Thursday, June 25, 2015

Your Company's Burn Rate - Budget And Capitalize Successfully

It may well take money to make money, but it requires intelligence and vigilance not to lose it. Too many entrepreneurial enterprises and crowdfunded projects suffer from the initial "high" of newly-found capital, and spend quickly and unwisely. Having a detailed budget at the outset -- a budget that incorporates your enterprise's "Burn Rate" of capital per month -- is essential to enable your business to survive and thrive.

As a word (in advance) of advice, establish a realistic application of proceeds and a month-to-month budget prior to seeking any infusion of capital. For the well-being of your company, strategic and tactical budgeting are disciplinary tools to keep your company in proper operating condition.

The burn rate is that amount of funds which your company must spend per month (i.e., necessary fixed costs, without any allowance made for revenues -- a "zero revenue" assumption) in order to continue its operations.

Be certain that while you are calculating your monthly burn rate that you do not include sunk costs relating to pet projects. Sunk costs are those costs which tend to relate to pet projects which are being treated as investments, but which are really cases of "throwing good money after bad". Don't make a provision for sunk costs -- simply identify them and stop incurring them by accepting (although this may be difficult emotionally) that they are merely an accumulation of waste -- stop feeding failed projects and cut your losses as early in your company's evolution as is possible.

After you've calculated your monthly capital burn rate, divide it into the amount of available capital (cash from investors, credit lines and from accumulated earnings) and the result produced will be the number of months that your company can sustain itself without generating any revenues. This computation yields your company's estimated lifespan if it were to generate no revenues.

Before commencing any negotiations for capital (through debt, equity, or otherwise), know your company's anticipated burn rate and multiply it by the number of months forecasted to be required prior to your company's initiating an adequate contribution margin (this latter number can be obtained by taking your company's price per unit sold, reducing that number by direct variable costs [such as direct labor and direct materials, as applicable] and multiplying that result by the number of units sold in a month) and you will have produced a conservative estimate of how much capital your company will require to sustain its existence until the contribution margin is fully adequate to cover the burn rate amount.

Some other important considerations and distinctions about your company's capital burn rate:

1) Gross burn rate is the total amount of money you are spending per month. Net burn rate is the amount of money you are losing per month. So if your costs are $500,000 per month and you have $350,000 per month in revenue then your net burn (500-350) is equal to $150,000. The reason that most investors quickly zero in on net burn is that if you have $3 million in your bank account and have a net burn of $150,000 per month you have more than 18 months of cash left provided your net burn stays constant. Conversely if you’re burning $600,000 per month (yes, some companies do) then you only have 5 months of cash left.

2) The answer is more complex than just Gross Burn Rate vs. Net Burn Rate. There may well be a trade-off between growth & profits.

Gross margin (GM) is the amount of profit you make per sale of your product or service taking into account your total costs of selling that product or service. If you have a very low gross margin (10-30%) it can be very hard to build a large, scalable business because you need to make a lot of sales to cover your operating costs.

Some industries work well with players who have low gross margins but these tend to be industries with very large, well established players and hard for new entrants to compete. In startup world low GM almost always equals death which is why many Internet retailers have failed or are failing (many operated at 35% gross margins).

Many software companies have > 80% gross margins which is why they are more valuable than say traditional retailers or consumer product companies. But software companies often take longer to scale top-line revenue than retailers so it takes a while to cover your nut. It’s why some journalists enthusiastically declare, “Company X is doing $20 million in revenue” (when said company might be just selling somebody else’s physical product) and think that is necessarily good while in fact that might be much worse than a company doing $5 million in sales (but who might be selling software whose sales are extremely profitable).

3)  In doing your burn rate calculations, it may well be advisable to add a percentage-based "contingency" or "reserve" factor to the base burn rate. I typically take the burn rate as it is calculated, and multiply it by a factor of 1.10, which represents a contingency or reserve factor of 10%. While the burn rate will appear slightly higher, it is reasonable and responsible to provide for contingencies. If these surplus funds are not needed, they can be allowed to accumulate as cash or in some other liquid investment to be used when as and if necessary. I advise you to err on the side of caution.

Every fiscally responsible entrepreneur or executive should know his or her company's burn rate; further the burn rate should be recalculated every several months using a zero-based budgeting approach. This is because fixed cost structures and amounts expended per month do (despite their name) tend to change in a sort of stepped function at certain critical levels of revenue production.

