Real World Finance 101 Webinar Transcription

Today's Webinar is Real World Finance 101 for Small Businesses brought to you by Professor and CEO Frank Coker. Frank has real world experience being a president of multiple companies. He has done a lot of work in the technology field and he has an excellent background in finance and that is what he actually specializes in, finance and technology. He is the perfect person to kind of take us through today's topic.

Frank Coker:  I'm excited to talk to you all about the wonderful world of accounting. I know this is probably not your favorite topic, but I tell you this is really the life blood and really the central thing that all business owners, all entrepreneurs need to really understand to make your businesses actually provide a financial benefit or an end result. This is really key.

What I'm hoping to do today is talk through really some practical ideas, some real basic concepts. Some of these may be total repeats for some of you who have learned how to use your accounting system over the years, but I bet you we're going to discover some surprises along the way that might turn on some light bulbs and that will hopefully give you some great new ideas about how to make your finances responsive to your company's goals and needs.

One concept that really bears just kind of a moment of thought here is when most people look at their business and they look at the data that their accounting systems (see opinion by Shelley Elmblad) produce, they typically see kind of the top of the iceberg. What do the basic numbers look like? There is a ton of information that is essential to the survival and even the performance of companies that is not readily available. It doesn't just show up on P&Ls and balance sheets (see opinion by Aonghus Sammin). Those are the things that can either sink your company or they can make your company thrive, and we're going to touch on some of those things as we go along here, but really at it's base there is a lot of important accounting fundamentals and we want to kind of talk through what some of those are.

Without reading the list here this is what we want to focus on today. Let me start with one real basic concept. Accounting is not the same thing as finance. A lot of people use those words interchangeable and think they're really talking about the same thing, but accounting by definition is all about collecting the numbers of all the transactions of the company, getting them all to reconcile and balance, and it's all about producing internal reports and making sure that bills are getting paid and just kind of tracking the day to day activity of a company whereas finance is really about looking forward. It's understanding how plans are being developed and how the finances of the company need to connect to those plans. It deals with modeling and things like scenarios, and really it has to be able to pull together internal and external data to make a whole picture.

Financial planning, financial management, financial reporting, all of that is a bigger thing that accounting sets inside of, or maybe I should say accounting supports financial management and financial planning, but accounting is really a very small subset. One of the things I really feel is important to point out early on here is most companies will have an accountant or maybe a controller that does their monthly accounting. They post transactions to their accounting system and then they turn around and expect that accounting person to help them be aware of financial issues and what is really important to know is that accountants are typically not financial managers. Many companies think oh, I got my financial base covered because I have my accountant and unfortunately a lot of accountants tend to see the world through accounting lenses and they tend to be looking backward and looking at what transactions have I processed and that's a completely different view of the world then what's coming ahead, what do I need to anticipate, what kind of cash requirements do I have, etc.

Financial planning is a very, very different animal and we want to slice that up just a little bit more as we go through this conservation today. Within accounting you have your accounting cycles, all of these things that you normally do every month to make sure that you get your reports out and you're paying your bills and you see what your cash balance is, all those sorts of things. The bookkeeper is the person who is responsible for making all that stuff happen. By the way, one important point here and most of you might be aware of this, but there's this concept called separation of duties. As a company grows and investors come on the scene or if bankers get involved they're going to want to know how do you do your accounting and is the accountant the same person that receives the checks and makes the deposits and makes all the entries in the accounting system, and if that's what is going on banks and investors get really concerned about that.

They like to know that the person doing the accounting is not the person who is handling the checks for example, and the principle of separation of duty becomes more and more important as companies grow. Think about that. Depending on where your company is at today that may or may not be an important thing, but it certainly will be down the road. 

Now, here is the financial manager looking at finances and doing a completely different thing than what that bookkeeper did. They're planning, they're setting goals, they create budgets, and they monitor progress against those budgets and against those goals, and a big thing is they have to communicate this information to the team. The management team and even everybody in the company should know some basics about where we try to go, what are the goals, what does our performance look like against those goals, and what do we need to do to make sure that we're improving so that our actual performance starts to take us to our goals.

This is much more of the financial view of the world, and if you're an entrepreneur that owns your own company you may be doing financial management and this bookkeeping stuff all under one person but ideally these are things that start to split out as a company grows and the financial management track becomes very different than the accounting track.

One of the key things all companies have to deal with is they need to get systems in place. The one obvious answer if you're in the U.S. is QuickBooks. That happens to be kind of the one system that probably shows up in about 80% to 85% of all new startups and is very dominate out there, but Microsoft with their Dynamics system, and Peachtree is actually present in the U.S. so you may have any of those systems, but the real big questions are is it easy to use? Does it interface with my operating system? Usually companies will have some form of CRM, some form of operations management software, and it's really important to figure out how to get those to talk together and share data so you don't have to do a lot of manual passing of data back and forth. We won't go into that a whole lot today, but I just wanted to make sure that as you think about your accounting software you have the basic ideas in mind as to what you want it to do for you.

As we look at what the financial manager does, the financial manager not only has the accounting system to draw from but it's really important that in the role of financial management you are looking at data coming from professional associations. There are a lot of sources out there of course. Of course there are tons of stuff out on the Internet and lots of ways to bring in external data. You can't manage in a vacuum. You have to be pulling in those data points to compliment your internal data so that you really can build the whole big picture.

Then of course your internal systems. One thing that we recommend is a financial dashboard and of course we produce a financial dashboard called the Corelytics Financial Dashboard, but there are other dashboards out there. Today I don't want to necessarily sell any particular one, but I would tell you that a financial dashboard is an important tool for management to be able to pull data sources together internal and external and start to see a picture that is really forward looking and it understands direction and futures.

It is also good to think about maybe a coach or a consultant. As you are probably aware most businesses are started by an entrepreneur that is an expert in some area of technology, or some discipline, some area of expertise, but usually not financial. Interesting enough finance is usually the last thing on the competency list for most entrepreneurs. It can be very healthy to bring in a coach or a consultant to help think through the financial management piece thinking ahead for the company.

Then of course ultimately as companies grow they need to bring in an advisory board and eventually a board of directors, and these are kind of the earmarks of a company that is growing and maturing and becoming investment worthy and the kind of things that you have to do if you want banks to be extending lines of credit and that sort of thing.

Just a quick look at all the different resources that the financial management process needs to tap into. When we drill down, let's spend just a few minutes here on what are the things that happen inside accounting? We'll touch on a few of these topics mainly because they help inform the financial management process. If you don't get some of these accounting things right it makes it harder to do the financial management job.

Let me just make sure that we're all on the same page here. A turn of accounts is actually the directory of all of the names of accounts you have in your company. Then there is this thing called line of business, LOBs, and the important thing here is to make sure that you have accounts to cover all the activity in your company and that you have a way to divide up the things that you do in your company and to these lines of business so that you can actually treat your business as if it were separate operating units. Each one of them has in effect their own accounting view if you would so you can see are these particular areas of my business profitable. What are the revenues that they generate, what are the expenses that they generate, and are they contributing to the overall performance of the business?

Now, when a company is first getting started this idea of the lines of business doesn't make a whole lot of sense. Everything gets lumped into one bucket and you just treat everything as one line of business, but over time you may for example have products that you sell and those products generate revenues and they have costs, and it's good to look at those separately from the services perhaps that you provide and you may use special projects. So, this is kind of a typical company that is a blend of selling products and services, and each of those lines need to be viewed as if they were separate businesses within a business. In the end though what you're really trying to do when you create your chart of accounts is make sure that you have enough details so you can see things at the line of business level, but you don't want to get so much detail that you drown yourself and that it's really hard to maintain your accounting data.

There is always that dynamic tension, but if you don't split out for example your revenues so that you know is this a product revenue or a service revenue you'll never be able to drill down and see what's working and what's not working inside the business. That's a very, very important consideration when you set up your accounting system. By the way, you don't need to do this on day one, but as you move along it is important to start asking the question do I need to split my revenues into categories, do I need to split my expenses into categories, and ultimately the answer will be yes when the time is right.

Let's talk for a minute about the difference between a balance sheet and an income statement, an income statement meaning a P&L, a profit and loss statement. A balance sheet, you probably already know this but it contains the balances, the running balances from month to month, year to year, how much do I have in all of my various accounts in my accounting system? The income statement is a very transientstatement or report, and at the beginning of every month it starts out at zero, and you have activity, and you track that activity, you track how much revenue came in and how much expense went out, and what's my profit? Then you clear it if you will back into the balance sheet. The results of the income statement get posted to equity, and you start over the next month at zero again.

The balance sheet is where the score is kept permanently, and the income statement is that monthly or quarterly or annual view of activity. A lot of people kind of get those confused and they think that the income statement is the ongoing scorekeeping but it's not. It's a period-based scorekeeping report. Now the thing that really is interesting when you look at a balance sheet, as you may know in the accounting world assets are always equal to liabilities plus equity. That's a universal rule. It turns out that is not just a U.S. idea. That's pretty much every country that has substantial accounting professions and they have to deal with currency, they're going to do this. They're going to have this kind of accounting system in order to manage the numbers. The banks do this. The governments do this. It's really important that companies do that so that they all are talking in essence the same language.

Another thing that happens inside the balance sheet is every time you make an entry in one place you have to make an entry somewhere else. That's why they call accounting systems the dual entry system. Ever since we left the abacus behind some many, many hundreds of years ago the idea of a dual entry accounting system has been front and center. If you buy a piece of furniture you're taking money out of cash so your assets in total are still whatever they were before you bought that piece of furniture. Or, if you borrow some cash you may have an increase in credit cards and an increase in cash. Everything continues to stay equal between assets and liability and equity. The cool thing is when you get into something like QuickBooks and you make an entry it knows to post to the 2 places that need to get posted, but every time you make an entry you have to make those 2 legs of the entry standup and keep everything in balance. That's just a fundamental concept.

But, it's important to know that as you make entries into your income statement ultimately what you're doing is creating this net income number which ultimately gets posted to your equity. If you have positive net income your equity will increase, your retained earnings in your equity account will increase by the amount of profit that you have over time, or it will decrease by the amount of loss that you have over time. That's one of the things that influences the equity value in your company. We'll come back and talk about that in just another moment.

Here we are looking at an income statement and also profit and loss, P&L, and there are some real standard pieces that you're going to see in virtually all income statements. There are sales, and a lot of times for most companies they should be tracking this thing called cost of goods sold and when you take your total revenue minus cost of goods sold you come up with this thing called gross profit. There's also this thing called gross margin which is gross profit divided by sale so that gives you a percent. If you sell $100 worth of stuff and your COGs let's say are $60, your gross profit is $40, and 40/100 is 40% so your gross margin is 40%. This is pretty easy math, but the whole idea of what goes in cost of goods sold is really an important thing to consider.

A lot of companies when they first start out they will skip cost of goods sold and they just treat everything as an expense. They have sales, expenses, and net income. That's okay, but over time that is not enough sophistication to help bankers, to help lenders, to help investor. It's really important to split out the costs are directly related to your sales from all other expenses. The only things that go in COGs are the things that were directly attributable to a sale. If you're selling hardware you have a cost of that hardware and that is a cost of goods sold and that gets you to your gross profit. You may also have services associated with selling the product and those services need to be part of that COGs and, therefore, help you understand what your gross profit it.

Now the cool thing you can do as you start managing this well is you can say what is my gross margin and what are other companies that look like me, what are they doing? This becomes a really important thing to start comparing because it may tell you that wow, your margin is way low. You need to be reconsidering some things. Or, maybe it's high and you have great margin and, therefore, you're more profitable than the rest of the industry. It helps to know that. If you're way off track something might be wrong and you might want to know what that is but you won't have any clue if you have a problem unless you can first of all create your own gross margin number and then secondly unless you get some gross margin numbers to compare to.

The same kind of story with expenses. If you have good, clean categories you can start to compare how do companies like mine look out in the rest of the industry? Here we are looking at all other expenses, legal, rent, general overhead, payroll, all that good stuff. One thing that we won't touch on today other than to just call it out is in almost all companies there are overhead expenses that include overhead salaries and then there is cost of goods, sold expenses or COGS and some payroll that belongs to COGS. If you are a consulting firm then your consultants, your billable consultants, should be part of your cost of goods sold and maybe your accountant, your operations manager, and maybe your CFO, those are overhead salaries and should be in the sales general and administrative category and viewed as an overhead, not as a cost of goods sold. There is some complexity in splitting out payroll but for the moment let me just say that that is something you should figure out over time so that you get a real good understanding of what your gross margins and your net income or profits are really telling you.

One of the concepts to make sure you're dialed into is this thing called accruals versus cash-based accounting. Accruals means you are tracking what you do owe whether you have paid it or not, and you're tracking what you have earned whether you have received those earnings or not. With keeping track of all the obligations that you have to other people and other people to have to you where cash-based accounting ignores everything other than did I actually receive the dollars and did I pay the dollars out the door? Cash-based accounting is something that smaller companies tend to do, but as you grow and especially if you are looking at major investors you really have to be doing accrual-based accounting because you need to know what you owe. You need to know that you have invoices in you have not paid yet, they are waiting to be paid, so when somebody looks at your accounting numbers they will know that they're looking at a complete picture.

What's really interesting is you can do accrual-based accounting in your accounting system and you can pay taxes based on cash-based accounting. Most companies really should be doing that. Most small companies should be doing that. It is totally appropriate to have slightly different accounting conventions for tax purposes than you have for management purposes. Let me just declare accrual versus cash, lets see we have that nailed down but again, if you have any questions just pop those to John. Here is back to recommending that you have the combination and do the cash for taxes and management purposes. It's all about getting those accrued in your accounting system so that you can see what you owe and so that you can see what other people owe you. Let's move past that.

One other thing that is in the accounting cycle besides entering all of your accrued invoices which have been paid and your bills that haven't been paid, all of that needs to be entered as it comes in, you also have these things called depreciation and amortization. I won't define those right now, but you need to be making entries ideally monthly on your accumulated depreciation so that you can see your total picture on a monthly basis with all of that folded in. I see a lot of companies that try to do their depreciation once a year and if you look at your monthly P&L statements 11 months of the year it looks like they're more profitable and all of a sudden this big depreciation expense hits and month 12 is kind of a big loss, and that's really a mistake.

Let's move on to a little conversation here about what you can learn from your balance sheet, but what the balance sheet doesn't tell you. The balance sheet is all about the hard dollar value of your transactions. For example, if you bought a computer for $5000 that goes on the books as $5000.  A year later it may be worth $2000, but you don't change that. The book value of that computer is $5000 and then of course you have your depreciation which continues to spread the cost of that over some period of time into the future but those numbers are the numbers. Anything that goes on the balance sheet doesn't change just because the market value changes. If you have a piece of property on your balance sheet just because the market for that property went way down because the economy was not looking real good it doesn't matter. You keep it on the books at whatever you actually paid for it.

That's an important concept in accounting. What that actually means though is that when you are out talking to somebody about the value of your business you can't just look at the balance sheet and say look, here's my equity value and, therefore, this is the value of my company. The fact is the value of your business is made up of a bunch of other moving parts that will never show up on your balance sheet. When you have somebody come in and do what they call due diligence, typically if a company is going to be sold and sometimes if there is a big investment going on you may need to hire an accountant, an independent third party to come in and do this review that is referred to as due diligence, and they will look at your books, they will look at your customers, they will look at your contracts and they will start to paint a picture about what is the real value of this business? What are your trends? What's your future potential? How do you compare against other companies that look like you that have been sold recently? How do you compare operationally? What's your ability to generate what they call free cash?

There's nothing free about cash, but what this really means is how much cash can you generate that is over and above the bills that you have to pay every month? That's your free cash. When they put all of those pieces together and they do their little magic formula and they say you know what? Your company is really worth 3 million dollars even though if you look at the balance sheet it's showing that you have an equity of 1 million that doesn't matter. The market value is something different, so don't let market value and equity value get totally confused although they do influence each other.

The balance sheet does not tell the whole story, and interestingly enough the income statement or the P&L does not tell the whole story. You know the worst thing, the thing that I think is actually even sad is when a business owner pulls out their monthly P&L, they look at it and they say alright, we're doing great. You know what? You can never look at one P&L by itself and know whether you're doing well or not. You might be able to say yes, I earned enough money to pay my bills; yeah, I generated some profit, but wait a minute. Stop. What is the bigger picture? It's like where is your company going? What if you generate a profit this month but if you actually drew a trend line your profit was dropping like a rock. That would really be important to know, and in fact you would want to take action on that. But, if you just look at that P&L statement by itself and it says yeah, you made profit you might just say well, I'm done with that. Now I'm going to go off and do some other work. It is really important that you understand the trends of all the things on your P&L. Which way are my profits heading? Which way are my expenses heading? How are my COGs doing? What's my gross margin doing from a trend point of view to really understand what your business is doing.

So, performance analysis is where the real action is. I always urge people to understand that their income statement is a picture, yes, it’s a point in time picture, now let's figure out what is the picture over time? Where have you been? Where are you going? What are those trends? With that said, here's the kind of trend analysis that I would urge people to do every month. If you don’t do it every month just like your accounting cycle you're going to be missing things and you're going to miss opportunities to make fine tuning adjustments every month. If you have to wait until the end of the year to figure out that whoa, I could have done something 9 months ago, I could have made a little adjustment 9 months ago, but today 9 months later I have to make a big adjustment. I have to yank my company around a corner and it's going to hurt. So, smaller adjustments are always better, less costly, less disruptive than big adjustments.

I would urge get this trend analysis process going for your company one way or another. I know companies that spend several man days every month, maybe I should say several person days every month doing this kind of analysis on spreadsheets. Again, this is where a dashboard can come in and it can do a lot of this for you and you just pop out the answers, but the real secret is not popping out the answers, the real secret is actually using the answers to make good business decisions.

