16 Jul 2020

Finance and Accounting 101

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A friend told me the other day that he was re-looking at my eBook “So you want to run an agency (and maybe sell it one day)”. He’d just sold his agency to a big International Group and they had put him in charge of that Group’s Regional office (smart choice, he’s very talented). I was flattered and intrigued. I wrote that book more than 10 years ago and to be honest I could not remember what I’d said so I refreshed my memory and was relieved to discover that the advice I give has mostly stood the test of time. I stand by it as far as an agency or consultancy is concerned.

In the intervening years since writing it I have spent most of my time investing in and supporting technology based businesses plus a couple of consumer goods start-ups, in all cases where professional outside investors are involved. I’ve been a NED and looked at a lot of business plans and financial results. My eBook is weak on finance and accounting for these kind of businesses. I’m not going to try to rectify that here – get yourself a very good finance director would be my first advice. I am, however, going to talk about what all the leadership team need to know about finance and accounting to get the best out of their finance director and run a better business.

The next piece of advice is that all the leadership team should understand P&L, Cash Flow and Balance Sheet. They should know the purpose of each, how they work, what the differences are and how they connect to give the complete picture on a business. They don’t need to know this to the standard of a Chartered Accountant but they need to know the basics. You’d be surprised how many don’t. These are all real and fairly recent examples:-

The CEO who told me their P&L was strong because he’d added the equity finance to the revenue line.

The CEO and COO who thought that being just above break-even meant they would not run out of cash. (They did – twice)

Several CEO’s who had no idea what they could or could not depreciate thus understating their P&L.

The CEO and COO who could not distinguish between equity, loan and deferred costs. (They even mistook an overdraft limit as the liability rather than the actual overdraft).

A senior business advisor (whose experience was all gained in large corporates) appointed as a NED to several start-ups who had no idea what a term sheet was.

Several CEO’s and COO’s who did not understand their various options to raise finance and the pros and cons of each.

I want to pause on this last example of financial ignorance. Of course you can use advisors to explain your financing options but you need to at least understand what they are and how they evolve as the business evolves. You must also appreciate that advisors, banks or financial investors will not weigh the pros and cons in the same way as you might as the actual person or team running the business. I will give three simple examples, all based on real situations I have seen first-hand.

The best way to finance your business is through growth (to be precise, operational cash flow). If you need, say, £500k to invest in the business, to hire new talent, build technology, put behind marketing, open up overseas markets etc, the very first place you should look is your revenue. Even if you can only squeeze a bit more from higher revenues that reduces the need to borrow or raise. Banks and investors will not tell you that, it’s not entirely in their interests.

It may nevertheless be the right option to raise money either through borrowing or raising capital . Where possible, borrow, it’s normally cheaper and more flexible. Selling (or issuing) shares is time consuming and expensive and places additional restrictions on the business.

When you raise capital you need a bit more than you think but not too much. I still hear advisors tell companies to take as much as they can get. There is some rationale to that as the process is time consuming so raising bigger amounts less often is better in some ways. Also, you never want to run out of money and have to ask investors or the bank, at short notice, for more. But the more you’ve raised the more equity you’ve given up plus too much ‘spare capital’ in a business has a habit of promoting the wrong behaviours. You must also be wary of the investors motivation – some US investors always want an early big raise so the business has plenty of capital. Why? Because they want to dilute the founders down so far they have to create huge growth to make their share worth something – if they can’t they’d rather know sooner than later so they can just move on to the next investment – Go Big or Go Home.

Simple but real examples that I hope show you cannot just rely on advisors or worse still the people offering you money. You need to understand it yourself.

Which brings me to the final point – you have to have some realistic understanding of how businesses are valued. Here are a number of things that could be used to estimate the value of a business to an acquiror:-

  • Multiple of Revenue
  • Multiple of Profit
  • Trading record over 3 years (trajectory)
  • Projected Cash Flow (and/or Free Cash Flow)
  • Nett present value of future profit (or cash)
  • Assets (Financial, Human, IP, Client, Distribution)
  • Contractual and other liabilities

I said ‘could be used’ to estimate value. The true value is what someone is actually offering to pay and that can depend on any and all of the above plus many other factors like the deal Structure (how the consideration gets paid). Depends on the business and it depends on the acquiror. But as the business leaders you need to have some appreciation of what they all mean, the implications for how you run the business, how you can raise money and where the information sits in your P&L, Cash Flow and Balance Sheet.

I must stress I am a long way from being an expert in any of the things I’ve covered – but I know enough to ask the right questions and to understand the implications of the answers. Even if finance and accounting is no part of your job description and you have the best advisors you still need ‘Finance and Accounting 101’ to start and run a business. That said, if your basic reflex is to drive the hell out of revenue and run a tight ship I’ll forgive you. Strong revenue growth and effective allocation and management of costs will cover a multitude of other shortcomings.

