Last night I lectured to a class at the MIT Sloan School on topics in international finance. Giving the lecture I realized that my entire career has involved international finance--project finance, Eurodollar loans, currency swaps, IPOs and risk management. I covered four themes.
In emerging markets one should always eliminate risks. There are so many economic and political risks (not to mention the occasional war) that if there is a vehicle to eliminate a risk, pay the price and reduce or eliminate the risk. For example, I always swap floating rate interest risk for fixed rate because I have seen interest rates increase 10 percent in a single day. Likewise I always try to borrow through term loans to reduce the refinancing risks. Twice I have had banks cancel all short term loan facilities in a country. Obviously I am speaking here about risks related to liabilities on the balance sheet.
On the asset side of the balance sheet, never chase extraordinary returns in asset investments. Most companies should park operating and excess cash in the safest investment with the lowest counter party risk they can find. Investing in exotic derivatives such as mortgage-backed securities to get additional return usually adds risk to the business, which is already risky enough in an emerging market. Related theme: do not invest in derivatives you do not understand.
In emerging markets raise cash well in advance of the need for it. I recommended 1-3 years in advance. The carrying cost of the surplus cash is far outweighed by the benefits of knowing that you can continue to execute the business plan despite riots, government overthrows, devaluations, etc.
All finance is now derivatives or synthetic instruments. The best way now to finance a business is to explain to the banker the objectives of the financing and the risks that you want to mitigate. Let the banker craft the financing instrument using derivatives rather than telling the banker what you want.
In the spring I am invited back to Sloan to give a lecture on the Asian Financial Crisis (1997). May be the most memorable lecture I will ever give. Can't decide whether to start with the story of my being shot at, the overthrow of the Indonesian dictator or how to lose $1 billion trading the Rupiah-Dollar. (The $1 billion loss was incurred by a prominent hedge fund.)
Much as Spanish is the language of Miami, accounting is perhaps the language of business. Without an understanding of accounting, one cannot prepare or interpret financial statements and key performance indicators may or may not be valid indicators of a company's performance. While understanding a business may start with the business model, the real understanding comes from accounting information.
I have been asked by the Pino Entrepreneurship Center to expand their workshop series to include an "interesting" workshop on accounting. On October 16 I will present the first "interesting" presentation on accounting in the history of the world :) Not being a trained accountant, but being a long time practitioner as a CFO, we will avoid the minutiae, GAAP, and boring stuff and focus on the practical, useful art of financial analysis. I will also show that all accounting is really just six journal entries. This little known secret was shared with me by a Buddhist monk in Malaysia on the condition that I pass it on to humanity. (Really--just six journal entries.) If you have never understood accounting before, this is the chance to find enlightenment.
After the groundbreaking morning session on accounting, the afternoon is devoted to relating accounting to business model and key performance indicators.
To sign up for the workshop, register here. Proceeds go the Pino Center.
I recently interviewed Greg Baty, the senior man on the ground in Florida for Hamilton Lane, the Manager of the $250 million Florida Growth Fund. Greg's background is quite diverse and includes a five year stint playing for the Miami Dolphins, where he developed his love of Florida. He has also spent time as a start up entrepreneur, advisor to early stage companies and as a venture capitalist with Guy Kawasaki's Garage Technology Ventures in San Francisco. He is a graduate of Stanford Business School where he was a Sloan Fellow. Key points from the interview follow:
Hamilton Lane's strategic direction is to expand their discretionary fund management business, which includes programs similar to Florida with the states of California (CALPERS) and New York. Consequently, Greg and his team have complete access to the full resources and support of Hamilton Lane and their relationships with over 600 funds worldwide.
The Fund will initiate its own deals but must have a co-investor fund that sets deal terms, valuation, board seats etc. This is where Hamilton Lane's vast relationships with other funds can be used to develop the lead investor.
The Fund will focus on technology growth companies in Florida but may also invest in other sectors with significant growth and return potential.
The Fund will invest approximately $125 million of its $250 million capital in direct investment in companies at all stages of development--from seed to pre-IPO.
