It's finally spring in Chicago and time to clean up the yard and prepare the garden. I ordered sod and mulch from Buy the Yard, a local small business. The customer service rep was very helpful and patient as I struggled through the math of how much mulch is required for my yard. A day after the delivery, I received a thank you note in the mail and a week later I received a follow up call asking "how'd we do?".
The thank you note reminded me of my experience financing a new car through Alliant Credit Union. The application process was painless because Alliant holds my mortgage and the loan officer had a complete view of my financial position. A couple weeks after the loan was completed, I received a personal, hand-written thank you note.
Each of these companies are competing with large, well-resourced competitors. I could have bought sod and mulch from Home Depot or Lowes. There is a Chase Bank two floors below my office and online loan services that wouldn't even require me to leave my office chair. Yet these companies are winning because they provide customer service that is difficult for competitors to replicate.
Many of our portfolio companies succeed because they provide a level of service that the competition can't match. I-deal optics has a high 90% fill rate on orders. Doctors rely on us to deliver product on as-needed basis and, frequently, on a next-day basis for patients that need an immediate replacement. Storflex provides short lead times to grocery store operators that are remodeling stores, opening new stores or recently acquired new stores. It's not uncommon for Storflex to turn a rush order in 24 hours when industry lead times are 3-4 weeks. SGA Production Services provides it's customers with the peace-of-mind that every job will be done on time, will be code compliant and will have a fit-and-finish that is required by our customers' demanding, corporate clientele. Imagine not completing enough seats for rabid fans expecting to enjoy their first Super Bowl and you will get a sense for the value of SGA's services.
Competing on service is not a new concept but it requires a solid understanding of customer needs (defined as pain, problem or concern) and a consistent and genuine effort to address the need. But, when a small business succeeds on service, it is a source of sustainable competitive advantage.
Posts tagged with Managing A Small Business
It's finally spring in Chicago and time to clean up the yard and prepare the garden. I ordered sod and mulch from Buy the Yard, a local small business. The customer service rep was very helpful and patient as I struggled through the math of how much mulch is required for my yard. A day after the delivery, I received a thank you note in the mail and a week later I received a follow up call asking "how'd we do?".
This WSJ piece does a nice job of outlining how basic economic incentives are threatening ObamaCare. Every Hadley Capital company provides health insurance benefits to its employees and nearly all of them will be exempt from ObamaCare penalties because they provide benefits well above acceptable minimum coverage. Unfortunately, they are not immune to the rising cost of health insurance or the cascading, negative outcomes of ObamaCare that are detailed in the article. It is disappointing that the White House did not consider fundamental economics or appreciate free market reaction before implementing ObamaCare:
“We wouldn't have anticipated that there'd be demand for these types of band-aid plans in 2014,” said Robert Kocher, a former White House health adviser who helped shepherd the law. “Our expectation was that employers would offer high quality insurance.”
“Regulators worry that some of these strategies, if widely employed, could pose challenges to the new online health-insurance exchanges that are a centerpiece of the health law. Among employees offered low-benefit plans, sicker workers who need more coverage may be most likely to opt out of employer coverage and join the exchanges. That could drive up costs in the marketplaces.”Comments
The Boston Consulting Group issued a report* this week about how small businesses are lagging larger businesses in moving their marketing budget online. The main takeaway from the report is that small businesses only spend 3% of their advertising budget online while larger businesses spend 15% of their advertising budget online. Getting small businesses to think about marketing online is something I feel passionate about. Unfortunately many small business owners don't have the time to learn how to effectively market their product or service online. It's a shame because 1) once you learn a couple basic things it's a very time efficient way to market your product or service and 2) the importance of understanding online marketing will only increase overtime as more buyers (both consumers and businesses) come online via desktops, tablets and mobile phones.
For those small business owners interested in learning more about how to acquire customers online I encourage you to focus on two basic strategies a) inbound marketing and b) paid search marketing. HubSpot has some great marketing kits that can teach you the basics on inbound marketing. Search Engine Land is a great resource for paid search marketing. Google also has some great tutorials on paid search. I actually learned paid search 5 years ago from watching and reading everything I could about paid search that Google shared.
For those business owners who have thought about online marketing, but haven't made time yet to do it please take some time to learn more. There's a good chance you should be spending more of your marketing dollars online.
*The report was conducted at the suggestion of Yelp but the findings and conclusions are solely the work of BCG
Our magazine business, Open Sky Media, receives “2/20 net
45” payment terms from our printer. In plain English, OSM receives a 2%
discount for paying in 20 days on a net 45 invoice. OSM’s CFO recently worked
out whether the business should more regularly take advantage of this early pay
OSM’s printer is its largest vendor so the early pay discount amounts to a lot of money over the course of a year. However, the amount of money OSM can save does not help inform whether it is a good decision to take the discount. OSM must determine the rate at which it will save and whether there are better uses for this capital in the business.
