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Sunday is Father’s Day.  For many of us, our fathers were part of, what Tom Brokaw labeled, “The Greatest Generation.”   They were a generation that was brought up during the depression and hardened by war.   Unlike most of my generation, they knew sacrifice and exercised that concept in the balance of their lives.  They sacrificed so that their children could have a better life.   My generation, the baby boomers, has become consumption oriented.   The Greatest Generation believed in the value of hard work.  Much of my generation and the younger generation have much more of a sense of entitlement.

The result of our fathers’ generation was to build the greatest industrial power the world has ever known.   As business owners and fathers, we should learn from the example “The Greatest Generation” set.  And thank them.

On Monday we will observe Memorial Day.  Note that I said observe and not celebrate.  The point of Memorial Day is to recognize those who served this country and paid the ultimate price to protect our freedoms. 

While our economy may not be in the best of shape at the present, we do have the most robust economy on the globe.  Why?  We have a generally capitalist economy that is made possible by the freedoms we enjoy.   The more freedoms in an economy, the more free enterprise flourishes.  

Freedom fosters entrepreneurship. Entrepreneurship is what enables an economy to adapt, change and be resilient.  Much like those who made our freedoms possible.  Honor them.

Your money or your life?

No, this is not about a street robbery.  But rather it is how some business owners have come to see the American dream. Why?  Because they simply spend so much time in their business that they no longer have a life.   None of us were put on this earth with that in mind. 

How do entrepreneurs and business owners end up in this position?  Passion, dedication, and yes, fear.   Fear of what?   Two fears primarily, fear of failure and fear of theft.  Both have the same basic solution.

Put in people and processes that allow the business owner to focus on the areas where they can create the most value (what we at B2B CFO call ‘Finders’).    Business owners need to free themselves of administrative tasks (what we call ‘Minders’) and focus on driving the future of the business. 

Rather than reviewing invoices and signing every check, business owners need to have a system of internal controls to help ensure that company policies are being followed and the strategy executed. 

In other words, what every business owner needs is a means to delegate responsibility and assign accountability.  Be a ‘Finder’, not a ‘Minder’.

Done properly, it doesn’t have to be your money or your life; you can have both.

Where are your sales now and where were they three years ago?  While that is important to know, the real issue is how did you get to where you are now?   If you can not answer that question, you better start investigating.  

If you really want to grow your business, first you need to decide where you want to go.  Then, once you know your goal, you need to develop a plan to achieve it.   One of the first things you need to understand in developing a plan is to understand your starting point and how you got there.   From there, you build a plan to get to where you want to be in the future.  

When you develop your plan for growth, take note of what you learned about your current situation.   Learn from your prior successes and failures to maximize your future success!

Where Does Growth Come From?

Growth can be either incremental market growth or systemic growth.  To get market growth to flow to your business, all you have to do is maintain the status quo and hope that the market does indeed grow. 

What if the market does not grow?  What do you do then?  You need to focus on systemic growth which is growth that result from planned activities.  Systemic growth can be achieved via organic growth or acquisition.   Generally, organic growth is thought of as growth obtained via pricing and market share gains.   In looking at acquisitions for growth, you need to determine the feasibility of achieving that growth without an acquisition.   Then before you undertake an acquisition, you need to determine the value of the acquisition.  The value of an acquired business does not come from the sales themselves, but from the acceleration of the sales versus those of organic growth.

So as you develop your growth strategy, make sure you plan and evaluate all of your options.   While it may seem difficult to perform this analysis, such evaluations are necessary to avoid mistakes and to map the best course to growth.

Throughout the recent financial crisis, the strength or weakness of a company’s balance sheet has received more attention.  So how strong is your balance sheet?  Most entrepreneurs do not know, since they focus only on the income statement.  However, creditors and investors will also examine your balance sheet.  If there is one thing that we have learned from this crisis, it is to keep your lenders happy and access to credit available.

Valuations

Before you can assess the strength of a balance sheet, you need to examine the individual line items and understand their valuation.  A key consideration here is that values of many accounts are dependent on assumptions.  Those assumptions are essential for the accountants, but they must be in line with reality.  Accountants value most assets based on historical cost, while investors value them for the wealth they create.  

Accounts receivable (AR) value is dependent on your ability to collect the amounts due.  An AR aging is a tool to assess this since typically the more overdue an account is, the less likely it is going to be collected.  Beyond the aging, are your customers struggling and are their customers paying them in a timely manner?  If your customer is not getting paid, what is the likelihood of you getting paid? 