The Fund will not focus on any particular industry or investment themes
The Fund's priority is investor return and is not specifically targeting job creation or economic stimulus
The Fund has well thought out objectives and is already seeing a "tremendous amount of deal flow". My one recommendation to Greg was to consider a Spanish speaking associate on the team in order to fully develop relationships in south Florida.
Back in June I posted on the launch of the Florida Growth Fund. The Fund launched with $250 million in capital
earmarked for venture capital investments in Florida. Funding was
provided by the State of Florida Retirement Pension Fund under special
legislation. The Fund is managed by Hamilton Lane, who manages over $100 billion in capital for private equity investments through third party funds and direct investments. Hamilton Lane's expertise includes all forms of equity investment including seed stage venture capital. Recent email correspondence with Hamilton Lane has provided the following additional information:
The Florida Growth Fund will be opening offices in Ft. Lauderdale and Orlando
The mandate of the fund is to invest in Florida-based equity funds and to co-invest in Flordia-based growth/technology companies
I am particularly pleased to see that the Fund will be co-investing in growth companies. Most out of state venture capital firms will not invest in start ups here in Florida without a local venture capital firm to co-invest and closely monitor the company. Florida Growth Fund will be able to play this local role through its two offices. This will increase the available capital in Florida not just from their fund but also the out of state venture capital firms.
I will be speaking with a representative of the Fund later this week and will hopefully have more to report on this positive development for early stage companies in Florida.
A CFO recently told me that his monthly financial statements had a $1 million error in gross margin. Not so uncommon in a first draft, but five of his subordinates had already reviewed the statements and nobody caught the error (5 college graduates, 4 degreed accountants, 2 CPAs). The possible reasons for this breakdown include:
Unqualified employees
Untrained employees
Too much work
Failure to analyze the financial statements
Unclear responsibility to review financial statements
A lack of standards
In my experience people normally assume that 1 or 2 explain the problem. In fact, poor management reporting can highlight any of the six possible causes. Poor management reporting is one of the best indicators of company wide problems that I know of. Each of the six reasons highlights a larger issue in either human resources, operations, management or leadership.
I think that 1-5 are more obvious in how they relate to management disciplines, but perhaps standards requires further discussion. To what standard do you prepare your financial statements? There are three choices in reverse order of importance:
GAAP (Generally Accepted Accounting Principles)
Accurate (reflecting not only the form but also the substance of the transaction)
Not misleading to the reader (the SEC's standard)
Most executives would say that they follow GAAP. This is a somewhat naive approach. Conforming to a particular accounting pronouncement fails to necessarily confirm that the substance of a transaction has been captured. If you pick the wrong pronouncement to account for a transaction, you follow GAAP but miss the transaction. For example, accounting for a transaction as a liability when it is really a derivative is a case where GAAP is followed but you have missed the substance of the transaction. Failure or slowness to recognize an impaired asset might be a case where the accounting is accurate but totally misleading. One could argue that the timing of an impairment is very subjective, which is exactly why the SEC sets their standard at "misleading". The standard for financial reporting is not GAAP or accuracy but the higher standard "to not be misleading". Establishing this standard, communicating it and enforcing it is the responsibility of both the CEO and the CFO and is a critical leadership responsibility.
PE Hub has a great post this morning on the annual meeting of the Blackstone Group.
Blackstone describes itself as an alternative asset management company
with $92 billion under management. However, Blackstone's beginnings were
as a private equity fund and they built their reputation doing LBOs.
A few quotes from Blackstone illustrate some important lessons.
“You almost never screw up by replacing a CEO, but keeping a weak one can be devastating.” Weak management has untold, continuing consequences. When you have a problem with a manager, replace them. The higher in the organization the more resolve you should have to replace them quickly.
