So You Want to Start a Business?

Aside from my stint in the military (6 years, 2 months and 15 days to be exact), I’ve had the good fortune of being involved with both early-stage companies (3) and starting one from scratch (5 so far).  For the most part, I was extremely fortunate to have good partners – only one failed due to poor planning and execution.  Every experience builds on itself and teaches you a lesson or two.  Failure taught me the biggest lessons in being an entrepreneur.  Below are my five rules to live by, developed as my must-haves through the years of school of hard knocks…

  1. Passion – let’s face it, everyone wants to be rich.  We don’t start companies to be poor.  But you have to have passion and vision for your products and services.  And it has to be beyond just making money.  PARR’s mission is simple – we provide world-class back office support to small and mid-sized companies so that owners can focus on what they do best, grow their business – and my partners and I are passionate about this.
  2. Trustworthy partner(s) – speaking of which, there’s only so much you can do as a sole proprietor.  Having that partner(s) whom you can trust is worth its weight in gold.  I ask myself three questions:  Do I like you?  Do I trust you?  Can you do your job?  If the answer is not yes to all three, the partnership is probably not going to work.
  3. Total commitment – no military training has ever prepared me for two things in life, marriage and becoming an entrepreneur.  If the Corps and the Army is hardest thing I’ve ever done physically, being an entrepreneur is the hardest thing I’ve ever done mentally.  Highs are so high; lows are so unbelievably low.  Without commitment, nothing else matters.
  4. Reserve capital – a good friend of mine (former founder of FreeMarkets and a lifelong entrepreneur) used to discuss run-way capital.  Don’t count on grants, line of credit or any other form of outside capital.  Unless you are bringing ready-made customers, you will need at least 12 months of run-way capital to make it.
  5. Focus on sales – nothing else matters…  One endeavor that failed, we had a decent idea, nice office space, business cards, desks, printers that can pump out pages of pristine documents, laminated business plan that we paid consultants to put together for soliciting outside capital (in violation of rule #3).  One problem – no prototype and no customers and in time, no money.  There were a few more hiccups, but that’s for another post.

Notice nothing technical such as business name, business plan, legal structure, zoning and licenses is listed above.  Not that they aren’t important, but I believe these tasks will get completed in due time once your business gets going.  Last but not least, go for it.  Once you have all your ducks in order, have faith and jump in head first.  No doubt you will be successful.

Online Banking Security – Guest Contributor, Jeff Pryzbyl

According to a 2010 ComScore survey, 64% of online bankers use their bank’s bill pay feature.  While not common with smaller community banks, the larger national banks offer a secure message center which they can securely deliver messages to accountholders.  A short e-mail will notify you to check your messages.

While consumers enjoy the convenience of bill pay, it has also caught the eye of the phishing community.  A common scheme is to send an e-mail, purporting to be from your bank, stating that your bill pay feature is being suspended due to certain activity.  The e-mail will direct you to click on the link in the e-mail to sign into your account and rectify the situation.  The e-mail will have the look of a bank’s e-mail, with the formatting of the message similar to your bank and their logo.  What gives away the scam is the return e-mail address, frequently ending in an extension other than “,com” (i.e.  The UK extension signifies a website registered in the United Kingdom.

For starters, don’t click on the link.  Most of the time, the embedded link will take you to a site that will record your username and password and then your account is compromised.  The safest route is to visit or call your bank at a known number (not any number included in the e-mail).    If you prefer to access the bank via their website, close your browser and re-start a new connection.  Access your account through your regular login.  Within their secure message center, verify that there were no notices about your bill pay feature and account is functioning just fine.  Then, to protect others, look on your bank’s website – there should be means to report phishing attempts.

A Principal at Parr, LLC, Jeff co-leads its finance and accounting vertical. Jeff has over 20 years of accounting, compliance and regulatory control experience, having served as CFO to numerous community-based banks. Jeff is a regular contributor to SMB Matters blog.

What MATTERS to SMBs. SMBMatters.

FTIL 4 – Greatest Guitarists

I definitely have Type-A, MSE (math, science  and engineering) oriented brain.  As a business partner of mine wrote in his blog, I feel more comfortable with numbers and hard science than words or art.  But even my closest friends would be surprised to know that I do have interest in other than numbers – olive oil, wine, and guitars for example.  Yes guitars – no I do not play one (I do play piano but yet again, that’s for another post).  But I do own one that was played by Bruce Springsteen and signed by him and his E Street Band members.  So when the Rolling Stone magazine recently published an article on 100 greatest guitarists of all time, I read with a keen interest.  For the most part, I agree with their rankings, at least the top 4…

1)      Jimi Hendrix – good thing he broke his ankle during repelling training while enlisted in the Army, otherwise we may have never known the great one.

