Especially now: Play nice!

To survive this nasty Covid 19 surge facing businesses of all types, leaders must make decisions that hurt but are necessary.  Keep the employees for the SBA PPP requirements regarding loan forgiveness, or furlough or let good employees go, so they can file unemployment claims?  And what about termination decisions you make affecting just the few you wanted to eliminate anyway?

I am reminded of the term, “Play Nice!” when thinking about and planning for this possible reduction in staff for survival.

What did Mom say when we were kids?

When you were a kid, surely at one time or another, Mom reminded you to “play nice” when you got a bit rambunctious with your friends.   I was reminded about this by Mark Wayman, a friend and reader, who applied this statement to his recruiting environment. He called out those people who focus upon executives who burned bridges with threats and lawsuits, instead of just picking up their toys and moving on after a bad business breakup.

My reminder to departing employees

Over the years, I have reminded departing employees in their exit interview that we should always, always both take the high ground and speak well of each other, since we never know when we will meet again under entirely different circumstances.  And indeed, former employees (not necessarily disaffected or threatening in their departure) have shown up regularly as suppliers and customers in various companies in subsequent months and years.

There is no immediate gain in threats to an employee or by an employee. 

[Email readers, continue here…]   But there certainly is an immediate loss of respect and the start of a series of events that sometimes cannot be stopped.  A threat of a lawsuit results in that person being immediately isolated and sometimes removed – if the employer believes there is enough evidence of misconduct or poor performance in the file to justify immediate termination.

Placing blame after the fact

Short of threats, bad-mouthing a former employer or employee is the worst possible behavior when considering the effect upon the corporate culture if the offender is the employer, and upon the person making the claim if by a former employee.  The point is that no one wins in this kind of word war.  And if it ever gets to a lawsuit, both parties lose a second time as the lawyers take control and costs escalate out of control.

Remember Mom’s advice

Mom’s advice is almost always right – for business as well as for personal relationships.  Never strike out at anyone before first cooling off and thinking about the relative worth of the effort against the long-term gain or loss.  The resulting effort will be surely muted and couched in a way that you’ll avoid retribution.

Facebooktwitterlinkedinyoutubemail
Posted in Protecting the business, Surrounding yourself with talent | 3 Comments

Three questions to answer about your COVID response

Most of us are affected by this current crisis. Many businesses threatened with closure forever.  Small businesses are the most vulnerable, even though most have furloughed employees. Rent and other fixed costs continue, even when revenues have dried up – a fatal combination.

So, here are three urgent questions for you

FINANCIAL:  Do you have twelve to eighteen months of cash to cover your “burn rate” now and as you recover?  Raising money during this crisis will be almost impossible, even from friends and family shocked by the stock market declines.

Everything will recover. Stocks will climb again. COVID will become a word used in the past tense.  But that good news will not help you if you run out of money during the time it takes for these to happen.

The financial effect of acting early

Plan for reductions in fixed overhead, salaries, and other costs now. Every day you wait is at least a day lost in the future when you could be growing again.  Apply to the SBA for an Emergency Loan or through your bank for the new “PPP” loan program.   Both are easier to get than conventional loans, and the PPP can be forgiven in some circumstances.  There is lots of literature published by the SBA, attorneys and accounting firms about both.

What are you doing today to modify behavior during this crisis?

[Email readers, continue here…  ]  DURING THIS CRISIS:  Having no plan is like having a bad plan.  Have you squeezed every dime of cost that is non-core related from your business?  Do you still need marketing costs when there is no-one out there buying new product?  Are your salespeople making few if any sales because your prospective customers are distracted by their own problems?

Act boldly to address painful layoffs, reductions in salaries, cuts in trade shows already contracted (even if cancelled or reset to the fall months.)  Rethink the value of these to your bottom line even after you’re open for business again.

What is the plan for after it’s all over?

AFTER THE CRISIS:   Here’s one most small and medium business managers forget in the midst of the panic to survive.  How about a marketing and sales blitz at just the right time to overwhelm your surviving competitors, look larger than life to your largest competition, and restart sales faster and perhaps at a greater clip than ever?  Your competitors will most likely be conservative at just that moment and be timid in their approach to spending lots for marketing and sales.