"Blackstone’s largest-ever equity check was in the Hilton Hotels buyout. Its $1.44 billion investment was marked down by 48.68% as of 12/31/08." Write off or write down bad assets. Weak accounting is a black cloud that hangs over a company. Also, if you take the write downs now they are behind you. In sailing they say to reduce sail the first time you think you need to. Write off assets at the first sign of a decline in value or create a reserve.
“When things do turn, we will be rapid commiters of
capital, similar to 2003 and 2004. Until then, we will be very cautious
exposing LPs’ capital, with the exception of purchasing debt at
significant discounts.” When the economy turns up there is a huge pool of capital now on the sidelines waiting to invest again. When Blackstone makes a new, large investment (say over $500 million) in a company, that will be a signal that Blackstone thinks the economy has turned.
For some reason I am always interested to read posts about what gadgets people carry in their briefcases. Very few people carry flashlights (very useful in hotel fires) and even fewer now carry calculators. I bought my first hand held calculator in 1973, which was the first step for me in automating financial modeling. It also lead to the retirement of my sliderule, which had served me well for about seven years.
My first calculator was made by Texas Instruments and only had the four basic functions (+-X/) and no programing capability. This calculator served me faithfully until 1981 when a power surge in Lima, Peru hurt it badly. A local fixit man was able to temporarily restore it but it failed for good a few months later.
To replace my friend from TI, I purchased an HP 12C calculator. This is the finest handheld finance calculator ever made and I still carry it with me. Partly I carry it out of tradition, but I am sure the calculator's feelings would be hurt if I started to leave it home after so many years of traveling together. My HP 12C has been with me for every dollar of financing I have ever raised and has never needed a re-boot in 28 years. I have also noticed over the years that nearly every good finance professional owns an HP 12C and that one should be very wary of finance professionals that do not use the 12C. This rule still applies today in the age of Excel because people will still whip out a handheld calculator for a quick calculation at a meeting.
Today I learned in a post on BijanSabet.com that HP has created an iPhone app of the HP12C (picture below text). I guess this is the natural evolution of technology, but for probably the first time I am a bit sad to see such a remarkable device as the HP 12C replaced by a newer technology. Now, how will we be able to spot the real finance people? Ask for a list of their iPhone apps?
I do not think my HP 12C reads blogs so please keep this news quiet out of respect for my old friend.
A loyal reader of this blog sent me today's press release from the Treasury Department, the introduction of which is below.
"WASHINGTON – The U.S. Department of the Treasury announced today that 10 of the largest U.S. financial institutions participating in the Capital Purchase Program (CPP) have met the requirements for repayment established by the primary federal banking supervisors. Following consultation with the primary banking supervisor of each institution, Treasury has notified the institutions that they are now eligible to complete the repayment process. If these firms choose to do so, Treasury will receive $68 billion in repayment proceeds."
The reader posed two good questions to me:
Too much repayment, too fast?
Was this money really ever needed?
Answer 1
Given the scarcity of capital in current markets, the general nervousness that surrounds the economy, the fact that we are seeing only a very few positive economic indicators, and the economic "upturn" could be a false signal, I would not have given the government back their money yet. Having to go back and ask the Treasury for a second capital injection in the future should definitely be a CEO career ending event.
Answer 2
The money was never really needed, except by Bear Stearns, Lehman Brothers and AIG. Only the later group had real cash flow problems. Almost everybody else had to take the money in order to increase confidence in the financial system.
As I have said before, a financial crisis is in large part a crisis of confidence. A crisis is of such consequence that most people immediately overreact, especially when it is the first financial crisis of their lifetime, government tenure or banking career. When the government gets involved significantly in the "turnaround" and all its aspects, we can be confident that the government will overspend, over regulate and generally focus on issues of no economic consequence. This is true regardless of political party.
The best thing the Obama administration could do would be to stop spending stimulus money and recognize that more normal market forces are now at work and will gradually right the U.S. economy. Maybe even in time for the 2012 presidential elections.
If the government continues stimulus spending and running huge deficits, government borrowing will crowd the private sector out of the capital markets and we will see interest rates not seen since 1980, when the Fed Funds rate was above 10 percent for almost the entire year and peaked at 19.44 percent. In the early 1980s government borrowing was to finally pay for the Vietnam War. (As an aside, someday the U.S. has to pay for the wars in Iraq and Afghanistan.)