2)      Eric Clapton – many would agree that there are two Claptons, pre-Cream and post-Cream.  Both awesome with sense of simplicity and style.

3)      Jimmy Page – Yardbirds and Led Zeppelin, ‘nuff said.

4)      Keith Richards – the immortal.  When he riffs, it literally cuts you.  If you listen to Satisfaction long enough, you bleed…

…but I take an exception to the fact that Carlos Santana is #20.  Number 20?!?   Now, I may be biased by my SF bay area roots, but what were the editors thinking?  Never mind he attributed much of his exploratory style of combining blues, African rhythm and modern jazz to doing tons of acid in the 60’s, but Carlos (Mr. Santana) was a pioneer, collaborator and a linguist (he coined the term Latin psychedelia), not to mention being a mentor to other influential musicians like Prince (or the artist formally known as Prince, whatever…)

In my opinion, Carlos Santana definitely belongs in top 5 of the guitarists of all time.  What are your thoughts?  Let the debate begin….

The Art and Science of Valuation for SMBs

A good friend of mine who owns a successful franchise territory in lawn care products and services, called the other day to discuss business valuations.  He wanted purchase additional territories to expand his empire.  Basically, there are two ways to grow a business – organically or through a transaction, e.g. acquisition, partnerships, carve-out, etc…  He chose the latter route and wanted to make sure he did not overpay for future growth opportunities.

There is an old saying among bankers – “price is what you pay, value is what you get.”  You want to make sure that value is built into the price you pay for.  Business valuation is as much art as science.  The numbers alone do not tell the entire story, as the risks inherent in any business situation are not static.  While there are countless methods, the three generally accepted approaches to business valuation are: asset, market and income.

Regardless of the method chosen, sound valuation depends on the clear identification of cash flow, future growth potential and inherent risks.  For bigger firms, like public companies, fair market value also takes into consideration marketplace perception, investment value, and investor’s intrinsic value.  However, for smaller, privately-owned firms identification of relevant, often idiosyncratic variables that go into valuation calculations becomes even more crucial.

After a lengthy discussion over a couple of cups of coffee, we identified the following variables as the most relevant for valuation for his scenario: historical revenue trend; type and duration of customer contracts; gross and net margins; EBITDA vs. OIBA metric; number of competing businesses in the area; short- and long-term and potential liabilities on B/S; and other critical drivers of future revenue and growth.  Art is in the identification of these variables, proper weighing of each and understanding how they fit into the big picture.  Science is in the application of the formulae and metrics to arrive at a tangible figure, and also includes the creation of a forecast to predict the future.

I may be a geek, but these are fun projects.  Business valuation is a strategic exercise, and there’s nothing like war-gaming potential scenarios for optimal results.

Europe in Crisis.?!

Europe Debt Crisis - Domino EffectHeadlines are meant to grab your attention, make a statement and pique curiosity, among many other legitimate purposes.  However, they rarely tell a story accurately or completely.  Often headline writers seem to delight in creating some cleverly turned phrase or esoteric quip intended to manipulate their audience’s sensibilities.  But we’d never go there here at SMB Matters.

The sovereign debt crisis transcends the touchpoints of the grand dream of modern Europe (which span across decades that brought Europe from the single market towards the economic union to the common currency, and ultimately a political union), and has transformed into a wider crisis about the European Union as a whole.

In the end our headline is not the story, but you find knowledgeable people framing this complicated matter by posing the follwing interrelated questions: How to punctuate “Europe in Crisis“?  As a simple fact(.)? As a rhetorical question(?)? Sound the alarm(!)?

On the very day of the historic Europe-wide downgrade, the head of the world’s largest bond fund did what you might expect him to do — he hedged.  In a commentary cross-posted in many outlets, Pimco‘s Mohamed El-Erian punctuated the question in each way.  He first noted that the market valuations had already taken the issue of downgrade(s) into account as fact, with debt yields reflecting the “old news” of the downgrade and its risks.  The Pimco CEO then pivoted to the exclamation, warning of the consequential impacts that would be felt within the Eurozone, such as a weaker Euro and increased market pressure and volatility.  Finally, El-Erian’s blog employed the classic “known unknowns” analysis, setting up a very effective cliffhanger for his audience to ponder the question of Europe’s uncertain future and likely effects upon the entire international monetary system from this historic crisis.