Consider that some of your cuts made during the crisis should be make permanent.  

Take advantage of shedding the overhead. Test whether those expenses are contributing to profits after the recovery.  It is easier to keep them off the books than increase overhead again, especially after earlier payroll lay-offs.

Be smart!  Plan now for financial and operational changes during and after this crisis.  You’ll be “miles” ahead of your competitors if you do.

Facebooktwitterlinkedinyoutubemail
Posted in General, Protecting the business | 5 Comments

Cash control during these strange times

And these are indeed strange times, especially if you haven’t lived through 2000-2002 and 2007-2008 recessions and difficulty in finding money from banks and investors.

The simple economic truth

Here is a simple economic truth.  Fixed overhead continues to eat into your cash month after month.  It doesn’t differentiate facile, efficient businesses from slow, disorganized, quality-challenged ones.

A shocking example of operations affecting cash control

If it takes eighteen months to get a new product out the door and into the market, and if a product’s gross margin is ten dollars but the corporate overhead is a million a month, it will take the sale of 67,000 more units to break even than if it were to take only six months to market.  If the total annual potential is 100,000 units, the slower cycle to market just cost the company two thirds of a year in the product’s profits.  With today’s rapid obsolescence, that could be the entire life cycle of the product itself, lost because of being slow to market.

The effect of being slow to market even in tough times

And profits from the sale of the product create cash for development of the next product.  If the time to market is slowed by inefficient development, the risk of a competitive product overtaking yours increases dramatically.

It’s all about fixed overhead and efficiency

[ Email readers, continue here… ]   So, the truth of the statement is self-evident. Because fixed overhead burns cash, extended development cycles burn more cash, preventing earlier sale of product, to create even more cash.  Efficiency in development pays off in less cost and earlier competitive products, often producing greater market share in the process.

A critical question for you

Have you considered how to make your operation more efficient as an important way to increase cash flow?  Most of us are quick to worry over cutting costs.  Some of us worry over how to greatly increase revenues.  Few of us worry over how to squeeze more efficiency out of the development cycle or from the organization itself.

There’s your homework assignment

Consider how, and then work on efficiency as a primary tool to reduce cost per unit of output.  You can also worry over how to make more gross revenue and how to cut costs.  But you’ll do well to address your company’s efficiency first.  Time to find a dark room where you can think without distraction.

Facebooktwitterlinkedinyoutubemail
Posted in Growth!, Protecting the business | 1 Comment

Have you fallen into the buggy whip trap?

Surely, you’ve heard the buggy whip analogy.  A business making those necessary items ignored the signs of progress and found itself without a market.  Perhaps that happened to sword smiths upon the invention of the rifle, and certainly to the makers of cassette tapes upon the dawn of the CD.  And CD’s with the advent of streaming.

My stories of unexpected change

I found myself in the middle of such a slow-rolling change twice in my career.  First, in the

Source: Wikipedia Common license

late 1960’s (yes, I know, a long time ago), there were 31 phonograph record manufacturing plants in Southern California alone.  By 1975, there were only two.  That is sudden change, brought about by the fast acceptance of the cassette, which in turn gave way to the next technology, CDs, after a rather short lifecycle.  Record plants were noisy, dirty places, using chemicals I can only imagine now rest somewhere in the ocean, to electroplate the “stampers” and press the records.  Cassettes, in contrast, could be manufactured in small rooms with much less expensive equipment and no damage to the environment.

A more modern example

The second time I learned the buggy whip lesson was at the dawn of the personal computer age, and this time we guided our firm without a hitch from minicomputers to networked PCs, even growing the business as we gave up the lucrative $100,000 hardware sales in return for service fees to network our customers’ systems, install our database, and migrate to customer-purchased desktop and servers.

Today the speed of obsolescence is even faster

[Email readers, continue here…]   Here it is, not so many years later, and the signs are more subtle yet, but the speed of obsolescence is much faster.  Take for example, the public’s quick acceptance of Facebook, Instagram, Twitted and other social networking portals, leaving early leader MySpace wondering what happened to their comfortable lead and large fan base.  With rapid sharing of information and recommendations, a fickle public can change its mass preferences seemingly in an instant.