Understanding where these growth curves are going. Oh, look at this my accounts receivable days is growing. I have a line that is going that going up. I might not be able to quite see it if I look at all my monthly accounts receivable balances, but if I put it on a trend line I can see it is going up by some percent. The real question here is if my receivables are growing that means it's sucking cash out of the business. How long can I let that go on before I have a real serious problem? But what a minute, let's put that in context. If my receivables are growing at 10% but my revenue is growing at 42% wow, that's actually good news. That means my revenue is growing faster than receivables and that means I'm throwing off more cash than is getting tied up in receivables. That's a healthy thing.

Now, if I look at this by itself I might draw the wrong conclusions. I just illustrated a bigger point and that is you have to look at your trends in combination and say how does this trend affect this trend and in combination are they healthy or do I really have a problem? We could go through lots of examples, but understanding these trends, setting goals and saying how is my performance matching up against a goal, and then saying what are the industry benchmarks? What are other companies like mine doing? How do their lines compare to my lines? Now you have something and you can really fine tune a business and make it perform very, very well. The difference between a fine-tuned business and an un-tuned business it's actually huge.

The amount of work it takes the difference is small, but the impact is huge. In fact, when you look at the mortality rate of companies, I'm sure you've all heard that 50% of all new startups die within the first two years, most of the time they die because they got hit with something that they really didn't understand. They didn’t have visibility on what was going on because if they did they would adjust and they would compensate. The difference between companies that survive and the ones that don't is plain and simply how well do they compensate? How well do they match what they do with what's really happening in their environment? You can always adjust expenses down to make it fit revenues. You can always adjust the functions within your business to make it fit the reality that you're in. It's only when a company is outrunning their reality that they die. How's that? Is that like sermon 37b? It's something that I think is really important for entrepreneurs though to really understand.

Now, let me come back to LOBs. This line of business conversation, we talked about inside of the business you have sub-businesses and so your services might be a business with a business, your product sales might be another one, and each one of these have their own growth curves, each one of these have their own profitability, and ultimately each one of these are contributing to the performance of the whole.

Now, here's what happens with a lot of companies. They don’t bother to do this line of business analysis. They just look at the whole thing. It sounds like why not? What's wrong with that? If I can look at the whole picture and I can see that my company is doing well isn't that enough? Well, it turns out that if you were to divide your company into lines of business you would find out that your multiple lines of business do not all function the same way. They do not contribute the same way. If you have a low contributor you need to focus on making that low contributor do better. If you have a high contributor that’s really where you want to put your investment. You want to grow the one that's doing well. You don’t want to invest in one that is doing poorly unless what you're just trying to do is to keep it from hurting the rest of the company.

But, you can't make those decisions if you don’t have visibility on what's happening in each one of those lines of business. I'm trying to build the case for why you ultimately need to get to this level of accounting, this level of financial management, and this level of decision making, and when you do that’s when you really tune up a business and make it perform exceedingly well.

Here's another concept I just want to throw in the bucket here. It's called key performance indicators. The reason I mention these, this is kind of an industry buzz word, KPIs, and the whole idea of a KPI is to look at how operating data and financial data come together. Operating data may be for example how many billable hours per month am I getting out of an engineer and how does that relate to my profitability? All of these, there are many, many of these examples, but they're all about creating these management indicators, creating a number, and the idea is to watch that number not at one point in time but over time. Where's the trend? Where's it headed?

Now, I'll tell you a lot people have systems out there or tools that help them calculate KPIs and then they look at it like once a quarter, once a year and they say oh, here's my KPI, it looks pretty good, but they stop at that and they don't look at how is it moving over time? I'll tell you the trend view of all of this is the magic ingredient that you really need to understand to really manage your business. So, here we are looking at trends. This really gets interesting. If today I'm looking at revenue that’s greater than expenses I might say well, I'm just fine aren't I? But, if I put this on a trend line and I say you know, if I keep making revenue grow at this rate and my expenses keep growing at this rate I've got a collision coming up and when that collision happens I'm out of business. My expenses are now chewing up more money than I can make. I've got a problem. The trend lines tell you that story.

The P&L, the balance sheet all by themselves do not tell you this kind of story and so accounting systems really are not the answer to understanding the direction of your business. They help, they're key, but financial management the next step is knowing where you're headed. Revenue that’s going up but expenses going out faster, that is an unhealthy thing and you need to know that that’s going on.

Well, here's a healthy story. Your revenues are growing faster than your expenses. That’s great. In fact look at this one. Here is revenue, it's going down. Is that bad news? Not necessarily. If I'm making my expenses go down faster than my revenue I may be… I mean first of all, that's fantastic news because that means my profits are going up and even in the phase of falling revenues you can make your company healthier and stronger over time. Falling revenues is not necessarily bad news at all.

Here we are with a case where revenues are coming down but expenses are staying constant. Let me tell you that's bad news. I would even say that if your revenues and expenses are going up at the very same rate I would ask you why you're bothering? Why put all that effort in to make your revenues grow if expenses are going to track right along with them? Your profitability in the end is no better than back here when you were smaller. It's really important that these two lines be moving apart at some rate like you're seeing on these healthy examples. You can only know this if you convert your numbers to trends and pictures.

I kind of went over this slide here. Really the question here is what are your numbers trying to tell you about your business? If your margins are shrinking when you're growing it may say hey, stop growing. You're just making life worse by growing. Stop, figure something out, but don’t grow and have shrinking margins. In fact, if the market is growing at a faster rate than you are maybe you need to ask the question why am I not keeping up with the market? That’s a different kind of growth question. Another way to look at things is to say wow, I have lots of cash, I've got lots of assets, but am I leveraging my business? If I have a whole bunch of cash just sitting there and maybe I'm not growing like I could, then that's not a good sign. That's when companies get kind of what they say fat and lazy and they really may be losing ground in the market and that’s not a good sign.

Another thing that your numbers might be telling you if you have revenues that zigzag a lot, they have lots of peaks and lots of valleys, companies that are in that position are really vulnerable. It's real easy for that valley to get stretched out just another extra month and the next thing you know you don’t have enough cash to cover all the bases. You don’t want revenues that zigzag all over the place. As much as possible you want them to be kind of level.

Let's look at a couple of other examples here of healthy versus unhealthy. If your revenues are growing and your cash is shrinking that’s not good. The other way to look at it is if you're revenues are growing and your cash is growing that’s a better sign. Here's a scenario dropping revenue, cash falling even faster, that's not good. This is healthy. Even though your revenue is falling you're still figuring out ways to tighten up and get more of your cash out of your receivables, whatever you're doing to build cash in the face of falling revenue says you know what, this company is going to survive. This is good. This company is probably not going to survive. Lots and lots of things we could be looking at so I won't go through all of the possibilities here, but many ways to look at these lines and understand whether your company is really healthy or not.

This is back to erratic revenue lines. If my revenue looks like this, even though my trend line may be the same as a company that looks like this, let me tell you that this company is much healthier because they figured out how to have a more stable income stream than this company. This many zigzags is not a sign of health. In fact, what's really bad is if you are staffed up to handle these peaks you probably are way overstaffed when you have these valleys. So, just one way to look at this. This is not healthy. This is healthy.

What about benchmarks? How do they play into this? Clearly as probably all of you know, benchmarks are the statistically averages of what other companies are doing in your industry and with companies that look like yours in terms of size. There are lots of places you where you can go out and buy benchmarks. I generally don’t trust benchmarks that are free. You can go to a lot of trade journals and they will say here is the average gross margin for companies in 2011. There are a couple of problems with that.

First of all, magazines and publishers they do surveys. They go out and ask people well, what's your opinion about your gross margin and a lot of the answers that they get back are wishful thinking. It has nothing to do with what's really in their accounting system so they publish benchmarks that are really off-track. It's worth paying more to get better quality benchmarks, and of course if you can get benchmarks that are updated frequently that’s way better than get old news benchmarks.

But, once you get benchmarks you can start to see how does the industry track look compared to your business and what opportunities might be out there? What's the market doing? Is there a fluctuation coming on? Is there a dip coming on? These are all things that you can typically get from good quality benchmarks and they're worth paying for.

Now, let me just say that when you put this altogether it's really important that you have a process and that you're doing this every month. I can spend a long time on this, but I'll tell you that you have to have your monthly process, look at your trends, and ultimately answering one simple question, what are the big 3 things that I need to care about this month and then making sure that everybody on your team knows that these are the big 3 things. Everybody needs to see the same picture if they're going to be on the same page, and if they are not on the same page it's really inevitable that your company is going to be grinding and working against itself. Nothing more important than getting everybody focused on the same direction.

This is an example of one way to communicate that with the team. This is just a dashboard view of what's going on in a company and to be able to sit down and say okay guys, here's our goal line. Here's where we are actually at. Here's our trend line. Here's our real performance curve month after month. We want to move everything up to this line. Let's figure out together how we're going to get to that. Big impact getting everybody on the same page.

How do you know when you have it? Oh yes, you got taxes on time, you're setting goals and you're tracking them, you're doing routine monitoring, business intelligence is shared with the team, you're making course corrections, and you got the tool set and it's like being in the console of the Starship Enterprise or maybe a Cessna, but it's where you really have command and control and your business is performing the way you want it to. In the end if you're doing all of that right you have a sustainable business, you will have long-term growth maybe with some dips in the mean time, you understand your position in the market, you're getting a return on your investment, you're building value in the company and at any point in time if you're doing this right if something happens, if you get hit by a bus, whatever it is and you need to sell, you need to transition ownership, you have a healthy company and you're going to get maximum benefit out of that. And you know what? In the meantime you're going to have a much more restful sleep.

5 Ways to Build your Company's Financial Strength

John:  Good afternoon.  My name is John Hardwick and I'm the Membership Services Coordinator here in InfoComm International.  Before we begin today's webinar, I'd like to take a moment to thank our sponsor, Kramer, for their continued support of our programs and events.  As you know, the goal of the webinar series is to help AV professionals maintain their competitive advantage through continuing education, a goal which Kramer Electronics is passionate about. And now I'd like to welcome our presenter, Frank Coker with CoreConnex.  Welcome, Frank.

Frank:  Good morning, John.  Thank you much, and good morning, everybody.  We have a very cool conversation to have with you this morning on 5 Ways to Build Financial Strength.  And I think you're going to see some things here that might surprise you. Ed Patton is my co-presenter this morning – have been working on some research and developing some new tools that are going to actually show up in the Corelytics Financial Dashboard here in the near future.

We've been collaborating on several companies, some of which are in the AV world and some of which are in other vertical markets.  And I think we've got some information that you're going to find very, very useful for your business.  But first let me also mention that this is part of a series of webinars that we've been producing and delivering for Infocomm with kind of the caption of Money Matters.  And we've been doing a bunch of stuff on P&Ls and growing your business and a whole series of other financial topics.

We've got several more in 2013 and would certainly invite you to keep an eye on those.  All of those, or at least the ones going forward, are also going to have educational credit associated with them for AV certification.  So that's always a little bonus.  But we have been getting a steadily larger audience for every one of these.  And we're pretty excited about the impact and the benefit that this is having for AV companies.  So Ed, are you out there in ether land?

Ed:  Yes sir, Frank.  Nice to be here, and thank you, John, for having me and looking forward to the webinar.

Frank:  So I'll tell the folks a little bit about you, Ed, and of course please fill in some blanks.  Ed is a CPA, a financial expert, and has worked with many companies in helping them understand this concept we're going to discuss with you today of financial strength.  And the cool thing about it is this is a whole lot about the balance sheet where most of the time we tend to focus on the profits and the P&L.

The real important story, the value of your company really sits in the balance sheet.  We're going to talk about what that really means.  So Ed, I know that there's a lot of stories to be told but since we got this limited time, I guess we can't tell them all those incriminating stories.  The fun thing working with you over the past few months as we've collaborated on some of these companies has been how your world there in Dallas, Texas where you've worked with a lot of companies over the years, a lot of the stuff that you do with companies is just really open their eyes up to understanding the dynamics of their financial performance and their financial strength.

That really has tied in really well with what we're doing at Corelytics and then the courses that I teach at the University of Washington on these very topics.  So I think we've really hooked some really cool chemistry together on this.  So with that, I want to just kind of jump in and talk a little bit.  First of all, we're going to introduce what is financial strength and why it matters.  And then we're going to talk about the five key ways that everybody should really fully understand about how to build financial strength.

This is the thing that builds the staying power and the value of your company.  So it is very important.  And then we'll show you some examples and some data.  We'll talk a little bit about some best practices, and then kind of wrap up with little conversation on dashboard strategies and Infocomm resources.

Let's get down to business.  So what is financial strength?  And really in the end, what it's about is your ability to produce the cash that your company needs to run normal operations.  But more than that, it's having the cash available for routine fluctuations.  Every company has their ups and down from month to month.  There's the fluctuations that you don't control, that's those outside economic things that can happen.  We're just coming out of one of the biggest ones ever; the so-called great recession put a big dent in a lot of businesses.  And if they didn't have the staying power to handle that on top of their own fluctuations, they're not in business anymore.  And we have seen a lot of companies disappear. 

But then this is really making sure that you've got the cash that you need to invest in your future, and Ed introduced me to this idea of the runway.  And, Ed, tell me just briefly what is your thought about a financial runway or an investment runway?

Ed:  Sure, Frank.  Just real quick, let me go through a little bit about my background real quick.  I've got to do that.  As Frank said, I have a CPA background and I also have an investment banking background where I've worked with boutique investment banking firm where we do financings for small to mid-sized businesses.  And so really through the experience I have, I've been both a generator of financial information on the CPA side and a consumer financial information on the investment banking side.

What I've found through that process is that there were some pretty basic but important financial pieces of companies puzzle that most companies don't have, actually both large and small.  And I'm going to get into the investment runway here in just a second.  But one of it is just as this webinar's about is financial strength.  And everybody, as Frank said, is focused on the P&L, and you need to focus on the P&L.  That's your business, your lifeblood.  It's very important.

But there's a lot of activity, financial activity and cash activity that goes on outside of P&L.  And so that can then translate to your financial strength or lack of financial strength.  But I think the question, back to that, Frank, was the investment runway is really how much runway, if you can have the analogy of your taking off in an airplane, how much runway do you have in front of you to get off the ground?

And I'd say the longer the runway, the more time you have to build up speed or, in a company situation, to build up financial strength or to build up cash, a positive cash flow.  So the investment runway is just to have the financial strength to go through some of, Frank you talked about these bullet points above there, it's either start-up situations or running your business, the normal cash needs, absorb fluctuations, just different things have come up in every business all the time.

Frank: So the picture I have in my mind, Ed, is you're trying to get maybe some new investment, some new line of business, or some new product offering.  You're trying to get it off the ground but you discover that it's going to take you longer to get lift-off than you have runway.  And so here's this airplane lumbering down the track, and the next thing you know it's in the mud or off the cliff, or whatever that picture is.  And of course it's tragic when those things happen, but with a little bit of pre-planning, obviously one of the things you want to always do is make sure you've got more than enough runway.  If you've planned it in a way where it's just enough and something happens along the way, then you've got a problem.

Ed:  That's right.  As we all know, your business doesn't always go the way you've put it in the Excel spreadsheet and you think it's going to go.  The idea, as Frank says, is to have a plan and also, what we're talking about here, is having a mechanism to measure your financial strength to really give you some idea of how long the runway is.  I'm not a pilot, but if you're running a plane, you don't want to have the front window covered up so you don't see the end of the runway.  Our idea is to help you see the runway.

Frank:  Yeah, a good point, Ed.  So let me just wrap up this particular slide by saying that all of this, when you put it together, is really about building for the future.  The financial runway or your financial strength is what gives you the ability to take on the future.  In all fairness, there's a lot of businesses out there that don't have enough financial strength to really do kind of creative and smart things for their future, and they are just kind of tied up in resources that are only enough to barely get them through the month, get their bills paid, get the payroll out, and then start over again for the next month.  Ideally, a business should try to be striving past that kind of time horizon.

Ed:  Right.  That's true.  That's usually the case, but sometimes the opposite is true too where they have more financial strength and they actually take some risk and stick their necks out but they don't realize that they have the financial strength to do that.

Frank:  That's a good point absolutely.  And so then they're really squandering opportunity in that scenario.

Ed:  Yeah.

Frank:  So here are a couple of bullet points on why it matters.  And I think we've already hinted at some of this, but it's like having insurance to minimize risk.  And so when those surprise things happen, it's having some reserve so that they just don't completely knock you off your feet.  Another way to say that is a cushion for the unexpected.

Really, another reason why this matters is if you don't have enough cushion, it actually is more expensive and higher risk being introduced to your company.  One of the worst things that could possibly happen is if you discover that you need money, but you discover it at the last minute.  And this is what happens in a lot of companies.  They realize that oops, they're not going to have quite enough money to make that payroll and now they've got to go borrow.  But oops, they don't have a line of credit ready.  And they now have to start doing some emergency things.  That is the most expensive kind of money you could possibly get.  Not only is that part expensive, but it hurts team confidence and you can feel it throughout the company when those kinds of things happen.  And so I think, Ed, one of the things we're trying to say here is the more you think about this ahead of time, the less you have to have these disruptive events.

Ed:  That's right.  It's really right to see that in the future.  And also, it hurts your credibility.  If you are fortunate it's some short-term money, but you know if you're going back to your investors or the bank or somebody another time or another time, you're to wear them out.

Frank:  Yeah.  The trust factor starts to disappear in a hurry.  And then this last part here is really – it's distracting.  If you are doing the planning upfront, it takes a fraction of the time and a fraction of really the cost.  But doing it at the last minute, it becomes all-consuming, it's very distracting, and it really keeps you from actually running the business.