Here’s what OSM decided:
On a $50,000 invoice OSM receives a $1,000 discount for paying 25 days in advance. That is the same as depositing $50,000 in a bank and receiving $1,000 25 days later at a whopping 28.8% annual interest rate. Calculated as 2% x (360/25).
OSM can borrow on its line of credit at 4.5%. It looks like a good idea to take the early pay discount even if OSM does not have excess cash available and needs to borrow on the line of credit. I would happily borrow at 4.5% to earn 29%...
But, it is not that simple. OSM needs to compare its total cost of capital, not just the cost of borrowing on the line of credit. Understanding cost of capital helps determine if there are better places to use cash than on the early pay discount. OSM’s cost of capital is high, greater than 20%, but still lower than 29%.
OSM is taking the early pay discount.
The same math can be used in reverse to determine if a business should provide early pay discounts to customers.
A caveat for finance and accounting types…the calculation of interest rate above is not the effective interest rate. It is presented above as a simple rate for, well, simplicity. The effective interest rate calculation is 2%/(100%-2%) x (360/25) or 29.4%.Comments
Earlier this month a handful of our portfolio company CEOs joined us in Chicago for a summit of sorts that involved strategy, brainstorming, issue resolution, etc. As part of the meeting we invited some folks from ghSmart to share some insights into how ghSmart helps companies implement a process for improving hiring outcomes.
The ghSmart process is covered in the book Who. It’s a really quick read and worth the effort for a small business owner that is struggling with building an effective team.
There are four steps in the ghSmart process: Sourcing, Scorecarding, Selecting and Selling. The Scorecard process is the most interesting to me because it requires a hiring manager (or owner) to apply some discipline to what is often a vague and loose process (think about your average job description). A Scorecard includes quantifiable, measurable and specific outcomes that the ideal candidate must achieve to succeed in the role. An effective Scorecard requires the hiring manager to clearing define what is needed and how it applies to the broader business strategy. Potential candidates are then rated against the probability that they can achieve the outcomes described in the Scorecard. The rating process involves a very comprehensive and focused examination of a candidate’s prior record of successes and failures - often as far back as high school. Pick up the book to learn more about rating and the rest of the process.
We spend a lot of time with our portfolio companies trying to optimize business processes in manufacturing, operations, fulfillment, financial reporting, etc. I like the ghSmart process because it provides a framework for implementing a process around developing a company’s #1 asset. It’s people.
I'm tired of this refrain. The mainstream media loves to
report on it and devote ink to guys like Marc Andreessen (founder of Netscape,
now a digital media VC) who suggest print media “burn the boats” and stop printing (his
recommendation for the New York Times). Not to be out done, his partner, Ben
Horowitz, believes that “babies born now will never read anything in print.”
Mainstream media is doing a terrible job of telling the other side of the story. So I will shout into the noise but you should know I am biased. Hadley Capital owns a collection of city magazines that we publish in places like Austin, TX; Marin County, CA; and Naples, FL. My mom and I also publish a couple of community newspapers. (Check out my mom’s thoughts on this topic.)
Strong media brands succeed because they provide compelling, quality content to consumers who, because they are human, are interested in themselves, their homes (or business), their communities (or industries), the activities of their friends, family and enemies (or customers, suppliers and competitors). The result is an engaged consumer that is valuable to advertisers. There was a good story in the NYT about this “fundamental” aspect of media (with a cartoon as the example, no less):
The success of “South Park” is a stark lesson in the fundamentals of entertainment: if you tell stories that people want to hear, the audience will find you.
This is true no matter how fundamentally the paradigms shift, or how many platforms evolve. (emphasis added)
“We’ve been doing it long enough to figure out that content will ride on top of whatever wave comes along,” Mr. Stone said.
The print platform is evolving. More than 20 years ago, Warren Buffett highlighted the challenges facing print media: fragmentation of audience (lower demand) and a proliferation of content choices (higher supply). Elementary economics suggests this is not good. As a result, print media is no longer the franchise it once was...but neither is Yahoo.
Despite these challenges there are sectors of print media that are (gasp!) growing. Consumer magazines in fashion, shelter and local are all doing pretty well. B2B titles are also holding their own as is custom publishing. Even in the newspaper sector there are bright spots as community newspapers continue to grow and new community papers are launched. (Buffett recently acquired a bunch of community dailies and weeklies).
The content in these sectors all share similar attributes: it is associated with experiences that do not translate well in current digital media platforms, it is highly targeted and won’t drive sufficient page views to make it worthwhile for digital media companies to rip it off (there, I said it), and/or there are few or no substitutes for the consumers that want the content...the moats are deeper.