The big question: How to spot the real thing?

Source: Geoff Sinbraldu, WordPress.com

How do you spot the buggy whip trap and differentiate it from a simple business cycle slump?  The answer is simple, but somehow out of reach for most senior executives and entrepreneurs.  Micro trends may seem to be a whisper, as mini-trends follow with leading adopters making a bit of noise.  It is those leading adopter founders and managers that take the chance on new technologies, new companies, new styles, and new idioms.  That is why so many larger companies pay specialty marketing firms to find, court, and listen to those individuals who lead the pack in taste and action.

No expensive consultants? Consider this alternative

For those of us who don’t have the resources to hire these expensive market trend-watching firms, there are simpler yet effective opportunities.  Usually, technology and style trends begin with those aged between 15 and 23.  And which of us doesn’t have at least one close relative or child at or near these ages?  Have you ever asked for an hour of such a relative’s time to discuss what’s “cool” or “coming” or “must have” in their lives?

Resist your “resistance to change”

It is human nature to protect your investment of money, time and brand in your enterprise.  That leads naturally to a resistance to change and inability to willingly move to replace your own product with something new that will kill its revenues.

But we all know that if we do not do it when offered the evidence of product or even industry obsolescence, someone else will jump in to fill the void.   Think carefully for a moment: are you investing in your own form of buggy whip product or service today?

Facebooktwitterlinkedinyoutubemail
Posted in General, Protecting the business | 1 Comment

Could you be your company’s bottleneck?

So many tasks; so little time

As a manager, you have a number of critical tasks that are general to your position as opposed to specific to your industry.  These include ensuring the continued health of the organization, setting the moral compass for your stakeholders, providing for succession by training and documenting, leading the effort in compliance of regulations and safety needs, and … elimination of all possible bottlenecks that impede the efficiency of your organization.

What is the bottleneck?

The definition of a bottleneck in your business is one that constricts the flow of work from

one area to another in the flow of product or service through your organization.

The three common factors making a bottleneck

A bottleneck in your organization’s flow of product or service can happen, shift, or disappear quickly.  Common to all bottlenecks are three factors:

[Email readers, continue here…] 

  1. All product, labor, and cost before the bottleneck are impeded from creating maximum efficiency by being forced to slow output or build inventories. This is a costly loss for any business and one that should be a focus for your management as soon as identified.
  2. The bottleneck itself strains to keep up with demand, often to the point of reducing its own efficiency in the process of attempting to keep up with demand.
  3. All processes after the bottleneck are slowed for lack of flow into their zone of control and waste time, money, space and output, always resulting in reduced revenues and profits.

Of course, you could fit that definition

You can be the bottleneck.  If people are waiting for you to respond to a question or make a decision about design, process, spending for a core need, or any of tens of critical decisions, you are creating a slowing or stoppage of work before you and idle resources behind you.  If this describes you at any moment in your day, you should consider removing yourself from the bottleneck list by delegation, reduction of your non-critical workflow, or (heaven forbid) increasing your hours of production.

Remove that impediment!

If failing to hire a critical employee is the cause of reduced efficiency, you must act quickly to either make an effective hire or alter the environment that creates the urgent need, all to remove that bottleneck.

And if an inefficient or undersized machine or department or process is creating a backup of critical path work flow, you must address this as an urgent matter whose cost is much more than the cost of the machine or person needed, but the amplified cost of the lost output it affects.

One of your most important jobs

You, as a successful manager, must be attuned to and responsible for elimination of all forms of bottlenecks within your span of control.  Watch for, and stamp out, all those you identify as soon as you find them.  The effect of your action is magnified several-fold at the output stage of your business, leading to increased customer satisfaction and increased profits.

Facebooktwitterlinkedinyoutubemail
Posted in Growth!, Protecting the business | 1 Comment

Do you even know what questions to ask?

