[VIDEO] What Makes a CEO Fundable to Investors?

 

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about what venture capital investors are looking for in the CEOs of the companies they invest in.  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in sharpening your own skills to impress prospective investors.  I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] How to Start Selling 'Wisdom' Instead of 'Widgets'

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about how to selling intelligence from data collected from your tools (e.g., Wisdom) can lead to higher revenues and long term client loyalty that simply trying to sell them the tool alone (e.g., Widget).  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in your product design and positioning.  I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] How to Grow Using a Roll-up Strategy

 

I was recently interviewed by Chelsea Wood, a Managing Director at Acquisition Lab, an M&A advisory service for early-stage entrepreneurs that prefer to grow through mergers and acquisitions, instead of building a startup from scratch.  This video presents strategies for how to think about planning and executing a roll-up, rolling many businesses up into one company to achieve better economies of scale (which we better detailed back in Lesson #258).  I thought this video turned out great, and Chelsea was kind enough to allow me to share these learnings with all of you. Enjoy!!

Thanks Chelsea for this opportunity.  It was fun collaborating on this project.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] What's More Important--Product Features or Benefits?

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about how to best to pitch your product to potential buyers, and whether to emphasize the product features or the resulting revenue, cost saving or user experience benefits to your customers.  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in your selling efforts.  I hope you like!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #343: How to Analyze and Report Your Financial Results

 

You would be surprised how many entrepreneurs don't truly understand the financials of their business.  Yes they are creating them out of Fresh Books or Xero, and they most likely focus on high level numbers like total revenues and total profits.  But, they don't dissect everything in between.  And, more often than not, when it comes to managing the finances of your business, the devil is in the details.  This post will help you learn the basics of formatting, interpreting and reporting your financials, so you will look like a pro with your investors or whoever else may be asking for them.

The Key Financial Statements

There are typically three financials statements that are prepared: (i) the income statement (or often called the P&L statement); (ii) the balance sheet; and (iii) the cash flow statement.  The income statement measures all inbound revenues and outbound expenses of the company, for whatever date range you are interested in studying.  This is the most studied of the financial statements, as all companies are striving to grow their revenues and profits over time.  The balance sheet lists all the assets, liabilities and equity in the company at any single point in time.  As the name suggests, the asset values, must balance with the liability and equity values. The cash flow statement gives you a true sense to how your cash balance on the balance sheet are moving up and down with any operating, financing or investing activities that may not be entirely clear from the profit levels shown on the income statement.  For example, the cash flow statement will adjust for non-cash items like depreciation and show how cash was used other than for paying expenses on the income statement.

Optimizing The Income Statement

To me, these are the key numbers to study on the income statement: (i) revenues; (ii) gross profit margin (revenues less cost of goods sold); (iii) EBITDA (gross profit less all expenses, resulting in earnings before interest taxes depreciation and amortization); (iv) return on ad spend or ROAS (revenues divided by sales and marketing costs); and (v) return on staff spend or ROSS (revenues divided by total payroll investment including salaries, bonuses, commissions and benefits).  There may be others depending on your industry or business model, but these are a few of the bigger ones that apply to most all companies.

Optimizing for revenues is pretty simple to understand--more is better than less!!  The bigger revenues grow, the better.  So, you are always trying to improve your revenues from the preceding period, either the prior week or the same week of the prior year if there is any seasonality in your business.

Optimizing for gross profit means that you want your gross profit margin (gross profit divided by revenues) to be improving, or at least staying flat in every future period.   Said another way, you want your cost of goods sold as a percentage of revenues to be staying flat or improving. Rising costs will obviously hurt your bottom line profits.  And, looking for opportunities to lower your costs, either with new vendors or more efficient processes will help you here.  Gross margins can vary wildly based on your business model, but often end up in the 20%-80% range, with most in the 30-40% range.

EBITDA is obviously benefitted by improvements in revenues and gross profits, but it is also benefitted by keeping all of your other expenses as a percentage of revenues flat or improving over time.  In terms of which expenses you need to focus on optimizing--focus on the big ones.  For most companies that is typically sales and marketing expenses and payroll expenses.  Those should clearly be broken out as separate line items.  The minor expenses can be bundled into "other expenses", but they too should be optimized where they can.  You are doing well if EBITDA is growing in dollars, and the EBITDA margin (EBITDA divided by revenues) is improving over time.  Worth noting, some expenses are fixed one-time expenses (e.g., your CEO's salary), so they will become less as a percentage of growing sales.  And, other expenses are variable recurring expenses that scale as you grow (e.g., shipping costs), that will most likely stay flat as a percentage of sales. So, know the differences here.  EBITDA margins typically end up in the 10-30% range, depending on your business model.