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Douglas Castle

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Sunday, June 21, 2015

Joint Ventures : Keys To Accelerated Business Growth

Well-assembled synergistic Joint Ventures can truly be the key to accelerated growth and success for companies wishing to build rapidly without having to raise or expend large sums of capital through the conventional equity and debt fundraising approaches. Joint ventures are also a wonderful way of rapidly expanding profitability without sacrificing equity or operational control of your business. But what, exactly is a joint venture, and what is unique about its structure?

A joint venture (“JV”) is a special business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. Because of its specificity, a JV is quite different from a full-scale general partnership. Joint ventures can be domestic or international -- in the current economy, international joint ventures are becoming increasingly popular. It is also becoming more the norm for a company to have multiple joint venture arrangements with providers of different abilities or resources.

However similar to a general business partnership which involves a broad business undertaking and a much greater level of involvement and intimacy between the parties involved (a partnership is a monogamous marriage while a JV is a more highly-targeted and limited relationship in terms of both its parties and its activities), the venture is its own entity, separate and apart from the participants’ other business interests.

Although JVs represent an intelligent way to pool capital and expertise and reduce the exposure of risk to all parties involved, they do present some unique challenges as well. For instance, if party A comes up with an idea that allows the JV to flourish, what portion of the profits does party A get? Does the party simply receive a portion based on the original investment pool or is there recognition of the party’s contribution above and beyond the initial stake?

A joint venture arrangement and the agreement which defines and documents the contributions, obligations, rewards and sharing of revenues (not a sharing of profits, as in a full general partnership) by and among the parties requires a careful vetting of the participants, a great deal of initial dialogue between or amongst them and some negotiation of the fine but crucial details of the intended relationship’s purposes and limitations.

One of the most unique aspects of joint ventures aside from their inherent allowance for creativity in structure, is that they can exchange valuable services in lieu of exchanging or investing cash capital. For example, in a joint venture between a startup company and a well-established, larger enterprise, the startup company may benefit by having the administrative, operational and back office capability of its more mature counterpart [and the startup is able to make use of these capabilities without having to capitalize itself with external funds and incur the fixed and recurring costs associated with running its operations].

In the arrangement described in the previous paragraph, the established company may be adding to its potential profitability (and perhaps product or service diversity) by leveraging its existing fixed costs -- this represents growth without incurring additional fixed or variable costs. This increase in operating leverage (or the deeper exploitation of recurring fixed costs endemic to operating a large-scale established business) benefits both companies which are the parties to the joint venture.

In another type of case, a company which may wish to expand the market for its products or services overseas may choose to enter into a joint venture with an overseas company having well-established market distribution channels in that target country in order to increase sales and diversify its customer market base. The first company manufactures and distributes its products domestically, but it expands its markets and market share by entering into a series of international joint ventures with established distribution partners in each of the countries into which it wants to gain access.

In yet another case, a company which is extremely proficient at marketing and which also has a large captive customer base may choose to enhance and increase its supply chain efficiency by having its goods manufactured through a joint venture with an overseas plant that is a skilled manufacturer with a well-established logistic delivery and support system. In this example, the joint venture is just a more intimate means of outsourcing.

A joint venture arrangement and the agreement which defines and documents the contributions, obligations, rewards and sharing of revenues (not a sharing of profits, as in a full general partnership) by and among the parties requires a careful vetting of the participants, a great deal of initial dialogue between or amongst them and some negotiation of the fine but crucial details of the intended relationship’s purposes and limitations.

A well-organized and expert management consulting firm not only locates, pre-qualifies and engages in the selection of a possible joint venture candidates for your specific project and your specific need, but actively participates in intermediating and moderating the dialogue, the negotiation process (as your representative or limited agent) and drawing up [subject to full review by the Client’s legal counsel and tax experts] a list of items to be included in the joint venture agreement.

Your management consulting firm has an ongoing maintenance and monitoring responsibility after the deal has been signed and the operation of the joint venture put into motion by intermediating, as required, between or among the parties to the joint venture or ventures.

In many cases, these special observation and communication activities are ultimately responsible for the success of the joint venture, the accomplishment of its specified mission, and the tone of the working relationship between the parties, which may be from varied countries with varied cultures and customs. Your consultant may even need to provide translators and interpreters as required in order to be certain that there is never a misunderstanding or breakdown in clear communications between multicultural parties to an international joint venture arrangement.

