Howe's Bayou Brad Howe's monthly guide to navigating the swamps of small business financial management January 2010 Good morning, and Happy New Year, since this is the January issue. Most small companies can't get rid of the Old Year fast enough. Was it survival of the fittest in 2009, or of the most prudent? Were you just lucky, or were some of your decisions really pretty smart? Now that it's all been said and mostly done, what did the experience of 2009 really teach you about better management of your business? Best regards, Bradlee T. Howe Financial Managers Trust Thinking Back, and Forth "What if…," he said. "What if you do everything right in this new business and for reasons totally beyond your control, it goes bust? You've done the best job that anyone could do, but it's not enough. What then?"Pat Liles, Professor of Entrepreneurship, was one of my mentors in those days. I had just finished telling him (1.) that I had just turned 40; (2.) that I had just purchased a new home with an 18% mortgage (early '80s); (3.) that Annie and I had just brought our fifth child into the world; and, therefore (4.) I had 20 years' worth of college term bills to look forward to. And — oh yeah — I was fully committed, with a partner, to starting a new business. "For your family's sake, if not your own," he continued, "you can't afford to let that happen. You have to assess the downside and hedge your risk. You can't put all of your eggs in that single basket." Pat was right. Despite my best efforts, the business did go bust, but not before I had responded to Pat's homework assignment and developed a back-up strategy which ultimately morphed into my now 25-year consulting practice. In retrospect, it all resulted from protecting my downside. There have been a lot of downsides tested during the past year. A lot of basic assumptions have been questioned, leading managers much more frequently to say "What if…" For example: In a conference call twelve months ago, the financially-astute director of one of my client companies was telling the rest of the Board, and me, that having more than $100,000 on deposit in any bank was risky. It was hard to believe that big bank failures were imminent, but we pulled the $700,000 balance — seven months worth of venture funding — from our large Boston bank and invested it in a ladder of almost-zero-yield T-bills. Better safe than sorry. We all slept better during the next several months. The management team of another client company in December 2008 decided that its record profits and substantial project backlog were evidence that its growth strategy was working. Consequently, the managers projected a 25% revenue increase for 2009, only to discover by the end of January that nothing more was coming in the door. Their Fortune 500-level clientele had put most of their 2009 initiatives on hold. Many painful decisions, involving salary reductions and furloughs, ultimately led to a new compensation structure with lower fixed salaries and strong incentives based on generating and closing qualified leads. A third client of mine also had a record-breaking year in FY08, benefitting from the revenue and profitability growth which resulted from bringing a new manufacturing facility on line. Feeling quite secure after several years of steady pay hikes, the 100 employees on the shop floor were looking forward to a continuation of 30% overtime, which increased their weekly paychecks by an average of 45%. Surprise: 2009 brought a revenue drop of 10%; new equipment increased productivity by 10%, and for much of the year O.T. was zero. But everyone still had a job, and the company continues to make money. From these and my other client experiences in 2009, five lessons for small business management are worth reiterating:
Alligator Bites Another 2009 "What if…" learning experience…"Oprah Winfrey probably thought she would see nothing but an explosion of gratitude when she tried to treat the entire Internet to two pieces of KFC's new Kentucky Grilled Chicken by promoting a downloadable coupon (no longer available) that could be redeemed at 'participating restaurants.' Little did she realize…. "When you combine the enormous drawing power of Oprah, the viral capabilities of the Internet… the general allure of anything that's free, and the state of the economy, the systems supporting the download should have been set up in anticipation of substantially greater turnout for Oprah's chicken giveaway than we had in the last election. "This didn't happen, or didn't happen enough, and Oprah.com commenters complained of hours-long delays in downloading the coupon, if they could download it at all. "Furthermore, if anyone warned KFC locations ahead of time that this was coming, that warning apparently did not contain enough exclamation points and underlined words…. "The result? The perception of a massive customer- service failure at precisely the moment when KFC was going for good PR. Customers who did get their coupons and trudged to a Manhattan KFC reportedly staged some sort of protest when they weren't served. "You don't really want the theme of your giveaway to be 'civil disobedience.' Nor do you want to spend the day after what should have been your moment of triumph clarifying 'there was no riot.'" — Linda Holmes, reporting on NPR, May 7, 2009 Draining the Swamp
Source: Market Data Center, Wall Street Journal *Oil statistics from 11/28/08 and 11/27/09 **Data from U.S. Bureau of Labor Statistics for 11/30/09 and 11/30/08 About Us Financial Managers helps the managers of smaller companies and non-profit organizations develop reliable financial information for operational decisions.On an affordable retainer basis, FM serves as the part-time controller and senior financial manager for multiple clients, leading them to profitability and positive cash flow. The goal is for the organization to outgrow Financial Managers' services, at which time FM will take the lead in identifying and hiring the right full-time financial person for the firm, and effect a smooth transition to his or her management. Financial Managers Trust 781-799-5737 | FAX 781-788-9794 PO Box 2 Lexington MA 02420 PO Box 1527 Fort Myers FL 33902 www.finman.com Newsletter developed by Blue Penguin Development |