Leveraging successful print operations allows publishers to innovate and serve readers and advertisers “on top of whatever wave comes along.” Print publishers are developing new distribution channels for telling stories that people want to hear and providing experiences that they value. For example, our city magazines are building profitable events that connect our readers with unique experiences while providing advertisers with valuable event marketing opportunities that are packaged with traditional advertising and/or sponsored content to deliver effective integrated marketing results. B2B publishers are growing digital communities with members that are passionate about their industry and are sharing knowledge, questions and ideas with each other. These communities offer advertisers targeted marketing opportunities and membership databases are excellent direct marketing avenues. Heck, even some embattled news providers are finding digital business models that work – evidence NYT’s success with paywalls and digital subscriptions.
Print is not dead. Is it the money fountain franchise that it once was? No. But a lot of print will remain to provide valuable content to passionate readers that experience high switching costs while delivering advertisers an engaged audience.
And I’m willing to bet that babies born today WILL read something in print.PDW
Over the past two years, we have been spending more and more time working to balance quality health insurance benefits with ever rising costs within our companies (sound familiar?). Our friend and advisor, Mark Gurda, has helped us achieve this balance and continues to educate us on structuring effective health insurance plans. We asked Mark to share some thoughts on how to structure small business health insurance plans. PDW
Starting with benefits = bad management
Over the past 20 years, I have found very few employers that have developed and sustained a reliable health insurance strategy that satisfies both the CFO and employees. Most employers, especially small employers with less than 200 employees, act in a reactionary mode as opposed to being proactive, resulting in increased costs, higher deductibles, and greater dissatisfaction from employees. It doesn't need to be that way. There are several steps that employers can take to manage costs without acting adversarial towards employees:
Step 1: Maintain reliable historical data. The first step in designing cost effective strategies is to examine your history. While every company can look at their tax returns to understand insurance costs in previous years, there is a consistent detachment from what the benefits may have been and how cost shifting in previous years may mask the real underlying trends. Write a one or two line summary of what your benefits were in that year, then track the gross cost of each line of benefits, and compare employee versus employer contributions.
Step 2: Analyze the data in relation to total payroll, not the prior year cost of insurance. Looking at insurance as a line item like FICA or FUTA can provide much more valuable data than simply comparing premiums to last year. When a company is adding staff because of growth, they may be adding younger, healthier, lower wage service people, or they could be adding highly experienced, older, highly compensated people. Companies with 0% changes in their premium could be heading down a slippery slope of deferred future liability, more than a company whose premium rose 35%. The details matter. Analyzing the net employer and employee cost, as a percentage of total salaries (not SALES, SALARIES) will provide much more valuable insight into managing future costs.
Step 3: Give employees incentives to choose cost effective healthcare. Consider some flex dollars for employees. If you grew up in the 50's, 60's or 70's and you got acne, your mom may have bought you some Clearasil. Today, adults and children are choosing faster, more expensive options and that $25 of Clearasil could be more expensive to employees than going to a dermatologist and being prescribed a $500 tube of prescription cream. Drug manufactures often have brochures in doctors' offices telling members that the manufacturer will rebate all or part of any prescription copayment based on the individual having income of less than $100,000. Your health plan should not incent employees to consume unnecessary, and costly, benefits.
Step 4: Start with protection. When choosing a benefit program that earns employee loyalty, it's best to start with worst-case scenarios. Start with PPO or HMO network strength, then look at a cap when the insurance pays 100%, then build down from there with plan deductibles, coinsurance, and copay’s (but be wary of copay’s). Over the past 20 years, employees have become accustomed to copay’s for ER, doctor visits, and prescription. Copay’s separate the employee from knowing how much they consume (and at what cost) and are a driver of profit and revenue for insurers. While it is convenient for employees to know exactly what they will pay at the time of service, that convenience results in much higher premiums. It's easy for employees to figure out what deductible or coinsurance they may have paid in a year, but it's very hard to keep track of all those $10, $20, or $50 copay's. Consider High Deductible Health Plans, HSA eligible, as an option.
Step 5: Implement responsible and sustainable employee cost sharing. I tend to advise that employers should focus their benefit expenses on the employee, with dependent costs shifted to the employee. If you pay a high percentage of cost for both the employee and dependents, ask yourself if an employee that is married with kids is worth $6k, $10k, $15k more than a single employee. Key people tend to have families so consider increasing their compensation to cover family benefits and then deducting the increased salary.
While each employer has a different set of circumstances that result in wide variations of plan designs, the key elements of a successful management strategy should not vary. Implementing Steps 1 & 2 both historically, as well as on a pro-forma basis, when considering any change, are management tools that should always be considered.