Ed:  Frank, I have to interrupt but there's an all-car parts commercial that says you can pay me now or pay me later.  That's sort of preventive-like medicine, and that's exactly why.  That's exactly what this is.  It's cheaper, efficient, a lot better, you'll sleep better at night, you do it on the front end.

Frank:  Ed, I'll bet you every company has had at least some near-death experiences along the way and they've been down this road.

Ed:  What we try to do is you're going to have a near-death experience but it's going to be in six to nine months, it's not next Tuesday.

Frank:  Right, the next Tuesday scenario is the one that will take years off your life. 

Ed:  That's right.

Frank:  But the truth of the matter is it really matters.  And the farther ahead your time horizon and the more you can see your financial strength and understand where this is taking you, the better.  So this is no big deal.  Here is the secret recipe.  And I would be surprised if there's anything on here that you haven't thought of before.

Obviously, the number one way to build financial strength is through profits.  And that is what really is the main source of developing a company and building financial strength.  But there are a lot of other tools that are available.  And obviously, going out and getting outside financing where somebody is buying the stock of your company, making an equity kind of investment, that is one alternative.

Debt financing, meaning borrowing typically – this is more about long-term debt; but it could be short-term debt as well.  Selling assets is an interesting way to go.  In fact you know, Ed, I think I told you the story about even our software company.  We had two products at one time and we wound up selling off one of our whole product lines to a competitor and focusing on the Financial Dashboard because there was nobody else out there doing what we were doing—the Financial Dashboards.

And selling off that one piece of the business not only generated cash, it also allowed us to really focus better.  And it has just made a world of difference for our company doing that.  So selling assets can be a really effective way to go forward when you're rethinking your business.

Ed:  You're right, Frank, if you're fortunate to have assets that have some value.  And I'm just wondering, usually, that's a pretty emotional difficult decision.  Was it in your case?

Frank:  Oh yes.  Oh man, it was like selling a child.  It didn't feel real good.  It's like we brought this idea into the world, we spent years developing this, and now we have an opportunity to sell it, but is that right?  But in the end, it was so important for us to do that.

Ed:  Yeah.  It felt like the right thing, but it can be a difficult decision.

Frank:  Yeah, it really can be.  But, you know, that's all under the whole heading of rationalizing business.

Ed:  Right, absolutely.

Frank:  And so this number five here, working capital optimization, we're going to drill into what is working capital here in just a second.  But there's definitely some dials to turn as you look at your working capital.  So rather than talk about that in any more detail, Ed, I'm going to just go ahead and jump to our next slide here unless there's any final thoughts here. 

Ed:  These five methods are probably, you'll look at that and Frank said, you know those, intuitively you know these but the key is to have an objective measurement of your financial strength and how each of these can affect that.  And just to have it laid out in a common sense format that you can understand it and you can use it.  So you may know these intuitively, but the key is to take it and measure them and have a tool that shows you what your financial strength is.  Okay, that's all.

Frank:  Yes.  And you know, Ed, in one of our earlier conversations, you made the observation that a lot of people, when they are running into kind of cash shortages or they feel like they're running out of resources, the first thing they try to do is all working capital issues because that's where it feels like the problem is.  But really, they've probably never looked at these other four or they tend not to look at them as being the place to start.  And actually, I mean obviously, building profit is the place to start.  Anything else is definitely secondary.

Ed:  Yeah.  And, Frank, we talked the other day when we're putting these slides together, I think these are really pretty much in the order of importance to really building your strength.  Unfortunately, working capital management is the last one but it's the one most – most have been written about, most articles have been written about.  And yeah, it's really not your strongest method to go about it.

Frank:  Yeah.

Ed:  It's important but it's not really going to solve your problem.

Frank:  Usually when you go in and attack a working capital issue, you may be solving this on a one-time basis.  So you'll get benefit out of it at a point in time, but that doesn't continue to provide benefit.  If you go out and collect some receivables today, if you run out of cash next month, well those receivables  are where you going to turn.

Ed:  You're right.  If you work your receivables down to zero, you can't get any better than that.  You don't have any more money, get out of there.

Frank:  Yeah.  So relying on just working capital optimization as your way to solve this problem I think we would both say that's kind of a last ditch effort.  That's not really the long-term way to solve this.

Ed:  Right.

Frank:  So let's jump in to this conversation on financial strength metrics.  Usually, when I pull up this slide and people look at this at first, they say, "Hey, number one, that is vague.  What do those two lines mean? That doesn't tell me anything."  Let me tell you there are two things that jump out when you look at those lines, besides the color.

Number one, these are trend lines.  Most people look at their actual performance data, some people will actually turn their financial data into grass and they'll look at their kind of up and downs and those jagged lines.  And you can't look at raw data and have any meaningful understanding of where your business is going.  That's been my experience.

It's really when you turn a line into a trend line that you really start to say, "Where is this headed?"  And then in this picture, what we're trying to show is there is some target minimum, and we'll talk about what that is, a place where your working capital should be or where you don't want to fall below because if you do you're putting your company at risk.  And hopefully, the working capital line sits above that minimum.  And hopefully, your working capital line is trending up.

And if you have a growing business and your line isn't going up, if it's going down over a 24-month period, it says that there's something unsustainable going on in your company.  And this is something everybody should know.  It's amazing to me how few companies have any idea whether their working capital is on its way up or on its way down.

The data is there tell you the story.  But over a 24-month period, it's going to be pretty clear where your company is headed.  So let me just make sure and, Ed, I'm sure you've got some embellishments on this, but really the basic definition of what the heck is working capital, it's current assets minus current liabilities.  And what this line here is, is that calculation every month for 24 months.  And then we do this regression analysis formula that sits in the background and you should never have to even know what that formula looks like.

Ed:  Put in Excel, you don't have to know what the formula is.

Frank:  That's exactly right.  That's right.  It will do it for you.  But you need to convert all of those up and down jagged lines into this nice consistent trend line.  And that is the secret sauce there.  That's working capital.  And then target rate, this is – in all truth, this 1.5 is a little bit of an arbitrary number.  But what we're saying here is that you should be able to cover your short-term debts with short-term or current assets, 1.5 times bigger than your current liabilities or your short-term debt.  So this is an average that we're using, although we're definitely finding in some industries, for example, where they have lots of inventory this number might be different.  In fact, it might even need to be higher. 

Ed:  Right.

Frank:  In service industries where you don't have much in the way of any inventory, then it can be lower.  So for AV integrators that don't carry inventory, you could probably get away with a lower number here.

Ed:  But I think 1.5 is a good – most industries, if you have 1.5 to 1, you're going to be in good shape.

Frank:  Yes.  The way this would work is if you have current assets of let's say $100 million or whatever the denominator is here, $100, and you have current liabilities of $60, your working capital is just $100 minus $60.  So that's $40.  And the idea of the target minimum, it's 1.5 times the basic number which is your current liabilities or $60.  And so what that would actually do is take you to a number that once you subtract – 1.5 times those current liabilities, you may subtract off the current liabilities, that brings you down to a $30.

And so in this case here, we're travelling along a working capital of $40 which is nice.  It's solidly above the target minimum of $30.  That would be a good story.

Ed:  Right.  So that level of current liabilities, you need to have 40,000 in working capital to be financial sound.

Frank:  Yes.

Ed:  I'm sorry.  You need 30,000, I'm sorry, and you have 40,000.

Frank:  That's right.  But in this case, we've actually got extra capacity.  And that might even come back to that story you'd mentioned a minute ago where maybe this tells you you've got some room to do some creative things.  And you should be maybe spending on some future investments.  But hopefully this is clear to everybody. 

There's no real complicated math concepts here, but the big deal is having enough to cover your current liabilities because if all of a sudden you had a disruption in your revenue stream, you had a few months of no profits or maybe even some losses, do you have enough runway or enough capacity to work your way through that downturn and come back the other side without crashing.

Ed: Frank, let me say to some of the participants here, a lot of this maybe somewhat new concept but at least with time they'll take our word for it.  This had been tested and it works.  I mean it does work.  So maybe a little bit of leap of faith until you've actually used it with your own company and seen it in action.  It's a good tool.

Frank:  Very cool, yes.  So let's talk about some examples here, Ed.  What I've got here are two slides.  The first one is about some healthy scenarios, what do those look like.  This is the one we were essentially looking at on the previous page, is gradually upturning working capital line with a target minimum that is below it.  That's the only thing we really care about on this picture here.  As long as we're above the target minimum, we're doing good.

In a lot of companies, we'll see a situation where they are below the line.  And if they are on a trajectory, if their trend line is coming through this minimum and on its way up, that's healthy.  That's really a good sign.  They're headed in the right direction.  And then of course we'll see situations where the working capital line is falling but it's still above the minimum.

This is what it always looks like when you decide to invest in kind of a new product or a new marketing campaign or maybe you're kind of building out a new business unit, you might have opened an office in a new city.  Any of those things are going to put a drain on working capital.  And the goal is to make sure that you keep that drain from going below the minimum.  And by watching this kind of carefully and seeing how many months of runway do I have before the lines intersect, that's the key thing to really understand.

Ed:  Professor Frank challenged me on this one.  First of all, that's healthy.  That doesn't look healthy but then you see where you really are.  This is a planned investment.  As you all know with a lot of planned investments or early stages, there's front-end loaded costs.  And so this is not a company where you're just losing money each month, if that's happening.  You're actually investing in the future.  And again, you hope that those front-end loaded costs start to generate positive cash flow before you cross the red line and it starts to head north.

Frank:  But, Ed, your point if this is happening accidentally or it's not an investment, they're not really doing things that are about growing for the future, then this is not healthy.

Ed:  Right.

Frank:  Am I right?

Ed:  That wouldn't need a little color put to it.

Frank:  Yeah.  Okay.  Let's take a look at this in the unhealthy section.  And actually if I go over here and look at this example, this is where, not only did it fall but it went right through the red line and kept going.  This is either a situation where somebody invested but didn't have enough runway and they just went off the end of it.  Or, what's even worse, is their business has taken a hit and it's not recovering.

This is something where, if this really is the pattern in a company, they need to restructure.  There's something – they've got to go back to square one and say, "How do I reorganize my business because if I'm staying on this line here, that's not sustainable?"  Eventually, they're going to not only fall below the minimum, they're going to fall below kind of the zero line which means they are getting into a place where they don't have enough assets to pay their bills.  That's the solvency problem.

Ed:  Just because you go below the minimum doesn't mean you have to shut the doors the next day.  Again, these are just indicators of your start to get into a bad situation.  And this one, we've talked about earlier, you want to see three, six, nine months ahead that you're having troubles instead of [crosstalk] payroll is coming right around the corner.

Frank:  That's – exactly.  In fact, if you're out here and this is the first you realize you've got a problem, and a lot of times that's exactly happens, they realize it, "Oops!  I don't have the money to make this payroll," that's really too late.  I mean it's very, very expensive at that point.

Ed:  And if I could say, our tools will help everybody to see that coming.

Frank:  Yes.  That's the whole intention, absolutely thank you.  This is a scenario here where a company, their working capital is kind of slowly drifting down while their minimum is drifting up.  And neither one of them, by themselves, may look like a problem.  But when you put them together, that's when you realize that something's going on.

If your minimum is creeping up on you, it's just because your short-term debt, your short-term liabilities are increasing.  And if they're on a steady path to exceeding your working capital capacity, that's really a real deadly scenario.  And this is just plain, simple case where a company is operating below the minimum.  This company is going to always be kind of a fragile scenario.  If something comes along and they hit a significant bump on the road, they don't have any capacity or any reserve to bounce back ­without doing a lot of desperate things.

Ed:  That's right.  Frank, one clarification on the middle one – if you're growing, your current liabilities can be growing, that would be normal.  But you want your current assets to be growing at at least the same or at a more rapid rate than your current liabilities.

Frank:  Right.  Thank you.  So, Ed, here's an interesting thing.  None of these conversations so far have we mentioned the word "cash."

Ed:  I know, that's right.  That's right.

Frank:  I mean isn't financial strength just really all about cash?

Ed:  Well, no.  It is really not.  That's a hard concept to get through.  It's difficult for me to get my arms around it.  But really, the working capital – the receivables, inventories, payables, which are mostly working capital – are really just holding tanks of cash before receivables turn into cash, inventories turn into receivables to cash, payables consume cash.  And so really if you focus on the working capital, it really tells you the big picture view. 

But then on the cash, if you've got a lot of working capital but not much cash, you're probably a wonderful candidate to be talking to your bank about a line of credit because really what that helps you do is just monetize your current assets.  And so with that, you don't necessarily have to have cash on hand, but you do want that availability to have cash.  That's what a working capital on a credit is, it's actually made for it.

Frank:  Okay.  What I'm taking from that, Ed, is if you've got financial strength, the cash is available.

Ed:  That's better.  That's a much more succinct way to put it, yes.

Frank:  Okay.  And if you don't have financial strength, it's not only going to mean that you really don't have enough cash, but you also can't get it.

Ed:  Right.  That's right.  Then it kind of get us back to one of those previous slides, you start to really have a desperate – if that's not a too dramatic word – but a desperate search for cash.  And it relates with the receivables and inventories.  Banks love doing working capital lines of credit.

Frank:  That's right.  When you have the right number to show them, if you're desperate, if you really need the money, they don't want to loan it to you.

Ed:  Then it goes back to some of that confidence and credibility too when you go to them [crosstalk]

Frank:  It does.  Yeah, exactly right.  So, Ed, here 's one of the companies you and I did some collaboration on.

Ed:  Yes.

Frank:  This is a real company.  I'll tell you that in this particular company's history, they provided services and technology to a whole variety of different types of clients.  And one day they decided they wanted to be more focused on the healthcare world.  They really tightened up their focus.  They redefined their business.  And it took them maybe six or eight months.  And all of a sudden, they started spiking and they started picking up contracts that led to additional contracts.  Their whole business has changed because they really got focused.

There's a lot of ways to kind of hit that sweet spot that lets your company really grow and multiply.  This is kind of the Jim Collins book about a good grade, where he talks about the flywheel – we spend a whole lot of time kind of pulling on it and pulling on it.  The next thing you know, it starts to carry its own weight and things start moving.  I really love this story.

They had a real scary moment for a few months where they had contracts but they weren't bringing in revenue quite fast enough.  And they were out there spending like crazy getting ready for this growth.  All of that really created a big storm.  They just sucked all kinds of working capital out, all kinds of cash specifically, to make that happen.

But the cool thing is, they had some reserve and they knew how long that reserve would last and they knew they were in great shape.  They took this hit very gracefully.  And when those revenues started coming in, they were just looking really, really solid.  This is a great story.  But you could see there was this major bump.  You can see that they stayed – well in fact in their history, they were below the minimum.  But over time, they've made this strategic decision and they're looking really strong.  Ed, what else do you see when you look at this picture?

Ed:  Pretty much the same.  It's somewhat of an odd picture because you have such a big high spike and a low spike.  But they took a risk in that month.  They took a lot of risk.  Frank, if I think I remember right, the owners put in some short-term loans to just have the cash to get through.  But they took a risk and it paid off. 

And you're right, a couple of things of interest is if you look at where the working capital starts and where it ends, where that linear progression white line, they're moving in the right direction.  And they got from being below the target to well above the target.  So it's an entrepreneurial success story with risk and everything.

Frank:  And actually one of the things that was really interesting about this company is, as soon as they started seeing themselves in this zone right here, their first big spike, they knew they were on a good track.  That's when they went to the bank.  They expanded their lines of credit.  They just hit a lot of really smart things.  And they actually paid off some debts so that things didn't quite look so bad or it didn't look like they were so extended.

The banks were really good to them.  And then all of a sudden, they needed to just step right back in and use all of that line of credit.  It really made their working capital go upside down temporarily, but that's exactly what it's for.  So, you know, they really played it right.  I'm going to move past this, but the next level of examination, this is the same company, this is where we talk about some stuff that starts to get a little bit hard core science, if you will.

This graph over here is all about showing where did their working capital adjustments come from and/or, another way of saying it, where did their changes in balance sheet components happen?  And we can see their long-term items, their long-term assets and their long-term debts are travelling on this blue line here.  And it really looks very similar to their working capital line.

We see their current assets and liabilities together.  And so this is really the same as working capital with cash subtracted out.  So this is that line.  And then this green line is just the cash line.  Now, Ed, this is where we could really hurt people's heads but we could tell them about the importance of understanding that all of the long-term activity on your balance sheet – your long-term assets, your long-term liabilities, and your equity – when you combine those and you plot what's going on with those, it is a mirror image, it's exactly what's going on with your short-term assets and your short-term liabilities.

Ed:  That could take a whole new webinar to walk people through that.  But again, if you'll take a leap of faith, they do balance. 

Frank:  Yeah.  That's why they call it the balance sheet.

Ed:  But the blue line is the changes in the working capital.  And you see that's $1,000,069 or $1,069.  That's that blue line.  Then the non-cash working capital components consumed $839,000 and that's the red line.  The difference between those two, that is your cash.  And their cash has gone up to $130,000

But the neat thing is you can see that $1,000,069 increase in financial strength or working capital, the huge majority of that came from net income, the $1,000,448.  So the good thing is, this is coming from their perpetual motion machine, their energy machine, the P&L.  There are other things that go on outside the P&L.  As you can see, there's long-term debt, non-current assets, short-term liabilities, there's just a lot of dollars that flows through your company that don't hit the P&L.

And I tell you, I don't want to get too much into that.  I'll get too confusing.  But it does work, in the blue line – it's very easy to set up.  And Corelytics can set this up for you.  But it's very easy to see what's driving your financial strength and then what's consuming the financial strength in cash.

Frank:  Yeah.  Knowing that we're kind of coming up on wrap-up here and, by the way, if anybody has any questions, please use that little text box in the webinar frame and drop those in there.  And even if we don't have time to answer them during the webinar today, we'll definitely get back to you by email.

