2009 Year in Review and Looking to 2010

Over this past year, the opportunity to work with startups and midmarket companies has been a delight, challenge and encouragement to the good workings of innovation and capitalism.  During this time, we have again seen state and federal policy affect the opportunities for business to plan, adapt, adopt and overcome the rapid shifts in monetary policy; banking and the government take over of product markets.  In addition to the greater policy issues that we track to know how to better serve our clients, the items closer to home that matter are understanding financial statements, cash flow, innovation, product development, marketing & sales and most importantly is capital availability.

It is significant to the operational health of an organization that the Board and management have an understanding of financial statements and the relationship of cash flow to sustainability.  During the course of this past year it has become painfully clear that knowing what financial statements mean and how to interpret that information for the purposes of risk management and strategic decision making is not a common skill set among those responsible for organizations.  We have seen the results of this lack of understanding in the public organizational arena and the problem is more systemic in the private small and medium business environment.  With the lack of understanding and knowledge comes the unintended or sometimes purposeful negative manipulation of funds and numbers to make things look better then they may be.  Not only that, if the Board and management are not clear on these subjects then when things start to really look gloomy, desperation may lead to inappropriate activities and use of cash that most likely is not available; hence the financial debacle of the last decade.  We have worked with business leaders to understand these fundamentals so that better decisions can be developed and risks can be mitigated.

I have been participating in a number of discussions regarding innovation.  Often this concept is relegated to technology and products, yet I believe that it has a broader scope into the other functional areas of business including the overall business model.  For some forms of businesses this is more difficult to envision due to regulatory requirements and policies that put the models in boxes.  But for the small and medium businesses, this is the time to look at what makes sense in the existing environment and determine if new opportunities can be derived through innovative thinking and approaches to the business.  We believe in critical thinking that includes cross-organizational participation to bring together the strategic plans that come from innovation.

Marketing and Sales is the lifeblood of any company.  The ability to communicate the differentiating value of the products or services in a competitive environment is what marketing is all about.  The difficult aspect of this for the small and medium business is to understand their competitive environment and set a budget that will produce results through increased sales.  It seems that many organizations still do not have clarity regarding the differentiations between marketing, advertising and sales.  This is an area that we have been able to assist companies in gaining insight and therefore increasing existing customer relations and building new channels to new customers.

The really tough spot for organizations over the last couple years has been access to capital and financing.  We have learned even more this year what the capital markets for startups and mid-stage companies is requiring.  The need to have very well researched and developed business plans is more crucial than any recent time in funding new companies.  Of the several key areas that get the most focus, these two are really zeroed in on:  an understanding of the competitive market and distribution channels.  This goes back to what was mentioned in the last paragraph.  Access to capital requires good efforts by the CEO who needs to get out and sell the value points of the     company to the investors.  With that there needs to be a good management team that develops the information that will build out the financial and business models.  These documents will be needed  in order to seek financing as well.  This may be in the form of a revolving line of credit or other facility.  Although the Federal Government touted that financing to small businesses would be available, the interesting aspect of this is that not much became available and the financial system did not make it easy to gain access to these dollars.

The promises of new loan availability to the small and medium business environment never materialized.  We do not expect it to get any better in 2010.  With this, we are looking at the more critical aspects of how to work with companies to really understand cash flow and cash flow management.  Through much research and study, we believe that companies need to aggressively develop a debt free model with a strong cash flow model.  This is counter to what the treasury and banking systems would have business do.  We are working out the operational methodology of this innovative model and intend to work with organizations in 2010 that will strengthen their cash management strategy and facilitate managed growth.

2010 – Looking forward

We intend to continue to communicate practical and informative business management for the blog entries here.  These will transit the various core activities of doing business and technologies that will best enhance opportunities for business management and market development.  We continue to qualify and quantify the business model that strengthens cash flow and growth strategies.  Our CEO, Tom Niewulis, will continue to discuss real life lessons learned in business, which personalizes that which almost every entrepreneur encounters.  His straightforward and humorous approach brings insights that often come across in a purely academic way from others. 