A well-conceived joint venture with the right participants and terms of relationship is the ideal way to accelerate growth and bolster profitability while allowing each participant to simply continue to do that which it does best (i.e., continued specialization and the efficiency that emanates from specialization) and to leverage that particular strength. It also saves each venturer from the potentially costly trial and error process of developing all of the necessary capabilities for success in-house. And most importantly, a joint venture allows for each of the participants to continue to operate in relative autonomy.

As the capital markets continue to remain strained and volatile, and as international consumerism and contracting are on the rise, you and your company may expect to see a great deal more activity in terms of joint venture formation than in the investment banking and venture capital sectors.

Douglas E. Castle for GEI and The Global Edge International Blog

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Friday, June 12, 2015

Management Consulting: Choosing The Right Firm -

Most companies at any stage of their growth (or even in the event of their decline) can be benefited substantially by retaining the services of the right management consulting firm. Management consulting firms are, generally speaking, in the practice of advising and assisting businesses to improve their performance in any given set of circumstances.

Consultancies operate primarily through an analysis of a client company's situation; the application of experience and expertise in formulating a tactical or strategic plan for improving the status quo; and, by proactively overseeing the implementation of the proposed plan of action until the desired result is obtained. It is in this last aspect of a typical management consulting engagement where even the most notable and established consulting firms tend to fall short.

Consultancies may provide organizational change management assistance, development of coaching skills, process analysis, technology implementation, strategy development, financing, marketing and branding, merger and acquisition or operational improvement services. Management consultants often bring their own proprietary methodologies or frameworks to guide the identification of problems and to serve as the basis for recommendations for more effective or efficient ways of performing work tasks.

In choosing the right management consulting firm, the following factors must be given serious consideration: objectivity, expertise, experience, problem-solving orientation, scalability of solutions, client-centric focus and affordability. In considering all of these factors, you may well find that some of the older, larger management consulting firms may not be the ideal match for your company's needs.

In an ideal client-consultant relationship, the client and the consultant can both gauge the return on the consulting investment (the “Consulting ROI”) by dividing the incremental improvement (produced by the implementation of the consultant's advice and efforts) by the total billings of the engagement. The greater this return, the more successful the engagement.

In making this evaluation, it should be borne in mind that the client's cooperation is an integral component of any successful engagement – and further, that the consultant can only hope to exert limited control over the client's compliance.

Returning to the factors for selection of a management consulting firm as set forth earlier, we should take a closer look at each factor, the reasons for its significance, and how to get a preliminary “reading” on whether or not your prospective selection has the necessary attributes to warrant your serious consideration:

When retaining the services of a management consulting firm, be certain to choose one that will view your company objectively (i.e., a firm which: has no ties to any of management or employees; a firm which is not too narrowly specialized in your vertical or technical industry; and a firm which does not have a conflict of interest where it may be doing work for one of your direct or prospective competitors).

Look for expertise (among the resumes of the management consulting firm's personnel) in the areas where you believe that your company needs to focus. Don't look for narrow technical expertise – look for expertise in the areas of business discipline where your firm may need shoring up, such as marketing, branding, manufacturing, strategic planning, financial restructuring, strategic planning, dispute resolution, team-building, risk management, etc. Business is business, whether it is nanotechnology or fertilizer packaging.

While expertise is quite important, there can be no substitute for experience in the various business disciplines – especially if that experience centers around a particular area of expertise across a broad spectrum of industry sectors. Some of the best small- to medium-sized management consulting firms are comprised of a group of experts (in different business disciplines) who are well-seasoned with the wisdom that only experience can confer.

Problem-Solving Orientation:
When requesting the services of a management consulting firm, your company is generally not looking for an academic or operational study – your company, as most, is usually looking for pragmatic, real-world solutions to suspected or known problems. Your company is seeking actionable findings. If your choice of management consulting firm is wrong, you will wind up with a tremendous amount of information, usually beautifully bound and presented. But is the information focused on solving problems? Is the information instructive and directly actionable? Most of all, will the firm that you select assist you directly in the implementation of its suggested course of action? Most firms fall short when it comes to distilling their information into a tightly-focused, streamlined actionable agenda, just as they are prone to fall short when it comes to “hands-on” assistance in the implementation phase.

Scalability Of Solutions:
Solutions to problems encountered by your company must be accommodating of your company's size of operation. If the solutions presented by your selected management consulting firm are based upon a framework and assumptions that are too large or too small for the existing size of your business, they can be more harmful than helpful. Scalability of solutions, i.e., suggestions and plans to fit the present size and immediate needs of your firm, is a critical component of a successful consulting engagement. Oftentimes, a large management consulting firm paired with a young, growing company makes for a poor match where scalability of solutions is concerned. As an added note, scalability is as essential to realistic implementation as realistic implementation is to a successful outcome. When it comes to management consulting firms and to proposed courses of action, one size does not fit all.