Great executives and managers seem to intuitively know what they don’t know.   But it is not at all uncommon to not even know what questions to ask.

Who would have thought about COVID 19 and public’s panic responses?

Image credit: Alexas_Fotos / Pixabay

One week we all thought we had our responses dedicated to supply chain disruptions. By the next week it was protecting our associates and employees.  And by the third week, we witnessed mass panic shopping, closures of most all venues, limits to how many could be in a store at once, empty shelves and much more. Most every white-collar worker was telecommuting.  What could follow?  Have you called your team to brainstorm the next steps in this ever-moving black swan event?

The” black swan” event questions

How do you avoid being sideswiped by the new product you never saw coming, or by the “black swan” event no-one ever thought of that might threaten your business?

Speaking with a roundtable group of fellow associates, most all of them CEOs, we addressed this question and spent an hour brainstorming how to protect against just such a lack of forward vision.

Scenario planning: “What if?”

One CEO stated that she engages regularly in scenario planning with her executives, asking “what if” questions to explore the edges of the group’s thinking about everything from disruptions of supply to changes in customer taste to acts of God such as floods, worldwide virus attacks, or earthquake.  The group agreed that this is an excellent process, engaging the entire team and members’ experience to explore the unknown.

But what if no-one thinks of the right questions?

[Email readers, continue here…]    But what if no one in the group thinks to ask the pertinent question that leads to the most impactful unknown?  What if that threat is outside of the experience of anyone in the room?  What if no one knows what to ask?

Using fiction for clues to the new reality

Another CEO chimed in with an answer that made us all think.  Most every technology advance has been predicted in works of fiction years before the fact, he stated.  Why not look to fiction for clues?  From devastating events like tsunamis to future user interfaces predicted in such films as Star Trek or Minority Report, there are liberating clues within the experiences of most of us.  Think of Flash Gordon or Dick Tracy, characters from many decades ago with communication devices that have not only come to life but have been far surpassed the reality.  Tom Cruise’s virtual handling of graphics by hand movements came true only a few years later, even popularized as a game with Microsoft’s Kinect system driven by body movement alone.

And how about “Contagion” and the many books and movies about pandemics?

Broadening our frame of reference

Our frame of reference must be as broad as possible when asking “what if” questions to protect our future.  Read more science fiction if you are involved in technology.  Read more disaster novels to expand your thinking to the very edge, even if only for a minute as you examine what and how to react to the unknowns that are sure to someday challenge us.

And stay safe as new coronaviruses seem to infect the world’s population every twenty years or so.  Plan even now for the next one which will surely arrive on our shores after this one.

Facebooktwitterlinkedinyoutubemail
Posted in Depending upon others, Hedging against downturns, Protecting the business | 3 Comments

Remember the FAIRNESS doctrine

Reduce the emotion; reduce the threat of lawsuit.

You’ve certainly experienced the angry outburst from an associate or employee who has just learned of an event that the person took as “unfair,” no matter how rational the explanation by the decision maker.

Most emotional responses to decisions in business are generated not because the person making the response feels the decision was unwise, but rather unfair.

Part of the cultural fabric of your business

So, enter the “Fairness Doctrine,” as a stated element in the cultural fabric of business. Simply stated, a decision or action that affects an individual must be made with consideration of the affected individual’s view of the fairness of that decision. This doctrine is a variant of “do unto others” but with a twist. The recipient of the decision in this case usually has little opportunity to respond in kind (“as you would have them do unto you”). It is this frustration coupled with the simple outcry of “That’s not fair!” – that can affect the culture of a company in ways never considered by the original decision-maker.

Why do many people sue?

People sue others and their companies usually because they feel emotionally that they have been treated unfairly, not just because they were affected financially.

Some examples of “unfair treatment”

[Email readers, continue here…]   Firing a person considered a key associate without any advance warnings or public revelation for the reason, such as the need to consolidate or downsize, is a good example of setting up such a groundswell of accusations of unfair treatment. Public dressing down of an employee in front of associates is inhumane and often generates a negative response from all who witness or hear of the action. Closing a highly effective department, shutting down a marginal company, canceling a promising project all are good examples of management setting up a visceral response of “unfair” among those affected.