ROAS is probably the most important metric you are managing for.  You can't grow revenues without growing your sales and marketing investment.  And, you want to make sure you are acquiring new customers as cost effectively as possible.  ROAS typically ends up in the 3x to 10x range, and the higher the number, the more effective your advertising investment is.  Worth noting, it is okay if your ROAS slightly declines over time as you scale, as your initial marketing spend is typically more effectively invested than your tactics used at scale.  But, it always has to end up in a profitable return on marketing investment.

ROSS is another important metric to measure.  It helps to measure that your investment in human resources is maintaining or improving its efficiency over time.  ROSS typically ends up in the 5x-10x range depending on your business model.

Optimizing The Balance Sheet

To me, the key numbers to study on the balance sheet are: (i) cash; (ii) debt ratio (total debt divided by total debt plus invested equity); (iii) current ratio (current assets divided by current liabilities); (iv) inventory turnover ratio (cost of goods sold, divided by average inventory); and (v) return on capital or ROC (net profits divided by total invested capital).

Optimizing for cash is pretty straight forward, more cash is better than less!  You always want to have enough cash on hand to ensure you can at least manage your business needs for the coming 12 months or more.  If not, it may be time to consider a financing or lower your expenses and cash burn rate to extend your "life line".

Debt is typically a bad thing for early stage businesses, given all the risks and uncertainties of a startup environment.  And, most debt for small businesses comes with personal guarantees from the owners, which means if the business can't pay its debts, the individual owners are backstopping the liability, and you can personally bankrupt yourself with any business failings.  But, if you are going to take on debt, never let your debt ratio exceed 50% of invested capital.  And, seek-asset based funding sources that can secure your assets or inventories, without requiring any personal guarantees, where possible.

Your current ratio is basically measuring if your current assets exceed your current liabilities or not, and that there isn't any immediate cash squeeze needed to fund working capital needs.  So never let this ratio go below a 1:1 ratio, or there may be some short term capital needed to fund immediate liabilities.

Your inventory turnover ratio is measuring how fast you are moving product in and out of your warehouse.  It is calculuated based on your average inventory levels in the studied period, not necessarily the point in time balance on a specific date.  The faster you are turning inventory the better, to reduce your out-of-pocket cash investment in inventory.  I would say an average business is turning inventory 3-4x per year.  If you are turning less than that, you may need to write off inventory that is not selling or change your product and sourcing decisions to help the business become more efficient.

Your ROC is helping to illustrate that you are getting your investors a good return on their investment.  Depending on how large your business and how fast you are growing, I would say ROC needs to be in the 15% to 35% range, on average, in order to attract and retain your investors. 

Optimizing The Cash Flow Statement

The cash flow statement is simply another way of studying your cash inflows and outflows, where you obviously shouldn't be spending more than you have to spend.  But, this statement is helping your CFO know whether cash was spent or generated from operations (e.g., capital expenditures for replacement equipment); investing (e.g., took an equity stake in a supplier) or financing activities (e.g., closed a new equity investment into the company).

Reporting Timing

To me, every business needs to be studying its business on at least a monthly basis.  Bigger companies tend to study their businesses on up to a weekly, or even a daily basis.  But, no less frequently than monthly.  So, at a minimum, when you get to the 1st day of any month, it is time to study the financial results of the preceding month.

Reporting Analysis

In your financial statements, I would be reporting results for: (i) the current month; and (ii) the year to date period.  And, I would be comparing them to; (i) the original budget; and (ii) the same results for the prior year period (e.g., compared March 2022 to March 2021).  And, the reports need to include: (i) dollar amounts; (ii) percentages of sales; and (iii) percentage growth rates, for every line item.  These reports need to include each of the important datapoints and metrics discussed in this post, so you can track their progress over time, and study if the business is doing better or worse than budget, and better or worse than last year, and to what extent.  

Here are example column headers for your income statement for the month of March: (i) March Dollars; (ii) March % of Sales; (iii) March % Increase; (iv) January to March YTD Dollars: (v) January to March YTD % of Sales; and (vi) January to March % Increase.

