Want to Start a Business?

America is the heartland of entrepreneurs and would-be entrepreneurs. Our young people want to start their own business so they can have the kind of life they’ve dreamed of, or to follow that great idea. Many of our corporate executives yearn for the day they can take their acquired knowledge and build a company of their own. I learned that lesson years ago when I realized the only job security you have is the job where you’re the boss. Immensely rewarding. I’m guessing many Americans now unemployed due to COVID are thinking about that pretty seriously about now. But owning your own business also means there is no employer on the top floor to write checks and pay your bills if you’re not being successful at your business. That’s the risk part.

So if you’re thinking about it, and wondering what kind of business you should try, consider this concept from Jim Collins, author of “Good to Great,” after his 5-year study of the characteristics of really great companies. He asked the leaders of those companies and developed as a result the Hedgehog Concept (don’t ask) that focused on the three things that great companies had in common. They were:

  1. What you are deeply passionate about – so you’ll keep going even when the going gets tough, as it will,
  2. What you can be the best in the world at – or at least the best in your market space, and
  3. What drives your economic engine – translated, you can make a lot of money doing it.

And one more thing: If your company needs to raise money to get off the ground, or to get to the next level, or to keep the doors open while your product finds its niche, whose job is that? This would be the part where I tout your fractional CFO as the go-to guy to raise money. But that ain’t it. YOU are the CEO of your company, regardless of its current state, and the people with the money want to see and hear from you. They want to hear first hand your vision, your sense of the market for your product, your impassioned belief that this will fly and fly high. Your CFO had better be able to back up your vision with numbers and solid assumptions behind them, and he/she may even be able to initiate contacts and make introductions as we often do. But that’s your support team. You are the coach and the quarterback and the cheerleading squad. So the #1 job of the CEO of a company that needs money is to raise the money!

Still want to build that great company? So, what are you waiting for?

The McDonald’s (Short) Story

It was 1940 when Maurice and Richard McDonald opened their fast food restaurant in San Bernardino, CA. Fifteen years later they’re doing great in their single-location restaurant when a funny thing happened. At age 52, all-purpose salesman Ray Kroc was selling the Prince Castle Multi-Mixer, a device for making six milk shakes simultaneously.  On a sales call he met the brothers at their hamburger stand. The brothers McDonald ordered eight Multi-Mixers and Kroc, who must have been amazed at the milk shake math behind such a sale, determined to have a closer look at an operation that required 48 milk shakes at one time. He soon calculated that that hamburger stand under a pair of garish golden arches must be doing a huge business every year. Kroc ultimately convinced the brothers to franchise the operation, and an empire was born.

The point of the story? Sometimes the best opportunities are right in front of you. And sometimes they just look like opportunities through rose colored glasses. Jim Collins, author of Good to Great (2001, William Collins), said there are three things that must come together for a business to become a great one. Paraphrased he said:

  1. You must have a passion for the business (because when things go badly, as they often will, your passion will help you stay the course).
  2. The business must have the potential to be the very best in the world (however you define your world).
  3. You must see clearly the ability to make a lot of money (these were not just “getting by” words, but meant to drive home the ability to really do well at the bottom line).

You have to believe Ray Kroc was a visionary to see all of that in one busy Southern California hamburger stand, because he certainly achieved greatness.

Or was he just lucky? Do you feel lucky?

Contribution Profit – Magic Words!

We all understand terms like Pretax Profit and EBITDA that we use to describe our company’s bottom line, but what tells us where that profit (or loss) is really coming from? The answer is a set of numbers that rarely appears on an income statement.

While the traditional income statement showing Cost of Sales and Gross Profit is most commonly seen in financial reports, there is great value in presenting Contribution Profit instead or as a different look at the Income Statement. In this approach all direct costs are deducted from Sales first, because they are costs directly incurred as a result of sales – costs that would not have occurred but for the sales. The result of deducting direct costs from sales is called Contribution Profit, meaning the profit directly contributed by those sales. What if your largest customer was actually bringing you half the profit of your fifth largest customer? Wouldn’t you want to know that?

After Contribution Profit, indirect costs and overhead are presented further down in the income statement, indicating they would likely have occurred even if the sales had not. To be fair, sometimes we find some overhead costs are directly attributable to a given product or customer, e.g., required inspections of an aerospace part before it can be delivered. These should be included in the Contribution Profit calculation to get a complete picture. This can make the calculation tricky, but even more important to do.