Preserving the dignity of the individual

I have often addressed the issue of maintaining the dignity of the individual in a business environment. The two are linked: the fairness doctrine and treatment of an individual with dignity, no matter how distasteful the decision implemented.

A solution to the problem

So, my advice is to take the time to establish the reasons for pending actions – if not in an emergency environment. Speak privately to employees who are in danger of being fired, documenting the discussion to the employee’s file. Open up to the general group with facts that might later affect them, even at the risk of losing one or more to a hunt for a new job. Most employees and associates, treated with respect and dignity, will respond with understanding and lose the emotion that might have accompanied receiving the later news of a negative event.

In fact, many times over the years, I have seen whole companies rise to new levels of efficiency, creativity, and sense of urgency when informed of the alternatives being considered by a board or management.

Sharing the dilemmas of management

At the risk of losing talent not targeted, it is only fair to treat people as intelligent beings capable of understanding the dilemmas faced by management, and sometimes able to find solutions to problems not seen by those in control.

Facebooktwitterlinkedinyoutubemail
Posted in Depending upon others, Protecting the business, Surrounding yourself with talent | 1 Comment

Reduce five risks: Increase your valuation

Why five risks?

In the creation of a young company, there are five principal risks to be addressed by the entrepreneur.  Professional investors will probe these five risk areas and make the decision to invest based upon comfort with each.  So, it is important for the entrepreneur to identify, address and mitigate each of these in order to increase valuation and decrease the risk of ultimate loss of the business.

First:  Product risk. 

Is the product or service possible to produce at all, let alone economically enough to

compete in the marketplace?  One way to mitigate this is by using early money to create a prototype, to perform market research, to complete the first generation of the product, or to deliver the service to a satisfied customer.

Second: Market risk. 

Are you ahead or behind the market with your product or service?  Will the public respond in numbers to buy, license or rent your offering?  This risk can be mitigated by finding a customer willing to purchase as soon as a proven model is completed, and willing to state this in writing.  Another is to gain the support of a core vendor who is willing to offer special extended terms to the company as its investment in creating the product in a finished state.  A third demonstration of overcoming market risk is by holding controlled focus groups and gathering information from unbiased potential customers supporting the acceptance of the product or service.

Third: Management risk. 

[Email readers, continue here…]   A great idea often fails from the inexperience or inability of management to bring the idea to market.  Similarly, great management often can manipulate an original idea or business plan into one much more attuned to the market, adding tremendous value that might have been lost sticking to the original plan.  This is sometimes labeled “execution risk” addressing whether management can create and run the company producing the product acceptable to the marketplace.

Fourth: Financial risk.  

Any new enterprise is at risk if there are not enough resources to get the company to breakeven, which is a proxy for stability.  If a company truly needs five million dollars to get to breakeven, investors that provide the first million are greatly at risk of the company failing to raise the remaining capital or of subsequent investors valuing the company at a lower price than the first investors, causing a “down round” in which the early investors are punished for taking the first risk.

And fifth: Competitive risk. 

If there are high barriers to entry with such protections as patents, long development time already spent or contracts with the major potential customers, then the risk of a competitor with more resources jumping into the frothy pool and taking advantage of the demand created by the company is minimized.

Reduction or elimination of one or more of these risks increases the valuation of the company and certainly improves its chances of survival and growth.

You may recognize these five as a slight variation on the “Berkus Method” which is often published and used by investors when valuing pre-revenue businesses.  Here we expand the definitions a bit to encompass businesses that are still early stage, but perhaps beyond startup.

Facebooktwitterlinkedinyoutubemail
Posted in Finding your ideal niche, Growth! | 2 Comments

Does your company have a “dirty cap table?”

How it happens

When you seek professional investors, whether organized angels or venture capitalists, one of the early questions you are asked is “How have you financed the business so far?”  Investors love to see entrepreneurs who have used their own money to ignite their businesses.

But often, entrepreneurs turn to others for initial capital. Describing that capital using the phrase “friends, family and fools,” or “FFF,” has become as common as to be trite.  And now that “crowd sourcing” has been enabled using the Internet – seeking many investors at a small amount per investment.