The current Fed Funds rate is at an extremely low historical rate of approximately 19 basis points, .0019, in large part to provide economic stimulus. However, the U.S. Government can not borrow forever before bondholders demand higher returns to match the enormous supply of new bonds coming on the market each month. Then interest rates will move upward dramatically. Will they reach 1980 levels--hopefully not, but interest rates have to move much higher.
One of the hardest parts of working with early stage companies and teaching entrepreneurship is to get people to reconsider their revenue model. It appears to be baked into the genetic code as the default setting that we sell a product or service for cash. One of the most effective ways to change this way of thinking is to show creative examples of doing revenue models differently.
SECInfo.com provides information filed with the SEC by publicly traded companies. This SEC info is a bountiful store of information not only on a particular company but also on industry trends, comparative analysis, KPIs, acquisition valuations, etc. SECInfo is my preferred site when I want to review a company's 10-K, 10-Q or S-1 filings. (SEC filings are explained in this file that can be downloaded. Download Edgform.)
I received the following email yesterday from SECInfo, which showcases an interesting example of a revenue model.
Dear Robert Hacker:
Thank you for using our http://www.secinfo.com service. In return for the free access you are currently receiving, we ask that you recommend SEC Info to all your friends and associates. This will benefit you, because, by increasing our user base, there will be less of a chance that we will someday ask you to pay us to continue using our site.
How does this work? The revenue to maintain and improve our site comes from our very-most-frequent users. If and when your usage pattern puts you in that category, we will ask you to subscribe. Because we measure your usage against that of all users, the more people that you can help us attract, the less the probability will be that we will consider you a frequent user and ask you to pay. But even if we don't grow fast enough and do ask you to pay, our subscription rates are less than our competitors ($10/month for individuals, and less per-user for groups).
We think this is a very fair deal, and thank you for your support.
SEC Info - Registrar http://www.secinfo.com
If I promote the site I do not have to pay. I like this model because my incentives are aligned with the company's. I also like the clear message to explain their logic and the fact that the email was automatically generated based on my usage yesterday.
As an aside, please visit SECInfo and check out the site. If you are not familiar with SEC filings, send me an email and I will do a series of posts on the information contained in each of the major SEC filings.
I am a strong advocate of focusing on sales (and not m__k__g) in my workshops, entrepreneurship classes and with clients. I constantly harp on customer acquisition cost and how are you going to get the customer, close them and collect the cash as part of fully developing a business model.
Every once in awhile I see a post that I should have written. Steve Barsh, an Adjunct Professor at Wharton, has a great post entitled Chasing the Money: Stop Trying to Raise-Start Trying to Sell. A must read for any aspiring startup execs.
One of the most popular posts ever here was a guest post by Rickard Warnelid entitled Project finance Modeling in Excel. At the time Rickard was a principal in Navigator Project Finance, an Australia-based group of serious Excel modelers for complex projects. Navigator has since launched a sister company called Corality and Rickard is in charge. Corality provides auditing of Excel models and Excel training worldwide. To commemorate the launch of Corality I asked Rickard to do a new post on Excel, which follows. The post includes some excellent links to new resources to improve Excel skills.
By this day and age most people agree that to be successful in the finance industry you need to be proficient in Excel. The level of Excel knowledge needed in different roles and organizations vary greatly but there are some common skills that are required for all users. When discussing ‘How to learn Excel’ it is important to look at these three categories of skills and review the available options for each category.
Technical Knowledge of Excel Obviously sound technical knowledge of Excel is critical to any user of Excel, however I often find that there is too much focus on Excel Functions, shortcuts, Toolbars, Add-ins, etc. Sure, these are all great, but too much technical knowledge can sometimes make you a liability in an organization as you are likely to construct Excel spreadsheet that only you can use and maintain.
