A second year MBA student wrote to me recently asking for help in developing his Excel skills for financial modeling. He said he had read the Excel posts on my blog but still could not get comfortable with how to translate financial issues (valuation, DCF, etc) into the logic of Excel. In the course of writing my reply I mentioned that he should look at other people's Excel models.
I have been using Excel or its predecessors for about 25 years, but I always take the opportunity to look at other people's models. Yes--some people's models are poor, but every once in a while I learn a new trick or see a logic presented that I can re-use. The less experienced you are, probably the more you can learn about Excel from just looking at a lot of models.
For the early Excel user one source of Excel models is here at Docstoc. Keep scrolling through the advertising and there are a lot of Excel examples to look at. Another site is Damodaran Online which has a wealth of finance spreadsheets by Professor Damodaran from the Stern Schoool at NYU. Great stuff!
If you are just interested to learn basic Excel, the best tutorial I have found is from the Fuqua Business School at Duke. Available here.
Two seemingly unrelated posts today by others prompt me to revisit the concept of planning, a widely misunderstood business practice.
In a post on HarvardBusiness.org Rita McGraith, a professor at Columbia University, discusses the differences in planning between large corporations and entrepreneurs. She states:
"In large corporations, it is entirely possible to get enough
resources to run a project for quite some time before anybody goes back
and checks the assumptions in the plan. You can be wildly off-base and
exposed to substantial risks before the program gets reined in.
Entrepreneurs, in contrast, use plans to focus their thinking and
create a framework out of a blank sheet of paper. The measure of the
quality of a plan is not necessarily whether it worked out as they
thought - rather, it's whether the plan helped them learn what they
needed to learn to move to the next phase of the business."
A quote I have used before in this blog comes from a former General--President Eisenhower:
"Plans are useless, but planning is indispensable"
Business planning is a systematic analysis of data and risk in order to allocate resources to achieve an objective in an economically efficient way. The professor is correct in her belief that the process is as valuable as the results of the plan, but there is no inherent reason why large corporations can not achieve the same benefits of the planning process as the entrepreneur. In fact, the frequent lack of realistic plans from entrepreneurs would suggest they should put more emphasis on the quality of planned results. My points:
Planning is an indispensable part of successfully growing a business, but that is true for any size business
Do not become over enamored with the process, because the results of the plan do count.
Remember President Eisenhower did win WWII, avoid nuclear war with the Russians and start the civil rights movement in the U.S. by integrating the U.S. military. Some amazing results from that indispensable process--planning.
The second post today that intrigued me was from Flowing Data where they summarized a McKinsey Quarterly interview with Hal Varian, Chief Economist at Google. A Varian quote is particularly noteworthy and stated below.
"The ability to take data—to be able to understand it, to process it, to
extract value from it, to visualize it, to communicate it—that’s going
to be a hugely important skill in the next decades, not only at the
professional level but even at the educational level for elementary
school kids, for high school kids, for college kids. Because now we
really do have essentially free and ubiquitous data. So the
complimentary scarce factor is the ability to understand that data and
extract value from it."
How does this "ubiquitous data" relate to planning. Read on faithful readers.
Planning is now much less constrained by data availability, which means the resources to develop better plans are freely available. Take heed!
While analysis of data has always been important, the expectation will be for more insightful analysis given the expanding quantities of data.
Visual presentation of large amounts of data and related conclusions will become a key factor in establishing credibility (in plans), which explains in part why so much money is being invested in new techniques to present or visualize large amounts of data. (This technology is a large part of what Flowing Data covers.)
The expectations for the quality of business planning will increase as the amount of data increases and the process of planning should become more fruitful as more data enriches the process.
The following image is a word cloud for Sophisticated Finance, courtesy of Wordle. May be developing an addiction to Washington bashing. Did not think I had devoted that many posts to the current economic crisis. When is Obama going to call me?
EconomicPic is a blog devoted to pictorial presentation of economic data. It is a very informative blog particularly in these days of severe economic malaise.
The picture below comes from a post today and shows the loss in market capitalization of the major U.S. banks over the last 16 months or so. While the loss of nearly 1 trillion in capital is staggering, banks typically leverage their balance sheets at 20:1 or higher. So a loss of bank capital multiplied by 20 represents the potential contraction in liquidity in the U.S. financial system. The U.S. has lost as much as 20 trillion in capital due to the financial losses of the banks.