Our ultimate goal for 2010 is to continue to build great relationships with our clients and build new client relationships by bringing insight and resources to efficiently execute their strategy, to assist in the development of new strategies, to facilitate greater understanding of financial and business models and to assess technologies from an their end user perspective.  We look forward to the opportunities for everyone to excel in 2010.

Cold Weather – Forecasting

The US is experiencing one of its Decembers cold weather blasts.  In the Pacific NW, we hit new low temp records.  The Small and Medium Business environment is experiencing some of its coldest times as well.  Not from an artic freeze but from the legislative lack of understanding regarding what business is and what it will take to really allow growth.  What increases the complexity of a business to be able to forecast budgets, manpower requirements, new product development and growth in general is the inane activities of government and a bunch of academics called economist who have no sense of reality.  The policy decisions being driven by the wrong view of economics and what drives an economy is perpetuating the cold weather that affects business forecasting.

What can any size business do in developing forecast and how is it segmented for growth in any environment or market segment?  One simple and fast method is known as the PEST analysis.  This stands for Political, Economic, Social and Technical.  There are a plethora of examples of this on the Internet but I prefer the KISS principle in all things.  With that I like the to use the relational matrix of PEST to SBSNeR which is Supplier, Buyer, Substitutes, New entrants and Rivalries.  The idea is to pull your team together and put on your Beany* copter hat and do some brainstorming.  As far as the matrix design, put your PEST on the top and your SBSNeR along the left side.  Now begin asking the simple questions about each box in the matrix to get the process engaged.  Expand your questions as the matrix is further explored.

Example questions could be:

1. What is happening with deregulation, protectionism and subsidies and how does that affect the industry the business entity is involved in?
2. What are the local, national and international economic shifts?
3. What are the social shifts related to industry, customers or suppliers?
4. What technologies are affecting the industry, how and why?

Use the results of this exercise to look at the business’s market, product set, personnel and financial model.  Then consider the results that need to be addressed in each area to meet the objectives that are defined as growth areas for the business.  Hopefully your primary growth target is increased cash flow.

An additional influence in forecasting is the question: what will happen with inflation?  We are all concerned about what the political powers will do to manipulate this indicator.  Professor Rothbard states, “Inflation, distorts that keystone of our economy: business calculation.  Since prices do not all change uniformly and at the same speed, it becomes very difficult for business to separate the lasting from the transitional, and gauge truly the demands of the consumers or their cost of operations.”  It is a challenge for business executives, especially in the small and medium business environment, to assess what this means in relationship to supplier price increases, cost of living adjustments for employees, demand by customers for price adjustments and maintaining a consistent Net Margin that will maintain positive cash flow.  Determining the influence of inflation is about looking at the complete picture of the living entity, the business, and seeing into the future the best we can.  Add this component to the PEST analysis then readjust all the variables to establish what are the goals set as growth factors for the particular business.

Forecasting is not the crystal ball activity many make it to be.  It is a methodology that is affected by numerous variables and therefore, a lot of work.  The lack of time and the value proposition of forecasting becomes the limiting aspect to accomplishing it in a small and medium size enterprise.  Yet, paying attention to it addresses several valuable business metrics that affect market knowledge, product alignment to the market and the affects of policy on future execution.  Properly done forecasting will heat up the incentive to execute to growth.

A Little Political Rant

It never ceases to amaze me that those that are in the trenches have a clear view of what it takes to restore jobs and allow individuals to develop real wealth.  The issue is philosophical.  What has happened over the last 50 years?  Simply put; instead of those elected to office really listening to the constituency, these elected persons rely on academics who for the most part have no true scientific or moral basis to influence policy that then affects the lives of individuals and the lives of businesses which are also living entities.  It is unknown to most of us that the Union for Radical Political Economics is 1,200 members strong that are academics that have direct influence on policy, especially in this present Congress and Administration. 

This organization believes and argues for the abolition of corporate profits and the elimination of pricing on eighty percent of the goods in the American economy.  We see this influence now in the attack on corporations and the interference by government in free-market exchange through Agency rules and regulations.  This is done not only at the national level but at the State level as well.  The assault on small and medium business is felt through the trickle down of egregious Federal, State and Local Agency rule making that set encumbering regulations and fees.  The constant barrage of incongruous business legislation and regulation seriously impacts how small business executives can forecast when they are wondering what is the next shoe that will drop.

