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Archive for July, 2009

Glad to see the Hockey Stick Forecast is alive & well….

July 30th, 2009 Comments off

     This morning I attended the 33rd gathering for the Growth Capital Conference in West Los Angeles, which is organized by the Growth Capital Institute. Aside from the standard self-serving pleasantries, which lasted the better part of 20-minutes, the conference showcased a presentation of 5 companies seeking growth capital. This was then followed by a 4-person panel discussing the current lending and capital environment. Although this was the first time I had been to this particular function, there were many of the usual suspects in attendance, which included the Tech Coast Angels, Pasadena Angels, Garage Technology Ventures, and various SBA reps. While a bit annoying at first, the lack of seating for an rsvp fee event was somewhat refreshing and the energy levels were high.

 

     Once of the greatest comments that was made to me by a successful business person, and later expanded on, was “Boring is not bad….”.  Well, that’s a bit of what we had this morning; some boring concepts, but not all bad. Unfortunately, what many of the concepts were lacking was the real “Wow” factor in their presentation and presenting the merits of their concepts in a simple 40k foot level. The presenters were give a simple parameter….7-minutes or less.  Many had problems staying within those confines and infused their presentations with too many details; details that could have been easily covered in a secondary meeting after capturing the attention of potential investors.  What was also somewhat amusing was the collection of hockey stick sales pr0jections without discussing any of the basic elements of a sales effort to achieve revenue goals.  In fact, one company even cited an 8x revenue multiple of a peer, from Q2-07, as a compelling reason for investing in their company. Don’t know if I’d be referencing valuations from 2-years ago….

 

     After the presentations were complete the conference transitioned to the panel of speakers, who would be discussing the current lending environment.

 

With regards to the SBA lending environment there were a number of points worth noting:

          Owners with an equity position of >20% are being required to provide personal guarantees on all loans.

          There is no longer 100% financing available.

          Start-Ups are requiring 30% infusion by Founders

          Ongoing entities are still only getting 80-90% with the remainder contributed by Founders.

 

     There was also a very consistent message by the panelists that they are only investing in entities where there is a unique proposition or offering. They are no longer investing in companies that are simply a variation of an existing and successful venture.  It was also noted, particularly by the Pasadena Angels ($25m / 65 deals) that they are doing more follow-on deals. While their investments in companies have doubled the number of companies in the portfolio has only increased by 50%. Further, the panel commented that “you can never assume that there will be follow-on financing and cite that as a basis for making an original investment”. They clarified that due to the environment, you need to make your investment decisions based on the merits and projections of the entity and not the hopes of bridging to more capital invested.

 

     Although a number of the discussion points were rather rhetorical, it was good to see the entrepreneurial drive alive and well at the conference this morning. It was clear that a number of the presenters really had not done their appropriate homework, or were being given some less than stellar guidance in their preparations, or just discarded that guidance outright. Regardless, I got a kick out of seeing that the Hockey Stick Forecast is still alive and well in funding presentations….

 

Thanks for Reading . . . .

 

Jeffrey Ishmael

Qualifying The Elements Of Your Forecast….

July 29th, 2009 Comments off

     We’ve recently began the process of transitioning to a 5-Quarter Forecast process, primarily to provide a greater level of insight to our Sales & Marketing folks. As we speak, they are already making trade show commitments, planning regional sales meetings, and finalizing ad placements. How can you be making these significant commitments without your plans in place for the following year? For the previous company I was at we were able to work under a more traditional annual budgeting process. This worked because we had a predictable activity flow, did not have large marketing or development efforts,  and we typically did not have more than 6-8 weeks visibility for our revenues due to the nature of the offering. But now, in the midst of a much more volatile & dynamic environment, not to mention, a Sales & Marketing calendar that is working almost a year in advance, such an approach isn’t feasible.