As Dean Light at HBS said about the current economic crisis, it's a matter of "liquidity, leverage and transparency". Yes-- and it may be a $20 trillion problem. Forget jobs, mortgages, healthcare and all the other issues Washington mentions. To turn around the economy we need to focus on re-building and re-capitalizing the banking system.
This is my week to get great stuff from readers. Please keep it coming.
A reader sent me a story from Xconomy about the economic contribution of MIT graduates. According to a study completed by two MIT professors, worldwide alumni of MIT have created operating companies with an estimated $2 trillion in annual sales. For the quantitative reader, each of the 119,000 alums of MIT contribute average annual sales of approximately $16 million. Setting aside any prejudice on the part of the professors, both numbers are staggering!!
It is well documented that the highest concentrations of entrepreneurship and VC money are nearby to great universities such as MIT and Stanford. Research revenues at MIT in 2006 (last year available) totaled $570 million and a substantial portion of that funding came from the U.S. government. Makes one wonder if more money for MIT and the other great universities in the U.S. would not have a more positive effect on the economy (in the medium term) than the current efforts in Washington.
A student reader sent me a link to a TED talk by Blaise Aguera Y Arcas from Microsoft. The talk showcases a technology called Sea Dragon which basically allows for images to be presented without the real estate and resolution constraints of the computer screen. Check it out here. Amazing images.
If you have not discovered the TED talks, you should explore this very rich content. Very accomplished people talk about their passions in the humanities, science and technology. An excellent talk on the "keys to success" is here. It is based on interviews with 500 very successful people. The key success behaviors apply to any pursuit but are particularly relevant for entrepreneurs.
For a change of pace, instead of talking about a professor or paper from HBS, today I am going to discuss a blog post from Harvard Law School. The post is entitled The Case for Big Government. In a guest post Jeff Madrick argues that the expanding the role of government and economic growth are not inconsistent. He states:
"But, in truth, America when it worked best, in my view, America used
government robustly to embed its social and political values but also
to create a foundation and capacity for economic growth and prosperity.
The case against big government has always been ahistorical. There is
no wealthy nation in the world today that does not have a big
government."
This is pure sophism. There is no wealthy nation in the world that does not have a large army, a good postal system and an income tax. Obviously none of these factors explain why a nation is wealthy and "big government" does not explain economic success.
We should not confuse the need for government intervention during the current financial crisis with a need for an expanded role for government. We could have avoided the current crisis simply through better regulation of financial institutions and by avoiding the unwarranted expansion of home ownership by the government.
The lessons learned from the stock market crash of 1929 and the Great Depression are:
the need to maintain confidence in the banking system
the importance of regulating financial markets
All of the other features of government intervention during the Great Depression have had limited continuing value, if any.
The problems with "expanded government" are multiple:
Expanded government requires deficit spending (borrowing) which takes money out of the capital markets and raises interest rates, thereby stifling economic growth in the private sector--the real engine of economic growth
Governments are inherently inefficient due to their confusing belief in achieving multiple objectives (political, social and economic) at the expense of doing a single objective well
Governments tend to use a monopoly-like mentality toward everything they do, which typically discourages innovation and undermines the need for constant improvement
In part the current crisis has been brought about by excessive self-interest and greed in the private sector. And, yes--we need to improve infrastructure, modernize schools and become energy independent. However, I think Washington is over reacting. Less government with money spent wisely will bring about a faster economic turn around. Trying to correct all the misdeeds of the past with a huge, wasteful government spending package will just bring on inflation and higher interest rates. I think we should all be sending the message to Washington to focus on the banking system and financial regulation and not try to make amends for every sin of the last 20-30 years.
The Constitution originally had a narrowly defined intent for the federal government. Such an approach worked remarkably well for many, many years. We should be very careful in forsaking the founding principle of a limited role for the federal government.
A friend referred me to a very cool site--Newseum.org-- that contains the front page of most of the world's leading newspapers. Pick the geographic area of interest and click on the city to bring up a current front page.
Obviously the headlines are in the original language. I can not figure out how to get the flash images of the text into Google Translate, but maybe a reader can help in the comments.
The Newseum is a 250,000-square-foot museum of news in Washington, D.C.that offers visitors an
experience that blends five centuries of news history with
up-to-the-second technology and hands-on exhibits.
Today's lecture in my entrepreneurship course at FIU was on Michael Porter's classic work Competitive Strategy, a book which I have discussed in this blog many times. I consider it the best book on business strategy ever written. In preparation for today's class everybody had to finish reading Porter.