30 Jun 2020

Solving the facebook problem

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Facebook are in the firing line yet again. Several large advertisers are boycotting them for publishing hate speech – these are big names like Unilever, Diageo, Pepsi, Starbucks. It will concern facebook, they will probably dial up their investment still further in an effort to stamp this out and their spokespeople will double down on on their well crafted defence based on that. “We are making every effort we can, it’s a tiny minority but while there is hate in the world there will be hate on facebook” I heard one say today. After all ‘we’re just a platform not a publisher per se’. There is one obvious solution which is to declare them to be a platform that publishes and impose the same kind of legal restrictions that apply to other media platforms/publishers/broadcasters. Admittedly these restrictions are not perfect. They differ from country to country, some are exercised through government watchdogs and others through a licensing system. If we go down this route the licensing option is the most effective – break the rules and you lose your license to trade, it is awarded to someone else. Can this be operated for the web – of course it can. Not every country or territory would sign up but if enough did it would flush out very quickly whether facebook were “doing everything we can”. But I think there is a better solution which takes the advertiser boycott to its logical conclusion. Reduce facebook ad revenue to zero by making it redundant as an advertising platform and forcing it to charge for its service. Facebook generates $70 billion in revenues from advertising and its costs are roughly $46 billion. But of course a great deal of its costs are incurred to generate the ad revenue. How much would they be if they focused purely on running a really good social media platform? Let’s take a stab – half? So how much would they have to generate from user subscriptions? About $7.50 per user per year. At $10 p.a. they’d be making a very decent $7 billion operating profit. It’s not quite as simple as that but the point is valid – there is a different business model available to facebook or other competing social media platforms. The challenge is how to force them to look for it. Well that is simple – take away their data advantage by creating platforms that allow people to transact their own data.

It has been estimated that your personal data – what you like, where you go, what you buy, what you watch/read/listen to etc – just as much as you want to share is worth $7,600 p.a. on average to you. Much more for high nett worth people, less for the less well-off but arguably more important. If you only earn $25,000 a year then an extra $2,500 for your data is very attractive (this has been proved – people in emerging markets and students are far more willing to sell their data or attention or opinions). Facebook’s model is based on them taking the commercial advantage for having thousands upon thousands of data points on you. The technology exists to allow you to cut them out the loop and transact your own data with whosoever you choose for your own gain.

With no – or at least much lower – ad revenue facebook and their ilk would have to find a better business model, one where people only hand over their money if they appreciate both the service and the ethics of the business. Would you renew your subscription for a business that allows hate speech or pushes content to you in irresponsible ways? No need for government intervention or business boycott’s – problem solved by giving people the rights to their own data and the means to transact it however they choose.

30 Jun 2020

Hand in the Cookie Jar

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Readers familiar with my blogs (how are you both?) will know just how much I dislike ‘digital advertising’. I know it works because advertisers continue to invest in it which must mean it has a ROI of a few percentage points. But that in turn implies that for the vast majority of us, most of the time it is nothing but an irritation. I pay for a few on-line subscriptions to papers and magazines – should I have to look at ads? No different to the physical publications you might say. The model has always been that content is delivered free or heavily subsidised because of ads. In the new model the content may be on-line and it might be the services of a search engine or social media platform but the deal is the same. Ad revenue keeps the cost of your on-line content down and in the case of google and facebook the ads pay for the whole thing. On that basis we should extend the model to include churches, museums, art galleries – why not hospitals? You can go to church for free as long as you are prepared to let someone sell you life insurance. By all means look at the Monet but right next to it, in your eye-line, is an ad for french cologne. While you are waiting for your test results who would object to looking at some ads for a betting company – hey, life’s a gamble. NO, there are just some places and some occasions when I don’t want to have to see ads. And I particularly don’t want to see ads put there because someone’s been sneakily following me around all day watching my every move. So in my case at church, or the museum or in the doctor’s waiting room I get an ad for a car just because I happened to mention to a friend that I liked it or paused to look in a showroom window. That is beyond irritating, it’s plain rude.