 

     As I regularly speak with folks in my network, which isn’t just inclusive of my finance friends, I’m surprised by the lack of information that is tabled/submitted with respect to qualifying a Budget or Forecast. I’m surprised that there are still Management teams that accept Budgets which don’t itemize the individual areas of growth or improvement for the coming year. How can you hold specific teams accountable if there are no specific actions tied to achieving the goals?  For instance;

 

          You’re citing revenue growth of 10%.

a.                   For the coming year have you itemized the various channels that will contribute to that growth, or taken into account any shrinking channels?

b.                  Have you timed the growth of your revenue to coincide with the calendars necessary to drive the growth plan?

c.                   Have you erred in forecasting a linear growth plan w/o even a plan to support that?

 

          You’re forecasting an increase in gross margin.

a.                   What are the contributing elements?

b.                  What are the non-recurring elements that will support the increase?

c.                   Have you reviewed the make-up of sales and looked at the margin quality of those transactions? Do you need to look at Domestic vs. Intl or any inter-group sales?

d.                  What portion of your increase is volume based vs. productivity based?

e.                   If productivity-based, what are the specific areas that you are targeting?

 

          Have you discussed your assumptions for OpEx with the rest of the team?

a.                   Do they buy into your preliminary assumptions or are you facing a potential shift in the business model that will necessitate new expenses?

b.                  Are there certain areas that need to be bolstered for a turnaround in 2010? Do your expenses support the revenue growth being projected?

c.                   Have you incorporated the necessary amount of consideration to mitigate unforeseen shifts increases?

 

     No matter what, you’re not going to be able to capture everything within your Budget. At a previous company, we received an unannounced increase in our utility rates from Southern California Edison. This happened a month after the Budget was approved by the Board. When your annual utility bill is $1.3 million, a 22% increase is not a minor element. We were able to make the necessary adjustments, but not without some difficulty for other areas. Whether you’re sitting in the CFO chair, CEO chair, VP of Sales or a Director chair, do you understand all the elements of your Forecast and are the assumptions that are incorporated sound? It’s redundant to start asking about why I may not be discussing other elements of the Budget, but again, this is the 40k foot commentary. Are you clear about the elements that comprise the foundation of your Forecast?

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Opening Your Network to Help Others….

July 23rd, 2009 Comments off

                Aside from getting an email or phone call about a job offer, there’s no business communication that has a higher value than receiving notice from somebody in your network that an introduction you made for them culminated in a job offer.  The one thing I learned through my “transition lessons” is how important your network can be for securing the next opportunity. In my case, it has been equally helpful as a sounding board for pressing business issues. In fact, one mentor specifically, has really helped me navigate some pretty interesting business dilemmas.

                I was recently asked to provide some advisory work in the securing of additional working capital, as well as the implementation of a broader finance function for a new company. Although the company was well down the road for product development and patents, they were still start-up from an operational perspective. It became clear, and rather quickly, that they needed an immediate infusion of cash and had put too much faith in other advisors who were not able to deliver. I also knew that I was not going to be their next “rainmaker” and needed to pull in some expertise from my network.  Coincidentally, I had received a call from a classmate telling me about a change in his working situation.

                We met up for coffee and went through what had recently happened with his company. He worked for an OC-based software company and coordinated the majority of their M&A and business development transactions. He had grown tired of their empty promises, inability to execute, and the increasingly high level of politics. Exit….stage right. I knew how he worked and felt that the technical knowledge that he had with the other company would be a great fit for this start-up. Fast forward a few weeks after the introductions and I learned he had been offered a F/T position as their Director of Business Development.  I’ve been able to get 4 people in my network placed over the last year and each placement is equally satisfying. Who in your network have you offered to help lately and are there any folks who might benefit from you opening up your little black book? It’s worth the effort…..

Thanks for reading . . . .

Jeffrey Ishmael

Baird & Co. Breakfast Summary…..