Mark Gurda, PresidentComments
My son sprung this question on me at the breakfast table this week. As I fumbled with an answer my daughter declared she wants to be "Ariel the Mermaid with a red wig" and my son followed up with "a worker man with a rusty truck". When I was their age I wanted to drive a semitruck.
At Hadley Capital we ask our companies essentially this same question. Answering the question seems pretty straight forward: "We want to...grow...meet our customer's needs...increase market share...expand into new markets..." The tricky part is to more clearly define these outcomes and then develop strategies to achieve them.
We work closely with the management teams at our companies to develop plans to fund and execute the strategies that will achieve the desired outcomes. Once the implementation plans are in place and execution begins we also provide a sounding board for addressing areas where the plans aren't working (or as cheerleaders when they are!). Finally, we provide structure and accountability for management to regularly report on the outcomes, both the successes and the failures. As all small company managers are aware, it's easy to become distracted from the big picture when the day-to-day requirements of running a small business get in the way.
All of this sounds easy in 400 word blog post. The reality is that this requires a lot of time, trust and hard work. We have a lot of experience working with small company managers to develop and execute strategies to help them be what they want to be when they grow up.Comments
Bob Rust's (founder of Hadley Capital porftolio company International Specialty Supply) letter to The Packer was published this week. The Packer is a leading news and information source for the fruit and vegetable industry. In the letter Bob outlines why, despite a few recent recalls, it is misguided to remove sprouts from restaurants and grocery stores. Nice work Bob. Check out the letter here.Comments
The title of this blog post is most commonly attributed to management guru, Peter Drucker. I saw it again recently in a venture capitalist's blog post. I think it captures the spirit of how Hadley Capital works with its portfolio companies. After acquiring a business we work with business owners to use good data to manage their business. This usually occurs in three steps:
1. Getting The Right Data
Sometimes a business doesn't have the right systems in place to get good data. For example, the current financial system might not allow a company to see their margins by product or they might not be able to see margin by customer. Getting this data is really important to managing your business effectively. It allows business to make the right decisions about what products to sell and which customers to focus on. At Hadley Capital we help our portfolio companies get the right systems in place so they can get good data about their business.
2. Identifying Opportunities
Once we have good data it's important to know what to measure it against. If a company's gross margin for a certain product is 30%, is that good or bad for your industry? Is margin improvement a real opportunity or should we focus on improving something else in your business? Hadley Capital helps our porftolio companies answer these questions and helps them focus on the right opportunities to improve their business.
3. Consistent and Timely Reporting
After the business owner has identified opportunities a big part of managing a business effectively is measuring data on a consistent basis. A lot of small business owners have trouble making timely financial reporting a priority. As a result, at any given time the might know the details on how their business is performing. At Hadley Capital we make sure our portfolio companies have the resources and personnel to provide accurate, consistent, and timely reporting. For example, if the business thinks it can improve its gross margin by 10% by making some changes it's important to see how those changes are affecting the business. By getting good data on a consistent basis the business can see very quickly how the changes that are being made are affecting performance of the business.
We find the majority of small business just don't have the time or resources to get good data and manage against it. Most of the businesses we work with want to do it, but they just never had the time or resources to get it done. It is a rewarding experience when we help our portfolio companies get where they want to go.Comments
If you are a small business, finding and business loan can be difficult. It can often be a very time consuming and frustrating process. A friend of mine is trying to solve this problem at his startup Plura Financial. The way it works is fairly simple. Plura asks you to complete a loan application. Assuming your business is in good standing, you will then receive a list of loan offers from interested banks. Think of it as Match.com for small business loans. From a small business perspective this is a good service for three reasons 1) it is a big time saver, 2) it makes it easier to compare loans, and 3) it's free. Historically a small business owner would have to spend the time to visit each bank and give them their financial information. Each bank would in turn have its own loan application process and there is not much in terms of standardization. Going back and for the with various banks ends up creating a lot of additional work for the small business owner. Second, if the small business owner is fortunate to receive multiple loan offers, banks make it difficult to compare one loan against another. They might use different pricing sources (LIBOR or Prime) and fee structures, or they might have different advance rates on collateral of the business. This makes it difficult to compare one loan against another and to figure out which loan is the best. Plura solves this by summarizing the loan information and presenting it in a way that is easy for someone to compare.
Finding a small business loan to help your business grow can be hard, but there are ways to make it easier. Check out PluraFinancial.com if you are currently out looking for a loan for your business.Comments
One problem we often hear from small business owners is "Im having trouble keeping up with demand". The business owner is typically talking about two types of demand: customer demand and skill set demand. Experienced small business owner can usually get their arms around customer demand. However, when their business demands new skill sets this can cause a lot of ongoing stress for the business owner. They may start to wonder if they are still the right person to run the business. We hear how this self doubt prevents them from sleeping or how it negatively affects their relationship with co-workers and family members. It is a genuine fear and a real problem. The skillset that is required to get a business from $0 to $5 million in revenue is often different from the skillset to get a business from $5 million to $10 million. The business owner is not sure if they have what it takes to get their business to that next level. They often have spent 10 - 20 years working very hard to get the business where it is. They don't want to screw it up and let down their employees and customers.