One of the world’s most respected economic minds managed to pose the question all three ways.  Which punctuation was right? We will put this to the SMB Matters blog team for their opinions in future posts, but we invite our readers a chance to register their own thoughts through the unscientific poll below.

Editor’s Note:  This post follows an earlier article from SMB Matters’ resident finance lackey  guru, Richard, who recently presaged the crisis now manifesting in the current European Bank Downgrade in the first installment of his Series on Global Finance and SMBs.  As an exercise in editorial discretion, we staggered publication of the Series to ensure that the discussion has a chance to develop before a competing topic shifts the focus elsewhere.  While Richard might expect a pat on the back for his rhetorical query asking what would happen if the European Union’s dilemma escalated, the SMBM Editorial Staff would also take this opportunity to point out the apparent wisdom of letting this story “fully ripen”.  In light of the renewed currency of this issue, this article includes a number of articles and commentary intended to reference differing opinions and analysis across the spectrum.  Let’s hope that the global economy can avoid the rot of an overripe crisis.

SMB Cash Flow Management – More Than Just In & Out

It takes conscientious effort and careful planning to properly manage cash under any economic conditions, but cash flow management becomes particularly critcal in a down economy like the one we’ve been experiencing over the past 5 to 6 years.  Cash is the lifeline of your business.

History is littered with promising companies that never reach their potential (or go under) due to improper cash flow or fiduciary management.  As they say in professional sports, “offense sells tickets – defense wins championships.”

For enterprises of all sizes, figures and reports from good revenue numbers and income statements may earn oohs and aahs, but it’s cash which ensures that the company continues as a going concern for another year.  Like anything else in finance and accounting, you have to take some initiative and get little creative for optimal results.  Read how one small business owner made strategic and tactical changes when his cash flow situation became less than desirable in Entrepreneur magazine.

We utilize a few rules of thumb at PARR when it comes to effective cash flow management.

  • Understand your business cycle – historical ebbs and flows and why they occur
  • Plan and forecast both accrual and cash P&L – short and long-term
  • Have a clear view of cash in and cash out – a master planning document or spreadsheet is often helpful to get a bird’s eye view
    • Cash in – by customer.  Understand their contractual obligations, as well as historical behavior
    • Cash out – by vendor.   Understand your contractual obligations
    • Reconcile. Note the variances against the plan; adjust the overall plan for the remainder of the year as appropriate
    • Ensure proper credit facilities are in place in case of misstep
    • Communicate, communicate and communicate – applies to upper management as well as line managers

Cash flow management is an exercise in risk management.  It is necessary because businesses must stretch and leverage their assets for greater return.  When done properly, cash flow management should be in complete synch with invoices that go out and bills that come in.  Your CFO or finance manager becomes a conductor in an orchestra that makes beautiful music.

Global Economics and SMB – 2012 US Growth Forecast (Part 2 of 3 Part Series)

2nd of a 3 Part Series

The consensus – the US economy is poised for yet another year of muddling through…   Most private economists forecast growth rates for 2012 to hover around 2%.  That’s little to get excited over, but these forecasts are modestly higher than the 1.7% rate many of the same sources estimate for the official statistics that will close the books  for 2011 on a US economy straining under the collective drag of continuing housing woes, a suboptimal job market and further cuts in government spending.  Below is a graphical depiction of historical quarter-over-quarter growth rate.

According to the Wall Street Journal, the US economy next year will be shaped by four themes:

  • Global weakness, especially in Europe and now emerging in Asia, threatens to undermine US exports – global GDP will drop from ~3% in 2011 to 2.7% in 2012.
  • Housing foreclosures will continue to depress prices, sales and new constructions – 3 to 4MM households are three or more months delinquent
  • Business will continue to add jobs but at a pace that will not put a dent in current level of unemployment – 123K new jobs per month will only keep up with population growth.
  • Government will continue its belt tightening.  Often the “G” of the GDP formula (C+I+G+(X-M)) plays a measurable role during the down economy.  In 2012, it will actually subtract from the total.

Again, what does this mean for small to mid-sized enterprises?  While the recovery has shown surprising amount of muscle in the final months of 2011, it would be foolish to assume the same continued pace in 2012.

Part 1 – Global Economics and SMB – Europe’s Woes


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