Ed:  This really is simple to set up and it's sort of like riding a bike.  Once you get it, it really makes sense.  And just take my word, it works.

Frank:  Yeah, it actually does.  So I'm going to kind of do a speed read on these next few slides here, Ed, just to make sure everybody understands a few of these points.  The one thing that we keep hammering on is you've got to think ahead.  You've got to think about the future.  You've got to do some what-if scenarios.  And you've got to be prepared for the things that you don't really have control over and that can wind up really changing the game for you.

But no matter where [audio gap] what your long-range plans are and what your potential risks are, all of them benefit from a strong financial position.  And so in the end, that's kind of the bottom line of this concept.  Really, what we urge everybody to do is to understand their trends.  Most companies are great at understanding how they're making money and where their expenses are coming from.

They know that on a month-to-month basis, and they might know it kind of an annual basis when they do a consolidated annual financial statement.  But that's not the same thing as trends.  Trends show direction.  You really need to understand everything about your business in terms of trends.  I would throw on top of that the fact that once you know trends and things like how is your company growing, how are your margin trend lines looking, if your margins are growing slower than the growth of the company, that says that your growth is actually not efficient and you're actually losing money or not making as much money on your incremental growth.

That can spell a really big problem.  A lot of companies think they could grow their way out of problems.  What they wind up doing is just auguring into the ground because they have some fundamental problems.  It might be problems of pricing, cost structure, and a whole variety of things.  The trend lines are what make it pop out.

In fact, Ed, you and I have looked at financial statements where it looked really good.  But once [audio gap] the trend lines, you realize that yeah, well those numbers are good today but they're headed in the wrong direction.  The person would have never known it if they hadn't actually seen their trend lines.

Ed:  I agree, trend lines in a big picture view.

Frank:  Exactly.

Ed:  Yes.

Frank:  And this is always a little thing that we try to focus on.  Even Tiger Woods wouldn't be the pro that he is if he doesn't have his coach there working with him.  And it's not because Tiger Woods needs to learn something new, it's that he needs his sounding board and his adviser to kind of stay with him and provide feedback and remind him of important stuff.

I want to just show you a couple of things that we're learning with the companies that are participating in the InfoComm financial benchmarks.  We're seeing some interesting things in the industry overall.  This data is, as of just a week-and-a-half ago, two weeks ago, we're still seeing an overall trend upward in sales.  But the trend for the last six months has really fallen off.

This is a bit of a concern.  I'm hoping that this is just like a dip that's going to be working its way back up.  But a lot of AV companies have been seeing this hit through overall sales.  And I'm going to just go real quickly through these next couple because we don't really have the time.  Gross margin is doing well, so that's a real healthy story to understand.

Here's something that is not healthy.  In the AV industry, as we're seeing it right now, working capital is actually losing ground and it is certainly not above 1.5 times short-term debt.  This is an area of real concern, and we have a lot of companies in the AV world that do need to take corrective action.  It's just not obvious to them.

This website, just so you know this, we monitor these industry metrics every month.  And as data comes in from Dashboard users, the statistics get updated and the grass updated, and there's commentary on this.  This is just going to continue to expand as we get more and more people participating in this program.

So we do encourage folks to take advantage of the dashboard.  InfoComm has underwritten the dashboard for its members and the price is $49 a month, which is half the regular price.  So that's really something that should be easy for folks to take advantage of.  There's a lot of drilled down stuff in here that lets you really see the details.  But if you just even stay at the very top level, it's very, very informative.  And of course we encourage folks to make this part of their monthly process.

Don’t just figure out what the issues are.  Yes, it's good to set goals, but it's really important to sit down with the team and talk about goals, goal attainment, and where the gap is.  That really leads to the whole team being on the same page and reaching to achieve important goals for the company.

We're offering a couple of free things here, and we'd love to have some folks that are either current users of Corelytics, and we know there's a bunch of you on the call today, and some new folks.  Just send us an email to support@corelytics and ask us and we will do a financial strength calculation for you and show you specifically what that looks like.

We've also got some advisers who are available and happy to do a pre-consultation.  If you really want to understand what's going on underneath that, Ed has granted his expertise and that will be available as well.  These are pieces to take advantage of.  Here's your website,  This is where you can go to sign up. 

But if you have any questions at all, just send me an email,, and I'll get you pointed in the right direction.  I would love to hear from you.  So, John, I think we just about exhausted the clock.  Do we have any hot questions out there?

John:  First of all, I want to thank you both.  This has been great.  Ed, Frank, this has been topnotch.  We do have some questions coming in and I would like to go over them very quickly with you. First one, what is the average GP margin percentages, I guess in dollars, in the AV service industry?  This individual has a company that does staging hospitality as their mainstream of revenue.  So I guess they're looking at what is the average GP margins, I guess as a percentage maybe or dollars?

Frank:  I don't have that right on the tip of my tongue.  In fact, I've got to tell you that companies that are in _ staging have a different financial profile than the companies that are primarily integrators versus companies that are primarily resellers of product.  We actually have what we're calling seven different business models out there yet a lot of those are different.  If you'll send me an email, and just remind me what kind of company you are, I will be happy to pull that number up for you and send it to you.

John:  Great, thank you.  We actually have one more coming in as we speak here.  What are considered current liabilities?  Does it include long-term debt or just monthly payables?

Ed:  It's really the payables and the accruals.  That takes the current force within the long-term debt and don't included in there.  I didn't want to get into that too much.  But I'll put that down in long-term.  You know what?  Really for what we're doing here, you could just use whatever you have as current liabilities on your balance sheet.  But of course that goes, if you have a long-term debt don't have that in there. 

But certainly a line of credit borrowing would be a current liability.  I made that too confusing.  But you can pull out the current portion of long-term debt or not, that's not usually too big a number.  But otherwise, just use your current liabilities on your balance sheet.  Payables, accruals, line of credit, I may be missing something, but that's the main.

John:  Wonderful.   Great.  One more question before we end our event today.  How are consulting companies averaging?  That might be a more one-off person-to-person conversation.  But as a whole, how are consulting companies averaging?

Frank:  I will tell you the thing that is so interesting is that when we look at the AV world, the companies that are moving more and more towards service are the ones that are growing the fastest.  And, you know, it's totally fine to be selling product and doing service at the same time [audio gap] service side of the business is growing the most and has the largest gross margin. 

We're watching hardware and components and everything.  There's this continual price squeeze going on and margins are just shrinking in that world.  We're actually going to cover this in more detail in one of our future webinars.  So please keep an eye on those announcements.

John:  Wonderful.  Well, this just about concludes it.  Again, thank you, Frank; thank you, Ed, so much for your insights today.  We really appreciate it.  We had a great attendance today.  Should any questions come over after the webinar, feel free to send them to Frank.  He'll be happy to help you.  My email is if you have any questions for me as well.

Be sure to visit  We've got a great schedule for 2013.  A lot of great topics.  Many of them are, are you available to great cost-free way to keep your CTS?  Again, thank you, Frank; thank you, Ed.  We look forward to having you with us on the next webinar.

Ed:  Thanks, John.  Thanks, Frank.

John:  Take care.  Have a good day.

Preparing Your Company for Sale

John:  Welcome to InfoComm's webinar series.  My name is John Hardwick, Membership Services Coordinator here with InfoComm International.  Before we begin today's webinar, I'd like to take a moment to thank our sponsor Digital Projection for their continued support of our events and programs.  DPI manufactures and distributes an extensive line of ultrahigh performance three-chipped and single-chipped DLG projection systems.

These projectors are the reference standard for demanding applications such as 3D simulation and visualization, large venue entertainment, live event staging, Fortune 5000, education, medical and scientific research, command and control, corporate meeting spaces, houses of worship, elite home entertainment, and many other applications.  If you would like to learn more about their products and services, visit today.

Please note today's webinar is being recorded live and offers one renewal unit.  If you've missed any of the previous webinars, you can access them anytime at as well as any upcoming events through the year.  If you have any questions, please post them in the navigation pane and we will answer them accordingly at the end of the webinar.  And now, I'd like to introduce today's presenter, Frank Coker with Corelytics.  Welcome, Frank.

Frank:  Hey, thanks a lot, John.  And welcome, everybody.  I guess it's good afternoon for those of you on the East Coast and good morning for all you strange folks on the West Coast.  And I can only say that because normally, I'd be talking to you from Seattle, but today I happen to be in sunny Orlando where there's a big conference going on.  So, you know, there's always an excuse to go chasing sunshine.

And then I'm guessing we probably have some people in strange time zones, in Europe and Asia, which we've had in the past and it’s always nice to have a nice a nice, global mix here.  We've got a really cool topic to discuss today.  And again, I'm really excited about introducing to you Craig Dickens who is going to join me for this conversation.  Let me just tell you a couple of words about Craig.

He calls himself a serial entrepreneur. That's actually an attribute and a good quality.  He's been the CEO of companies and he's been through many M&A transactions.  Craig, I know you just recently got a certification and maybe you could just mention what that certification is.

Craig:  Sure.  Thanks, Frank.  I appreciate the invite today, and thanks to everyone listening.  And certainly thank you to InfoComm for the platform to discuss what is going to be I think an interesting topic because many of us with a couple of grey hairs are looking at the future and trying to size up our opportunities for kind of leaving a legacy or selling our company.  So thank you, Frank, for the invite, and special thanks to InfoComm for the platform.  I hope everybody enjoys it today.

My role, as Frank mentioned, as a certified M&A adviser, is to help companies kind of bridge that gap between where they've been and where they want to go.  So that's really the focus.  And a lot of folks don't have a road map.  They're excellent at what they do and they have expertise in their markets, but when it comes to selling your company, it's kind of a different ball game – different set of roles, different set of expectations.  I just try to help bridge that gap and bring buyers and sellers together in a way that is honoring and respectful of the work they've done, their life's work, and then also provide some value for an acquirer in the mix.  I get to be sometimes referee and sometimes cheerleader, so it's a lot of fun.

Frank:  You know, Craig, I bet your mix in there is father-confessor.  You get to hear a lot of startle stories and a lot of escalating things.  And the fact is this is not the kind of thing that people go through multiple times, I mean a whole lot of times in a lifetime.  This is, for most people, even once is a pretty extreme event.  And so I guess we should not expect that anybody has this down because they're rehearsed, right?

Craig:  Yeah.  Too many of us have seen that list of stressful events in life and certainly all of us have our battle scars over the years with running businesses and dealing with bankers and customers and all the other pressures that are on small businesses today.  But the list of stressful events when you're contemplating selling your company, if you were to go down that list, some of us are familiar with it – death in the family and marriage and some of these major significant lifetime events – within that list, there's probably 10 or 15 of them that are involved in selling your company.

It could be retirement is somewhat stressful, the financial aspects of not getting a paycheck, where do I go to work,  I have a theory that I want to play golf five times a week and does that theory match reality.  So there's a lot of stress around the process.  And generally, folks, to your point, Frank, it's a one-time event and they're not experts at that. That's where having somebody to help bridge that gap and to really kind of align where they've been and where they want to go is the first step in the process.

Frank:  So I wonder if this would be quite to selling your child or something?  That's probably not on your list, is it? All right.  I only want to talk things here just before we get roaring down the street called agenda.  One of the things that many of you know, who's been attendees of this Money Matters series, we've tried to do a number of topics that are focused around financial and business management topics.  And we always put a special emphasis on the idea of knowing your metrics, understanding your numbers, and that's going to be just as true today as we talk through preparing your company for sale.

Having knowledge of what your numbers are telling you is absolutely crucial to really running a tight ship.  We use the Financial Dashboard Corelytics to do that.  And InfoComm is a supporter, underwriter, provider of Corelytics to InfoComm members.  So you'll hear us mention that a few times along the way.  But with that said, Craig, we're going to just dive. Here he is our agenda for today.  I'm trying to get my screen to move forward, there we go.  So we got a couple of big picture things and we got a couple of how do we move through the process topics.  In fact, we're going to share with everybody some really key items here on how to know whether your company's ready or not.  And then we'll touch a little bit on some resources that you can take advantage of at InfoComm. 

So, Craig, we all know that there's a lot of consolidation going on in many industries.  Our recent economics, we've kind of drove a lot of activity.  You were mentioning that you were seeing an acceleration of small business sales.  Your take on it is that it's going to increase because of the baby boomer effect.

Craig:  Yeah.  That's right, Frank.  Baby boomers are the most entrepreneurial generation that's existed in our country anyway.  And that had some timing.  The baby boomers have started to hit 65 and I'm wondering what the next chapter looks like.  And because of the entrepreneurial spirit, there's a lot of folks that are looking to transition. 

And typical supply and demand – when there's more companies for sale, the values tend to get pushed down a little bit.  So the companies that are going to be ultimately successful are the ones that can increase their value along the way and really focus on those things that an acquirer would like to see in terms of consistent revenues and a good plan going forward.

Frank:  So you're actually seeing a growing supply and demand, maybe not quite keeping up with it.  Is that a good way to summarize?

Craig:  Yeah.  It's definitely, you know, folks are looking for a path.  And the exit strategy on their mind is how do I convert this baby or this golden goose that has provided such a great lifestyle for my family?  How do I convert that into something that's lasting and legacy and really helps me prepare for retirement?  It's a little bit tricky.  The more companies come on the market, the more price pressure there is.  So the ones that are prepared and have a plan will do well; the ones that don't will probably not do so well.

Frank:  And I guess, Craig, to your point here, the last bullet, a pretty large number of companies are going to wind up just basically having to fold, kind of shut the doors because they haven't really set the stage.  Succession planning is probably only one reason why that might happen, right?  I'm guessing that, you have stated, really cultivate the value of their company, it's not going to generate its value to justify the cost of trying to do a sale.

Craig:  Yes.  Some of that is the entrepreneur we talked in the beginning, the mental aspects of kind of changing your gears from running a company to selling a company.  And I think obviously the financial aspects, you need to pay attention to that as well.  And that's why, for example, Corelytics is such a valuable tool to my clients because they can see where they are from a preparation standpoint.

But literally, there's some thinking that the owner needs to kind of just to sometimes say, "Okay.  Where is the value?  Let's look at this from a 5,000-foot."  Because we're so used to operating the business on a day-to-day level, making that shift and focusing on value is key to kind of the beginning of the succession plan and moving forward.

Frank:  Well, with that as backdrop and our whole discussion here really should actually encourage everybody to be thinking about really doing a deliberate plan because to not plan is really to kind of leave your company vulnerable.  But I think the other big reason to be doing really deliberate planning is you never know when an event is going to take place where all of a sudden it is time.  You've got to do something.

It could be a health issue.  It could be all of a sudden, you got somebody new who moved into the market and they want to acquire you.  And the last thing you want to do is say, "Well, give me a year while I get myself ready."  Unfortunately, that year may not even be available.  I think that's part of the pitch for why planning now and planning immediately is really, really critical.

Craig:  Yeah, absolutely.  There's an old adage that great companies run as if they could be put up for sale tomorrow.  You do some of the things and the disciplines, minding your financials and working on your business every day.  But literally you might also, on the positive side, get an offer one day or flip an offer from someone that's advantaged in buying your company.  And sometimes they don't want to wait six months while you polish it up a little bit. 

Frank:  To that point, Craig, there's a lot of folks that when they get an offer, it also is the clue that somebody else is getting an offer from that same company because if somebody's looking they're not going to usually just go to one possibility.  And that kind of area or really favors the person who is most ready.  And it's a huge disadvantage when a company is not ready when such opportunity is popped up.

Craig:  Absolutely.

Frank:  So, Craig, here's the punch list that you and I put together.  And I really need to give you the credit and thanks for these because you've got some cool titles here.  They're provocative.  And now all we're going to do is figure out what the heck does that mean.  So let's try to downstream these in rapid fire because I know time always gets away.  Let's just jump right in to the, are you saleable from a financial point of view?  Could you introduce us to this question?


Craig:  Really, buyers care about two things.  They care about if you were to strip away the things and not to take anything away from our baby or our golden goose or our secret sauce in the marketplace.  What part of the AV industry we specialize in or are known for expertise.  But a buyer really, on a financial level, cares about how much profit you're going to generate and how reliable are those estimates, and the predictability of those, really that's the key.

And from a buyer's standpoint, he's got to have confidence or she's got to have confidence in the fact that your profit will keep going so that it'll allow them to get their return on investment.  Those are the two factors from a financial standpoint.  Any we can do to bolster those two realities will be real important to the future.

Frank:  This is just kind of the first of a number of steps here to be looking at.  But the whole idea of predictable and consistent, earnings and margin, that's not as easy as it sounds because a whole lot of AV companies have spikes because of projects and contracts and have a short duration and then they're gone.  Here is something I thought I would toss in to this conversation because these are cue lines from an AV company.

One of them is very spiky and one of them is a lot smoother.  They're in the same industry and they actually have almost the same growth rate.  And so, Craig, if you were advising a company or a buyer and you were talking to this buyer, you were saying, "Here's two companies to look at," how would you describe these two companies to that buyer, and what would make one more beneficial than the other?

Craig:  Good question, Frank.  There's two things that acquirers look for, some are financial, some are emotional.  But really they're looking for the growth rate, which obviously we've got the same growth rate on both of these finds.  But then they're looking at the risk equation – which is the less risky path along the lines of financial performance?  It's really kind of striking if I were a buyer or a seller, I would like predictable revenues.

I would like assurances that the revenues are going to continue.  And the chart on the right obviously gives me that comfort level to minimize risk.  I know I don't have to deal with spikes because those spikes can go inverse.  If I lose one contract, then F becomes really erratic.  So buyers are looking for future potential and growth rate, and then also the least risk will be more attractive.

Frank:  So, you know, one of the things that I have seen once upon a time when I was at PriceWaterhouse, we get some valuations and due diligence on a series of companies.  And went through a process where when we found companies that look like this one on the left, we would actually discount them.  We would just knock the top, like the top 15% or 20% off of all peaks, and then do the calculations.  In some cases, that just erased profitability.