Inventory is carried at cost, but needs to be assessed in terms of its salability; is it obsolete or have market prices dropped below cost (think commodities)?  In some businesses, spoilage can destroy the value of inventory overnight.  In industries with rapid technological change, obsolescence can occur within months of the product being introduced.  Knowing the underlying physical goods is critical in assessing valuation in these types of businesses.

Fixed assets are carried at cost and are reduced in value on the balance sheet over time via depreciation.  These accounts are the most dependent on assumptions.   Buildings and equipment are depreciated over an estimated economic life, which assumes a certain level of maintenance.  Have they been maintained?  Do these assets really have the remaining economic life that is reflected?   Or has the replacement cost of them changed dramatically?   Have they been made obsolete by technological advances? 

Land is carried at cost for accounting purposes, without any depreciation.   Has the market value of the land you own grown significantly?  Or did you find environmental issues that will decrease its value?

Intangible assets such as patents, trademarks and goodwill arise from the purchase of another business.  These assets are assigned a value when they are purchased for accounting purposes.   The key questions to ask are whether there is real value to an outside purchaser, or do they generate cash on their own?

Liabilities may seem simple, but what if you have payments due based on some contingent event?  Is all of your expected indebtedness accounted for?  Have you provided for vendor invoices that were not received on a timely basis?   Have all taxes incurred, but not paid, been reflected?  Are longer term liabilities, such as pensions, taken into account?

Once you understand the underlying valuations, you can further assess the areas that a balance sheet reveals: liquidity, cash to debt coverage, and leverage.

Understand your balance sheet so that you can look at it the same way your creditors and investors do.   Make them happy and you will increase your financial possibilities.

This article was first published in the January 2010 issue of New Jersey Business.

February 2010 marks the 100^th anniversary of the Boy Scouts of America.  When most people think of Scouting, they think of camping and knot tying.  While those are part of the program, they are but a few of the tools employed to fulfill Scouting’s mission.   To me, the goals of Scouting are twofold; develop the leaders of tomorrow and build the character of our youth.

When the terms Scouting and leadership are used together, most people think of those Scouts who attained the rank of Eagle Scout.   Eagle Scouts  include a US President, the first man to walk on the moon, Nobel Prize winners, as well as numerous Senators, Governors and successful business executives.

While the list of Eagle Scouts and their accomplishments is impressive, the majority of Scouts do not earn the Eagle rank.   What Scouting has done for them is no less important; it has helped build their character.  Many of my fellow B2B CFO partners have been involved with Scouting  and exemplify Scouting’s values.

As an Eagle Scout and an adult volunteer, I am proud to be a part of an organization that is committed to the development of young men into responsible adults and training the leaders of tomorrow.

February 11 is the birthday of one of America’s greatest entrepreneurs; Thomas Alva Edison.  While best know for his invention of the electric light bulb, and to a lesser extent the phonograph and motion picture,  his real legacy lies in the business arena.  Like his best friend, Henry Ford, he changed the way industrial companies operated. 

Besides founding General Electric, Edison revolutionized  the way products were developed.  His Menlo Park laboratory was the first industrial research lab.  He  integrated various scientific disciplines in a single location and combined the process of invention with mass production techniques.   By integrating teams of researchers that could focus on all aspects of his inventions, he was able to move them  rapidly from research to development to commercialization.   These concepts remain in widespread use today, in industries ranging from household goods  to pharmaceuticals.

The "Wizard of Menlo Park", as he was often referred to, left his mark on industry and humanity for generations.

“I found Ray to be a very experienced and competent financial professional, with a broad base of knowledge across the full spectrum of financial disciplines. More importantly, Ray was extremely conscientious in all of the work that he did to support my business. In fact, Ray became an integral member of my management team. Based on my experience with Ray, I am quite sure that he would do an excellent job as a B2B service provider and I recommend him with confidence.”

Phil Kornbluth

Matheson Tri-Gas

It’s the Customer Stupid!

I know, this is a take off on a campaign strategy of the early 1990s, but it is true.  As a colleague of mine often says, what is the one thing it takes to have a business?  It’s a customer.  Your can have a product or service, a business plan, a sales team, or even money.  But without a customer, you don’t have a business. 

Focus on your customer, not your internal operations and you will be far more successful than your competition.  If you are like most entrepreneurs, you know your business and customers better than anyone else in your company. 

My point is not to neglect your internal operations, but that you as the business owner should focus on your customers.  Put the people, processes and infrastructure in place to handle the operations.  Surround yourself with talented employees and advisors, so you can develop the vision for your business and then deliver it.