Hadley Capital has had a lot of success in helping small business owners that are struggling with this problem. We like this situation for three reasons: 1) overwhelming demand is a good sign that the entrepreneur has found product/market fit 2) we have the experience and skills to help the entrepreneur manage through this phase of the business and 3) we can give the business owner some liquidity and they can remain involved in the the business. This type of liquidty event can lower the business owner's overall risk while increasing their risk appetitie to go after new opportunities.
We have helped many of our portfolio companies deal with the challenges of growth. We help them get the right systems and people in place so the business can embrace the growth and manage through it. If you are entrepreneur feeling overwhelmed by demand for your product or service, please reach out to to us. We would love to talk.Comments
Working capital is the short term liquidity (read: cash) required to operate a business. Working capital is defined as Current Assets (primarily accounts receivable and inventory) less Current Liabilities (primarily accounts payable).
When Current Assets increase (inventory goes up), cash goes down. When Current Assets decline (inventory goes down), cash goes up. Likewise, when Current Liabilities increase (payables go up), cash goes up. When Current Liabilities decline (payables go down), cash goes down.
Each of our portfolio companies have different working capital "situations", some more advantageous than others.
Our magazine publishing company has the most traditional working capital situation. When it sells advertising, customers generally receive terms (net30) and so the company carries accounts receivable from advertisers. Current Assets up, cash down. The company also owes money to various vendors that we work with including our printer, freelance writers, etc. It carries these as accounts payable. Current Liabilities up, cash up.
This is about as simple or traditional a working capital arrangement a business can have and results in some matching between cash uses (increase in receivables) and cash sources (increase in payables).
Our event rental company has an advantageous working capital situation. It collects deposits from customers in advance of completing a job. These customer deposits are a current liability. Current Liabilities up, cash up. At the completion of the job, it typically receives final payment. A receivable is created and instantly paid. Current Assets down, cash up. Some of it's vendors provide terms so it carries account payables. Current Liabilities up, cash up. Cash up, cash up, cash up. Hard to beat that arrangement.
Our eyewear distribution company has a disadvantageous working capital situation. Like most distributors, it buys inventory from suppliers that require substantial upfront deposits before they will begin manufacturing product, then an additional payment when the product ships. These deposits are Current Assets. Current Assets up, cash down. The company makes a final payment when the product hits it's warehouse and becomes inventory. Current Assets up, cash down. The company sells the product to its customers on terms of Net30, creating accounts receivable. Current Assets up, cash down. The company carries some accounts payable, helping to offset the significant amount of inventory and accounts receivable. Current Liabilities up, cash up. Overall, the working capital position is pretty rough. Cash down, cash down, cash down, cash up.
Managing working capital is critical to the cash flow of any small business. Small businesses with disadvantageous working capital positions may require a working capital line of credit (also know as an asset-based revolver or revolving loan) in order to finance operations, particularly during periods of rapid growth.Comments
Below are reflections on some of the topics covered at the G20 YES Summit this week...
Reflections on innovation...
Shai Agassi, founder and CEO of Better Place. Better Place is attempting to revolutionize the auto industry while also reducing reliance on oil.
Imagineering. This is a word that has influenced Shai's career and it was one I have never heard before. As Shai describes it, imagine with no boundaries, but then bring it back to the realities of your engineering constraints. You don't want your thoughts and imagination to be restricted, but at the same time an idea is only useful if it can actually be produced.
Its not a revolutionary concept, but I have never heard it as eloquently described as Shai was able to do so.
Professor Muhammad Yunus, Economist, Founder Grameen Bank and Nobel Peace Prize Laureate
In his stirring speech to the G 20 YES delegates this week, Prof. Yunus reminds us not to blame poor people for their situation but instead to focus on ways to help solve the problem. He presented microfinance and Grameen Bank as an example of a social business that is both a) sustainable on its own and not dependent on government or other sources of financing and b) has helped lift tens of thousands people out of poverty.
His speech reminded me of the One Acre Fund, another social business with similar goals.
While some of the protesters at this week's events proclaim that capitalism has failed, listening to Prof Yunus extol the benefits of capitalism and its ability to create sustainable and socially conscious businesses that are not dependent on government subsidies reminds all of us that its not the governments job to eliminate unemployment or poverty, but rather to provide a framework wherein capitalism can thrive.