Improving your technical knowledge is quite straight forward even though it can take time – there are thousands of great websites dedicated to this topic along. My recommendation would be to pick 2-3 three of these and spend ½ hour a day reviewing tricks and functions until you feel comfortable instead of trying to cram it all in over 1-2 weeks.
Professional Presentation Presenting your spreadsheet analysis at a level suitable for professional documents is a lot harder to learn than the technical components of Excel. The best way forward in this category is to follow good examples by looking out for good design practices and to constantly try and develop a better understanding for communication of numerical findings. Finding some good Excel templates with pre-defined style will also help.
Understand your Business The last component of Excel skills hasn’t really got anything to do with Excel… To build a financial model or a spreadsheet to analyse any business case, acquisition, private equity injection or any other scenario it is critical to have an in-depth knowledge of the underlying project or business. It doesn’t matter if you are a master of pivot tables, offset, mmult and vba if you can’t explain how your business makes money…
I don’t have any recommended sites for this section as it is a very general skill that can only be developed ‘on the job’ by constantly asking questions about the business model of the company that you are analysing. You can test your own knowledge by trying to explain to a colleague or a friend the relationships between operational volumes, revenue, costs and investments. If you can’t explain it to someone else then you need to do more research before starting your spreadsheet.
Rickard has started a blog, if you want more. Cool post comparing model types to cities is here. I think my models are like Columbia, MD, the first planned community in the U.S.
Daniel Buenza, a Professor at Columbia University Business School (my alma mater), focuses his research on the social studies of finance. In a recent article he describes his research over the last three years on the derivatives trading desk of a major bank. The period examined included the recent financial crisis and the bank came through unscathed, i.e. no huge losses or need for a capital call. Before we get to Dr. Buenza's conclusions on why the bank avoided the errors of their peers, lets first examine this new concept of social studies of finance. At least it is new to me and hopefully of interest to you--my respected readers.
Basically the social studies of finance examines the role of technological artifacts and mental models in capital markets. Technological artifacts are artificial human constructs that provide knowledge. (More on this subject here.) Wikipedia defines a mental model as "an explanation of someone's thought process for how something works in the real world". In summary, the social studies of finance involves the study of the role of technology-based and "pure thinking" models in capital markets. Obviously the two types of models can interact on the same problem. In a simple Excel model, you change the assumptions and the company cash flow changes. This would be an example of the two models interacting. Program trading would be an example of technology-based modeling where the model basically trades the position. Playing Texas Hold'em would be an example of the pure thinking model.
The unscathed, unnamed bank that Buenza studied managed to avoid catastrophe by a principle called reflexivity. Reflexivity is nothing more than the ability to reconsider your position on an issue. In finance terms, it would be to reconsider your assumptions. In other words the mental model is reexamined, thereby leading to a change in the technology (computer model) which governed the trading strategy.
The particular bank in question had a very collegial atmosphere, free exchange of information between colleagues and no superstars to upset the flow. This culture allowed traders to gather much more data and to change their mental models more easily, thereby avoiding the current financial disaster. When trading model driven positions, there is a tendency to over rely on the model and be slow to realize the model is no longer trading profitably. Excessive positions and a slowness to realize that the trading models were no longer working properly is a large part of the cause of the current financial crisis.
Most of us do not trade derivatives, but Buenza's study of the bank points out the importance of maintaining a culture that is conducive to changing assumptions. Most air crashes are due to pilot error and in most of those cases the co-pilot remained silent while knowing the pilot was making a terrible mistake. It is not easy to maintain a culture where reflexivity is the practice, but it may help you avoid disaster in your business.
The fine folks at Finance 3.0 have launched a new sister site Finance Yard. The new site is a financial headline news service. Nice balance of international and U.S. stories presented in five categories:
Business
Companies
Economics
Markets
Newsmakers
Check it out!
In the interest of full disclosure, I am now an advisor to Finance 3.0.
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.
This is the third and probably last post in the series on key performance indicators. Previous posts are here and here. This is the war stories post, but because I always develop KPIs for any company I am involved in, I do not have any near death examples. A positive example follows.