The critical issue is that small and medium business owners need to be involved in the legislative process at some level.  Joining associations such as the Small Business & Entrepreneurial Council (www.sbecouncil.org) can inform business executives of national issues that will affect the elements of forecasting.  Contacting your State Legislator or County Commissioners will give one insight into local issues being addressed that will affect the business entity. 

With the fact that policy will affect business, every business needs to be involved in the political process.  Know who your elected officials are and communicate with them.  It is the responsibility of the business executive to do this for the sake of the living entity, the business.

*For the younger generation see Beany & Cecil cartoons by Bob Clampett

Exit Strategy Part 3 – Succession Planning

Funny how a discussion regarding politics and election cycles got me thinking about Succession Planning. The question that got all this really going had to do with how we raise up true Statesmen in our present political climate. Where do we find those that can be critical thinkers that act on principle and not on the dictates of a political party? The same questions are relevant to business. Where do we find and develop our next CEO, Vice Presidents, Boards of Directors and Small Business Executive/Owners?

So, we find the business entity in a moment of transition that is significantly going to affect operations. A senior executive is leaving. It doesn’t necessarily matter why but in this case; it is one of the top three decision makers in the entity. An Exit Strategy is being executed whether it is personal or that of the organization. What happens now? Let’s take a real life example; the CEO of General Motors (GM) is gone. The example being that I have defined every key person in the SMB environment as an executive and if your number one in the organization you’re most likely the CEO or President. What’s happening if you are gone? Who’s there to step in? Who will succeed you?

Succession planning is big business for Human Resources and Organizational Consultants. It is often thought of as the thing that heavy hitter and large corporations do to make sure that the good old boys keep the wraps on things. Wow, what wrong thinking that is. As we see with the GM example, the Board of Directors made a decision to remove the CEO and now are in a hunt for a new one not to keep an old boys club going but to increase the value of the company to the stakeholders.

The idea of increasing value of the business entity in a sustainable manner into perpetuity is a first principle of a Succession Plan. The basic concept for all businesses no matter what the size is should be to understand how to keep the entity moving forward with the inevitability that the most senior leadership will exit at some point for any of the reasons that I discussed in Exit Strategy Part 1. When someone heads out the door, what happens is a long conversation but the question here is – who is ready to step in?

I look at Succession Planning as an investment in critical assets of the business entity. As you know, I view a business as a Living Entity so that means there must be stewardship of that which is part of the entity. With that thought in mind, developing the individuals to succeed is critical to the growth and development of the business. Ensuring that someone will be able to step into the next role in leadership and management is critical. That is why I think that this list is some of the top reasons for a Succession Plan as part of the business entity Exit Strategy.

• It will prepare current employees to undertake key roles
• It develops talent and long-term growth
• It will improve workforce capabilities and performance
• It most often improves employee commitment and therefore retention
• It will meet the career development requirements of existing employees
• It will most certainly counter the increasing difficulty of recruiting employees externally
• If done right, it focuses on leadership continuity and improved knowledge sharing
• It will provide for more effective monitoring and tracking of employee proficiency levels and skill gaps
  

I believe that in short, Succession Planning is simply training and better yet, mentoring. I know, too simple yet very difficult to implement especially if there are a lot of ego’s in the senior management hallways. Just a quick reminder, the sustainability of the business entity isn’t just about you; it is about the longevity of the business.

OK, ego’s aside. All the HR experts and academics will agree that without a plan several things could happen to the organization such as:

• ß Loss of expertise and business knowledge
• Loss of business continuity
• Damaged client relationships
• Time and effort to recruit and train replacement employees
  

What are the basic things that should be in the Succession Plan?

