take for granted until low or gone.

We admonish our CEO’s to keep six to twelve months of liquidity available.  We know from experience that raising money may be nearly impossible when economic times are tough, and when we have under-performed on our business plan.  We tell our CEO’s to raise cash when not needed – because that is the time when it is easiest to raise.  Or when the news is particularly good.  Or the terms offered are especially favorable.  Or even just when available at any reasonable cost in equity or interest.

Good managers are good students – easily coached by those on their boards or advisors who have been through eh rough times in their business lives.

So, it is true for us in business too.   Nothing good happens after midnight – that event when money or time catches up to our business plan and begins to bite.  Gun shots, drunk drivers, cash crises, deadlines missed.

Do you have that sense of urgency?

Where to learn more…

In other posts (and in our book, “Building Great Boards” – available on Amazon and other booksellers) 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?

Yes, we will spend a moment reviewing the SVB-Signature Bank crisis that recently left many of us losing sleep. But we will do this in the context of our decision-making and protection of our businesses.

For a start…

Did you even think of spreading your banking risk when receiving your first investment? Only 18% of SVB’s deposits were insured.  Yes, I know much of this excess was from companies with lots more in the bank that we will even have.  So, ask yourself if any of the executives or investors for those companies even considered spreading the cash among several banks just for safety?

We want to impress our bankers.

That’s natural. We may need our bankers when times are tough. Larger deposits now do impress bankers.  But looking back on the SVB crisis, we dodged a bullet.  Would we do it again?

Don’t le banker control our businesses.  Think: protection first. Impressions second.

Now to the reasons to want to impress your banker:

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.

[Email readers, continue here…]   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.

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.

Then again, this is how SVB got into trouble.  They cultivated relationships with companies where VCs do their business and suggest this for their portfolio companies. So, remember “protect the business.”

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.  Sounds a bit dramatic.

But think this: It is better to owe the bank than have them owe us!

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. 

The risk is that the workout division will become much more aggressive when the bank is in trouble.  Sound like a possibility here?

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.

This, along with thinking of protecting the business, It is just one more of the things a good manager does to ensure the ultimate success of an enterprise.

It is no secret that the IRS carefully looks below the surface for personal use of company assets (including cash) in its corporate income tax audits.  This insight addresses more the impact of such behavior upon the actions of employees and others who observe that behavior from a senior manager or owner of a business – and know that they cannot say anything about it without jeopardizing their jobs.

Is this just an earned perk?

Use of a corporation as a personal piggy bank seems to be an earned perk in the mind of some entrepreneurs and some CEOs, reasoning that the only harm in doing so is in taxes never paid to the IRS.  The truth is that there is a much deeper degree of damage done to the moral and ethical fiber of the company itself, and certainly to the credibility of the executive or entrepreneur with employees.

Addressing company culture with negative actions

[Email readers, continue here…]     The culture of a company is created from the sum of many parts, most all coming from the top.  One of the most toxic shocks to good culture comes when a promise of ethical decency and mutually fair behavior is breached by a senior manager, observed by others.   Think of the effect of locking the supply cabinet only to take from it whatever the person controlling the security of the cabinet wishes for personal use.  Or of the reaction of your accounting person when asked to book obvious personal uses of the corporate credit card as company expense.  Or flaunting the privilege of that corporate card by charging expensive meals with high priced wines when not entertaining outside guests.

The most damaging effect of all…

And there is another degree of damage to measure in more extreme cases – the robbing of the entity’s ability to finance its own growth, sometimes causing reliance upon bank loans or other sources of capital.

Those in charge, even if one hundred percent owners of the business, have a special obligation to be open, lawful, and ethical in the use of those assets upon which others depend for their continued jobs and living wage.

Here’s a striking example.

The most striking example was the one hundred million–dollar purchase of one of my companies by a New York private equity investor using only five million of its cash.  The rest of the purchase price was concocted from a brew of zero-coupon bonds (where the face value is many times the invested amount until the reduced cost bonds mature thirty years later), and borrowing using the target company’s accounts receivable and other assets as collateral for a loan to purchase the company.

Offering too little in an acquisition to satisfy the seller? 

Satisfy the seller’s need to claim a higher sales price victory by moving a substantial part of the price into a future earn–out or using the target company’s own cash to pay part of the price, or asking the seller to finance a significant piece of the sale.  With the latter, you can make the price seem higher just by calculating the full amount of interest to be earned by the seller over time, adding that to the stated purchase price, and announcing a price much higher than the present value of the purchase.

Be aware of the seller’s ego and play to it…

[Email readers, continue here…]    There are so many ways to satisfy a seller, sometimes a seller’s ego, by making a price seem higher than the reality of the purchase.  In the investment world, if we are unable to come to terms over the valuation of a company, we sometimes add penny warrants to sweeten the deal, allowing the investors to own a larger stake in the company at any time merely by exercising the warrants.  If there are enough of these, the CEO or founder can announce a valuation as high as double the actual negotiated enterprise value of the company.

Using this technique with a supplier

And how about a product purchase where you cannot come to a successfully negotiated price with your supplier?  Ask for extended terms well beyond sixty or ninety days.  Not only do you save the value of imputed interest, but you most likely will use, resell, collect from your customer, and even earn on the excess sales revenues deposited in your bank before you ever have to pay the supplier.   Almost always, such an arrangement is more favorable than factoring or private asset lending, does not take away from your ability to borrow from other sources, and allows you to make customer promises and profits you could not have made otherwise.

The lesson: There are many ways to bridge a gap.

Don’t rule a too–high negotiated price out until you think carefully about the terms of purchase as a tool for leverage.  Sometimes, the person on the other side must keep to a minimum price you cannot understand or afford.  Just think of the second tool, terms, you can use creatively to bridge that gap, whether driven by seller’s ego or competitive necessity.

It’s an easy rule to remember.  You name the price; I’ll name the terms.  What power!

Think like a startup, with little resources, a limited window of time, and few dollars to spend on expensive experts.

Divide the hiring decision into two boxes.

This insight comes from a fellow CEO who explains that he leverages his financial resources for growth by dividing his hiring decision into these two boxes.  He interviews for adaptability, creativity, intelligence, drive, and a cultural fit.  He believes that he or his managers can teach processes, taking advantage of the new hire’s fresh look and open mind.  He believes that the core of his company is the creative process, and therefore that must be his focus.

Then he turns to contracted outsourcing for his routine processes, those that require no creativity and are repetitive in nature.

Here’s an example that should resonate.

[Email readers, continue here…]   Our CEO cites the example of computer programmers.  He hires for creative ability, people who can be the architects as opposed to the simple coders of routines.  If properly supervised and quality controlled, he finds that it is easier and cheaper to parcel out projects to programmers or programming groups to perform the actual coding of projects pre–defined by his insiders.  He divides the tasks so that no subcontractor has all the core knowledge in house as a protection against theft of intellectual property.

The punchline. Creativity.

And he concentrates on the management of creativity, the core of his business.

There are obvious advantages to this. 

Costs are variable and can be curtailed easily in tough times.  Management time is focused upon the creative aspects of the business.  On the other hand, depending upon the length of a project, an inside employee may be cheaper in the long run, and quality control easier to manage.

Business management is a series of tradeoffs. Here is one to consider carefully as you leverage resources including cash to grow the business.