Mouna Sepehri, an Executive Vice President at Renault
"There are many ways to fail, but the surest way to fail is not to take any risk": Sepehri started off her speech at the G 20 YES event with this quote which she attributed to Benjamin Franklin - one of America's greatest inventors.
People are generally afraid of failure, and failure in some cultures carries a stigma or a financial burden that can last a lifetime. Yet, as Franklin points out, not trying is a failure too. At Hadley Capital we are always looking to minimize the risks that our portfolio companies take, but at the same time, we understand that to create long term value, sometimes you have to take calculated risks. We invest millions of dollars in companies supporting management teams and helping them analyze their investment options. While we don't want to fail, we also know that you can never win the game unless you are in the game.
We're starting to work with our portfolio companies on their 2012 budgets. We use budgets to help our companies:
Forecast revenue - Who are our most important, most profitable customers/programs/products, what new revenue can we expect this year, is any revenue is at risk? For most of our companies, this is the most difficult aspect of budgeting and requires the most effort/thought. Some of our companies have more predicable revenue streams than others but each company produces a monthly revenue budget.
Control expenses - What are the costs of earning our forecasted revenue - manufacturing costs, selling costs, etc.? What are our fixed costs for the year - rent, utilities, insurance, debt service, etc. What are our variable expenses and which can be trimmed back if our revenue does not meet plan? Where can we be more efficient? In our experience, controlling costs begins with setting profitability goals on a per project/product/customer basis. Our companies also continuously seek ways to become more efficient in G&A spending - from utilities to office supplies to occupancy costs to insurance to credit card processing.
Make investments - If revenue minus expenses meets our profit goals then we focus on investments in the future. Which new programs will we implement, what will they cost, what is our expected return on investment? This year our companies will make new investments that range from new product launches to hiring new employees to acquiring new equipment to opening new locations to implementing new ERP systems to making acquisitions of complementary businesses.
Set rewards - Developing a detailed budget provides our managers with clear expectations for required outcomes. We work with the managers of our companies to set rewards (for management and employees) for achieving or exceeding these outcomes and aligning their interests with ours.
The last couple of years have been interesting times but disciplined budgeting has been one strategy that has helped our companies weather the storm. While know one knows what 2012 will hold, we are optimistic that the economy will continue to improve and that a rising tide will lift all boats...but if the tide goes out our companies won't be caught swimming naked.
As all small business owners know, quality health insurance is expensive and the rising cost of quality health insurance is depressing wage growth. In lieu of salary increases, employees are receiving a "silent raise" that is used to pay employer-paid health insurance. Employees rarely recognize these "silent raises" because they do not bear the cost of health insurance in a transparent manner. A market where a consumer consumes a good but doesn't see the true cost is not an efficient market. (This is just one very small problem with our nation's delivery of health benefits.) This problem was recently laid bare when one of our companies was acquiring another company. Our company provides better benefits - in coverage and out of pocket cost - than the company we were acquiring. These quality benefits are not "free" and in order to include the new employees from the acquired business in our plan we had to lower their gross salaries...never a comfortable conversation...yet all the new employees have higher "after-health-premium" net salaries than with their old employer. Helping employees understand the true cost of health insurance (to them and to the employer) will allow them to make more informed decisions in a future that may not include employer-paid health benefits. PDW Oct 13, 2011 PS - Interesting article in The Atlantic on this topic..."health care stole your wages."
As all small business owners know, quality health insurance is expensive and the rising cost of quality health insurance is depressing wage growth. In lieu of salary increases, employees are receiving a "silent raise" that is used to pay employer-paid health insurance. Employees rarely recognize these "silent raises" because they do not bear the cost of health insurance in a transparent manner. A market where a consumer consumes a good but doesn't see the true cost is not an efficient market. (This is just one very small problem with our nation's delivery of health benefits.)
This problem was recently laid bare when one of our companies was acquiring another company. Our company provides better benefits - in coverage and out of pocket cost - than the company we were acquiring. These quality benefits are not "free" and in order to include the new employees from the acquired business in our plan we had to lower their gross salaries...never a comfortable conversation...yet all the new employees have higher "after-health-premium" net salaries than with their old employer.
Helping employees understand the true cost of health insurance (to them and to the employer) will allow them to make more informed decisions in a future that may not include employer-paid health benefits.
Oct 13, 2011 PS - Interesting article in The Atlantic on this topic..."health care stole your wages."
With unemployment above 9% it is amazing to me that Hadley Capital's companies are having trouble finding qualified candidates to fill open positions. For a recent opening for a Controller we received more than 300 resumes and only a handful, less than 10 candidates, had the functional and interpersonal skills required for the job. Yesterday I received an email from one of our managers that highlighted this dichotomy, she wrote: "we are actively searching for qualified sales reps but have been very disappointed in who is applying..."