Craig:  Yeah.  And many accounting firms now, and that's part of the standard process to do a quality of earnings report.  So within the graph on the left, just take any one of those mountaintops, that could be a one-time sale.  It's not highly repeatable.  It's not contractual.  It's some events that may have come and went.  So really the quality of earnings and evening those out and looking at the value of each of your earnings streams is definitely something for owners to focus on and even try to diversify, which we'll talk about a little bit next.

Frank:  Yeah.  The only thing I would add is that when I look at a company with spikes like this, what I know that these scramble like crazy to make the next new sale because this looks like sales come, they get taken care of and then they got a lot, make another one; whereas this one is more about keeping sales sold and maintaining relationships over time.  That's what I would assume just by looking at these movements of this curve.  Very different sales pressure, very different focus on those two companies is my bet.  So, Craig, let's jump to your next topic here about growth potential.  And I know you've got a couple of thoughts on how an acquirer might look at their growth potential variables.

Craig:  Yeah.  On a macro level, a lot of times when we – as we go through the life cycle of our company, we had certain plateaus or we get comfortable or the marketplace moves in a direction that we have to catch up with.  So acquirers are always looking at growth rate and growth potential and opportunities for them to come in and take what you have built and done and leverage it, whether it'd be their distribution network, their sales channel, even the geographic market where we can reach out a little bit further or look at different streams of revenues.

So if you've got a mindset, even now and you may have owned your business for 20, 30 years, that growth is going to be the key driver for getting an acquirer's attention, it basically validates if we're growing, we're listening to the market, we're responding to those challenges that the market grows out of, and we've got a mindset that we can do more with our business.  And that's really where acquirers are looking to do.  They're looking to do more with your business.  So growth rate is really, really important.  And scalability of that growth, the more scalable you are, obviously that just kind of acts like a supercharger that we can take this to the next step and the next step.

Frank:  So, Craig, let me throw a little challenging thought here to you.  In a different industry, I've watched this story play out that was really quite surprising.  And it was in the IT industry, it was an IT service company.  They had a growth rate of roughly 8.5%, close to 9%.  And over a two-year period, that really looked solid.  They were being courted by a company that was looking to roll up several IT service companies, and so they were on the list.

It turned out that they didn't get selected.  When all the [audio gap] came in, they got left out.  They found out later that 9% was below market because the average for solid or established companies was 14%.  And this company didn’t even know that.  They thought that they were cruising along at a great pace, and they didn't even bother to think, "Oh, I wonder if that's as good as the rest of the industry."  What's your take on how the industry metrics play into a question like this?

Craig:  I think it's a really great point, Frank, and important.  It's one of the things I love about Corelytics is that I can pull up industry averages.  But knowledge of the industry and how you compare and benchmarking, even if you're in one or two areas of the market or even from a geographic standpoint, that's going to play into your overall valuation.  And keeping up with that number or keeping that number, that's when you get invited to the dance and that's when you become more valuable.

Frank:  Yeah.

Craig:  So in terms of multiples and sales ranges, half a turn in our business to go from maybe a 5 multiple of sales with 6 multiple, those can be substantial dollars and those can be built around how you perform against the market.

Frank:  Yes, good point.  I'm going to jump to this next topic here.  Here, we're talking about Switzerland.  Now you've got to help me out here because Switzerland didn't exactly help me understand this at first.  How did they get in the act?

Craig:  Switzerland, speaking of neutrality.  On the one hand, if we're a niche player, that's good because we have expertise in a given business.  But by the same token, we're in trouble if that segment of the business drops a little bit.  So I know a lot of our folks that are probably listening, when you look at the boxes on the right-hand side, those are the main areas from an AV standpoint where revenue is derived from.

And the more boxes you can check, the more neutral you are to kind of use the Switzerland term, the better in terms of diversity of revenue streams and consistency of revenue.  So if, for example, product sales are down or you're in between new product cycles or margins are being compressed a little bit, it's great to have a services or integration part of your company that might be able to pick some of this up or even some consulting for what's coming down the road.  So that's where Switzerland comes from.  But really it's about diversity and neutrality to revenue streams.

Frank:  So, Craig, I know that along the way, you were also an angel investor.  You've got some investments in AV companies.  I think, if I heard you right, those were manufacturing companies, so definitely a part of the AV ecosystem.  As a vendor, you would probably expect to see fewer boxes checked here.  But as a service provider and somebody who's a reseller, I think what we're saying here is that really the more legs of a company, the more lines of business, the better.

Craig:  Absolutely.  And even from a manufacturing standpoint, the reason I made some investments for example in Tectonic is because they've obviously got manufacturing and provides some disruptive products.  There's an opportunity to really kind of change the rental side of the business without product.  Again, the more boxes you can check, the more insulated you are from competition. 

And from a service standpoint, constantly being open to new product offerings and how you can build additional either services or revenue streams from the product side is important to look at.  I know our listeners look to do that every day, but technology changes.  Staying up on that and being able to kind of leverage that will be important to an acquirer.

Frank:  One of the ways I look at this, Craig, is that when you build a company that has multiple platforms, not only does it give you more solid footing as the ground shakes or however you want to look at this analogy, but more importantly, it gives you ways to kind of cross-fertilize between these areas.  And you actually, in effect, build your own ecosystem. 

So if you're selling products and you can also be doing integration products that incorporate those products and then maybe you have major implementation projects that now put that all to use, that's kind of like a whole series of handshakes or a food chain that is a lot stronger than just having one piece of that.

Craig:  Yeah, absolutely.  And the second part of that and again through the lens of an acquirer, acquirer wants to know your plan.  And so for example when we're dashboarding each individual areas, if we've got product sales, integration services, we can manage each one of those, set up benchmarks and goals to say, "Okay.  Our goal is 20% increase, and our goal is 40% margin on services," then we can track that and show those numbers to an acquirer and say, "These are the areas of the business that we're in.  These are kind of the hand-offs.  These are the ancillary sales.  These are service sales.  And here's how we're doing in each segment."

That's powerful information.  That separates what I call the mom and pop managed by your gut towards an investment grade or an investible company that has diversified with their tracking.

Frank:  Yeah, good point.  I'm going to circle back to this one in just a few minutes here because for every silver lining, there is a dark side I guess, it was really supposed to be the other way around.  There's actually a downfall to this whole process.  I need to save that for just a minute and look down to your next one, the valuation titter-totter.  What's your thoughts here?

Craig:  Well, you know, a business that doesn't – I'm going back to a financial buyer, if I look at a company and I say, "Okay.  There's two checks I have to write at the end of the transaction."  The first one is you pay the owner, and here's what the value is.  And then the second check is working capital.  I've got to come up with a way to fund this business going forward.

So obviously the more I have to fund working capital, the less I can afford to pay the owner, that's sometimes the mindset of an acquirer.  So as you look at your business and work on your business, some of the things, as you go back to that previous slide in terms of okay, what businesses are going to get in, which ones are going to consume cash?  Which one do I have to have inventory for? 

So as you look at valuation, that's an important part of the mix.  And if we can diversify in areas that don't burden the company from a cash flow or inventory standpoint, sometimes that's a good strategy.  And then the inverse is working with your suppliers to make sure you've got appropriate terms to build and grow your business on is important as well.

Frank:  So when I think of this kind of titter-totter metaphor, as I'm hearing you, there's a push-pull between money that the company might need and money that the owner is trying to get out of it as kind of like the bottom line of a transaction.

Craig:  Yeah.  The part that often gets neglected, and this is kind of down the road for folks that are seriously considering sale of their company in the near term, that working capital component is also what I'd like a highly negotiated point.  It's a point where you need an advisor or an intermediary to get in there and say, "Okay.  Let's define working capital.  What is that? Let's peg it to a number and let's make sure that we don't get in trouble because that is –" it can be a decent amount of money in a transaction.  So it's just something for folks to kind of take notes to, to keep in mind as they think about that.

Frank:  Yeah.  While they're mentioning that, let me just say that we've got some upcoming webinars that are really going to look at working capital and balance sheet pieces.  That would be a real important kind of add-on to what we've been talking about here.  I'm going to jump to the next topic here which has to do with the recurring revenue world.  I'd like it if we get this organized, Craig.  You kind of start from the least solid, I guess, to the most solid of the hierarchy, and how companies go about building this recurring revenue world.

Craig:  Yeah.  And I think the tie-in, Frank, is back to the original premise of what acquirers look for.  They want streams of cash flows and they want reliability in those streams so that they can say, "Three years after the acquisition, yes we got a return on investment.  It was a good purchase. It made sense for us."  So if we tie that to growth and we tie it to some actionable things that companies can do in terms of their thinking in preparing for a sale, whether that sale is three years from now, five years from now, this isn't going out changing the world and coming up with a new widget.

This is thinking about the quality of your revenue and how you can get it more reliable and repeatable.  So your point is dead on.  Consumables too pays and whatever ancillary things that folks sell today, those are things that yeah, you need it and you come back every 30 days.  But there's kind of, not really a reliability to whether someone is going to come back for that type of an item.  Some commodity consumables are the – you buy the copier and it's a one-time investment but you need the toner to keep going.

So you stump money into the copier and the toner is kind of the recurring expense.  You can't really operate the copier.  You have to come back to me for that toner.  Same thing with subscriptions, if I've got a subscription to a magazine, it's okay. 

 Frank:  In the AV world, a lot of this doesn't apply to most companies at first glance.  But I do know that there are plenty of AV companies that are selling consumables and they find a way to make that actually part of their business just because it's a logical extension.  In some cases, really all they're doing is providing a bridge between their customer and a supplier.  They do the arrangements and pass on some amount of savings to their customer.  That's a good way to keep that customer close.


Craig:  Absolutely.  You're adding value and that customer comes back repeatedly.  I think another way, there's been companies in the space that have been pretty innovative and whether they've borrowed it from the computer model or not, but almost guaranteeing buyback on certain items really helps folks in a lot of traction so that they come back to your company.  After a certain amount of years, you can get a credit for your equipment.  I know a couple of companies that have done that pretty well.  But again, it provides kind of a sticky relationship, if you will.

Frank:  Well, you know, we don't really have time to chase this all the way down.  But I'll tell you, I do know of some leasing companies that will provide plans and terms like that.  And then they make it available to an AV reseller.  And then that reseller basically incorporates that right into the way they package and sell.  That lets the end customer take advantage of those buyback guarantees and all kinds of other provisions.  So yeah, there's a lot of this.  If you just think creatively, this can have huge value and just leveraging the business flow at an AV company.

Craig:  Yes, some long-term contracts.  If you can– and again, it starts for the mindset shift to really just take it to the next level, ask the question, make sure that from a sale standpoint you're incorporating that question.  iPhone and Verizon are carriers that have done a good job with conditioning us onto your contracts.  Again, that revenue is a little bit more desirable for someone if they know that it's going to come over the transom for the next two years.

Frank:  Yeah, exactly right.  So let's jump to the next topic here, monopoly control.  How are you positioning this thought on this list?

Craig:  Your value in the market is relative to the kind of creativity and your ability to keep competitors out of the space.  Some instances, we obviously can't control that.  But if there are things where we can develop expertise and develop a known secret sauce or even IP or even more so a system, if we've got a system sell or something that can integrate or walk someone down the path, if you've got that and other folks are just checking one of those boxes, "Hey, all we do is we sell this," you inherently become more valuable.

And I think the macro point I'm making by looking at these seven or eight items, is really focusing on looking at your business and working on your business versus for or in your business.  Sometimes an owner has to step away. And that's why a lot of times we'll do offsite meetings and say, "Okay.  Let's look at the value drivers.  Let's see how you score on each one of these so that we can enhance the ones that we're already good at.  If we don't have a secret sauce, let's try to find that before we position ourselves in the market."

Frank:  Yeah.  You know, one other point that I would just tag on here to monopoly control, is really the whole concept about being a specialist in a niche market.  If you are really establishing a reputation in the house of worship area or maybe in the education arena, in fact I'm seeing a bunch of people in the IT space go after hospitals and healthcare and just totally focus on that because of the new push for electronic medical records.  That whole venue has turned into a perfect area of specialization.  I know there's equivalence for that all over the place.

Craig:  Sure.

Frank:  So let's jump to the next one here, Craig.  This one is about customer satisfaction.  It seems like we almost shouldn't mention this because it should be so obvious.  But we forget about this.

Craig:  Yeah.  It's definitely something in the new reality of the buying cycle.  Most consumers are not talking to a salesman or not calling you until they're 70% through the buying cycle.  So they're reading about you, they're hearing you, they're looking at your website, and they're seeing reviews in some cases, whether you know it or not, you might even be tweeted about as we speak.

So really having an understanding and acting your customers say, "How can we get better?  How do you view us?"  And the net promoter score is something that Bane [ph] started years ago.  Based on the most recent experience, how likely is it that you would recommend an AV company to your friend or colleague, that's kind of the ultimate question that says, "If I'm going to recommend you, it means I love your service or your product."  That should be something that we ask our customers pretty regularly too to see how we're faring in the market.

Frank:  And of course if we continue to ask that question on a regular basis and we may not be real satisfied with what that score looks like today, our personal goal is to continue working this and figuring out what are the things that can be done to make more customers feel like they have a dynamite experience and they really would recommend you.  That's the ultimate outcome.

Craig:  Yeah.  The same is true on the financial side as well.  We've got to keep asking ourselves, "Okay.  Where are we at?  Where are our margins at?  Where's our business growing?  Where's the traction?  Are we getting a good return on our investment?"  Notice from my language, you're thinking more investment at this point when you start to think about selling your company.

Frank:  Yeah, absolutely.  So that's really a logical stepping stone to this next one here because it's, if everything else is in order, or let me reverse it.  If you don't have everything in order, when that bus comes along and takes the key person out, it's like okay I am just really setting myself up for a, you know, I must have good ending for the company.

Craig:  Absolutely.  I remember a lot of folks get into trouble – imagine your spouse running the company or if there's the health issue.  But more on the positive side, a lot of entrepreneurs are built strong and so dedicated and resourceful in running and growing their company.  When you're thinking about selling your company, you need to make sure that everything that you do is teachable, valuable, and repeatable for your staff because chances are, my guess is if you're selling your company, you're only going to stick around for alittle while and you may want to retire and do something different.

So making sure that you've got that common spoke to your employees and that they can do what you do if you get hit by a bus will be valuable.  And how this manifests itself when an acquirer says, "So tell me about what you do, what's your role in the company," they may test that.  And if it all keeps coming back to you, that means that the systems haven't been put in place within your staff and the company is too reliant on the owner.  That's a flag for acquirers to say, "All right.  If he goes and rides off into the sunset, or she goes and rides off into the sunset, we may have a problem on our end."

Frank:  Yes, exactly.  Back to my Pricewaterhouse days, I saw that one thing tank a number of potential sales just because they said no, that's a risk factor.  If the owner is the key to success of this company, that's not a good story.  And it almost seems illogical.  It's like, "Man, I've had this – here's the owner that has just when great and wonderful things happen, why wouldn't that be a valuable story?"

And then I turn around and see a company where the owner figured out how to delegate everything and basically goes sit at the beach, that company was more valuable.  And it always seemed counter-intuitive, but if that owner can't walk away from the business and relax for an extended period of time, that's probably a clue that the company is really not ready for sale.  What do you think, Craig?  Does that sound right to you?

Craig:  Absolutely.  And part of what we do in this process, our role is transformative.  We're not very transactional.  We don't want to just tell people sell their company.  It really has to have a transformationally owner's thinking.  And we coach CEOs and business owners to say, "Okay.  What does your vacation look like?   Are you checking emails every day?  Are you able to own a blog?  Do you have confidence in your staff that they'll be able to handle things while you're gone?" 

Those are the good building blocks and measures to not only make the mental transfer or change your thinking to, "All right.  I may not be involved with my company down the road," but it also is a gift to your staff to say, "Okay.  I'm able to let go and see how you guys function.  And if there's things we need to correct over time," that's when you really start to work on your company versus for or in your company.  That's really important to an acquirer.

Frank:  Yeah, very cool.  Here is a punch list, and I know that this far from complete.  It gives an idea of some things.  I wasn't intending, Craig, for us that you go through this piece by piece by any means.  But I just wanted to flash out there the fact that when a company is thinking about getting their act together, a whole of bunch of this when you look closely, it really involves documentation and making sure that everything is accounted for.

The one though that I would hit right at the very top is having the team ready.  In fact, I would say not only ready but somewhat rehearsed.  My thought here is that the owner of a company should have their adviser, their attorney, and possibly a broker – I don't know, it's debatable whether you actually need a broker, but in some cases the attorney can do all of that – but there's some mix here, and you've got to have these outside resources to actually make a deal come together.

In fact while we're at it, let me just say that the worst thing an owner can do is to go off and negotiate in their own behalf.  And this is kind of like selling a house, there's probably other analogies we could use here.  If the owner is doing it themselves, they may be able to make the sale, but very often they are going to get way less than what a professional deal-maker would come up with.

The problem is the owner is actually the court of last resort.  And so if there's this intermediary or a broker who says, "You know, I was trying to get that price for you, or I'm trying to make that concession, but I've got to go back and talk to the owner," that gives some buffer space to kind of think through in solving problems.  An owner has no place to go.  If they're the only one involved in this transaction, who else are they going to blame?

Basically, they're going to wind up saying yes and no and locking themselves in only to find out that oops, the combination of stuff that they locked themselves into might not be in their own best interest, but it's too late.

Craig:  Yeah.  We see that a lot.  And I guess I would summarize this by just a couple of observations.  If the team that you have and the tools that you've put in place to be able to secure that and speak confidently about the company, then that's where a good intermediary or advisor will be able to put the team and the tools in the right order to maximize the value from a transaction.

