Category: Operations

I heard a term the other day that made me pause and think that it needs to be discussed more frequently: time series analytics. It simply means taking snapshots of data on a regular basis (e.g. daily) and then using it for reporting and decision making. Most startups build web apps that solve problems and provide data at a point in time (e.g. current number of employees) but don’t do a good job of providing time series analytics (e.g. I want a chart of the number of employees per pay period for the past 24 months). Sure, you might have a good feeling about the trends but being able to see it visually can provide more insight.

Here are some time series analytics we already do:

• Weekly KPIs Google Spreadsheet where a new column is created each week to input the two KPIs per department
• Monthly financial review where a new column is created each month to track different metrics
• Marketing metrics powered by GoodData

Time series analytics are one piece of reporting that need to be looked at more frequently. Startups should consider time series analytics in their own app reporting sections.

What else? What do you think of time series analytics?

At last week’s EO Accelerator education day on finance, the CPA put up a slide showing how a $3.5 million/year revenue consulting business could be exactly the same financially as a $20 million/year construction company (imagine the construction company flows through most of its revenues to sub-contractors). From a technology startup point of view, a similar story can be painted for a $10M revenue ecommerce business and a $5M revenue software company. It comes down to the cost of goods sold and the gross margins of the business.

Here’s how a $5M revenue software company and a $10M revenue ecommerce company might look similar financially:

• Ecommerce business – $10M revenue, $5M spent on inventory, $1M spent on outsourced warehouse and shipping, $4M left (margin)
• Software business – $5M revenue, $1M spent on customer acquisition (cost of goods sold), $4M left (margin)

Entrepreneurs enjoy talking about the number of employees they have as it’s a decent proxy for company size. Employee count and revenue are two very different things. The next time someone volunteers revenue size, consider their gross margins in making a comparison to other types of businesses.

What else? Do you consider gross margins when thinking about the size of a company?

As a startup begins to scale conversations internally change from “how do we keep the lights on” to “how do we improve our efficiency and get better economies of scale.” As part of this mind shift, one of the inevitable performance indicators that comes up is around the efficiency ratio of employees to customers or revenues. One of the stats that’s been a focus historically is the revenue per employee, with companies like Google being exceptionally high.

For a startup that is scaling, revenue per employee might not be the best measure yet because some departments are going to have more economies of scale than others and the company is still likely investing heavily in areas. While scaling, more specific efficiency ratios like the following are important:

• Customer support employees to customers older than 60 days
• Client services employees to new customers
• Sales reps to new customers
• Marketing employes to new qualified leads

The goal is not to blindly add more and more people to a department because of growth but rather continually looks for ways to get better economies of scale from team members and track how that scalability changes over time.

What else? What do you think of efficiency ratios around employees to startup metrics?

Every year for my EO forum we do an off-site retreat out of town. Every quarter for my company we spend one day off-site doing a planning session. There’s tremendous value getting together outside the normal confines of an office and spending time to reflect on progress made as well as to plan the future. Retreats are a great way to do this.

Here are a few tips when thinking about an off-site retreat in a startup:

• If you can afford it, hire a professional retreat facilitator and go to a nice place (it’s hard to take people away from their families for a period of time so splurging on a good place makes it more worth it)
• Make sure and schedule plenty of structured time to go along with hang-out time (EO forums that don’t have a retreat facilitator typically don’t schedule enough structured time with programs and exercises)
• Start with a simpler mini-retreat where you go away for a day with no overnight component before doing a multi-day retreat
• Require homework in advance of the retreat so that people involved come to the event prepared with thoughts

I didn’t appreciate the value of an off-site retreat until I had the chance to experience one facilitated by a professional at an amazing location in the mountains. Now, I’m sold on the value.

What else? Have you done an off-site retreat and what are your tips?

Entrepreneurs over the years have asked me whether or not they should do accrual or cash basis accounting for their startup. The general idea for accrual accounting is that as income or expenses are signed for they should be put on the books whereas with cash basis accounting you only worry about it when money changes hands. So, with accrual based accounting as soon as you receive the purchase order from a client you put the revenue on your books (assuming it is all recognized at once). With cash basis accounting you don’t count the money until you receive payment for it — even if that is 60 days after you received the purchase order.

