David Cummings on Startups

Category: Entrepreneurship

  • Three Financial Tips for Growing Businesses

    Last week I had the opportunity to participate in the EO Accelerator quarterly education day as I’m the Champion for the Accelerator program on the EO Atlanta Board. Each quarter we have an all day education event taught by a certified facilitator that flies in for the program. The program, for entrepreneurs with revenues under $1 million, is three years long, with rolling admittance and unique content on the topics of People, Strategy, Money, and Sales. This was Money day.

    Money day was taught by Greg Crabtree, one of the most entrepreneur-minded CPAs I’ve ever met. Greg runs a firm in Huntsville, AL that charges a flat monthly fee, typically $400 – $1,000, to clients in exchange for fixed quarterly accounting services and unlimited advice. Greg provided several frameworks for thinking about financial concepts in business, that are especially helpful for entrepreneurs.

    Salary Cap

    The idea behind the salary cap comes from professional sports, like the NFL. The way to calculate it for your business is to take all your non-labor costs on a trailing 12 month basis and subtract that value from your trailing 12 month revenues. Why is this good to measure? It helps you focus on the maximum amount the business will bear for labor costs before the company won’t be profitable. Too often, entrepreneurs add new staff before the business warrants it and this provides a value to monitor. Note that looking at your trailing 12 months expenses and revenue is typically better than looking at annual values on a calendar year, for the purposes of making decisions like hiring.

    Core Working Capital

    One question I’ve asked many times, and been asked many times, is “How do I determine how much I should have in the bank before expanding/hiring?” Core working capital (CWC) is the answer to that question. CWC, according to Greg’s recommendation, is two months of monthly operating costs in cash in the bank after the following:

    • Taxes
    • Debt payments (he recommends no debt or line of credit)
    • Current liabilities

    Of course, the amount of desired working capital will vary from business to business, but this simple rule of two months of cash in the bank is a good starting point.

    Profit Margin Goals

    The third take away from Greg came in the form of profit margin goals. Greg’s advice was that businesses should strive for a 10% profit margin after fair market wages are incorporated for all principals in the business. Here are the three common profit ranges for a growing business:

    • 5% range – the danger zone
    • 10% range – the target for most businesses
    • 15% range – doing extremely well, especially if the business has scale

    I hope these three financial ideas for growing businesses are as beneficial to you as they are to me. Thanks again to Greg for doing a great job.

  • Pros and Cons of Free Product Trials

    We’ve been offering free trials of our software for years and have come to understand some of the pros and cons of doing so. 

    Pros to Offering Free Trials

    • Helps assess how serious of a prospect you have
    • Provides an opportunity for the prospect to interact with other members of your team (services, support, etc) and show them how great of a company you have
    • Sets prospect expectations of what the product does and aligns interests with the company, proving that it is a good fit
    • Provides a sense of urgency as the free trial will expire at a certain date

    Cons to Offering Free Trials

    • Usually more labor intensive, especially for more complex products as services and support teams need to be involved
    • Can lengthen the sales cycle as the prospect might have to get other people from his/her organization involved, and actually do real installation work
    • Some prospects will keep asking for free trial extensions, which can create an adverse situation with the sales person that wants to solidify the deal or walk away

    A couple other items of note:

    • The free trial is really a proof of concept project, and should be referred to as such
    • Before doing the trial, clear success guidelines must be set up and agreed to by the prospect (e.g. in the proof of concept, we will show x,y, and z working resulting in some benefit, and culminating in the prospect signing a contract)

    In almost all cases, I recommend offering free trials (proofs of concept).

  • More Benefits of Daily Check-ins

    As you might know, I’m a big fan of daily check-ins. After spending some more time doing them (we’ve been doing them for 16 months with the leadership team), I’ve realized there are several additional benefits I didn’t consider before. Here are some more benefits that come to mind:

    • Having everyone stand up and talk in front of their colleagues gets the energy level up
    • Since it is at the start of the day, everyone says hello or good morning, helping promote the team camaraderie
    • As you’ve already talked with your team that morning, if an issue comes up later in the day related to one of your priorities, it doesn’t take as much time to get them up to speed on something you need help with

    I highly recommend doing daily check-ins across your company.