July 16th, 2009 Comments off

     Yesterday I was fortunate enough to receive an invite to a breakfast sponsored by Baird & Co., a St. Louis-based investment bank that specializes in the Small and Mid-Cap sector. Good folks that I have known for some time. The breakfast was to feature Paul Purcell, the CEO of Baird, where he was to discuss his insights on the market and what we might expect. I was pleasantly surprised when I showed up and found a table set for only 16!  I was expecting to be part of a group of 50 or more considering the status of the keynote. Another fantastic surprise was seeing Peter Ueberroth seated at the table across from me! While no stranger to controversy, Peter Ueberroth is an amazing businessman with an endless history of success on the resume.

     Another pleasant surprise was that the group that was assembled was very Retail and Apparel centric and represented a number of different segments. After Purcell delivered his opening remarks on the current results of Baird and how they were positioned to deal with the current market, he had two main topics to discuss with the group – the California economy and CIT Group. I’m not going to touch the California topic since I don’t have enough time to table that topic. Regarding CIT, the group seemed to be split on whether the government should provide any type of bailout to CIT. There were the typical positions….the logical approach of letting them fail and the risk-averse position of bailing them out to avoid more serious ramifications. If you’re unfamiliar with CIT, they provide approximately 60% of the available financing for the Retail and Apparel sector. I’m fortunate enough that I don’t have to rely on them to factor invoices or provide any other level of trade credit, however, we do have a high number of competitors in our industry who do rely on them. There are also a large number of retailers who have a broad portfolio of suppliers who also rely on CIT. The risk to both are high. I’ve already been working with a number of our suppliers to secure discounts for early pay since we are in a good capital position. For my vendors who are currently working with CIT, I’m working towards offering contingencies that have us shifting any factoring discount away from CIT to us, in return for an early payment.  No question, CIT poses a huge risk to the sector I participate in.

     Paul Purcell also discussed a number of other topics as well. While their operating income has slipped in recent quarters, they are still very profitable. He was also very encouraged by the recent results of Goldman Sachs, which he cited with a high level of respect. It should be noted that Baird was recently named a Top-100 employment firm by Forbes, ranked at 14th, and only surpassed by Goldman. While Purcell also acknowledged, that in hindsight, he would never have predicted the liquidation of top-tier firms in his industry, he was very optimistic that the next 12-18 months would provide an incredible period for investment opportunities. There was also further discussion about the increasing presence of foreign wealth within the U.S. market, particularly real estate. This point was confirmed by Ueberroth, who cited a number of statistics relative to the Southern California coastal market and homes that were being purchased by foreign parties for use as second homes or L/T investments.

Definitely a great opportunity to hear the views of everyone in attendance.

Thanks for reading. . . .

Jeffrey Ishmael

Financial Ratios ARE NOT your KPI’s . . . .

July 14th, 2009 Comments off

            As a follow-up to yesterday’s post, I wanted to expand on the area of having effective measurements and the ability to quantify what is happening with the organization. There’s no discounting the value of all the standard financial ratios, working capital measurements, and HR-related figures that tie back to revenues & other financial figures. However, these measurements are standard through any organization, are easily studied in any business school textbook, and really don’t provide the necessary insight to increase operational productivity. These are merely barometers to give you an additional confirmation that your efforts are paying off and your key measurement tools are providing the appropriate data for decision-making.

 

            Well that’s a great point of view, but what are the key measurement tools and what about a practical example that can bring that full-circle?  Let’s take the example of an apparel company that is selling to smaller retail customers. For years, that small company continues to grow, is building a great brand, and the strong growth is unknowingly masking the growing inefficiencies of the company. In further support of the company’s growth it acquires one or two very high profile customers that have hundreds of stores.  As growth starts too slow, or perhaps stalls, what are the measurements that you have in place to identify what your areas of weakness are and give you the necessary insights to focus your efforts and get back on a path of growth?

 

·         What is your revenue distribution among your customer base? Do you have too strong a concentration with any one customer?

·         Are you driving your revenue growth with lower quality sales that do not carry the margins upon which you built the business?

·         With the growth that you have been able to drive through a few new customers, do you have reporting in place that indicates the health of your core account base? What are the average revenues per door for your core accounts? Stable or increasing?