On a personal level though, a lot of owners will be looking at this list and go, "Oh gees, I don't know.  This seems like a ton of work.  I like growing my business more than I do buttoning it up."  This is an area too where it looks like a tough list to work through and you might be saying or going, "Well, I'm not so good on this one or that one."

But that's really where an intermediary comes in to help you position the company, get it set up so that we can maximize some of the things that you've done over your life's work.  And then be able to present that in such a way that it makes a cohesive value-oriented proposition to an acquirer.  Although the list looks daunting, getting a little help with it can really ratchet up the value and really tell a story to win a potential acquirer. 

So that's where I'd say the intermediary comes in to not only keep you from making the mistakes a lot of folks are doing.  I'll give you a specific example.  Just because you get an offer for $10 million, everything is subject to due diligence.  They're going to go down a list similar to this and they're going to start to doubt it and go, "Well, you know, we don't have a clear business plan.  Our financial statements have some holes in them.  Our key customer and supplier contracts, the fine print says this contract is only good with your company, there's no successor language in it, or your sales pipeline isn't really visible and you don't have a system."

Even though an owner gets excited and walks mentally down that path and begins to perhaps even cash the check, a lot of times owners are very disappointed because they don't know what's coming next. And that's where a good intermediary can kind of walk you through that program.

Frank:  Yeah.  I have seen many cases where a buyer is throwing a number out there that they know is not going to be the final number.  But yet, it hooks the seller.  And the seller all of a sudden starts to –exactly what you're saying – they start mentally spending that money.  "I can see strips.  I can see paying off some real estate.  I can see all kinds of stuff."  They just get reeled in and then they start finding out about the adjustments and all of the other things that can just completely change the picture.

But if you're already in a negotiation cycle, if you go all the way back to square one, you're almost guaranteed that the deal is not going to happen.  And it's really too late to really totally change your approach.  That's an interesting dilemma.

Craig:  It's pretty clear, Frank, that if you've tried to do it yourself and you failed, the next go-around you're going to get less for your company.  And that's the part that's pretty discouraging folks.  It's always best to invest in the process, set it up right because it's kind of like real estate.  When they say the first offer is usually the best one, statistically that's true, same thing with companies to a degree.  If you're prepared and if you do it well, but the second or third go-around, you're really not going to get the best offer.

Frank:  Yeah.  Well, Craig, there's another reason why I think this list is important and here's the subtle thing that I've really liked to push on.  If a company, if a business owner says, "You know, I'm going to start down this path.  I don't really have a big mind just yet, but I know it's out there and I want to start getting my ducks in a row." 

What happens inevitably is the minute the owner starts down this path, putting their team together and building more structured documents, building more structured process and procedure, and actually doing metrics on performance and looking at pipelines, they discover stuff that can be improved.  And guess what?  They start improving earnings as a by-product of this.  It can be a fabulous outcome for a company.  Just the whole process of discovery is really a healthy thing.  

Craig:  Yeah, it is.  A lot of times owners – one of the values that I think I'd like myself bring to the party, is that especially not being very transactional, my goal isn't to sell a company, my goal is to help the owner figure out what door they want to go through.  And that might be giving it to their son or daughter.  It might be selling to management or employees.  It may be just to sit back and click coupons.

So a lot of times folks won't end up selling their company but like putting all these systems in place, they streamline their company's operations.  They've got now, again, dashboards and metrics and pipelines to work from.  So I think it's a and click coupon.  They don't need to sell. 

Frank:  Yeah.  The picture in my mind wasn't clipping coupons.  I wanted to picture that owner out on the beach and taking that three-month vacation and not having to check in every day.  That's the picture.

Frank:  Okay.  All right.  So we're going to need to kind of jump a little bit because I know we've spent the bulk of our time here.  There's a couple of points to make and, Craig, you really keyed these up nicely because there's things that people need to know about their business and they need to be visible.  They need to be measurable.  They need to actually be updated on a very frequent basis. And there's tools that just automatically do a whole lot of that stuff.


And then to underscore that point, is when you start doing that, that's when you start discovering all the many ways that you can start turning the dial and tweaking your business and actually making it even more productive to a point where you may not even want to sell.  But no, that's not really the point.  It's just that any time you can get more benefit out of your company, the better.

Craig:  Absolutely.  In our business, the buyers always say, "Well, we only past performance.  We're not buying future."  But I'll tell you, my job is to bridge that gap between, "Yes, here's where we were in the past, and here's our performance.  But look at our trends for the future."  And every buyer want, they say they won't pay for the future and they won't pay for tomorrow's earnings. But if the trends can point you in the right – if your direction is good and your trajectory is good, they will pay for those trends.

And that's the key, being able to use the tools and work on specific areas of your company, benchmark them against others, set goals for yourself, and say, "Okay.  How can I turn those dials?"  They will pay for that if you can show it to them.

Frank:  Yeah.

Craig:  A lot of folks' difficulty is they can't show it to them.

Frank:  Exactly.  This may be a little blatant but you've got to have a great springboard for saying, "Well, one of the dashboards before you, well of course it does exactly those things."  There's no accounting system out there that does this thing we call Predictive Analytics.  Accounting systems are fabulous at looking at the current and the past, not really good at looking at the future and predicting the future.  And of course that's what we are very highly focused on. 

We have had a lot of fun doing this with InfoComm because not only are we helping companies see their own trends, but it's actually looking at those trends in light of how that compares with peers.  As we are building this knowledge base, we're getting more and more granular.  The information is just becoming more and more valuable to all InfoComm members.  And it really is an exciting thing to see. 

One of the things about the dashboard, just so everybody knows this, at one level it's great for painting the broad sweep, but it also is a perfect way to dive down into the details of the company and see very specific things in a very structured way about what's, you know, what's contributing to our problem or what's underneath a problem because that's where corrective actions actually have to happen.

One of the things that we recommend for companies is to do this monitoring process every month and look at gaps between plan and actual.  In this case here, we've got a plan, this blue line, that's the goal.  The user of this dashboard wants to get to start as of this date and go forward and they're trying to close this gap.  But at the same time, they're also saying, "Let's look at how this compares to the industry," and they're nowhere near industry performance or industry benchmarks.

The thing to notice is, this is for one line of business inside the company.  Now, here's a point that I wanted to make, Craig, and I wanted to get your reaction to this.  Earlier, you were talking about a benefit of firing on more than one soldier, having multiple lines of business to make a company more stable.  If you do that, I would argue that you need to manage each line of business as if it were a business within a business.

And you've got to know about that business profitability.  And you've got to really know all the numbers on each one of those individual LOBs and manage them individually.  What I see is companies that may have kind of a fairly decent big picture.  But when you start drilling in, you'll find some soft spot that really are not being managed well enough.  And they need to either do something or move on to some – they need to just jettison an area.  When we talk about having multiple pillars in a company, it's good only if they're all being managed and taken care of.  Is that the way you would see it, Craig?

Craig:  Absolutely. And, you know, my granddaddy used to say it's hard to hit a target you're not aiming at.  Each line of business is really – call it a four-legged stool or a three-legged stool.  You may take one away and what do you think, Frank, that an acquirer, they're going to say, "Oh great."  Now you've reached $10 million.  You're real valuable, but then they start to kind of look at where the soft spots are and they just start to nip value if you can't justify them, if you’re not paying attention to them.  So definitely focusing on each line of business is very important.

Frank:  I know we're running up to the wall here.  And, John, let me just ask if we've got any questions out there.  I'm just going to kind of stroll through these last few slides as they ask that question.  Anything that we need to respond to right now?

John:  Something that came up that was great that I thought would be a good tie-in is, in some situations where a company is looking to sell or is moving towards selling their company, obviously the staff may get wind or pick up on this depending on how big or small the company is.  What would be a good way or maybe the best way to head off any negatives that might come off with that?  Maybe staff focus internally?

Frank:  Well, in my experience, management actually – if they create a mystery out of this, they're actually going to create a situation where the people are going to invent their own story.  And I think it's really important to be ahead of the gossip curve.  But one really constructive way to do that is to say, "Guys, we're going to be launching a series of projects over the next couple of years that are all about building the financial strength of our company.  And we're going to have some advisers in.  We're going to have some projects.  We're going to be examining ourselves.  And we're all going to win if we help transform this company to the next level."  And so really what I'm pitching to you, John, is a proactive story about growth and taking the company to the next level.

Craig:  I agree, Frank.  That's a great beginning process.  We find, in the industry, 95% of all confidentiality breaches come from either upper management or owners themselves.  And part of that, this may seem like a shameless plug for a professional M&A intermediary, but the process does in the industry really need to be highly confidential.  But a lot of times, owners will talk to their golf buddy.  They'll talk to their CPA.  They'll talk to other members of their team.  And sometimes that information can slip out when you don't want it to. 

So it's really important to have somebody focus on the confidentiality and work on gathering the team and the right folks that are in the M&A space because we realize just how important that is in managing a clean process versus one where it's out there in the wind in the industry.  Doing that is one part science, one part arts.  But it's definitely – the outcome I think is a lot better than what the downside can be in that if folks hear about it, then it becomes a rumor mill.  And that's not healthy for your company, for your culture, and even your supply and customer relationships.

John:  So it sounds like play it safe, be upfront.

Frank:  Right on, well said.

John:  We have just about another minute.  I'm just waiting to see if there's any more additional questions that come in.  But I do want to thank Frank and Craig for their time today.  I really appreciate your insights and your efforts.  As Frank mentioned, Corelytics is a member benefit of InfoComm.  And it's a great way to really see where you're going, see where you've been, where you're going.  Being able to project forward is a great tool.  So I welcome everyone to connect with Frank.  Of course, our members, we hope you're already working with him.  If not, please reach out.  It's a great program.  Again, thank you, Frank; thank you, Craig.  And we look forward to the next webinar.

Frank:  Thanks, John.  And good selling week to everybody.

Craig:  Thank you very much.  I appreciate it.

John:  We'll see you next time at our InfoComm webinar series.  If you missed any of the webinars, feel free to view as well as any upcoming webinars.  Thank you again and have a great week.

Balance Sheet: Key to your Financial Strength

Blythe:  Hi.  Good afternoon, everyone.  I'm Blythe Girnus with CompTIA.  And thank you for joining us for today's webinar.  Your Balance Sheet – Keys to Financial Strength.  Before we get started, here are a few quick reminders.  Please submit any questions to the Q&A panel on WebEx throughout the webinar and we'll ask them throughout the presentation.  If you need any help during the event, feel free to send a private chat in WebEx to CompTIA Host for assistance.  And if you happen tweeting about this webinar, please use the #comptia with your post.  Today's session is being recorded, and we'll send out a follow-up email with links to view the recording and to download presentation materials.  And you should get those by end of day tomorrow.

This webinar is produced by CompTIA the non-profit trade association advancing the global interest of IT companies including solution providers, MSP manufacturers, and distributors.  CompTIA members have access to a wide range of online tools and resources, educational content, networking events, and certifications, and credentials.  If you're not already a member, we encourage you to visit or email for more information.

We have a great speaker today.  I'd like to introduce Frank Coker.  In addition to being CompTIA's faculty member, Frank is co-founder and CEO of CoreConnex as well as a Finance Professor at the University of Washington's iSchool.  Frank has over 25 years of experience as a management consultant, business developer, and entrepreneur.  He has founded six companies, is a coach to dozens of start-ups, business turnaround specialist, and is currently CEO of Corelytics.  With that said, let's go ahead and turn things over to Frank.

Frank: Hey, Blythe, thanks a lot and good morning, everybody.  But I guess I really need to say good morning if you're on the West Coast.  And I'm sure we got some East Coast folks, so afternoon to you.  And we got a really fun topic here today.  Now, I know that most people would not absolutely bring your day to a screeching halt and say, "Let me stop all my business because I need to learn about balance sheets.

But, you know, I'm going to bet with you that after we spend this hour together, you're going to have some ideas about some things you can do in your business that actually are going to make you feel like that was the right decision.  So let's get started.  The thing that I would really like to focus on today is an area that a lot of entrepreneurs kind of skip over because it doesn’t feel like it's the thing that's front and center.

Every entrepreneur that I talk to is really dialed in to their P&L, their profit and loss statement or their income statement.  And that's where they spend their time.  They rarely even look at the balance sheet.  But, you know, when it matters is when they go to a bank and say, "You know, I need to borrow some money," and the bank says, "You know, your balance sheet doesn't look so good."

Well, that kind of brings everything to a halt. All of a sudden, the balance sheet takes on new meaning.  But what I'd like to do today is talk a little bit about the many ways that the balance sheet really does matter.  And some of the techniques for making sure that you really do show financial strength and some of it just how you manage your resources.  And it's not that you have to create a whole lot of new something but it's just managing them maybe a little differently.

We'll talk about some real data, some real examples, and some best practices.  We'll wrap up with a couple of ideas about how you might want to monitor your data and make sure that you're staying on top of that.  So with that as a start, let's make sure that we're all tuned in to what it means when we say financial strength.  I'll tell you, a lot of entrepreneurs, a lot of business people that I talk to think that financial strength is either profitability all by itself or it's how much cash they have in the bank.

That's kind of a ­– that is a way to look at it, but it's a little bit short of what really needs to be in the definition.  You have financial strength if you have the resources you need to run your normal business operations and really take routine hits.  Every business is going to see little ups and downs.  I've never seen a business especially in the IT space that doesn't have ups and downs.  When financial strength is adequate, you can just sail right through those ups and downs.

But when you get kind of the 100-year flood, as it were, or kind of that unusual spike up or down, they can take a business out.  I've seen companies that actuallyhave one, a very large contract, started spending money like crazy, doing everything they needed to do to take on that contract.  And all of a sudden they realize that they had spent a lot of money and had not received maybe even the first payment.

The next thing they knew, they could not afford to make that next payroll.  Disaster crept in.  But from an income statement, it looked like "Wow, we have got it made.  We got a great contract and a great business opportunity."  So what I would tell you is that being ready to absorb big peaks in values is very important.  Beyond that financial strength is really about even being able to weather a long-term storm like we've seen in the past few years as the economy itself turns out.

There's some people that didn't have a cushion, they didn't have a staying power, and that just took them out.  And then when you do decide you're going to make an investment in the company, if that's going to drain cash, there still needs to be enough leftover so that you can continue to absorb bumps; and then this whole notion of building for the future, and then this one that I'm going to talk about a couple of times along the way – positioning your company for a potential sale.

A lot of people that I talk to say, "Well, I may decide to sell my company in a few years or maybe ten years, but that's really not where I'm at today."  All I want to say at least at this moment is it's always a mistake to think that you don't need to be prepared to sell your company.  There's basic things that should be done on an ongoing basis.  If you wait until you know you're going to sell your company, it's usually too late to do adjustments that make the biggest difference.

So I really want to encourage anybody who is contemplating financial management of their company and the potential – the desire to build something that has value.  It is never too early to start that and it should be just part of your culture, part of your thought process every month.  We'll talk a little bit about some of the examples of why here in just a few minutes.

But hopefully you get the picture.  Financial strength is making sure that you've got the muscle to kind of take hits, take bumps, and come out strong; and you've got the ability to invest where you need to take advantage of opportunity.  So I'm going to drill into something here that may be a little bit of a mental stretch for you all.  So hang with me here because this is actually going to make a bunch more sense later on.

This is right out of my Masters Degree Program that I teach at the University of Washington.  I have lots of students that are executives in companies coming back for ongoing education for career advancement, all that good stuff.  Everybody who's ever had a business class or who just understands the fundamentals of business always come in with awareness that, on the balance sheet, assets always equal liabilities plus equity.  Everybody kind of knows that.

If you've got any basic accounting system whether it's QuickBooks or any of the Sage products, you've looked at your balance sheet and you always see a total for assets matching up with the total for liabilities and equity.  But here's the interesting thing, nobody teaches this.  When you get into an MBA program, they open another door which says, "You know what?  All of your short-term stuff – your short-term assets and your short-term liabilities – are equal to all of your long-term stuff – your long-term assets, long-term liabilities and equity."

If anything is happening down here on working capital or the short-term stuff, it's also happening in capitalization or your long-term stuff.  So this is actually a really interesting aspect of a balance sheet and a lot of people don't really quite realize that this is true.  And when you do though, it actually can open up some interesting doors.  For example, I see people all the time just say, "Well, I'm trying to manage my working capital.  I'm trying to make sure that I've got enough cushions." 


Working capital, I think you might all know this, but short-term assets minus short-term liabilities, that's pretty easy.  But working capital is something that you need to manage.  This is what banks will come in and look at immediately to decide whether you're creditworthy.  But whatever you're doing down here also has an equal and opposite effect down here in capitalization.  So for example if you're booking profits and beefing up your cash, all that's increasing your working capital because your short-term assets are going up, and your equity is going up.


So everything that happens on this top portion is always equal and opposite of what's going on in the bottom portion.  So as you know, if you add the short-term asset and your asset side is increasing, something is going to be going on over here that is going to reflect that.  With that in mind, let me jump to a couple of other concepts because the one thing that we got to keep a tab on is what are we doing to our working capital.

If we're doing stuff that is hurting our ability to have enough assets to pay off our liabilities, we are putting our company at risk.  And you obviously want to have positive working capital.  You want to have more short-term assets than you have short-term liabilities.  When you don't, you've got a company that is viewed as a risky company.  And short-term assets may be cash and receivables and inventory.  There's a variety of lesser things that are in that category, but that's the main pieces.

Your short-term liabilities are your bank debts and maybe some vendor payables and it could also some payroll that you have processed but you haven't actually made the payments on.  Those could wind up sitting as liabilities where they're waiting to actually get paid.  But in all cases, those short-term assets should be above short-term liabilities.  Now, we're going to dig into this a little bit more.  But hopefully this is kind of a little bit of a framework so that when we talk about this in the next few slides, you'll be comfortable with what is working capital and how does that play.