Here are some quick tips to keep in mind regarding accrual and cash basis accounting for startups:

• Almost all startups should be cash basis as that most aligns with the nature of trying to get a business off the ground and being cash strapped (the number one reason startups go out of business is that they run out of money)
• If you get prepaid for your service or service component of a product sale (like support), accrual is the way you should go since you can use the capital without paying taxes on it until it is recognized via the obligation being completed (e.g. it is December and you just got prepaid $12,000 for 12 months of your SaaS product, you only recognize $1,000 for the month of December for the purposes of the IRS for the year, yet you still have $11,000 in the bank to start the new year that you haven’t recognized yet)
• The IRS requires the accrual method if you average more than $10 million in revenue and have inventory, so there’s no choice at that point

Accrual and cash basis accounting are easy to understand once you go through a few scenarios with your accountant. Most startups should do cash basis accounting as cash coming in and going out most closely align with a business in the seed to early stage.

What else? What other thoughts do you have on accrual vs cash basis accounting for startups?

Update: See the comments for several people that recommend accrual accounting instead of cash basis accounting.

A friend of mine who’s been an entrepreneur for the last four years likes to refer to any of the stuff he doesn’t enjoy doing as brain damage. In his world, he doesn’t have back-office personnel support resulting in a quite a bit of brain damage. Most entrepreneurs have to deal with minutia that isn’t fun. The simplest test for the amount of brain damage work you have to do is to look back on your day and ask yourself what work energized me and what work sapped my energy. Work that takes energy from you is brain damage work.

Here’s some example brain damage work in a startup:

• Taxes (need I say more…)
• Basic infrastructure problems like the phones or internet going down
• Government paperwork, licenses, fillings, etc
• Letting employees go that aren’t working out (big relief when it’s done!)

My recommendation is to do what you can to limit the brain damage work in a startup so that you can focus on items that you enjoy.

What else? What are some other brain damage work items?

A couple years ago the co-founder of Rackspace told his success story to the EO Atlanta chapter. One of the takeaways I enjoyed from the event was the concept of the pod/matrix approach. Morris, the co-founder, recounted Rackspace hitting several hundred employees and feeling the growing pains trying to service customers with fanatical support. They had dozens of people of in their support department, dozens of account managers interfacing with customers, and dozens of people in accounting to field all the billing questions.

Departments where having difficulties with more and more layers of management and customer complaints were increasing. In addition, the executive team was really concerned as to how they would scale the entire business from a few hundred people to a few thousand. The solution was a pod system where teams of five were built to handle the majority of customer questions quickly and efficiently. Pods were built to match the most common customer requests:

• Two Tier 1 support reps
• One Tier 2 support rep for harder technical issues
• One account manager for sales
• One accounting clerk for billing

With these pods in place, scaling the business was simply a matter of having more and more of these teams as they added more and more accounts. Problem solved.

What else? What are you thoughts on a pod/matrix system like this?

RSS is great in that so many apps support publishing and consuming the XML format. So much so that it really becomes the core plumbing to drive a startup dashboard. Tools like Google Reader, Socialite Mac, and Thunderbird support bringing in RSS feeds along with other types of information, perfect for creating a central hub of data.

Here are some potential items for the RSS-driven dashboard:

• Yammer / SocialCast feed
• Twitter / Facebook accounts
• Google Alerts (RSS feeds are native functionality) / Saved Twitter searches
• EchoSign / DocuSign feed (for sales contracts out for signature and signed)
• Marketing automation prospect feed
• Inbound marketing activity feed
• ZenDesk / Tender support ticket feed
• Lighthouse / GitHub feeds

As you can, this is really a list of critical business apps and RSS provides a mechanism to centralize the most important information for each, which in turn represents the current pulse for the entire business. Of course, this could lead to information overload but I’ve found it’s better to have too much information compared to too little.
What else? What do think of an RSS-driven dashboard and what feeds would you add?

Continuing the EO Strategy Summit theme from yesterday, there was another new methodology used that I hadn’t seen before: ARMD goals. Back in 2008 I talked about SMART goals, and now that I know about ARMD goals I like them better because they are simpler and don’t have the redundancy sometimes found in SMART goals.

Here are ARMD goals:

• Actionable – What specific things need to be accomplished?
• Realistic – How attainable is the goal?
• Measurable – Is there a number (metric is ideal) or “completed/not completed” that can be attached to it?
• Date – When is it going to be done?

My recommendation is to answer the four points of ARMD when making goals.
What else? What do you think of ARMD goals?