I reached a tipping point this week. As I was reading on-line I was being bombarded with ads for backgammon boards – and I mean bombarded. They were not just there, they were flashing and rotating and popping up in the middle of the articles. I knew why – I’d been on a couple of sites looking to buy a backgammon board. I’d done my research, made my choice and the board had been purchased. I wasn’t really in the market for another backgammon board, you really only need one, but yet here I was getting hit by ad after ad all over the sites I visit. I know why, it is because Criteo, the French Ad tech business use 3rd party cookies to track me and sell that information to advertisers and their agencies. They profit from this transaction but I don’t. Turns out it is actually possible to disable them, which I did and the pushy creepy ads disappeared . Some algorithms are doubtless still at work but there at least seems to be some randomness to the ads. If they happen to be for something that interests me I’ll click. I did that recently for ‘Forever Spin’. I have a childish fascination with spinning tops and often spin coins or rings to see how long I can get them to keep going. ‘Forever Spin’ tops go on for ages (but not forever) and actually I might buy one. However, before I switched off Criteo I was going off them as a company due to the incessant ads they were targeting at me. Do you, like me, walk out of a shop if a sales assistant just won’t leave you alone? Normally you can tell them that you’re just browsing and they will back off. I have been known to tell them that if they don’t back off I’m leaving. Hard to do with digital advertisers. Not so easy to tell them to fuck off and leave you alone as long as they have their hands in the cookie jar. And they will even if you manage to disable 3rd party cookies. All the times we accept that the web sites use cookies and give them our permission to download them onto our hard drives, we are saying it is OK to track our browsing history, analyse the data and make commercial use of it. We can’t see it happening, we get a very small share of the commercial benefit, if any, and we have to put up with digital ads that are mostly pointless and very rarely entertaining. The only solution, as I have outlined before, is to use block chain technology to allow us to transact our own data as individuals. Then they would have to fuck off and leave us alone.

25 Jun 2020

Existential Threat vs Existential Opportunity (with a bit of Hedonism thrown in)

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For some reason I can’t explain I have a keen ear for trends in vocabulary. I notice when certain words or phrases enter the ‘Narrative’ (that’s one by the way) and quickly get over-used to the point of cliche. Here are some other examples:-

Curation – a few years ago it burst on the scene and suddenly everything was curated.

Agency – in the sense of achieving control over events.

Trope – I think it means emerging themes or plot-lines

So…. – at some point, for no apparent reason, every reply to a question now started thus.

(Don’t even get me started on ‘Like’ or the Aussie inflection that turns every statement into a search for approval.)

Modern speak aside I’m just interested in words generally and words that enter our modern lexicon in particular. I’m actually quite nerdy about it, because when a word or phrase catches my attention I research them. I need to know what they really mean or more often their range of meaning which can be rich and unexpected. It’s been a rewarding hobby because every now and again I find enlightenment. It happened again this week.

I had for some time been interested in the word ‘existential’ and how every issue or threat or problem had now become existential. Not pressing or serious or concerning – existential.

I vaguely understood what existential meant – something that relates to existence. So in essence (a very important word we’ll come back to shortly) an existential threat is one so pressing, serious, concerning it risks our very existence.

On the other hand I also vaguely remembered that existentialism was a branch of philosophy, Jean-Paul Sartre and all that stuff about angst rooted in the absurdity of life.

I decided to dig around and I was right. There are two meanings to existential. One meaning does indeed relate to existence. So an existential threat would be a threat that affects existence. That is mostly how it is used today but with an added twist of ‘clear and present danger’. An existential crisis is something really serious we have to deal with NOW or life as we know it is over.

Listening to the narrative (aka stories in news and social media) we face a number of existential threats around racism, gender fluidity/equality, climate, water, population, the growing gap between haves and have-nots, Artificial Intelligence, China and Chinese hegemony (great word, look it up, it’s all about domination and a power grab) to name just a few.

I’m not being flip when I say it’s all very angst-inducing. All the more so as we are in the midst of an existential Covid-19 crisis soon to be an existential economic crisis and some unknown ‘new normal’ (there’s another trendy phrase). And don’t forget on top of all this there are the ever present existential challenges we all have as individuals – we have our own problems to deal with as regards our careers, health, family & friends.

I don’t think I’m alone in my angst, I think this will ‘resonate’ with a lot of people – not just matter or be relatable or even strike a chord, resonate.

The enlightenment for me came from exploring the ideas behind existentialism. The essence of existentialism is that life is what we as individuals make it. Prior to the existentialists philosophers like Aristotle or Aquinas believed that essence comes before existence, that there was a natural order of things, a meaning to life that determines our best actions and therefore the meaning of our existence. Existentialists believe the opposite. Existence precedes essence. The natural order is absurdity and only by the actions of individuals do we bring meaning and purpose. From good old Wiki, not my only but my most used research tool (please donate to them) I share this:-

Sartre argued that a central proposition of existentialism is that existence precedes essence, which means that the most important consideration for individuals is that they are individuals—independently acting and responsible, conscious beings (“existence”)—rather than what labels, roles, stereotypes, definitions, or other preconceived categories the individuals fit (“essence”). The actual life of the individuals is what constitutes what could be called their “true essence” instead of there being an arbitrarily attributed essence others use to define them. 