Net Income is identical in either case, of course. The greatest value of Contribution Profit is in presenting it for (a) individual product lines or (b) individual customers, thus showing the specific contribution to the bottom line that was produced by each individual product line or customer. We recommend making this calculation periodically for a company’s largest customers and their highest volume products. You never know what you might find.

Is it time to sell your business?

It was nearly 20 years ago when I first approached this topic, something just about every consultant on the planet has an opinion about. While we’ve helped a fair number of privately owned companies get sold, I’m not here to tell you if or when you should sell your business. But what I can tell you is the characteristics I think your business needs to demonstrate to get the highest price possible. It’s a short but important list.

  1. Is your business producing positive cash flow? If it’s not making money, your selling price just dropped through the floor.
  2. Does the business have growth potential? Your buyer doesn’t want to pay for your past success, they want to buy a way to their own future success.
  3. Is the business “clean”? This has to do with good accounting and reporting, a clean tax record, no contingencies hiding in the closet.
  4. Is the timing right? Are you selling because it’s going downhill and you want to jump before it drops further? Fageddaboutit! Fix it first.
  5. Are your expectations reasonable? Given your answers to the first 4 questions, are you expecting a fair price or a pie-in-the-sky one?

I could write a book on each of the questions above, but you get the point. If you’re not sure, or if you’re good for 4 out of 5, get an outside opinion from someone in the business – an investment banker, a business broker, or Your CFO for Rent. We’ve been there and we’ve helped get it done. But whoever you ask, be prepared to listen. They’re going to tell you a few things you don’t want to hear, but you should hear it before some potential buyer does.


Ergonomic keyboards and mice – from Consumer Reports

I’m not a techie, but I spend hours each day at my computer. Pain in my index finger is nearly constant, even when I changed to a trackball and shifted my clicking finger. So I rallied when I read the current (September 2020) issue of Consumer Reports, which evaluated ergonomically engineered keyboards and mice. I ordered their top rated wireless mouse immediately. You might want to check it out.

Your team doesn’t agree! Now what?

Management teams often disagree on key issues affecting the business, based on their own view of what’s working and what’s not. If a consensus is desired, that leaves it to the CEO to consider those views and set the best course of action. But what if it’s not clear whose opinion is right and whose opinion is misguided or misinformed? How do you properly take into account the views of your team? Here are two questions on this topic that one client asked us, and our response:

“1. If key people think it’s handled, and other key people think it’s not, how do you reconcile the views and put reality into your action plans?”

This is truly the question that every great company has found a way to answer, and troubled ones frequently don’t even try to. This is very often a process that is dependent on management style. The key is to find out from those key people what they really believe, not what they want to believe. In my view this is the process:

Conduct individual one-on-one interviews with each member of the team, telling them in advance the agenda for your meeting, and give them some time to prepare. The agenda would be:

  • For those who think it’s handled, come with concrete evidence that supports your view. Show me clearly why you feel it’s under control. You don’t challenge their view if yours is different. You only challenge them to be clear about the evidence they use to support their opinion.
  • For those who think it’s not handled, same question, same requirement to back up their view with specifics, same non-confrontive listening.

Then you study the respective responses for Aha! moments, flawed thinking, a new perspective, or a validation of what you felt before. When the process is complete, I believe the consensus reality will be clear, and hopefully the course of action will as well.

“2. How can you be sure that you’re not missing something that someone else sees more clearly?”

See answer to 1. Above.

We are Your CFO for Rent®

The Recession is Here – Protect and Prepare!

Well, after a pretty strong 2019 we’re truly in the toilet, economically speaking. The still active COVID-19, protests over police behavior and BLM, and the shut down/open up/shut down again guidance from our elected officials have pretty much guaranteed this is going to be a very bad year for many businesses. The question to as yourself is this: Does it have to be a very bad year for your business? We last answered that question for readers back in 2008, the last time we were faced with recession. The answers then were good enough to be repeated here, because evidence indicates that clients and readers who had the information at hand to protect their businesses and prepare for a stronger recovery did just that. Here are 4 reports you should have on your desk and 3 tips for allocating scarce resources that will ensure you’ll come out of the gate better than your competitors.