Client-Centric Focus:
If the management consulting firm that you are contemplating engaging spends more time touting its own accomplishments and reputation than examining your needs, consider this to be a negative indicator. While an allowance must be made for a certain amount of salesmanship, a client-centric management consulting firm will inundate you with requests for information and question you extensively.Then, they will make careful note of your information and answers and reiterate or paraphrase them to you, just to be certain that they understand your needs so that they may sculpt them into the scope of your engagement. A firm that does far more talking than listening and observing is probably not client-centric. For those of us who are professionals in management consulting there are three understood rules: 1) know your client; 2) understand exactly what your client would like for you to focus on; and 3) be certain that the scope of your engagement is built around your prospective client company's needs and objectives.

Cheaper is not necessarily better or worse. Your company must be realistic when it comes to its budget for consulting, and be fully candid with any prospective candidate management consulting firm about budgetary constraints, as well as time constraints. While some of the largest consulting firms may be very inflexible in terms of their hourly rates and demands upon your limited budget, some of the more contemporary small- to middle-sized consultancies may be willing to defer a portion of their billings and/or take part of their compensation on a contingent basis geared to the occurrence of some successful event.

If a consulting firm just seems too expensive for your budget, and they cannot work with you in terms of pricing, you may well be speaking to the wrong management consulting firm. In the current economy, management consulting firms need to be creative when it comes to their pricing if they wish to remain in business. After all, management consulting is a business just as manufacturing or retailing. Businesses must be more flexible and creative in a difficult economy or when faced with a client base having special budgetary needs.

As of June 1st, 2015, some of the better-known management consulting firms having a presence in the United States or the United Kingdom (according to Wikipedia) included the following [the author of this article does not necessarily endorse these firms, the list is not exhaustive, and the firms are merely listed in alphabetical order]:

  ABeam,  A.T. Kearney,  Accenture,  A&G Management Consulting,  AlixPartners,  Altran,  Arthur D. Little,  Avasant,  Avascent,  Bain & Company,  BDO Consulting,  Bearingpoint,  Berkeley Research Group, LLC,  Booz Allen Hamilton,  Boston Consulting Group,  Capco,  Capgemini Consulting,  CGI,  Cognizant Technology Solutions,  Collinson Grant,  Computer Sciences Corporation,  Corporate Executive Board,  Deloitte Consulting,  Detica,  Elix-IRR,  Ernst & Young,  FTI Consulting,  Grant Thornton,  Hay Group,  HCL Axon,  Hewitt Associates,  Hitachi Consulting,  Horváth & Partners,  HP Enterprise Services,  Huron Consulting Group,  IBM Global Business Services,  Ikon Marketing Consultants,  Imdad logistics,  IPL Information Processing Limited,  ITN Consulting,  KPMG,  Kurt Salmon,  L.E.K. Consulting,  Logica,  Marsh & McLennan Companies,  Matrix Knowledge Group,  McGladrey,  McKinsey & Company,  Mercer (consulting firm),  Mitchell Madison Group,  Monitor Group,  Mott MacDonald,  Navigant Consulting,  Oliver Wyman,  PA Consulting Group,  PricewaterhouseCoopers,  Protiviti,  PRTM,  Qedis Consulting Ltd,  QualPro,  Rambøll Management,  Roland Berger Strategy Consultants,  The Saint Consulting Group,  Sapient,  Schlumberger Business Consulting,  SDG Group,  Simon-Kucher & Partners,  Slalom Consulting,  SM&A,  Strategy& (formerly Booz & Company),  Tata Consultancy Services,  Tefen,  The Burke Group,  Towers Watson,  TQMI Ltd,  Walter Rhodes,  West Monroe Partners,  WS Atkins PLC

Many of the above-listed management consulting firms are very specialized in the nature of the services that they provide. Many tend to be centered around accounting, IT, research, financial analysis and other vertical areas of expertise. While this may be seen as positive (and may actually be desirable in certain cases), much can be said in favor of multi-specialty firms, especially if your company is a relatively young or rapidly-growing enterprise. By and large, diversification of expertise is generally a positive in management consulting companies which serve a client base of young entrepreneurial enterprises and small- to middle market-sized firms.

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