However, before I could start the lecture a student asked why should one use outside capital to grow their business. Growth and how to achieve it is a key theme in the course, so off on a 10 minute diversion from Porter we went. I asked the students what were the benefits of growing a company with outside capital and got several good answers, but I realized that not one student had used anything from Porter as the basis for their answer. When I pointed out the absence of Porter's five forces in explaining the benefits of growth, a few students gave me a knowing smile. With help a few students had realized that Porter is quite relevant in explaining the benefits of business growth. My point--they were being trained to use Porter's methodology by reading the book (and hopefully my subsequent lectures), but at the first chance to use the methodology the students completely forgot their training.
Contrast this example with Katie Couric's interview with Captain Sullenberger, the captain who landed the airliner on the water in New York, as retold in Bert Decker's blog Create Your Communications Experience.
"When Sully said he had to 'force himself to use his training to force
calm on the situation' Katie asked, "Was that a hard thing to do?"
Sully replied, "No, it just took some concentration."
Setting aside that Captain Sullenberger is a good deal older than my students with a lifetime of experiences, he makes two very good points. Rely on your training and take the time to concentrate in order to properly do as trained.
A friend back from Iraq tells a story with a point similar to Captain Sullenberger. He talks about his first enemy fire and says he was terrified like never before. In a moment of near total panic he started to remember his training. As he started to use his training his perception of the risk started to diminish and as the perception of risk diminished he grew more confident. He realized that following his training was going to keep him alive.
In my 36 years of business I do not think I have ever had an adrenaline rush or a moment of fear similar to combat or a crash landing in an airplane, but I agree with the heroes above. When the situation is the most dire, take the time and concentrate on your training. In business training means subjects like microeconomics, introductory finance, Michael Porter, etc. These fundamental subjects provide the necessary tools to properly analyze a crisis or better yet, to head off a problem before it becomes a crisis.
Note: The flip side of this point is also true. When you diverge from your training in subjects like microeconomics or introductory finance, you almost always get in trouble.
I recently did a one hour webinar on Business Concept Development where I outlined the five step process I teach in my Entrepreneurship classes. Unfortunately the webinar service used by FIU does not provide an archived copy but the slides are available through this link. Download WEBINAR-BUS CONCEPT-2
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My next workshop on developing the business and financial model is this Thursday, February 12. Details are here.
Some people say that Twitter is for when you are bored. Others say it is the best source of breaking news. Sometimes it is just fun to see what applications people have developed to work with Twitter. A cool "new" app comes from @walter at Sxoop Technologies. The app creates a mosaic of all your followers on Twitter. My mosaic is below.
Another cool app I tweeted yesterday. This app shows current tweets on a world map.
If 2008 was the Year of Facebook, I think 2009 will be Twitter's year (Twitear?).
Enough fun. Back to the 10-K.
Note: I found the Mosaic app through a post on the TypePad blog.
Today I had lunch at Chik-fil-A, the restaurant chain with the ad campaign featuring cows that advocate eating more chicken. What made the experience noteworthy was my order taker. Rather than grunting at the end of the order "take away or eat here", she politely asked "are you dining in today?"
This noteworthy query prompted me to ask her whether the question was her phrasing or dictated by corporate headquarters. She promptly and proudly replied that her wording came from Chik-fil-A policy.
Great companies pay attention to the details and especially when it involves direct contact with customers. Developing people that execute good customer policies and procedures well is especially commendable.
The polite order taker with the delightfully phrased question made my day a little nicer and I felt even better when she told me it was corporate policy. Well run companies always make me feel better.
Today's class in entrepreneurship at FIU dealt with how customer need and disruptive innovation can shape the business model. To explain this complex concept I use a video from Scott Anthony, who blogs for HarvardBusiness.org, and a blog post by Bruce Temkin entitled Five Disruptive Customer Experience Strategies.
I will be giving a workshop for the Pino Entrepreneurship Center at FIU on February 12, 2009. This is an evening workshop from 630-900 PM. The subject is Strategy and Finance and focuses on using the "business model" to develop a financial plan. Very practical, little theory and ends with an example of "how much money to raise". Particularly relevant to early stage companies but useful to more mature companies that are growing. Details on registration are here. Proceeds go to the Pino Center.
This previous post will give you an introduction to the workshop.