First, my 4 reports – top tools for protecting your business:

  • Report #1: Your minimum cost of doing business – your fixed nut, or as a client once called it – LODO, Lights On, Doors Open.
  • Report #2: Your earned Contribution Profit on each major item you sell, and on each of your top 10 customers. I’ve never seen a client not be flabbergasted when they saw this report for the first time.
  • Report #3: Your projected cash flow, in detail, by month or even by week if it’s tight, so you KNOW when you’ll need to tap your bank (assuming you’ve already taken advantage of any government aid programs available to you). Don’t forget loan forgiveness or repayment obligations.
  • Report #4: Your detailed P&L report in trend format – month by month, side by side, for 12 or 13 months, so you can see trends as they develop before they overwhelm. A 1-2% drop from last month is probably nothing; a 1-2% drop each month for the past 6 months is dangerous if you don’t know about it.

And my 3 tips for preparing for the recovery:

  • What projects are you currently investing in that you could postpone for 6 to 12 months without hurting your business today? Put them on hold and keep the money in the bank.
  • What projects have launched but aren’t  producing the results desired, requiring more funding to keep them going? Consider dropping them or putting them on ice for now, until later when the climate might make them more appealing to your customers.
  • NOW, where can you make an investment that will position you for market share gains when things turn around, as they always do? This is how you get ahead of the competition by seeing further than they can, and having the resources to back up your insight.

Want help? We do that. We are Your CFO for Rent.

Working from home? Here’s your technology preparedness checklist

Here’s a very useful checklist developed by Jerry Savin, CEO of Cambridge Technology Consulting Group, former national president of The Institute of Management Consultants, and one of the few tech experts who actually speaks English. He developed this list to help those of us who are working out of the office as a COVID-19 defense mechanism but don’t want to be hampered in our ability to work effectively from home and at the same time avoid being victims of those who would take advantage of the lesser tech support typically present in home offices. The link to his complete checklist is here:

Checklist for Remote Working

Lease or Buy – Which is Best?

This question still comes up regularly. Should we lease or buy the equipment we will need next year? About half the time the questioner is actually asking which method is least costly. So here’s the answer.

The answer will ALWAYS be: Leasing is more expensive. The leasing company is buying the asset you want, usually from the same source you would, and then leasing it to you. Another layer of operating cost and profit (the leasing company’s) has been added to the transaction, and their buying power will almost never lower your cost below what you could have gotten it for directly. If a lease sounds less expensive, you probably need help in negotiating a better purchase price.

So why lease at all?

The answer will ALWAYS be one of these:

  • To conserve cash, either because you couldn’t get a loan or couldn’t come up with the cash required for a down payment on a loan. Expect a very high lease payment because the lessor probably sees this as a high risk transaction.
  • To get credit from a new source without impacting your normal bank credit lines (which you’ll need later), or when your bank credit lines are tapped out and you still need more. Watch out for violating your regular bank loan covenants.
  • To conserve cash, but this time because your high business growth rate is consuming large amounts of cash to build inventory, finance receivables, etc. In this case the extra cost might be worth it if margins are high enough.
  • To sell tax benefits you can’t use but someone else can. Still raises the cost over an outright purchase, but often looks prettier at first blush.

The answer will NEVER be to save money.

This doesn’t make leasing good or bad, just more expensive than buying outright. Might there still be good reasons to lease? Of course, as we’ve hinted at in our bullet list above. But given the level of interest rates these days, you’ll want to take a hard look at leasing vs. buying to avoid making a financial mistake you’ll be paying for years down the road.

If this isn’t perfectly clear, please call us. We’d like to help.

Teachers Beware! Your Retirement Plan may be costing you way too much!

While teachers likely don’t read the Wall Street Journal, that newspaper does some very solid investigative reporting, and on October 2019 they reported on one such investigation around the high cost of many 403(b) retirement plans. Costs were sometimes much higher than justified in many of these plans because sales agents for insurance companies used deceptive sale techniques to gain support and enroll subscribers.

How to protect yourself? Ask the hard questions and don’t accept general answers. Read the fine print when the presenter stands to earn money from your purchase, because they have a strong interest in your buying their product, perhaps much stronger than their interest in protecting you from exorbitant fees.  AND learn the basics of financial management for yourself, because you are your own best advocate. Grab a copy of my book “Financial Mastery for the Career Teacher”, Corwin Press 2014. You will learn how to manage your money more effectively with chapters covering such key areas as:

  • Your personal business plan
  • Managing debt, life insurance and savings
  • Buying a home
  • Investing in the stock market and/or real estate
  • Retirement planning, wills and trusts
  • How manageable technology can help you

Find it on Amazon or other online book sellers. All from Your CFO for Rent®

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