• Identifying roles for succession
• Developing a clear understanding of the capabilities required to undertake those roles
• Identify top performers in all departments and make sure that they are engaged and satisfied to stay with you for a long period
• Prepare and develop employees to be ready for advancement into each identified role
• Understand the time needed to backfill the key roles
• Continually review and check the process of succession and whether planned individual development has taken place
  

You are thinking; well, I’m just a two, maybe a three person shop at best. What do I need to think about this for? I would suggest that you reconsider what Murphy can do in any business and that if you’re that entity that was just mentioned, what happens to the other couple employees if you exit unplanned? Honestly, any lack of planning leads to potential failure of the business. Without proper succession planning, the future success of the business is left to chance once the leadership is gone. Under these possible circumstances, if the entity succeeds at all, it is by default rather than planned.

Proper business continuity for sustainability is dependent on succession planning that can help prevent a business from being frozen and discontinued. If the business entity is family owned, a plan also helps avoid conflict among family member and between heirs and surviving owner-executives. Remember, that no matter the size of the business entity; it endures the same pain when it has to go through management changes. It all scales according to the complexity of the organization as a Living Entity.

If the entity is a corporation with a Board of Directors, the discussion does become even more complex when it comes to CEO and Board Member succession planning. It is even coming to the point that legislation is in effect for publicly traded companies that require succession planning for CEO’s. Ah, another discussion.

New SBE Council Report on SMB Friendly States

I have found that the Small Business and Entrepreneur Council is a great organization to be a part of. The are working hard for all of us in the SMB environment from a policy and information perspective.

They have just released a new report. Here is the first paragraph from the news release. Please follow the links for all the information.

"The Small Business & Entrepreneurship Council (SBE Council) today released its 14th annual rankings of the states according to their public policy climates for small business and entrepreneurship in the "Small Business Survival Index 2009: Ranking the Policy Environment for Entrepreneurship Across the Nation." Access the SBSI 2009 map of the states by clicking here."

For a full copy of the report follow this link Small Business Survival Index 2009 report

NCDCS is a source for the SMB environment to help understand the policy changes as they affect risk management, governance, board development and strategic planning.

Exit Strategy part 2

I am revisiting this discussion because it has become so important in today's environment and because of the the illness of a friend of mine. This potentially life threatening illness was never a part of the business plan. So now what do they do? I am reminded again through this personal challenge that most small and medium businesses don’t think about what it means to exit since the idea is to build a business. Every entrepreneur is busy spinning hats to move their idea forward with passion that the thought of exiting is so remote you might as well be in another universe. Yet, there are distinct areas that I find every business needs to consider as part of an Exit Strategy.

My life lessons in business have taught me to identify and prepare for these areas as best as practical. Since I consider every business owner an executive no matter what the size of the entity in revenues or personnel, the first area to consider is the Executive Exit.

Every Executive should be interested in leaving the business at some point. Several planned Exit targets are:

1. The attainment of some age, income level, savings acquired or other parameters that meet thought out wealth requirements.

2. The growth level or health of the business entity - sustainability.

3. The transition of the business entity to another. That being someone mentored in a succession plan, a sale or merger.

4. If the cash runs out, what is the plan? This is for self-preservation.

Unplanned Exits need to be re-emphasized and they could be:

1. Death of the executive, spouse or other key personnel.

2. Divorce of the executive or other key personnel.

3. Disaster, which could be: accidents, natural disasters, financial, market turndowns or key customer(s) exiting.

All said and done, without an exit strategy, the executive does not know how to finish the business activities which makes doing business like getting into a race with no end in sight. The potential is that somewhere along the line there needs to be an exit. The business started with and for a purpose. The Exit should be planned for, as well as having contingencies for the unplanned or unexpected.

Babies and Economics

I’ve been off line the last week since our daughter presented us with our first grandson this past Friday.  We were hoping that he would hold out until my wife’s birthday on November 4 but he was more then ready to come into the world.  Based on baby behavior and his size, we are guessing he is two weeks late.  Wow!  That gets one thinking about delivering to the customer on time.  Well, we are delighted with welcoming our grandson even in these seemingly troubled times.

During my flight to Dallas from the pacific NW I began to reread Ronald Coase essay “The Problem with Social Cost” and John Locke’s letter on Toleration.  What do these have to do with a new grandson?  I believe that the simple essence to the answers of our present political and economic dilemma can be fundamentally found in these two works for starters. 

