Contribute to A-M-D, or support someone who does.

Posted on April 25, 2011 by Dave Berkus
  • A.  Accumulate or acquire (product line, breadth of services)
  • M. Marketing or merchandising (expert and diligent use of resources)
  • D. Distribution  (adding channels and reinforcing relationships)

Let me credit CEO Erik Hovanec (www.leisurelink.com) for this one, whether he originated it or recast it from his past.  As his chairman, I have watched him masterfully focus his employees all toward a common theme aligned with the company’s goals.  The genius of this insight is that no employee is exempt, even those in accounting or human resources.  Everyone supports the contribution to AMD in some way, or, according to Erik’s challenge, should not be here breathing the air, taking valuable space and consuming scarce resources.

People in R&D, business development, purchasing or production all fit in to the “A” of the equation.  Without constantly improving or increasing products to offer, a company today is quickly overtaken by its competition.  Stagnant companies usually can trace their inability to gain market share upon the “A” area first, and management should pay particular attention to putting resources into this important focus of the company.

[Email readers continue here…] Without the “M”, effective marketing and or merchandising, sales people and distribution channels quickly dry of leads and must fight for attention beside better branded competitors.  Marketing is the area least understood, often least funded, and perhaps one of the most important within any company.  Even with the best products or service, companies fail for the want of good marketing.

For many industries including those with Internet-based sales entities, you cannot have enough channels of distribution, the “D” in this insight.  Some management will argue that channel conflict is one of the worst ways to lose the loyalty of distributor and direct sales resources.  I’d counter that a cohesive distribution strategy calls for a coordination between inside and outside distribution resources by management, not a competition for customers using inside resources to compete with outside distribution.  There are many ways to allocate or split a product or service in the marketplace: by size of customer, geographic location, market segment, or even agreed-upon rules to protect open competition between the distribution groups.

Sometimes, a company must create a unique brand to self-distribute in competition with other distribution resources.  Many manufacturers have successfully created “OEM” labels for branded retailers wanting to distribute under the retailer brand, without disturbing other distribution channels.  And many wholesalers have successfully created a new self-managed retail brand for direct distribution in competition with current retail distribution channels.

Focusing your entire staff on a simple, understandable set of functions in support of the goal is a masterful way to increase productivity, create urgency and measure contribution of individuals to the common good.  Remember: A-M-D.

Posted in Growth!, Surrounding yourself with talent | 2 Comments

Celebrate each victory.

Posted on April 17, 2011 by Dave Berkus

Growing companies give rise to many events that great managers will take advantage of to create and shape the culture of the company itself.  Each new plateau in revenue growth, each time a month’s orders hit a record, each large order from the sales department, all of these and more give rise to opportunities to celebrate publicly.  Everyone in a stressful corporate environment loves to pause and relish the latest victory.

Each time our company would hit a new milestone, I would make a public announcement personally, then, with my payroll person in tow, walk the floors of the various company buildings handing out $50 or $100 bills to all employees as instant bonuses.  You wouldn’t believe how much people seemed to enjoy the boss’ visits.  The goodwill created and buzz that continued for days were well worth the small cost.  Everyone got the message: growth is great, and everyone is treated equally in celebrating.  Each distant or foreign office was included, although not often enough with personal delivery services.  This is different from “managing by walking around”, which requires no reason or structure other than the willingness to listen and learn from people on the line. 

Many companies have a bell hung somewhere in or near the sales bull pen, rung each time a sale is consummated.  Managers should encourage everyone within the hearing of the bell to stop long enough to applaud, reinforcing the unanimity of approval for each new sale.