Once the reports are created, now you or your CFO need to study the data and metrics, and produce a Management's Discussion and Analysis document, that discusses the key trends and why the numbers are moving in the direction they are, and why they are better or worse than last year or the plan.  That "WHY" is the most important thing here, make sure you have a firm grasp on the reasons behind any movements in your results or metrics, so you can manage them accordingly.  So, build the monthly discipline of actually studying this when allocating your time.

Closing Thoughts

I was a finance major in college, so financial statement analysis is a pretty basic skillset of mine.  But, if you never studied finance, it can be a daunting exercise.  So, hopefully, this post can help point you in the right direction to truly mastering the numbers of your business.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #342: Don't Aspire to Be Champion (Windows)

 

Normally, in the world of boxing, you would aspire to be world champion, knocking out every opponent you see, pounding them into submission until they finally break.  But, the business world, is not the boxing world.  And, apparently, Champion Windows didn't get the memo, that  you are not supposed to beat up your own customer prospects.  I recently survived one of the most brutal sales experiences I have ever lived through, while shopping for new windows for my home.  This story was so unbelievable, that I needed to share it with you as a case study of what NOT to do, in your own selling efforts.

Background

I didn't now anything about the windows industry when I started this process.  All I knew was my home needed new windows.  I had heard of the big brands like Andersen and Pella, and did a little online research on them.  I ultimately invited Pella to make us a proposal.  But, these brands appeared to be more expensive than many others, for very similar products, and I wanted other options.  

Online research proved too confusing--dozens of unknown brands sounding all the same, and not knowing who to trust.  And, there were no installers that represented multiple brands, where you could compare and contrast products, much like you would in any other shopping experience.  So, I ended up swinging by Home Depot, for their thoughts, as they represented multiple brands.  They recommended the Simonton brand for my needs, so I invited them to make a quote as the windows and services would ultimately be backed up by Home Depot, a known and trusted brand.  

But, I still wanted a third quote.  I had seen a few new windows already installed in my home, so for a consistent look, I called the old owner and asked what brand she used, and she mentioned Champion Windows.  I assumed they would be more price competitive than the bigger brands like Pella, so I invited them out to the home to make a quote, as well.

The Pella Quote

The salesperson who came out to my home was pleasant and appeared knowledgeable, answering the questions I had.  He measured my 24 windows and quoted me within an hour.  He quoted me around $29,000 for their vinyl windows.  At $1,200 a window, that was a lot more than the $600-$1,000 range that was being discussed online, in terms of a reasonable budget for replacement window costs.  I guess that was to be expected from a major brand, being a little more expensive.

The Simonton Quote

Again, a very knowledge and friendly salesperson from Home Depot came to the home, showed me his products, compared the various brands in the industry (which was one of my goals), did his measurements and quoted me the project within an hour.  The quote came in around $22,000 which felt good to me, especially with how comparably rated Simonton was to Pella in the Consumer Reports reviews online.

The Champion Sales Pitch

Let me start by saying Champion was in my home for over four hours!!  And, it wasn't a single salesperson, it was a two person team (a salesperson and his boss, training the new salesperson).  It started with an outdoor tour of the house, not only looking at the windows, by trying to find other products that may need replacing (e.g, doors, sills). I can't discredit them for trying to upsell an order, if they could.  But, they were here to focus on the windows.  So, it was frustrating me that they were wasting my time on anything other than windows.

When they finally came inside.  They made me sit through a long slide show presentation.  They discussed their company, their position within the industry, their warranty, etc.  But, no discussion of the products themselves.  After an hour of politely listening, I asked if we could jump ahead and see the products, he said no that they have to follow their set script.  And, worse yet, if I did not verbally agree they had the best warranty in the industry, they would refuse to continue their presentation and would leave my home.  I should have had them leave at that point, but I was invested at this point, and wanted to learn their quote.  So I continued on with their shenanigans.

When we finally got to speaking about their products, I have to give them credit.  They did a good job of positioning their products as the best.  They showed their white colors vs off white colors of others, they showed how durable its construction vs. flimsy others, and they showed a corner cut of them vs. the competition (with theirs insulated).  But, the wow moment was when they took out a heat lamp and compared BTU readings of their glass vs. others, with them looking great.  Of course, I didn't know any better, and in hindsight, learned that many window sellers do the same thing with an "off the shelf" window salesperson kit.  But, by this point, I was finally warming up to their products; it only took two hours to get to this point!!