A few years ago I ran a telecom company offering voice and data services to businesses. One month I noticed a precipitous decline in gross margin. Turned out one of the owners had contracted for a new fiber ring to carry data traffic (part of cost of sales) at a cost of $65,000 per month. Since this made no sense to me I determined how many data customers we had at the time. Answer--18 customers (KPI-1) paying $20,000 in total per month (KPI-2). Great, we have now increased our negative cash flow by $65,000 per month (after I had spent a year to get us to cash flow break even). So what did I do.
I created an incentive scheme to highly motivate the sales force to sell data. Each sales person had a monthly quota of one data contract per month in order to be eligible for any bonus payments earned on new voice contracts. In other words, if you did not close one data contract each month, you got no bonus. Now the sales force was focused on selling data and the commission on data was one months revenue or an average of $1,000 (a very large commission for our sales force).
Next I developed the KPIs for the sales force. KPIs for the sales force (60) were tracked weekly by me. The KPIs were a simple addition to the existing KPIs. There were two. Data contracts closed and $ value of data contracts closed per sales person. We also had a KPI not related to sales. Data revenue on the fiber ring as a percentage of monthly fiber ring cost. Note: the fiber ring cost was fixed so the real management effort had to be in getting the sales force to sell data.
At the end of the first month we had sold one new data contract. Not a stellar start. Six weeks into the program we still had only one sold data contract (voice sales were on budget). So I started to investigate. Turned out that data sales were much more complicated than voice sales and the sales force needed training. We designed and implemented the training in a week. When I left two years later we had monthly data revenues of $670,000, more than ten times the monthly cost of the fiber ring. Along the way we started tracking data customer attrition as a KPI. This signaled to us that we need a dedicated customer service department for data.
I believe that 2 or 3 KPIs are all you need to track a major management objective, which is almost always revenue growth related. 40 or 50 KPIs and you lose track of the key objectives.
Another thing I believe is the Rule of Two. You only need two weeks or two months of a particular data to identify a problem. I could spot new sales people who were not going to make it after two weeks and they were gone at the end of the month. A proven sales person misses quota one month, I notice. After six weeks (4+2) if there is no upturn in performance I am investigating. Usually they got divorced, have a sick child or some other one of life's major challenges. Somebody counsels them about their performance. At the end of the second bad month they get a warning and they are gone with three bad months in a row. (If the selling cycle was longer, I would probably give a sales person a longer period. Maybe a new sales person would get two months to show real traction.)
In my experience managers frequently look for excuses to explain away a bad KPI, wait too long to admit a problem and then have an emergency to address. Remember the Rule of Two. Two bad periods of data and you have a problem situation. May take some experience to know whether to use two weeks or two months, but remember two points make a line and a line is a trend.
In response to yesterday's post on key performance indicators, a long time reader of this blog wrote to me as follows:
Don’t think I need to tell you, but this is a very relevant post.
I’m not sure the average reader (one who may not have similar experiences to mine) will appreciate it as much as they should. If you can give concrete examples of why KPI’s are important (where things went wrong without monitoring them, or they helped somebody “pull up on the stick” in time), you will have a couple of very good posts.
If you can explain the process of determining KPIs in a manner that can be understood and implemented by your readers, you will have an OUTSTANDING series.
I am going to follow the reader's advice and do a series of posts on key performance indicators (KPI). First I am going to talk about how to determine KPIs and then in a subsequent post I will tell some war stories about KPIs and how they saved the day or accurately predicted the demise of a company.
KPIs basically report on the growth drivers of revenue and the productivity related to key expenses to produce revenue. KPIs are not a rehash of the income statement and frequently rely on information not on the income statement. To determine the KPIs you first must understand the growth drivers for revenue in the business. To restate from a previous post on growing your business, there are five possible revenue growth drivers:
New Accounts (manufacturing)
New Locations (retail, restaurants)
New Subscribers (websites, social media)
New Distribution Outlets (consumer products, business equipment)
Sales Force (business services)
Most businesses rely on only one of these drivers as the critical success factor for growth in revenue, although occasionally two factors may be important. In my experience many companies do not understand the real growth driver in their business or do not analyze the driver to a sufficiently granular level. Perhaps an example will illustrate.