  • Frameworks for Fast Growing Companies

    One of the hardest things to do for a fast growing company is to get everyone aligned and on the same page. One business guru said successful businesses are 1% vision and 99% alignment. Here are some good books for entrepreneurs once they get past $1 million in revenue:

    What are your thoughts? What books do you recommend?

  • SaaS/Web is Ideal for ADHD Entrepreneurs

    A common trait you’ll find among entrepreneurs is that they have tons of ideas and routinely can be described as ADHD. Due to this phenomenon, SaaS products, and the web in general, make for an ideal medium as it affords an elegant manner with which to constantly tinker. In many cases, you can have an idea, see it live in production, and get customer feedback in a matter of days or weeks (with strong automated testing, of course!). What other types of products allow you to do that? Physical goods? No. Services? Rarely.

    Constant iteration and innovation really is adrenaline for enterpreneurs. It doesn’t get much better than SaaS/Web for products.

  • Some Thoughts on Sales Commission Strategy

    Sales commissions are a tricky thing. Once you put them in place, it is difficult to change them without the sales team being demoralized that their compensation is going to go down (even if it isn’t!). The goal, generally, is to minimize base salary and maximize performance based compensation. Here are some thoughts on strategy:

    • Align company interests with the commission (e.g. have commission percentages based on the profitability of the item being sold such that things like license revenue have a higher percentage commission than services revenue)
    • Significantly reduce compensation if quota isn’t hit (e.g. cut the standard commission in half if quota isn’t reached for the designated time period)
    • Don’t limit the up-side (e.g. don’t put a cap on the maximum amount a sales rep or account manager can make)

    Sales, and management of a sales team, is one of the most difficult, and rewording, aspects of a business. Good luck!

  • What are your three most important business measurements?

    It’s that time of year to start next year’s planning. We’re currently debating the three most important items to measure and set goals against. Here are the current three we’re working on:

    • Employee satisfaction
    • Customer renewal rate
    • Revenue bookings
    What are your three?

  • Debt is Your Friend

    This one is for entrepreneurs and not consumers: debt is your friend. Too often, first time entrepreneurs think the first step to starting a business is raising money from other people or venture capitalists. My recommendation is to get the business off the ground doing whatever it takes — including using your credit cards. I used credit cards for my business eight years ago and even played the game of applying for new cards that had no interest for the first X months and transferring balances between cards in an effort to minimize the interest rate. Having tens of thousands of dollars of credit card debt, like I had, isn’t for the faint of heart, and is not recommended for most people, but it is often times the only way to get access to money.

    As for banks, the truth is that most entrepreneurs will never get a loan from a traditional bank unless you have collateral for 80% of the value (e.g. stocks, bonds, real estate, accounts receivables, etc). People think banks are in the market of loaning money but they are really in the market of buying physical goods on your behalf and letting you pay them back for it. They aren’t there to fund your dreams that involve intangible assets.

    My advice is to seriously consider debt whenever possible.

  • Jack Welch on the Four Types of Employees

    My younger brother is a first year student at Harvard Business School and was recently discussing a case in class on Jack Welch’s management style. After 35 minutes of discussing the case, the professor surprised the class by having Jack Welch come in personally and answer questions. The key message by Welch was that of the four types of employees and what you should do with them:

    • High performer that buys into the corporate culture — promote and empower them as much as possible
    • Low performer that doesn’t buy into the corporate culture — fire them as quickly as possible
    • Low performer that buys into the corporate culture — give them a second chance in a different position to see if they can be an ‘A’ player
    • High performer that doesn’t buy into the corporate culture — do a public hanging where you fire them and then discuss with other managers their short comings
    Of course, the last two types are the ones that provide the most difficulty for companies. I thought it was an interesting perspective from a very decorated business person.

  • Tips for Office Subleases

    We’re in the process of securing a new office for early next year and I wanted to share some tips I’ve learned over the years when it comes to offices and subleases:

    • Offer much lower than they’re asking as it’s a sublease and they likely already have a new lease, especially in this soft commercial real estate market
    • Try to offer a deal when your company grows into the space over time e.g. pay for 50% of the space the first six months, 65% the next six months, 80% the next six months, and the full amount the remainder of the time
    • Shorter subleases will result in better deals as companies don’t like moving very often

    I’ve found that you can consistently rent office space for 50% of the market rate using these approaches during normal market conditions.