[Email readers continue here…]  Victories that shape a company’s culture can take many forms.  Years ago, an emergency phone call was directed to my office from our distributor in Australia.  Their largest customer, Hamilton Island Resort, had just suffered a fire that destroyed the building containing their large minicomputer installation.  No-one was injured, and there was a backup from the night before stored in a safe location.  But there was no replacement machine in Australia, and each day that guests checked out without paying their bills amounted to a day where cash flow was at least temporarily reduced by at least $250,000, not a small amount as it accumulated.  Simultaneously, we had a new machine with identical specs on the shipping dock for a Florida installation at a property whose managers were pushing the company for an instant delivery.   I made the decision without pause to redirect the shipment to Australia that day.  Then I immediately called the CEO of the Florida customer to explain.  Not too happily, he acquiesced.   Everyone within the company knew of the problem and of our instant reaction to aid our customer, even in the light of pressure from the Florida customer now back in line for shipment.  We oversaw the successful installation in Australia the next day in a temporary building and our people helped key in data subsequent to the backup.  Everyone knew from management’s actions and their own efforts that the customer comes first, always.  This story has a second happy ending.  We engineered a rerouting of the Florida order a week later so that the computer to be shipped would be the 1,000th of its model.  Before packing it in its large shipping crate, we held a party in the shipping dock for all employees, with streamers and cake and the world’s largest greeting card – hundreds of sheets of continuous form computer paper, which every employee from software programmer to shipping clerk signed with a message of thanks and goodwill for the Florida customer’s sacrifice.  That week, we scored two great customer stories and more goodwill throughout the organization. 

Victories come in many shapes, sometimes when least expected.  Celebrate them all.

Posted in Depending upon others, Growth!, Surrounding yourself with talent | 3 Comments

Forecast your cash position and sleep more soundly.

Posted on April 11, 2011 by Dave Berkus

In the past insight, we created an example to demonstrate that it truly takes money to make money; that growth calls for increases in working capital. The example we crafted proved that companies can easily find themselves strapped for cash during periods of rapid growth as well as in downturns.

There are many techniques and time horizons for forecasting cash. For those companies with constant billings to customers during a month, and for those with extra large fixed costs such as payrolls at periods during a month, it is important to begin the discipline of the 13 week rolling forecast as a tool for finding and planning around short term cash problems. Each week, the actual cash position is updated and the past week dropped from the forecast and a new week added. This format is much more relevant to management that a monthly forecast when cash is tight, allowing for weekly planning in advance. In addition, and perhaps in place of this, for many more stable companies, a monthly cash forecast is appropriate and serves as an excellent planning tool for arranging any lines of credit or extensions of payment to suppliers over the months’ time.

I’ve experienced periods of failure to plan short term cash needs, finding myself worrying over daily cash flow, and draining energy and focus from strategic issues. And I am sure many of you who have been in growing businesses have had this experience as well. For those of us who have lived through the worry of arranging for (or passively hoping for) cash to cover the next day’s needs, this insight is a lesson learned. Even if accurate cash forecasting highlights a coming problem, the element of time and elimination of surprise both work to reduce the drain upon management, and allow for time to plan for ways to increase cash flow systematically.

Posted in Growth!, Protecting the business | 1 Comment

Growth calls for more cash, not less.

Posted on April 3, 2011 by Dave Berkus

Here we must do a little math calculation together to make a point.  Assume that your gross margin from sales is 50% for ease in calculation.  Assume 30 days to collect receivables from completed work, and 30 days to complete the work.  Finally, assume a fixed overhead equal to all of the remaining 50% of revenues, just for the sake of making this point.  Zero profit. Now consider an increase in your revenues from $1 million a month to $1.5 million, the extra $500 thousand to be billed in 30 days upon completion of work.

During the first 30 days, you pay out over that period $750 thousand, the fixed overhead and cost of sales.  That’s $250 thousand more than last month, putting you in the hole.  You bill the $1.5 million on the 30th day and start the clock, waiting 30 days for receipt of the cash.  During that time you receive the $1 million you billed the month before but pay out another $750 thousand in overhead for the following month.  Where do you sit at the moment before collecting the $1.5 million billed last month?  You are down an extra $500 thousand beyond the breakeven amount when you were billing a steady $1 million a month and paying out 50% for cost of sales and 50% for pre-ramp overhead.

[Email readers continue here…] It took your company finding or funding $250 thousand a month for two months to finance an increase of $500 thousand in revenues.  Surprised?  Most managers are.  If the growth continues, the amounts needed just increase and increase, until fixed overhead is no longer such a large part of revenues (growing more slowly than revenues), and perhaps margins increase with buying power and efficiencies of mass production.

With an asset-based bank line and a limit far higher than current need, a company can borrow against those receivables and eliminate at least the second $250 thousand of cash needs, since the receivable “pledged” for the bank line increases by $500 thousand.  Most companies have little headroom in their asset-based bank lines, and such expansion of revenues can be accommodated only for awhile before the line is borrowed to its maximum.