Let's suppose we are starting a business services company and we are selling Xerox machines to busineses. The sales force is the key growth driver and what we need to understand is the productivity of the sales force. The KPIs I would use are shown below:
Weekly by Salesperson
Customers contacted last 30 days
Customer meetings
Customers sold
$ Value of machines sold
Average $ value of machines sold
$ Value service agreements sold
Average $ value of service agreements
I would also include the following month-to-date information by salesperson:
$ Value of machines sold and monthly budget
$ Value service agreements sold and monthly budget
These 11 pieces of data allow me to track each salesperson weekly. I can see their prospecting, their meetings and their close ratio. Looking at the dollar values allows me to determine if they are going to make budget and the averages allow me to see if they are selling inexpensive machines or working to make their budget. For a sales force you have to use weekly data because two weeks of bad performance is sufficient to identify a problem at the salesperson or sales manager level and by the third week you should be taking corrective action.
Each month I would also calculate the customer acquisition cost by adding up all the costs for each sales person (salary, commission, benefits, car, phone, support materials, etc.) and dividing that total by the number of customers sold. Comparing this number to the average gross margin per customer would show me the productivity of the salesperson and whether a salesperson was contributing to EBITDA.
If I were running a steel manufacturing plant, the growth driver would be accounts but I might also monitor the sales people. For the account KPIs, I would be looking to understand the trend in repeat orders (given that it is not common to get a one off order), as shown below:
Weekly by Account (or top 50 accounts individually)
Orders $ (and vs budget)
Average order $ last 4 weeks
Average order $ last 13 weeks
Tons (and vs budget)
Average tons last 4 weeks
Average tons last 13 weeks
$/ton (and vs budget)
$/ton average last 4 weeks
$/ton average last 13 weeks
In this analysis I am trying to see the trend in revenue in order to spot changes in the economy (or a sector--autos) and whether a particular type of client is a better customer (in order to re-direct the sales force). Given the high fixed costs in steel manufacturing, I am particularly concerned about any negative effects on sales (which would include possible changes in tactics by a competitor). For the same reason I want to monitor the trends in tonnage. Price per ton allows me to determine how my pricing may be affecting sales and whether any changes in sales mix are having a positive or negative effect on revenue.
The example from the steel factory also makes clear another important point. KPIs should help you to monitor key business risks, such as high fixed costs, customer acquisition cost (social media sites) and customer attrition (subscriber based businesses such as telecom).
KPIs should also be used to monitor the performance of large, current assets. For example, in retailing you can not look just at inventory turnover. You need to monitor "open to buy", discounts and markdowns taken and expected delivery dates for additional merchandise. The KPIs, therefore, match up with all the tools you have to manage inventory (the critical current asset).
Next post I will dig up some war stories and discuss the Rule of Two.
During the holiday weekend some one wrote and asked me what I mean by "sophisticated finance", which I have never precisely defined in this blog. After 260 posts, here goes.
When I came back to the U.S. in 1999, I had just spent ten years building a company in Indonesia from $40 million in annual revenue to $1 billion. At every opportunity during those ten years I took the opportunity to reduce or eliminate risks in the company because the environment of Indonesia included significant political, social and economic risks. Not as bad as some African countries, but a place of dramatic and significant risks. To manage or reduce these risks I became an accomplished derivatives trader/manager in currencies, interest rates, equities and off balance sheet vehicles. Derivatives were an important tool, but I only used them to hedge risk and rarely speculated. At one point I thought that all finance would be based on derivatives and the last ten years may have proven me correct.