Recent news from the National Federation of Independent Business, a leading small business advocacy group, and the Federal Reserve Bank of New York confirm that our companies are not alone. The NFIB reports that 33% of small businesses reported having few or no qualified applicants for job openings. The Federal Reserve Bank of New York reported even more depressing statistics – nearly 60% of all respondents to the Empire State Manufacturing Survey report difficulty finding workers who are proficient in advanced computer skills, interpersonal skills and punctuality/reliability.
Read that last sentence again: manufacturers report difficulty finding workers who are proficient in showing up on time and being reliable. Unreal.
We search for bank debt on a regular basis, either to fund new acquisitions or to refinance older ones, and we have numerous close relationships with bankers that lend to small and middle market companies. As such, we have a fairly good understanding of financing terms in today's markets.
Recently, there's been some news in the press about how credit terms have gotten looser, maybe too loose, due to increased competition between banks. This is true, but only for large credit facilities (i.e., loans in excess of $20 million). For smaller credits, its not the case.
For smaller loans, the market is more stable. In good times and in bad, sophisticated small and middle market bankers want to see the same thing in a credit: Good business owners and managers who they can trust, substantial equity in the business, some collateral, and, enough stable cash flow to support the debt payments at a multiple of 1.2 to 1.3. That is, the operational cash flow of the business should be at least 20% more than its proposed 'fixed obligations,' i.e., expected taxes, capital expenditures, and debt interest and principal payments. The NYT's Your the Boss blog just did a good piece on small market lending that confirms our opinions.
In short, there's credit out there but its prudent credit, which is probably a good thing.
P.S. July 8, 2011 - Wells Fargo research indicates credit is still really tight for small businesses.Comments
Like many small businesses, our portfolio companies are constantly looking for ways to stretch dollars. Many of our portfolio companies have realized substantial savings from auditing credit card charges – known as merchant account fees in the trade. Actual savings have ranged from a couple thousand dollars per year to nearly $10,000 per year. That's a lot of savings for what amounts to a commoditized service offering!
I asked our friends at FeeFighters.com to provide a brief overview on how small business owners can realize similar savings on merchant account fees. Here are their suggestions:
Merchant account fees are the fees businesses pay to accept credit card payments from their customers. Its important to keep an eye on these fees because they typically represent anywhere from 2% to 5% of revenue. Any savings a business can make on these fees will fall straight to the bottom line. Here are three ways business owners can keep merchant account fees down:
1. Beware of Bait and Switch Pricing Tactics. Credit card processors will often quote one rate to business owners and then charge a totally different rate. In particular make sure that the rate you are getting quoted is not the "standard card" rate. Credit card processors will often quote the standard rate (say 2%), but when a customer uses a rewards care (not a "standard card") the business will be charged a different rate (say 4%). This is a common tactic. Since the majority of people use rewards type credit cards the business ends up paying much closer to 4% than 2%. Quick Tip: To find your actual effective rate simply divide your total merchant account fees by your payments revenue.
2. No Cancellation Fees. Make sure that the merchant account contract you sign does not have any cancellation fees. Many credit card processors will put a cancellation fee in the fine print. Often times a merchant will learn they have been duped on pricing and then try to switch processors. When they try to switch processors they learn that they have a large cancellation fee in their contract. If you have a large cancellation fee, it can often prevent you from switching to a processor with a better rate. If you request that it be removed before you sign, almost all credit card processors will remove the fee. If not, it's a signal that perhaps they aren't the best partner for you.
3. Go shopping for a lower rate. Some credit card processors will raise rates over time. The most common tactic is to add miscellaneous monthly fees. Its very similar to what consumers experience with their cable bill. You start out paying $80 per month. You look at the bill 6 months later and all of sudden its $100 per month. Like all of your monthly business expense items its important to make sure you are getting the best rate possible. One way to do that is to make a habit of shopping for the lowest rate. At FeeFighters.com you can get credit card processing quotes in just 3 minutes. FeeFighters has merchant-friendly terms including: interchange plus pricing (which is the most transparent pricing available), no monthly cancellation fees, and free monthly audits to make sure that the rate the merchant was quoted is the rate they are paying.Comments
I recently read an article about the future of LED lighting entitled "Solid-state lighting: 'The case' 10 years after and future prospects" by Roland Haitz and Jeff Tsao (published by Wiley in 2010). In it, the authors make compelling arguments for why LED lighting will displace most traditional lamps by 2020. One of the things I found most interesting was their summary of what it takes to win a technological revolution. They write,
"The most common ingredient is benefit to the user. This benefit can be measured in performance, cost, convenience, or environmental factors. But benefit alone is not sufficient. The path to successful revolution most provide at least two additional ingredients: (1) The existence of stepping-stone markets to finance the required investments and to hone manufacturing processes to the required performance; and (2) the targeted technology must be mature and/or incapable of reacting to the attack in a timely fashion."