·         Are you having to commit an unusually high amount of resources to support newer significant customers and is this factored into your net customer margin calculations?

·         As a wholesale supplier, do you have effective reporting on your sales personnel and their productivity? What are their metrics versus last year, on a per-door basis, etc?

·         Are you tracking discount and markdown activity by customer? With these two factors in mind, do you have the ability to report net contribution margin by customer?

 

            There’s clearly a distinct difference between the standard financial ratios and those that you need to drive strategic decision making. If you’re coming to an organization where these measurements are absent then you quickly need to get up to speed with the company to develop a set of indicators that will support the rest of the team in their decision making. Changes in a consolidated gross margin figure or revenue per employee are not going to drive strategic initiatives.

 

            With the above considerations in mind, tell me how your indicators that track revenue by employee, working capital days, consolidated gross margins, operating expenses as a % of revenue, and all the other textbook indicators are going to really help you drive aggressive increases in corporate productivity. The only way you’re going to get there is to have a full understanding of your business, be willing to roll up the sleeves, and come to the table as a financial strategist for the rest of the team. You need to be aggressive in your approach to reporting and find the hidden information gems within your business that you can polish and exploit.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Discipline #5: CFO as the Master of Measurement

July 13th, 2009 Comments off

            In the last segment on “Reinventing the CFO”, I covered the CFO role as the Warrior of Waste.  The 5th  discipline in Jeremy Hope’s book is CFO; Master of Measurement. This is perhaps one of my favorite sections of the book, and the one area I so rigorously incorporate into my day-to-day operations. Not only in a financial perspective, but in an operational perspective. Without measurement, there is no assessing the progress the company is making, not to mention the accountability that measurement can bring into the development of management goals.  The latter being one of the more important areas, which ultimately will drive the operational results.

 

     In Jeremy Hope’s book, he notes that the CFO has a key role to play in changing the measurement culture.”  Hope suggests that in order to efficiently fill the role of Master of Measurement, the CFO needs to:

  • Measure to learn and improve
  • Choose the right measures
  • See measurement as patterns, trends, and abnormalities
  • Provide external reality checks
  • Use a range of measures to inform a dialogue about management performance

 However, before any senior Finance manager can start implementing new methods of measurement, the source data needs to be thoroughly understood and its accuracy confirmed. Depending on the size of the project, this might take weeks, or it could very well take multiple quarters if the data sources is a new one and needs to be implemented throughout the organization.  I would cite a new labor reporting platform for North America as a perfect example of a new data source contributing to a new source of labor productivity measurements.

 

For one company I worked at, we had a field service organization that was comprised of 150 field engineers, generated almost 350k paid hours annually, and was responsible for approximately 30% of our revenues. Yet there was no reporting structure in place that reported our productivity levels, hourly cost rates, or the distribution of hours by activity. In an effort that spanned the better part of a year, we implemented a new payroll reporting process that had our engineers reporting their field hours by activity. We rolled this platform out by region, and as we did so, we reviewed the data monthly with our Regional Service Directors to confirm the information. Once we had consecutive quarters of data, we initiated the process of publishing the results and then implementing monthly & quarterly goals for labor productivity and specific improvement plans for non-productive areas where hours were lost.

 

It was not an easy process and it took an open and collaborative approach with the field organization since there was an inherent distrust of anything previously published and there was no confirmed data source that anyone trusted. As a result, we realized a full 10-point increase in productivity levels, which effectively meant the avoidance of hiring an additional 15 field service positions.

 

My reliance on implementing measurement tools is very high, but only those tools that I can trust, since ultimately, those tools will result in implementing levels of accountability for the team, as well as other levels of management in the organization. In the end, accuracy is key. While it’s quite easy to be excessive in assembling a toolbox of measurement tools, brevity is key so that you have the proper tools to drive increased performance with your staff, and ultimately for the organization. Do you have an effective set of tools and do you trust them?

 

Thanks for reading . . . .

 

Jeffrey Ishmael