I’ll start with Locke’s argument that a society cannot properly function without core religious foundations.  He argued that these foundations are rooted in personal understanding and Biblical relationship with The Living God.  Not only that, Locke argued that atheists should not be tolerated because 'Promises, covenants, and oaths, which are the bonds of human society, can have no hold upon an atheist'.  What this means in the context of my grandson is that there is a responsibility of his parents and me to ensure that he has a moral foundation based on Biblical principals.  This is so that he clearly understands that the meaning of promises, covenants and oaths have deep rooted meanings and are more than just words that a bunch of lawyers can manipulate in legal jargon.  There are responsibilities that have personal, societal and eternal ramifications.

This brings me to what Coase talks about in ‘The Problem with Social Cost’.  For the most part this has nothing to do with babies but it does have everything to do with pricing models and government subsidies.  Yet, in the long run, without babies we would never be able to look at the future of economic opportunities.  With that confusion running through your synaptic nerve endings, let’s consider that all businesses begin with babies.  The theory of supply and demand is most relevant in this context.  Let’s face it, baby demands and mom supplies.  Now the interesting aspect of this is that baby, especially a newborn is always in demand for any number of potential commodities:  mom’s milk or appropriate substitute, cleanup after messing diaper, sleep, warmth, attention, care and love. 

Supplying these needs for baby has driven many industries that culminate in mom being ale to supply the demand.  If one were to specify a single segment of this generalized baby industry as economic theories do, breast-feeding would be a major study.  How so you ask?  Think about the volume of production to the time cycle of demand.  This element alone speaks to the essence of core business management.  Simply – baby has to eat; usually at some set time frame (if the parents are smart and set a schedule and not let baby dictate the cycle); mom has to produce the milk and ensure that the delivery mechanisms are balanced and in good working order.  Some folks don’t understand that you have to balance out the time on each breast to sufficiently ensure milk production.  If for some reason, the mom cannot produce sufficient milk for the baby the consequences could be devastating or an alternate source for this product must be located and acquired.
There in lay the opportunity for a new venture that meets a demand.  New entrepreneurial opportunities arise from needs or wants.  Of course, if one looks at modern economic theory and its ill-fated implementations we recognize as Coase did that the true human element is removed.  Humans have been minimized when viewed in economics, law and business.  Theorist have become ideologues and in doing so attempt to formalize sociological answers as if people were cocooned in The Matrix.  This thought takes me back to reading Locke and the fact that we have to look at business and economics from the Human point of view with morality and virtue derived from an absolute source, in my world-view, the Biblical Living God.  It is interesting what fundamentals of sociological, economic, business, monetary, government and other life factors are presented in this world-view.

What having a grandson presented into my life transcends beyond the raising of my own children is that to understand business and the world around us, we need to get back to the fundamentals of life.  We are human; our western culture is formulated in the values and ethics of a Judeo-Christian world-view.  Businesses are Living Entities as I write about in my book and seminars and must be nurtured no different than a baby from conception to its opportunity to establish its legacy in society. 

Exiting Before You Begin! What’s With That?

One of the challenges in the publicly traded corporate world continues to be succession planning at the executive and board level.  Boards and shareholders are looking for leadership that are not only creative and responsive to markets but who can be people of integrity in fiduciary responsibilities.  This challenge seems to be more complex in the private company environment.

About 90% of our economy revolves around the small and medium business environment.  Most of these companies with more than ten employees are often family owned or have a tight knit management team.  Often unlike the corporate entities that negotiate executive packages with exit plans, these businesses do not have business or personal exit strategies.  That is unless the exception for a business is exit strategy that will be required to formulate if investors are participating.

What’s the difference in exit strategies?  Most often, when the discussion is engaged about an exit strategy it is related to investors and what the investors want in return for taking the risk in a company.  The math for this type of strategy is not all that extensive but it varies depending on when an investor comes into the company.  This type of exit strategy is most often established in business plans.  Other and often more critical exit strategies are the small and medium business (SMB) executives’ personal strategy and the board member strategy that often takes a back seat. 