Now, I'm going to also tell you that working capital is really the measure.  It is the way to look at your financial strength.  The one thing we want to do over time is we want to know, is my working capital trending up or trending down?  And it's just like – let's say your revenues, they're going to spike up and down from time to time.  But over time, what are they doing?  Are they – is your working capital moving up or down?

Okay. And by the way, if working capital is going up, you also know that your capitalization is going up.  It's like – let's pick one of these, either side of it is going to work just fine.  Working capital is actually the one that the bank's going to look at first.  They still are going to be looking at your capitalization because they're going to want to know if you've got assets that they can use as collateral for a loan and they're going to want to know if you've built up equity in your company.

And if you haven't done those things, it's not only going to show up here, it's going to show up in your working capital.  They're going to be, as we've said, kind of mirror images of each other.  Okay.  So now let's say we got all the fundamentals totally sorted out, everybody completely gets it, by the way if you don't, don't be uncomfortable.  Don’t hesitate to send an email if you want to clarify any of that. 


So why does it matter?  We've kind of indicated already that it's kind of like an insurance against risk.  Having financial strength is like an insurance policy.  Something comes along, you didn't expect it.  But then that's really what number two is here.  It's the cushion for the unexpected.  And we've kind of hinted at this, but if you don't have enough then your company could hit a bump that it just cannot absorb. 

If you have to go out and get an emergency loan because you hit a bump that you didn't expect and now you need it, here's the R&E, the banks are less likely to give you money when you need it the most.  Have you had that experience?  I bet you that some of you have.  It's like, "Wow!  I'm running short on cash.  I better go down to the bank and see if I can get a loan." 

That's way too late.  I wrote a blog a couple of weeks ago, it's actually a month ago, about being prepared.  The one thing that I was trying to drive home is you need to go to the bank and get a line of credit when you do not need it, not when you need it.  They'll welcome you with open arms.  They'll be very accommodating when you go there when you don't need it.  And then you get everything done and you're ready. 

The storm hits and now you've got the cushion you need.  You have just done exactly the right thing for your business.  In that blog, I talk about kind of the old adage about the hole in the roof where somebody says, "Oh, it's sunny today.  I don't need to fix that roof because it's not leaking today.  So hey, no worries."  And then when it starts raining, it's like, "Wow!  I've got a problem.  I need to go fix it but I would get wet if I went up top to fix it.  So I'm just going to let it leak." 

A lot of people run their businesses just like that.  They do damage.  And if they do get a loan when they need it, or if they do go up and fix their roof when it's wet, a lot of times they slip off the roof, a lot of times they get really wet, it's miserable.  The other analogy is that it costs a lot especially if you're going to hire somebody to come out there and fix your roof in the rain on an emergency basis, you can expect to pay a lot.

And the very same thing happens when you're out borrowing from a bank.  So I'm just trying to drive this one point home.  Do your bank relations early and when you don't need them because this can be an expensive mistake if you wait.  You know what?  Now that I look at the rest of these bullets, they all – that's exactly what they say.  So let's consider this little piece covered.  It really does matter.  You need to be ahead of the curve.

So just to kind of back that up, there's really two big reasons why companies fail.  Over time, kind of really the number one reason is companies and owners, they just give up.  They get beat up.  They just can't take the heat in the kitchen.  But very close behind the number one reason is number two, which is companies will discover that people like what they do and they think they're being successful by growing their company.

They wake up one morning and find out, "Wow!  I've got good growth.  My revenues are going up.  I've got new customers in the pipeline.  But what's going on with my cash?  I can't keep up.  My cash account is gone.  I've used up my credit card.  My line of credit's all consumed, and I have nowhere to turn.  What is going on?  How can growth be bad?"  Growth can absolutely wipe out a company if there's a fundamental problem with their cost structure or with their pricing.


You don't see it until you start growing.  And the next thing you know, it just absolutely takes the legs off your company.  I have another webinar where we talk about managing cash and managing profitability.  But today we're going to just look at it in terms of how does all of that show up in your financial strength because you can see if you've got a problem just by looking at your financial strength.  We'll talk about how that works as part of today's discussion.


So let's jump to the five ways that you build financial strength.  And remember, let's think about this as building your working capital, which means building your short-term assets in relation to your short-term liabilities.  You want to get that short-term asset number to be higher.  And of course, one way to do that is to bring in profits and actually retain those profits.  Let me tell you, I see a lot of companies where the owner says, "I don't want to pay taxes twice so I'm not going to leave any profit in the company.  I'm going to drain it out and put it in my pocket and save taxes."


There's nothing wrong with doing that except if you take out too much or if you leave the company dry, it can be very, very damaging to your company.  Just as a little hint here, I'll tell you that if you leave the right amount of money in your company, the value of that money in your company can be several times more than the cash you left in, and it's way more valuable inside your company, when somebody looks at the financial health of your company, than it is by taking it out and avoiding taxes.


There's a longer discussion on that.  But I would urge don't be too quick to take everything out of the company because you're trying to minimize taxes.  A lot of accountants will advocate that, but they're not financial managers and they're not seeing the damage that you do to the company.  I'm really reluctant to take that kind of advice from accountants or bookkeepers who don't really see that bigger picture.


So watch for that by keeping money in the company, the right amount not everything, but keeping the right amount in, it actually helps you build financial strength.  And then of course there's a whole notion of equity financing which means you have maybe an angel investor.  You have somebody who decides they're going to come in and buy stock of your company and put dollars into it.  That's one way to build financial strength.  There's a whole big discussion around when to do that, when not to do it.  But that is one way to get money in and build strength.


Debt financing, meaning borrowing.  Usually that means from a bank or some other institutional lender.  Selling assets, now this only works – you only build financial strength when you sell assets if you're selling long-term assets to raise cash.  Not too many companies can do this very often, but I've seen situations where people have decided, "You know, we're going to sell one of our trucks because, number one, we can probably do without it, and we need to put that money to work for other purposes."


And they've immediately traded a long-term asset for a short-term asset which is their cash.  They pay off some short-term debts.  The next thing you know, their financial strength is looking really solid.  And then, kind of a wrap up, and this really kind of overlay these first four points, but making your working capital optimized.  And the way to do that of course is reducing your short-term debt and/or improving asset performance meaning building your short-term assets.


This is the combo.  All of these are like conceptual headings and then of course, every one of these, you've got to dive in to what's underneath it.  But these are the levers that you as a business owner or a financial manager need to care about in continuing to manage and oversee the asset strength or the financial strength of your company.


All right.  Let's dive into this just a little bit more.  And I'm going to make an assertion here.  First of all, I'm going to tell you that when you look at a trend line, you are seeing something way more important than what you see in a financial statement.  Now, this is something that I really pound the table about because a lot of people go in and look at their P&Ls and their balance sheets and they see the numbers, they see last year's numbers and this year's numbers, and they might say, "Well, you know, this year's numbers look a little better than last year so we're doing better, right?"


Not necessarily.  If the trend line, if the month-over-month, year-over-year trend line is going up but it's not going up enough relative to another trend line, you've really got a problem.  So I'm going to assume that you know that a trend line is really an important piece of analysis that every company should do and they should do it absolutely every month because this is what's going to tell you where you have problems in your company.  And you may not see those problems just by looking at financial statements.


And I guarantee you, you won't see them if you just look at conventional graphs.  A graph by itself shows all the ups and downs but it doesn’t show you the exact direction that you're heading.  So here's my point on this slide, your working capital should be gradually increasing over time.  Even though you're going to have ups and downs, the overall trend should be up.  There's times when it might be down, and I'm going to talk about cases where that's totally cool.


But there's another concept here, and it's called the target minimum.  The target minimum is going to change over time as your business grows or as maybe you just take on more debt, let's say.  There's a number of things that make this minimum grow.  But here's the idea.  Your working capital, which is assets minus liabilities, should be more than this target rate which we're going to ­– for a lot of industries we say that this ratio should be 1.5.  The way we look at this is it's 1.5 times your current liabilities minus current liabilities.


In other words, it's the same as your working capital calculation, but instead of current assets we're saying, "If my current assets were 1.5 times my liabilities, my target line and my working capital line will be identical."  Okay?  So current assets, 1.5 times current liabilities.  You want to be above 1.5 times your current liabilities with current assets.  And so we create this target minimum and we look at where your real working capital trend line is.  And if it's above, you're healthy.  If your working capital is below this target, it says that you're operating at less than 1.5 times your current liabilities, and that means you have less coverage than you really should have.


You start losing your ability to absorb shocks.  If your working capital line actually falls below zero on this dollar axis, then you don't have enough assets to cover your liabilities.  Now your company really is at risk on a day-to-day basis.  So hopefully, these numbers kind of make sense.  We got a little calculation going on down here.  I'm going to skip that for right now just because we need to sail through this.  But this is really an important thing to wrap your head around. 


For now, just know that you need to care about your working capital line and you need to worry about where is this target minimum.  You could argue maybe the target minimum ought to be 1.2.  I've heard people even argue, "Well, as long as you got more than 1, you're really okay."  But the only way I would agree with that is if their business had a revenue line that had no bumps.  Then I would say yeah.  Well, one time is okay.  But if you got any amount of bumps, you definitely need to be above 1 and 1.5 is a good solid industry standard.


There will be times when you're below this, no worries.  That's absolutely going to happen.  But over time, this trend line will tell you exactly what's going on.  All right.  So now that you've got that totally wired, let's look at a couple of cases here.  Here are three healthy scenarios.  These scenarios look at the one we just talked about.  This is just a really nice-looking situation where working capital is going up and it's above the target minimum.  I see no problems with that.  That looks really good.


Here is one where they're below the minimum or have been below the minimum, but they're working their way up and they're getting ready to cross that line or maybe they've just crossed it.  This is really a good sign.  And when you look at this line trending up, one thing you know is that this is, in spite of bumps and shocks, this is the underlying trend line so this is good.  Now, what's going on over here?

Here is a situation where the working capital on the right-hand side is going down and the target minimum is flat.  What do you think is going on here?  They're above the target minimum.  Well, we see a whole bunch of companies that are doing exactly this and they're good.  And the reason is, is they're investing.  So they're taking some of their assets.  They're investing it in training, in certification.  But they have the capacity to do it.  They're above their target minimum, maybe they're hiring some new people that aren't productive yet and so it's taking cash out and not replenishing it.


Well, that's good.  But if this line were intersecting, I would say, "You know what?  You're not in a position to make investments especially if they're not going to have a return quickly."  So this is a solid situation as long as it's being done intentionally.  So here again, staying above the minimum is the goal.  And understanding what healthy lines look like is really the thing we want to do.  Okay.  If that's what health look like, what does "unhealth" look like?


So here is the first one where the target minimum is above working capital and that's a problem.  What we’re seeing even in this picture is the target minimum is continuing to increase while working capital is below and it's not increasing.  Actually this is a ticking time bomb.  This company is going to be fine for a while but they're going to hit a brick wall and they're never going to know what really caused this to happen.  We do see this scenario all the time.  This is more like having bad cholesterol and not seeing the problem until all of a sudden it's too late to correct it. 


Here's a scenario that is probably going to be more visible to everybody, but obviously something's going on where it is not being corrected.  Here's working capital above the target and it's coming down and it's getting ready to cross.  In this situation, it's a combination of working capital coming down, not a whole lot, and the target minimum going up, maybe not a whole lot.  But man, when you put those two together, it's like one car going 30 miles in one direction and another one going 30 miles in another direction.  And when they hit, it's a 60-mile-an-hour collision.  That is really destructive where a 30-mile-an-hour collision might not be so bad.


It's the speed of these two lines coming together that is the killer in this story.  So really what this one is, is something's going on with this minimum to push it up.  It has to do with their short-term liabilities are climbing.  The thing that is deceptive is their short-term assets are probably also climbing, but not as fast.  That's why this line, from the outside observer it might look like, "Hey fine.  Our short-term assets look like they're increasing from month-to-month."  But when this red line is going up like that, your liabilities are increasing faster and a head-on collision is going to really be fatal.


Now, look at this one, overextended.  Here we have the target minimum not going up very much at all, but working capital is in a dive.  We see this kind of situation when companies, something's happened to them and their profitability is really failing them and they're not building their assets.  In fact, their current assets are shrinking.  This is a company that, when this line gets crossed, it's really a matter of time before they're going to have to shut the doors.  They're just not going to have any choice.


You can argue that well their business just isn't going well.  And what I would tell you is that's totally beside the point.  If you manage your balance sheet right, your business can be cut in half and you can still be healthy.  So don't ever blame these problems on the fact that well, your revenues are just falling and therefore your company is just not going to make it.  I've seen companies lose 80% of their revenue and actually even be healthier because all of a sudden they realize that, "Wow!  I've got to diet and exercise.  I got to do things to be healthy."


And at 20% of their old revenue, they were making more profit because they started paying attention.  These problems aren't just because revenues are coming down.  It's because there are some issues with prices, with cost structure.  It's the basics that are in the way.  So I hope this all really makes sense because if you feel comfortable with this piece, then there's much important stuff to talk about.  If you don't manage this stuff, the rest of it is not going to make a whole lot of sense.


So here's a company that I've been working with recently.  Their working capital line, this black line, used to be below 0 and it was below 0 for more than a year.  And then twelve months ago, they decided to start working, delivering IT services.  They decided to specialize in healthcare.  They did a couple of clinics.  They need a nice large outpatient facility.  And then actually their reputation got out there and they found a whole area where no other – even though there's tons of IT companies around in the Seattle area, these guys discovered a niche.


All of a sudden, man, they just jumped into it.  They got some big contracts.  And then here was kind of a funny process, they wound up getting big contracts and their spending went through the roof.  So their working capital, it did go way down because their cash got sucked out.  But even back here, as they started up this line, they got a good relationship with the bank and actually they also got a relationship with an outside investor, so they could bring in some cash, helped them make a serious jump.


They took a hit.  They brought in some borrowings.  They shot back up.  And all of a sudden these guys are really in a whole new place.  They're never going to go back to this old low curve again.  And the company is rocking.  So the whole idea of taking your company up a notch and moving to the next level is a fun thing to do.  But if you don't have the basics right, it actually can happen.  And for a long time, they never can figure out why they were stuck.


They couldn't get past – they couldn't get out their own way.  And it wasn't completely because they haven't specialized.  It was because they couldn’t invest in anything.  They were just constantly trying to squeeze out that next payroll, and that's all they could do.  So a few smart moves including getting focused and becoming specialized really took them to a whole new game – fun, fun story.


All right.  Okay.  These are wavy lines.  This is – high density of numbers here so just hold on for one second and we'll get out of this one.  But I want you to know that when you start drilling in and you look at your numbers and you really understand cash flow, this is so important.  Most companies are great with an income statement, not so good with a balance sheet but they'll make their way through it, but very few look at cash flow.


It turns out that what cash flow helps you do is understand all kinds of stuff about these trend lines.  So I'm not going to go into this in a whole lot of detail.  But this picture is actually exactly what was going on with this company.  And I would say that most business owners don't ever need to really understand this in a whole lot of detail, but they should have somebody in their circle – whether it's an advisor or a CFO – somebody who understands this and who can show them exactly how things are moving over time.


But what we're seeing here on this blue line, this is the long-term assets of the company – well actually the long-term assets minus liabilities, okay?  So this is the assets side of the picture, and the red line is the current side of the picture.  Remember, it's the top portion of the equal-and-opposite stuff.  But what we're doing is looking at current stuff without cash and then we'd pull out cash all by itself.


I don't know if you've followed me on this, but all your long-term stuff, all your short-term stuff without cash, and then just cash.  So this red line plus the green line is always equal to the blue line.  What you can see in this picture is cash is being created.  It's positive, it's above the line so that is really cool and you could see where they really generated a bunch of cash along the way.  But where did that cash go?  Well, it got soaked up by long-term stuff.


So they've been doing some investment and building their assets in all likelihood, and building equity, that's good stuff.  And then a bunch of it was used up by short-term stuff.  From a big picture point of view, it's really all about sources and uses of cash, and actually that's a part of the class that I hated the most until I finally heard what that meant and then I loved it.  But this is where cash is coming from and where it is going to.


All right.  Now let's kind of back up a little bit and think about why this stuff matters.  One of the things I try to encourage folks to do is to realize that there's a bunch of stuff that they can plan, but there's a bunch of stuff that they cannot plan.  What you always want to do is make your plan resistant or able to absorb the unplanned.  I wonder if that got through, if that made sense.  Make your plans be shock-proof.  Make them ready for the unplanned to happen.


Okay.  What might you be planning?  Well, you might be planning to expand.  You might be planning to acquire another company.  These are big heavy moves that a lot of companies are thinking about.  You got to get your ducks in a row.  There's a lot of reasons to do these things.  But the minute you start thinking about mergers, acquisitions, big expansion, you know what?  You have to care about your balance sheet.  You have to.


You have to know, is your balance sheet healthy?  And you need to do the calculations before you go see the bank or before you go to an investment banker who's going to help you with an acquisition.  You need to know, are there holes in your balance sheet?  Is your financial strength sagging?  If it is, you've got to fix that first because nobody is going to take a serious risk or nobody's going to want to work with a company that really has financial strength problems.


You're going to be doing your financial strength because of this kind of ideas, but you know, also manage your balance sheet as if you were going to all these stuff, even if you're not, because you want to be ready if anything happens out there.  There's just a ton of reasons to think ahead and make sure that your financial strength is rock solid all the time.  When you do, there is just nothing that's going to knock you off your feet.  You will be able to take opportunities when they come up.  And they will from time to time.