Let’s pause there and think about that.  This might seem a bit heavy but actually it is very simple and very powerful. As Ghandi said, we can be the change we want to see. Each of us as individuals can bring meaning and purpose to life by our actions. There is no “Well, that’s just the way it is” it can be what we choose to make it. The existential threats are over-whelming, the world does feel absurd, it can cause depression and angst. The way to fight this is to change what we do not what we think or say or tweet. We can consciously fight our prejudices, we can behave more responsibly, we can behave less decadently and more morally.

Of course we can also do this collectively and through our institutions and we are right to push for this to happen but it starts with us. As former Chief Rabbi Jonathan Sacks wrote in his book on Morality we behave as if it’s never our fault. We seem to have abdicated our moral responsibility to others, the government, big business, the left, the right, Them.

I think I want to be a good existentialist. I want to mean what I do and own what I do (I will make mistakes of course but I can try). If we all do that, if we start with our own purposeful actions, it can create a better existence. We are capable of more than our labels or various identities would have others believe.

I now see the growing movement towards purpose-driven businesses, if it is authentic, for what it really is. I now see it in existentialist terms. These are businesses no longer prepared to accept life as it is. They have a purpose to make life what it could be starting with their own business.

All sounds a bit worthy does it not? Well, let me sugar the pill. After researching it long ago I converted to hedonism which favours pleasure over pain. This does not mean what most people think, which is the more Epicurean version of excess and indulgence. We all have choices in how we do things. I live in Cape Town most of the time and I have two ways I can drive to the centre of town. One is a bit quicker but the other takes me past some of the most beautiful ocean views in the world. As a hedonist I take that route most often – and yes I sometimes cycle it. Buying fewer things but items of much higher quality is the action of a true hedonist. Doing right by others, embracing diversity, making a positive difference where you’re able, these can all bring more pleasure than trouble to an ethical hedonist.

Hedonistic existentialism – do you think it might catch on? I hope so because it’s an existential opportunity to deal with the existential threats and derive some pleasure. What do I want? So, I want it to be a new trope in the narrative, we can like assume our individual agency and like curate our actions? Hedonistic Existentialism – like doing it and liking doing it?

20 Jun 2020

The Point in Purpose

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I went into the twitter-sphere this week to question the claimed purpose of a very large Telcomms company. Let’s call them Megaphone. It was in response to a nauseating tweet from the head of their ad agency who was telling the world how proud he was of his client’s commitment to purpose. I’m a customer of Megaphone and it seems to me their only purpose is to make as much money as they can with as little regard for customers as possible. I’ve also had dealings with them in the past from the agency side and they were brutes. I suppose leopards can change their spots and maybe they’re trying. I’ve just visited their web site where sure enough you find their purpose front and centre and it reads very well. It talks about connectivity and the social good it can do and I admit, it struck a chord with me. Access to affordable mobile data can level the playing field for the poorest, it can enable people to start and grow their small businesses, it can promote inclusiveness. But do I believe that is the purpose of Megaphone? Do I think the ad agency CEO is really proud of them for this? No, I don’t. I think they’ve jumped on the purpose bandwagon and somebody has told them this is the kind of purpose that will sound great. It could well be someone in the ad agency and they’re licking their lips at the prospect of how much money Megaphone will spend telling people about their higher purpose. The CEO’s tweet was promoting a conference they were hosting about “Purpose” and I guess the CEO thinks the Megaphone case study will be a crowd puller and the ad agency will be seen as thought leaders in the purpose game. Because make no mistake, purpose is hot. It was hot before Covid, it’s even hotter now – hell, even I’ve jumped on the bandwagon (see my article on Neo-naked Economics, I’m all over it).

If I’m wrong then I apologise both to Megaphone (who you can probably figure out) and the CEO of their ad agency (which won’t be much harder). But here’s why I don’t think I am.

Purpose has to be 100% authentic, it really has to be the reason you do everything you do. It has to guide your every decision and action. If it does, you don’t need to tell anyone, it’s obvious. I was talking to the CEO of one of the world’s largest multi-nationals recently, a business with a very good record in sustainability and purpose, and he made the point that you have to be driven by this for years before you earn the right talk about it. I suspect you never brag about it unless of course you are into virtue-signalling.

Let me put it another way. Do you love your partner? Is this because you thought about it and decided you needed to love someone so you gave some further thought as to the kind of person that should be? Having made your choice have you communicated that to anyone? Have you pitched up at a meeting or a party and said to people, “You need to know I love my partner and here’s why”. Have you felt the need to attend a conference on Love to use your love of your partner as a case study? Does your partner believe you love them a) because you tell them and everyone you meet or b) because of the way you consistently treat them even when no-one is looking?

You have a purpose, you don’t get a purpose. And that purpose is the compass by which you navigate, it’s how you run the business, not the punchline in a communication strategy. It’s fine to have a purpose that is primarily about making superior shareholder returns but if it is, there’s no point in pretending otherwise.