 The focus for the moment is the SMB executive exit strategy.  The founders of businesses in this environment usually get going with their hair on fire and learn that the space fantasies talking about warp drive is not all that far fetched.  The fact that life happens along side of various business activities seems in the nebula.  So when one some thing happens, not only are hats spinning but so are heads with the dumb founded look of, what happened.  I look at four areas that need to be prepared for in personal exit strategies:  Disability, Death, Divorce and Departure.

•  Disability, I know the effects of disability first hand.  I had a major accident that devastated one of my first businesses.  The fact was that I did not have succession plan in place and did not train employees sufficiently to carry on with critical aspects of the business.  Because of that, the entity collapsed.  One never knows when a debilitating accident will happen.  What I learned in the military about training your replacement, I did not carry into my business life.  But I learned the hard way and have ensured ever since that if I as the chief executive and bottle washer go away, the business can sustain itself because others can carry on.

•  Death is inevitable and no one knows when it will appear.  With that, the idea of looking into your organization and training key people is critical to the legacy of a business.  If there is no one that you think can sustain the business, then have some plan laid out for outside counsel or your Advisory Board to do a search for a replacement.

•  Divorce is another devastating life experience.  I don’t know about this one first hand but know enough folks in business to understand that this event can cause a business to come apart.  There is not a rational way to prepare for this potential except to take care of your spouse first.  Business will get done but an unhappy home life affects many things including the company.  If this event does occur, then having had the knowledge to train up others will help obviate the instability caused by a divorce. 

•  Departure is something that we all would like to occur in a most positive manner.  In this positive light, succession planning is critical.  What are the benchmarks that need to be established for the SMB executive to transition?  These often are personal financial targets achieved, age, family goals or any of a hundred targets one could set.  This takes a working process just like any exit strategy.  With this positive side comes the dark side.  If the business entity is a Partnership then there may be issues between partners that cause one or more to depart.  These may be for the bright side of an exit strategy but it could be for other reasons.  Hopefully the partnership formation contracts accounted for the exit of each partner.  The same is true for an LLC in that the formation documents should clearly articulate an exit plan for the active members and specifically those in management.

I find that in working with any size business, the concept of developing an exit strategy of any flavor is not often thought about and planned for.  This is especially true at the early stages of forming a business entity.  I always, get the quizzical look when I talk to business startup executives about having an exit before they start.

What is your exit strategy?  Do you have one that is business plan focused to the investment community or have you looked at the executives in the company to define what their exit could be?  Either will have major effect on the business and its sustainable legacy.

Changing Business Times

The changing times of the U. S. economy are driving more individuals to look at alternative ways to build income. For years, there has been the transition in the American workforce from the single employer for life employment to thinking about multiple streams of income. This transient employee milieu began emerging as the society began to move away from heavy industry to more financial services, intellectual industry and the explosion of technology.

We saw in the 1990’s that as quickly as a new technology company was started there were sometimes mass exodus of key employees from one company to the new. The incentives to do this overcame any sense of loyalty to the initial company. We know that the younger end of the baby boomers to the present will change careers on the order of 10 to 15 different jobs by the time they are 50 years old.

With this being the case and the present economic cycle, it is only reasonable that we are seeing the increase in entrepreneurship. The Small Business Administration Presidential Reports have commented consistently that about 30 million individuals a year go into business for themselves. What that means is that there a lot of folks that are looking for honest and well-compiled information about how to do business correctly. What is happening is that the information super highway has terabytes of data around the “how to” of this or that. Yet, the consolidation of that information is not presented from a real life human perspective.

What we will continue to do at NCDCS is work hard to give a credible Life Lessons Learned approach to business. What is a business as a Living Entity and how are those participating in the Living Entity, building a sustainable legacy. We are here to be committed to you, our readers and clients. We have returned from a long-term engagement and family medical issues. We are more ready than ever to be the Strategically Whole-istic Organization that you have known us to be.

Many thanks and Blessing to all those who have been our trustworthy colleagues and friends through this last year and into the future.