Growth requires its own unique form of working capital cash planning.  The mere fact of rapid growth is not enough to create capital within most organizations until the growth becomes more stable and receivables collections catch up with costs advanced to the various resources to “buy” that growth.

Posted in Growth!, Protecting the business | Leave a comment

Find your rock in Ensenada.

Posted on March 28, 2011 by Dave Berkus

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?

 

Posted in Ignition! Starting up | 10 Comments

Never use short term borrowing to cover long term debt.

Posted on March 21, 2011 by Dave Berkus

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.

Posted in Hedging against downturns, Protecting the business | 3 Comments

Manage your mantra.

Posted on March 14, 2011 by Dave Berkus

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?

Posted in Growth!, Positioning | Leave a comment

Hire ahead of need only when growth is stable.

Posted on March 7, 2011 by Dave Berkus

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.

Posted in Growth!, Hedging against downturns | 2 Comments

Demand pull – cost push.

Posted on February 28, 2011 by Dave Berkus

Place your cash bets behind proven demand.

The term, “demand pull – cost push” was created by the great economist, John Maynard Keynes, to describe the two primary drivers of economic inflation.  Demand pull: too much demand for a product or service and not enough supply cause a competition for the product that drives prices higher without increasing the intrinsic value of the product.  Cost push: labor or parts costs increase, causing the product or service to be priced higher without adding intrinsic value.  As a student of economics, I studied Keynes and his many theories of macro and micro economics, but this one kept returning to me as an excellent way to describe a completely different business principle.

All of our enterprises have limited resources, even the largest of the Fortune 500, and especially the smallest of competitors in a market.  Most new product introductions are planned with a broad campaign aimed toward the whole of the marketplace, committing resources such as money and manpower to the effort.  I have learned over the years that this may not be prudent.  Instead, seeding various segments of the market, vertical niches, with focused attention in form of marketing and sales efforts, will quickly yield positive results from some niches and perhaps no interest from others.  It is upon the moment of understanding which niches respond positively to the new offering that a company should push costs into increased marketing and sales efforts into those niches, concentrating fire power and overwhelming the niche, instead of making few waves in an ocean of broad opportunities and becoming lost in the process.  To describe this, Keynes comes to mind. Push the costs into market niches where you seed your marketing, and experience the pull of customer demand as a result.  Cost push – demand pull.

Posted in Growth!, Positioning | 2 Comments

Cast your net where the big fish swim.

Posted on February 21, 2011 by Dave Berkus

This is one of those “My dad used to say” homilies.  You’ve probably heard the accompanying “It takes just as much effort to sell a small deal as a big one” over the years.

The truth of this is more nuanced.  Some businesses will prosper in the shadow of larger competitors by specializing in those smaller accounts that are just not attractive to those with higher overheads and larger aspirations.  But for most, the true sign of success and potential for even more is in the landing of a major account, one that validates the pricing, quality and competitive advantages of a company’s offering.  For this reason alone, it makes sense for most of us to aim high once we have worked the kinks out of our offering with smaller customers.

On the other hand, the worst thing you can do is land a big fish when not prepared to reel it in.  It is hard to recover from any failure to perform, but doubly so when the customer is highly visible in the industry.  So it is worth building the business’s capabilities through stages of customer size if the goal is to serve the biggest and outdistance the competition at that level.

[Email readers continue here…] I am on the board of a services company that specializes in the middle of the market, knowing that very large competitors throw lots of resources at the largest accounts – resources that our company just does not have. Rather than being constantly beaten in this arena, the company has chosen to compete in an area of the market it can defend with superior service which the larger competitors with their higher cost structure could not reproduce in smaller accounts without large losses.  Further, scaling the enterprise and its infrastructure to go after the few very large accounts would be at the cost of development for the midrange of the market and perhaps subsequent loss of that share to others.

And I am reminded of a cousin of mine who years ago sold custom window blind product to Sears, by far his largest customer, scaling his plant to produce more and more for Sears as orders flowed.  One day a sixteen wheeler full of returned product drove into his loading area.  Sears, which granted a no-questions-asked return policy to its customers (even for mis-measured orders) just dumped the product back on the supplier without explanation, nearly bankrupting the small company.

Even though there are many advantages to casting your net to attract the big fish, you should be well aware of the risks involved and have resources available to manage those risks.

Posted in Finding your ideal niche, Growth! | Leave a comment