The article then goes on to discuss the benefits of the automobile over the horse carriage, the semiconductor transistor over the vacuum tube, and other less successful examples.
While Hadley Capital is not a venture capital investor, we often review companies that may be affected by technological change and thus we need to form opinions about whether such a change may occur, and if so, how fast. This article framed some of these factors well.
Yesterday I attended a conference at the University of Chicago Booth School of Business. The keynote address was a panel discussion about social media. The panelists included professors, entrepreneurs and consultants such as Eric Lefkofsky, one of the founders of Groupon, and Rishad Tobaccowala, whose consulting clients include Coke and other major companies. It was a particularly interesting topic on the day after LinkedIn went puplic and was trading at more than 60x revenue and 300x cash flow.
A few takeaways:
- Social media is very useful for engaging with customers by allowing for two way dialog, feedback, etc.
- But this dialog comes at a cost: There are now may outlets for disgruntled customers to air their views and thus firms ability to control their messages from the top-down is being supplanted by those from the 'organic muck'
- Social media is still in its infancy: The average American watches 5.5 hrs of TV per day (ouch!), spends 6 minutes on Facebook and 4 seconds on Twitter, so we all probably don't have to run right out and spend huge $ on social media content
- But the growth rate for social media is extremely high and the cost of providing content (like this blog) are small, so ignore it at your peril because catching up later might be very, very difficult.
It was an interesting discussion. Oh, and LinkedIn isn't worth $9 billion...
In an earlier post I wrote about how the partners at Hadley Capital eat our own cooking. The investors in our funds appreciate this alignment of interest. We extend this alignment of interest to the management teams at our companies through incentive programs that reward employees for achieving key objectives and goals. When times are good, all boats rise. When times are bad, everyone works hard to bail out the boat. And there has been a decent amount of bailing over the last 24 months…
The senior managers of our companies are all owners of their respective companies either through purchased equity or through equity incentive programs. All of our managers also participate in incentive cash bonus programs and many of our managers utilize incentive cash bonus programs for their employees.
Of the hundreds of small companies we evaluate each year, very few are effectively utilizing incentive programs to drive positive change. Effective incentive programs are not complex and are not difficult to implement. Sales commissions represent the most basic form of incentives. Sell more = make more. But incentives havea place in all areas of a business from purchasing to manufacturing to development to customer service to administration. There are a few simple guidelines to keep in mind when structuring incentive programs:
Set goals – establish goals that are specific, measurable, easy to communicate and well-aligned with overall company goals
Measure results – design processes to measure and collect results on a regular basis
Display outcomes – employees need to know the score so display the information measured and the status towards the goals
Deliver timely rewards – reward employees as soon as possible after achievement of goals so that there is a clear feedback loop
Collect feedback – listen to employee recommendations for changes, improvements and problems and incorporate them into future incentive programs
Obviously the goals and objectives of each business are different. Defining the objectives for your business (or a part of your business) is the most important step. But a close second is developing incentive programs that will align the interests of the employees with management and ownership.
One of my favorite books on this topic is Jack Stack’s Great Game of Business. There are lots of other writings on incentive structures but, like most things in business and life, sometimes it’s easiest just to get started and learn as you go.
Governor Quinn recently signed a new tax law – House Bill 3659, the Mainstreet Fairness Bill – that essentially requires internet retailers with an “affiliate” in Illinois to collect sales tax. The stated purpose of the bill is to “level the playing field with brick and mortar locations” and also to collect an estimated $150+/- million in sales tax that the state has been “missing”.
What Illinois legislators fail to realize is that this law does not level the playing field. It actually makes it more difficult for Illinois companies to be competitive. The reason? Because neighboring states like Wisconsin and Indiana do not have the same restrictive laws. In fact, this law may lower Illinois’ overall tax revenue because it is easy for internet retailers to move. In fact, just today I received a call from a small business that wants to partner with Hadley Capital and move his company to Wisconsin, less than fifteen miles from where it is currently located in Illinois. His company employs more than 50 people.
Amazon recently cancelled its affiliate program with all Illinois firms and there are other companies that are also planning to leave the state as a result of the new law. Janet Novak wrote a good piece on this on her Taxing Matters blog.
My suspicion is that Governor Quinn’s effort to “level the playing field” and his effort to generate tax revenue will in fact make Illinois businesses less competitive, result in shrinking tax revenue as more businesses leave the state, and destroy thousands of Illinois jobs. The Mainstreet Fairness Bill doesn’t sound too fair to me.