The legality issues

The problem in taking such money rests in the legality of taking money from non-accredited investors, people who do not meet the SEC standard for making non-public company investments.  Currently that standard requires a minimum of $200,000 in annual income or over one million in net assets, including the value of the investor’s principal residence.

What if some past investors don’t meet that standard?

[Email readers, continue here…]  Since many small investors in a young business do not meet that standard, there is a chance that the company has taken money that it should not have taken, according to SEC rules.  There is an exemption for members of the entrepreneur’s family and in some cases for close friends with intimate knowledge of the entrepreneur and of the plan and, of course, for employees of the company.  It is worth checking with an attorney to see if such investors are truly exempt.

Does issuing a PPM insulate the company?

Some small companies work to create “private placement memorandums,” attempting to protect themselves against this problem, couching the proposed investment in legal language stating the risks involved in making the investment.  The PPM does nothing to mitigate that problem when the investor is not accredited.

Missed filing requirements

To compound the problem, often stock is issued by the entrepreneur without filing any report of such issuance with the state of issue.

So, what is the problem?

The sum of these problems is that a disaffected investor can sue the entrepreneur or the entrepreneur’s company for a rescission of the investment and return of the money invested if the money was taken improperly, especially when the business has failed and the investment lost, putting the entrepreneur at risk for the loss of additional personal assets.

And what is the cure?

The cure for this, when professional investors enter the picture, is for the company to craft a “rescission offering” to those shareholders who invested illegally, offering to repurchase their shares at full value invested.  This is sometimes difficult since it often happens just at the time a company needs new money most and is in the process of seeking that money for growth.  If a previous investor does not accept a rescission offer, there is some insulation provided to the company against a future lawsuit by that investor.

Your future process

So, plan to take money only from qualified investors. Check with your attorney if there is any doubt.  The risks of a problem rise with unmet investor expectations, and fade with success.  But sometimes, such behavior will cause a subsequent angel or venture capitalist to pass on an otherwise good opportunity, and that would be a shame, one that could have been avoided by diligent process in the early investment cycle.

Facebooktwitterlinkedinyoutubemail
Posted in Protecting the business | 1 Comment

CoronaVirus and small business: A discussion about economics

By Harley Kaufman, guest author

Note from Dave: Harley is an old friend and avid reader of BERKONOMICS. With a background in management and technology, he gives us something to think about regarding today’s top-of-news subject.

Addressing the issue to small and medium businesses

The CoronaVirus (Covid19) could potentially cause some real disruptions in the US generally and, specifically, to the small and medium sized businesses that probably make up the bulk of your readership.  The Administration has demonstrated absolutely NO talent or capacity to being able to handle such challenges.  Worse, their credibility and trust factors regarding their messages are zero or below!  Appears to be a recipe for disaster.

Advice to managers, entrepreneurs

With a multitude of caveats, then, it might be worthwhile to your followers to heed the following advice:  Anticipate the worst, prepare for it, and hope for the best!  For consumer driven businesses, the actions that are needed to anticipate the worst are simply to borrow NOW at the lowest possible rates in order to have a significant nest egg if the CV scare drives people to stay home and away from any crowds at all.

Which companies are most at risk?

The obvious companies that would suffer the most quickly are mall locations, strip mall locations, theaters, restaurants, and many many more.  Their liquidity nest eggs could well be challenged beyond their capabilities to handle it.  Waiting until it becomes clear that they need additional capital (even short term capital) would put them in competition with the rest of the business world and would be a lot pricier than it would be currently.  Why wait?

A lesson from the recent past

Take a lesson from Ford Motor Company and their prescient CFO and President in 2006 and 2007.  Right before the Great Recession they were the only automaker to go out in the marketplace and beef up their balance sheet with a great infusion of borrowed cash – at low rates.  They then became the ONLY automaker that didn’t have to borrow from the government to get through the rough patch.

 

 

Facebooktwitterlinkedinyoutubemail
Posted in Protecting the business | Leave a comment