The Champion Quote

Drumroll, please!!  The time I had been waiting for had finally arrived.  After asking me to confirm they were the best company, with the best warranty, with the products, and there was no reason other than price not to engage them, they finally gave me their quote.  Understanding, I had already told them the quotes of Pella and Simonton, with the hopes that they would try to beat it.  So, you can imagine my dismay when their initial quote was a whopping $54,000, after two hours of sitting there.  When I told them "are you crazy?", knowing what they were up against, they tried to position it, "well, you said we were the best, and that comes at a premium".  

When I told them that price was a non-starter, then they said, "well, we have a 15% off sale, and if you buy today I can increase that to 25%".  That lowered the price to $41,000.  But, I still said that it felt too high vs. the others.  He said, "well, what do you want to pay".  I said I was prepared to pay up to $1,000 per window, so I would agree to move forward at $24,000.  He countered with, "I'll have to talk to my boss, but the best I could do is $29,000, again if you buy today." And, that was swapping out five double hung windows, with two cheaper slider windows which saved $2,000 (so apples-for-apples he was at $31,000 vs. the others).  

He saw I was getting close to accepting, so then he throws in doing any window sill repairs that he saw outside for free, which he said was a $3,000 value.  So, $26,000 was his final offer, reiterating it had to be now or never.  If he left the home, the price would immediately jump back up to $41,000, as their company requires a "same day sales policy", and that if I wanted a lower price, I would have to wait a year for them to come back out and quote again.  It sounded like sleazy sales tactics to me, as I couldn't imagine they would walk away from a huge sale.

What Happened Next

I told them I needed to clear a purchase of this size with my wife, and that she wouldn't be home for a couple hours.  I asked if I could call him later and purchase tonight.  He repeated, "if I leave your home, the price goes up".  Now I was getting upset, saying how unreasonably stupid that sounded, where he reiterated "company policy".  After another 15-20 minutes of hemming and hawing, he finally agrees that if I sign a contract now, he will put an out-clause in it, that if my wife does not agree to move forward, we won't, but I need to write a 25% check as a deposit before he leaves.  I told him I psychologically would not write a check until I am ready to purchase, and after a little more back and forth, he finally agreed that if I sign the contract with the out-clause, I could call him later with a credit card (breaking yet another company policy for me).  I begrudgingly did it, trying to lock in the low $26,000 price for what I perceived as a good price for what appeared to be a good product.

My Wife's Reaction

When my wife came home, I shared this story, and how I was browbeaten for over four hours.  Her reaction was, "I don't care how good their windows are, they are not getting our business.  They sound like complete slime balls, and I will not give them my business out of principle."  At which point I terminated the contract with Champion with my out-clause.

The Ace Up My Sleeve

What Champion didn't know was, I was communicating with Home Depot while Champion was still at my home.  I shared the above story and my thoughts of the Champion pitch and product, at which point the Home Depot salesperson said "don't fall for their dog and pony show, it is all smoke in mirrors".  As an 18 year veteran in the window industry that was brand agnostic, I trusted him when he said Champion is offering you nothing that merits paying a higher price than the Simonton quote.  He was convinced Simonton was a better product.  And, even came back to the house the next day and repeated the same heat lamp experiment for me that was done by Champion, to prove they were the same.

The Part That Upset Me Most

At one point in the conversion with Champion, I asked them point blank: "why would you start at $54,000 when you know you are competing with a $22,000 to $29,000 quote?"  His response: "you would never imagine how many people pay the first price without even negotiating it."  All I could think: you are willing to fleece unsuspecting people that don't know any better to the tune of almost 2X the price, pocketing that extra $28,000 as pure profit.  Glad I negotiated, but it was a pretty awful experience of getting to that price I was willing to pay.

Selling Lessons for You

My suggestions for all of you coming out of this case study: (i) build great products, as ultimately that is what people want most; (ii) price them competitively out of the gate with your first offer; (iii) limit your sales pitches to an hour or less, where you can (everyone is busy); (iv) follow the lead of your customer if they want to discuss something that is "off script"; (v) don't take advantage of customers, be honorable corporate citizens; and (vii) be nice people, as customers ultimately want to work with nice people.  I sure hope Champion reads this blog post and changes their ways.  And, if you ever need a good window guy, I now have a good one at the Home Depot (who ultimately won this project at $20,000 when they swapped the double-hung windows with sliders, as Champion proposed)!

For future posts, please follow me on Twitter at: @georgedeeb.