In Indonesia we ran the most sophisticated IT operations in the country, as evidenced in part by the fact that the top IT people were always getting job offers. We constantly upgraded IT largely to better manage the company's largest asset--merchandise inventory. Outside Japan, we were the first retailer in Asia to use computerized inventory management (80,000 SKUs), link all our store communications via satellite and to poll POS (point-of-sale) information daily. Building this IT infrastructure was where my interest in IT really grew and I began to understand its importance.
The third critical element in Indonesia was a constant strategic review process. We constantly tracked our customers through a variety of information sources, including what was probably the first use of market research in that dictatorship. As the customers income and social aspirations changed significantly over a ten year period, we reacted both tactically and strategically. Good strategy requires that you constantly be close to and informed about the customer.
Sophisticated finance is an integrated approach to thinking about strategic planning, IT and finance. Financing (and risk management) without good strategic planning is like building a shopping center without a set of blueprints. An in depth understanding of IT is required because modern business operations can not be understood properly without detailed knowledge of the IT infrastructure. (Of course, to implement sophisticated finance, a company needs reliable and timely accounting, good controls and access to capital.)
Another way to think about sophisticated finance is to think about what is critically important to a business--knowledge of the customer, access to capital to pursue the plan and the use of IT as a competitive advantage. Bring these three things together in your business and you are beginning to use sophisticated finance.
Over the weekend I did some blog housekeeping. I created a new category on the right hand side which includes all my posts on the financial crisis dating back to August 2007. 18 posts are included.
I do not arrange real estate financing, but this came in email yesterday. Looks like there is capital available. I do not know this fund so any interested party should do their own due diligence.
To discuss specific transactions or for more information about LEM, contact:
LEM Focuses on New Mezzanine Financing and Loan Purchases
LEM
Mezzanine, a direct lender providing structured finance alternatives
for real estate owners, announced that it has more than $200 million to
invest by year-end to originate mezzanine loans and purchase existing
senior and subordinate debt. LEM typically invests longer-term and on a
fixed rate basis, but has also done many floating rate transactions.
The company is also active providing preferred equity structures in
transactions where the senior loan must be assumed and the borrower
needs more leverage.
"We
remain active in today's capital marketplace and are targeting core and
core-plus, cash flowing opportunities, whether they are a refinance,
acquisition or purchase of an existing subordinate position, said Herb
Miller, a founding partner of LEM. "Our strong equity base gives us
liquidity to originate or buy positions and to continue lending in this
environment. We can help senior lenders, brokers and borrowers get
transactions closed during this tough period," added Miller.
"In
this capital market climate, with rising first mortgage rates and
reductions in loan proceeds, borrowers will require more mezzanine
financing to complete their transactions, and LEM has geared up to fill
that need," said Jay Eisner, a founding partner of LEM. "We see an
opportunity to work with borrowers whose senior debt is maturing and
who need to reduce that debt in order to refinance or extend their
loan. We also expect an increase in preferred equity requests since
buyers may want to keep existing low-rate loans in place, and leverage
their acquisitions with LEM s preferred equity. LEM uses the preferred
equity structure in transactions where mezzanine financing is
prohibited, usually because of restrictions in the existing first
mortgage.
LEM has provided mezzanine financing behind, FreddieMac, FannieMae, CMBS, insurance companies, banks and other senior lenders.
LEM,
a series of private equity funds with over $450 million of equity,
provides mezzanine loans, preferred equity and B-Note financing from $5
million to $25 million for commercial and multifamily properties
nationwide. LEM writes larger deals if they involve a portfolio of
assets or special situations. Loans are generally non-recourse with
terms of up to 10 years.
LEM
is a direct lender, providing mezzanine loans, preferred equity, and
other forms of subordinate financing to meet the needs of each
transaction. LEM prides itself on its creativity and ability to close
deals quickly, and it does not depend on third party funding, outside
approvals, or the vagaries of the investor marketplace. With complete
control over all aspects of the transaction from sourcing to closing,
LEM is a true 'one-stop shop'. LEM also performs all asset management
and servicing in-house. In today's marketplace, it is this level of
service that makes LEM a structured finance leader.