So as I'm going along here, if you see any questions or anything, please do jump.  I'm going to keep on moving, and we're right on target from a tiny point of view.  So what I'd like to do is reinforce the notion here called understanding your trends.  Again, this goes back to the conversation about you will never see the subtle differences going on in your company until you look at everything in terms of trend lines.


Everything has a trend line if you do the math.  A trend line, what is that?  There's some heavy-duty terms that you can talk about, you know predictive analytics.  You can talk about linear regressions and all kinds of other stuff.  But if you're the business owner, you don't really care about that jargon.  What you care about is that somebody can go off and compute a trend line for you.  They can show you what does your growth look like, what do your margins look like.


Hey, wait a minute, let's pause for a second.  Let me just tell you, if your revenue growth is going in the wrong direction relative to your margins, your company is going downhill and you can't know it unless you see the relationship between those two.  Well, that's really true for all of these.  I think you probably all remember this.  If your revenue growth is larger than your gross margin growth, what that means is all new business, all incremental business is actually generating less profit than your business used to.


If these trends lines aren't lined up right, they'll show you immediately that you're actually going downhill, in fact that your growth is hurting your company.  In a lot of cases, the right thing for a company to do is to not grow because growth is going to actually drive them into the ground.  So all of these have similar stories around them.  We were talking earlier about working capital, yes that's your financial strength.  If that's not growing at the same time your revenues are growing, you've got a problem. 


And what you should be able to do is to dig in to your company and say, "Yes, I have a company that is an operating business and it's got its bottom line.  But each of my lines of business, they also have a bottom line.  What if I have a line of business that is going down while my other lines of business are going up, what that means is I'm carrying some dead weight.  And maybe if I got rid of the bad one, I would be better off.  But at a minimum, if I've got a line of business that is dragging me down, I want to look at it, I want to watch it, I want to tune it, I want to fix it."


If you do that, the whole company benefits.  Here's a problem, a lot of companies do not know line of business performance.  When they don't, they see that they've got some kind of problem with profitability or costs are growing faster than revenues.  As they say, "I've got to change something."  Very often, I'll tell you, it's a high percentage, it's way over half, will go in and change the wrong thing.  They'll fix an overhead when the problem has to do with costs.  They'll fix one line of business when it's the other one that is creating the problem.  And they'll invest in the one that's not doing well when they­ could have with that same investment to work than the one that is doing great, and they would be doing fabulous.


They just have no way of zooming in and understanding their business from a line of business perspective.  Every one of these areas have trend lines.  I would urge you to be thinking about how do you look at your trend lines every single month and make sure that they're working together.  They're working in harmony.  They're working in concert.  They're not fighting each other, and they're not going to crash into each other.


If you discover the problem after the crash, it's going to cost you many times more than if you see the problem ahead of time because trend lines are going to point in the right direction.  When we were back there looking at these lines here for working capital, if we're back here in this moving-to-the-edge scenario and we can watch our working capital come down and our minimum going up but we haven't crossed yet, man that's the right time to make a change.


You can do that because trend lines are going to tell you that you got a problem coming.  Typical financial statements will never show you that.  So I just wanted to make that one little departure.  Make sure that trend lines really make sense.  One thing that I have increasingly encouraged companies to do is to get a coach or get an advisor.  It's not because that advisor is necessarily going to know the answers for them, but it's somebody that can help them pay attention to the questions, keeping the issues on the table, keeping focus on the issues, and making sure that something is being done to address them.  It makes a huge difference.


And, by the way, there's a ton of really good advisors all over the IT services community.  You don't have to spend a lot of money to have an advisor play a very small but very important role with your company every month.  And maybe they'd just spend an hour a month.  In fact, we've been helping a whole bunch of advisors get connected with IT solution providers.


We have a list of advisors that we’ve developed that really want to do this kind of work, and they're great at it.  If you just use them for a small amount per month, that's really all that's necessary and it can make a big, big difference.  So here's the story, you would never see a professional athlete pursue their athletic career and not have a coach.  It just doesn't happen.  It's not because the coach can do a better job than the athlete.


It's not that at all.  It's because the coach keeps reminding them about the stuff they need to keep front and center.  It's an accountability strategy for the business owner and for the top team.  I just can't emphasize that enough.  If anybody wants a coach out there, I can certainly provide you some pointers to get to some people that are just absolutely excellent at doing that sort of thing. 


Here is a quick shot at the ­CompTIA Financial Dashboard powered by Corelytics.  We've got a bunch of folks in CompTIA that are using this dashboard continuously.  They're able to see things like here's your revenue.  Something's going on here.  We've got a problem. The light comes on, it's red.  And of course the reason it's red is because I'm not hitting my goal.  My expenses are orange in this case because I'm close but I'm not really quite ready to be –


I can relax on receivables cash and gross margin because those look like they're all in the right place where I'm hitting my goals with those.  So this is just some of what you would see in that dashboard.  The cool thing is ­CompTIA has underwritten that dashboard so that all of CompTIA's members can get this for about half the price that you would pay if you were just buying it on their retail price.


This is a tool that shows you all your trend lines.  I'm not going to dive into all of the pieces here.  But it's all about trends.  It's all about goals and comparing yourself to your peers.  It does forecasting and ratios and various other metrics.  It's certainly looking at things like contributions.  So when you look at the staff section here, it's talking about how are your revenues per staff looking, how are your profits per staff, how is your payroll, et cetera, looking on a per head count basis.  Those are really important metrics to watch over time.


Dashboarding is really the thing that a lot of companies are doing now.  One thing that I think is really critical is as we come out of this recent economic downturn and as technology continues to come down in price and increase in function, it's just a big headbutt that's going on.  All of these forces are kind of coming together.  It winds up putting a squeeze play on companies.  If you don't have a way to watch your business with precision, that squeeze play is going to do serious damage. 


In the future, it's going to be more and more important to drive with precision.  It's not enough to just do kind of put your thumb in the air and say which way is the wind blowing and make adjustments that way.  That's kind of the old way and it used to work.  But going forward, it's going to work less and less.  You really want to have the ability to dive into the details once you know where you may have a problem.  These are a bunch of the things that that CompTIA dashboard can do for you.


The whole idea here is to look at those trend lines, look at your plan versus actual, set directions so decide where do you want to go, and then the big thing is unveil the secret.  Make sure your team knows and make sure the team gets to see where those lines are at, where you want them to go, and where they are going.  The minute you do that, your team can say, "Aha!  I see where the gap is."  And then you're going to be asking the team, "Help me figure out what we do to close these gaps."


This is something that when you let the team help you do it, they will take ownership and you'll have a much better outcome than if you, the business owner, comes to them and says, "Here's the gap.  Here's what you need to do to fix it.  Get busy."  There is zero sense of ownership in that scenario and I rarely see that strategy work.  Even when the owner knows the answer, it's like take the picture.  Show them the trends.  Show them the gap between where you want to be and where you are.


And say, "Guys, what would you do to fix this?  How can we fix this?"   When they tell you, they will be the ones who own it and actually deliver it.  It's really quite cool.  There's a couple of little things we're promoting here.  If anybody wants to take a look at a financial strength analysis, we're happy to do a one-time shot for folks.  It's a great way to learn about what it means to look at trends and understand the dashboard.  And we're happy to help you do that.  But let me ask Blyth, have you seen any show-stopper questions coming in?


Blythe:  No, we don't have any questions yet.  If anybody does have questions, please enter them in the Q&A panel.  That's on the far right-hand side of the screen, and we'll get to them now.  This is probably a good time to stop for questions.  So if you have any questions, please put them in there.


Frank:  So you know, there are really one or two reasons why there's no questions.  It's either because it was so clearly explained, or it's like, "What in the heck is that guy talking about?"  But I'm going to assume it's got to be the first, right?  And if anybody wants to shoot out a comment or a question, I am definitely reachable by email.  I urge you to go to and be the proud owner of your own trend lines.  This is an email address that will get me if I can provide any help.


Blythe:  And we're just about ten minutes from that time.  So if nobody really has any questions or if maybe they're still pending on Frank's information that's here on the slide.  So if have any questions for him that might top up later, maybe check down his email and he's a great resource to reach out to.  So please track that down.


I also wanted to remind everybody of our upcoming event coming in July.  CompTIA'a annual conference has been rebranded.  It's CompTIA ChannelCon.  You may have remember it, a breakaway from last year and your staff.  So please take a look at the agenda.  It's a pretty solid, educational event as well as a free networking event.  And that takes place July 29th until 31st in Orlando.  And that is at the Peabody Hotel.  If you're interested in signing up for that, please go to or you can just go to and you can somehow cross that pretty easily.  We've got the ads up for it.


Also, we encourage you to register for some upcoming webinars that are being brought to you from CompTIA.  The next one is April 18th, Resources to Help You Build a Better Channel; and April 24th, Opportunities for IT Solution Providers in the Digital Signage Market, and that's one of our newer ones.  So definitely if that's a space that you're interested, I encourage everyone to register for that.


But it's just about two o'clock Central time.  We're going to wrap up.  Thank you everyone so much for attending today.  You will see a survey pop up when close out please fill that out.  That really helps drive the programs that we continue to do or needs developed.  We take your feedback really seriously.  Thanks again, everybody, for joining today.  Thank you, Frank, for a great presentation.  We'll see you and talk to you soon hopefully.  Take care, everybody.


The importance of the complete system for an IT business

by James Kernan

As technology experts, we understand that in order to maximize performance of a system, you can’t focus just at one aspect, whether RAM, IO performance, or connection speed because the weakest link will draw the whole system down.

Similarly, in your business the whole system needs to be tuned to maximize your profitability.  Finding leaks, blockages and failures is essential to any system which is why a periodic 360degree look at your company is essential. 

My clients inevitably improve when we evaluate all of the following aspects of the business and find their weakest link

  • Strategic Planning
  • Leadership
  • Team Culture
  • Financial Operations
  • Bottom line
  • Productivity
  • Sales Performance Review
  • Marketing
  • Customer Service

I have some easy ways to get an almost immediate view of where you stand based on your financial performance. I’m happy to help get you a report to start the conversation and begin whittling away at your problem areas over time using reports that are owner-driven (no financial expertise required). 

Servicecorps Success Story

We have worked with Kernan Consulting for the past three years.  Servicorps has doubled our revenues and increased our net income over 400% since 2011.   During that timeframe they have helped us with everything from strategic planning, recruiting, sales, marketing and financial operations.   They even helped us with an acquisition of another MSP this past year. 

We hold two monthly planning and review meetings.  With the use of the Corelytics dashboards it is easier to track our progress and stay on top of the numbers.  We are also members of The HALO-Network which provides project management and outsourced resources as needed as well.   These services helped us win business that we normally would not of been able to support

-Lee Morgan of Servicorps Systems

Growing Value, Building Strength

A company that is growing and that has positive working capital over time is automatically a valuable company.

Trend lines cannot be faked and tell a clear and succinct story that is well understood by most investors and lenders.

Fundamental business problems cannot hide and you can’t fix a trend problem overnight. It takes 12 to 24 months to establish healthy trend lines,

Even more if you can forecast where you are headed, you are way ahead of the game.

With the right business advisor, you can speed your way to recovery and the benefits can far outweigh the cost.

Checklist for Success

Have you ever heard the saying “If you fail to plan, you plan to fail”?   All great businesses start with a plan that is why we address that right from the very beginning.  Our team will help you the following:

  1. Create your Vision and Plan
  2. Set your Goals
  3. Create your Go-To-Market Plan
  4. Hire the Right People
  5. Create a Culture of Success
  6. Monitor their Performance

As the leader in your business you must create a monthly habit of keeping on top of your weaknesses and evaluating your strengths.  It can take an hour or less each month with the right advisor.

Tips for working with a Consultant/Advisor

Choose any consultant, accountant, or bookkeeper for more than just tracking your numbers.  Find someone who can identify issues, help you discuss trends and even listen while you talk through some options for adjusting course. 

Then get into a regular cadence:

  • TALK monthly, even if just by phone.  Ask your advisor to identify areas of concern ahead of the meeting so that you can focus on setting priorities for your team.
  • FOCUS on only 2-3 top issues per month.  Work on areas that will have the biggest yield first!
  • SHARE with your team. Get them involved in defining solutions. They are the key to achieving needed results.

Ask for a free personal financial assessment and/or report so you can see where you stand.

They’ll then provide you with the understanding of your top issues so you can work to solve them and track your goals in that direction. Find an advisor to give you a financial assessment and help your business stay on track.

Keeping your Company on Track

There is one consistent characteristic of all of the successful companies I’ve worked with.  They have made a habit, a rhythm of keeping their company on track before it’s too late. 

Advice I share with my clients are practical, but like a good workout, it’s often difficult without someone to hold you accountable.

  • Find a quiet place OUTSIDE of your office to work on this. Don’t allow interruptions.
  • Find a system to help inform you of your trends*
  • Re-evaluate what IS and IS NOT working and profitable; a key part of being successful is knowing what NOT to do as much as what TO do.
  • Stay connected to a Peer Group to help you see opportunities and problem areas, as well as to provide support.
  • Document new benchmarks (objectives or goals).
  • Keep track on your scorecard and complete on a semi-regular basis

*Trends are more important than absolute numbers.  My clients always ask me whether their revenue, ratios and inventory are “good” or “bad”.  I respond, “Well, are those numbers improving or getting worse over time?”

Don’t forget to share with your team!  Involve your employees; they will work harder to accomplish your vision if they feel they are part of it and buy into the plan. With a participative style of management, you encourage every key employee to contribute and make them feel a part of your plan and vision. If you dictate the plan to them, they will be more inclined to fail because it wasn’t their idea. Give them a company presentation – and – a simplified view of your Business Plan and recent performance so they can help you solve issues and improve.

Consistency is critical.
Accountability is essential.


Working Capital & Financial Strength

A Money Matters Paper, part of a series
by Ed Patton, Patton & Associates with Corelytics

Working capital is short term assets minus short term liabilities. It’s a key measure of your financial strength.

Creation or consumption of working capital should be tracked and understood just as you do with sales, expenses and net earnings.

Remember that working capital components turn relatively quickly.  Therefore, the working capital you create today will soon turn into the cash you have to run your business.   Also, remember that a standard working capital line of credit can monetize your current assets when cash is needed prior to Accounts Receivable being collected and/or Inventories being sold.

When working capital runs low, an unexpected bump in the road can be disastrous. Building a durable company requires working capital to be maintained at strong levels so you can absorb bumps.

A lot has to go right to increase cash. But any one thing can go wrong and your cash supply will dwindle. Sales have to be made, cash must be collected, spending must be controlled, and with a little luck you will have an increase in cash. And if that’s not enough, you can borrow money or sell assets to generate needed cash.

Track Your Working Capital Growth

There are many ways to make it all work, but any one of these parts can also trip you up. Making the right choices, turning the right dials and keeping everything in balance is a basic requirement of business management.

A company that is growing and that has a positive working capital trend line relative to the target trend line is automatically a valuable company. This shows that the engines are firing on all cylinder sand that the fundamentals are there. Investors will see value.

Trend lines cannot be faked and tell a clear and succinct story that is well understood by most investors and lenders.

Fundamental business problems cannot hide and you can’t fix a trend problem overnight. It takes 12 to 24 months to establish healthy trend lines,

 If you have the right business advisor, you can speed your way to recovery and the benefits can far outweigh the cost.

An ideal working capital position for most companies is when current assets are equal to one and one-half to two times short term liabilities. That means, short term assets need to be 1.5 to 2 times the total of short term liabilities.

As a company grows, the non-P&L items that generate or consume cash increases.  These items include capital expenditures, loan and equity activities, and working capital changes.  With traditional reports, these added financial activities complicate the evaluation of cash flow (re, changes in cash).

A brief cash flow statement that categorizes these items into a common sense, business-friendly format provides insight as to whether or not your business is creating (or consuming) financial strength and shareholder value.  Without such a simple tool, you can miss important information about your historical results and impact of planned changes.

What is the Right Working Capital Level?

1½ - 2x CURRENT Liabilities.

The next question is where is the working capital trend line heading? If capital is heading down while revenues are increasing, there is a danger that the company has fundamental problems where growth is damaging to the company. If working capital is growing as revenue increases there is a high probability that the company is healthy and will strengthen with growth.

Generally, an increase in working capital equates to building financial strength. But even a financially strong company can have liquidity problems. A well-managed line of credit can make all the difference as it will allow you to monetize your uncollected receivables and inventories on the shelf. This type of borrowing can be a solution to a cash shortage and it can be a way to help a company absorb bumps in the road. But when short term debt exceeds short term assets or when it is heading in that direction, it’s time for alarm bells. Once you get on this slippery slope it can become impossible to dig out.

A working capital target needs to be set for a company and then actual working capital should be monitored against the target every month. A good standard for most companies is a working capital target equal to one and one-half to twice the company’s short term debt. From here you can create 2 trend lines: one for the target working capital and one for actual working capital. Then the goal is to make sure that the working capital trend line is above the target trend line and there should be a growing spread between the two trend lines as a company grows and builds financial strength. If the two trend lines are coming together or if the working capital trend line is below the target trend line, the business needs a careful examination. Something is keeping the business from building financial strength. All of this is a careful balancing act. And the starting point is with the working capital trend line.


The Patton Common Sense Cash Flow Statement™ generates unique, succinct insightful financial information that has not historically been available. 

Corelytics and Ed Patton have teamed up to provide a dashboard version of the unique and important information provided by the Patton Common Sense Cash Flow Statement™.


Mr. Patton is a thought-leader in financial reporting and has developed the Common Sense
Financial Method™ which provides unique insights into Cash Flow, Financial Strength, Liquidity, Shareholder Values and Banking Options.  This flyer is an introduction into the CSFM’s Financial Strength component.

Corelytics is developing a dashboard application to track your working capital and to compare your current ratio to a pre-determined target ratio.

This important metric will help you see if your business is building or consuming financial strength.