Schmidt

It's Time for Your Business Breakthrough...

How to REALLY Set Accurate Business Goals

by Leave a Comment

Every year, on December 31 (today) I sit down for 30 minutes and outline my goals for the coming year. I always set three types of goals: personal, “stuff,” and business. At the same time I set three, and five-year goals that are bigger and badder extensions of my one year. I used to set 10 and 20-year goals, but found that these changed dramatically. Today I set 10 and 20 year “destinations.”

Personal goals are just that: lose weight, take a meditation class, get eight hours of sleep every night, etc. “Stuff” goals are entirely about material possessions. No it’s not bad to own nice things, whoever started that rumor probably never drove a 1500 horsepower, $2.7m Bugatti Chiron (I have–it’s awesome!). The point is, in life, nice possessions make the journey more enjoyable. Of course you should want and try to acquire those that make you happy, because believe me, if you own that Bugatti, you’ve earned it!

The third goal, business, is where I want to focus this article. Whether you are a one person company, the CEO of a large organization, or someone who is somewhere in between – business goals are vital if you want to thrive and live a life of abundance.

How to Set Accurate Business Goals in 2017

Let’s start out with an existential fact of life. The more regularly you set goals, along with cataloging how you achieved them, or (much more importantly) why you did not, the better you will get at achieving your goals.

Why is this? In simple terms, cataloging successes and setbacks (there are no failures, if you learn from them) will allow you to determine the driving forces that push you forward or hold you back. Seek more of the former, aggressively push away the latter.

Beneteau’s 34 Racing Sailboat

Assume you suddenly found yourself on board a Beneteau 34 foot sailboat in the middle of Lake Michigan. You have no idea how you got there, and absolutely no idea how to sail. Inside there was enough food and water to last for a year, so you were in no danger of starving, but you knew nothing about sailing. If you’re like most human beings, overtime you’d start to experiment to try to get things moving, otherwise you’d find yourself adrift for a long, long, time.

Eventually you’d figure out that when the sail is raised and properly positioned, the sail “lifts,” or moves, the boat. At some point you’d determine that you could both sail into the wind (at about a 45 degree angle) and with the wind. This might take months, but you’d eventually crack the code. As time marched on you’d discover that by making the sail more taunt you’d travel faster and by making it less taunt you’d travel slower. Once you discovered all of this, you would then know how to control both the speed and direction of the vessel with relative ease, subject only to the vagaries of mother-nature.

You’d need to be careful though, as you piloted your craft faster, the wind would create more lift and actually might cause the boat to rise out of the water and capsize as the centerboard (the long fin underneath) emerged from the side, so the proper balance of speed and lift would be in order. Of course the better you got, the closer you could take your vessel to the edge where speed and calamity meet, without tipping over.

Setting business goals is a lot like teaching yourself to sail. The more you set and measure successes and setbacks the more you can control the speed and direction of your business. Grow too slow and you’ll leave valuable opportunities on the table, grow too fast and you run the risk of something going horribly wrong because your “centerboard” has left the water. Get it just right and your business becomes an unstoppable powerhouse set up for success for years to come!

Getting a Business Coach

I’ve been fortunate to have some very good coaches along the way in my career. I can tell you with 100% certainty that a great coach can make the difference between a terrific, high growth, highly successful operation, and business calamity.

Coaching comes in all forms: a great book (I’ll bet the person on board that Beneteau 34 wished there was a book called Sailing for Dummies in the glove compartment); a business coach (my absolute favorite is Rajeev Dewan – I’ve spent the last two years with Rajeev (several days x once each quarter) in Sydney, Australia and he gets results!); a mentor, or some combination of the three. One thing is certain, coach or not, all great business leaders measure and catalog successes and setbacks.

The best coach however is experience, and that is why successful business leaders are generally successful again when they set out to build a similar business to the one they just left; however, to supercharge your experience (and turn 10 years into two), set goals, measure if they are working, adjust accordingly and most importantly, seek answers as to why (or why not) you were successful.

 

Good luck this upcoming year.

 

 

 

How Simple Language to Builds Trust

by Leave a Comment

A man who uses a great many words to express his meaning is like a bad marksman who, instead of aiming a single stone at an object, takes up a handful and throws them all in hopes he may hit.
~Samuel Johnson

When I wrote The Busy Adult’s Guide to Making College Happen! the copy editor at the publishing company asked me a two part question, “do you want to sound smart, or do you want your book to sell?” “Are they different?” I asked? “Completely,” he responded. “You’re book is written using college graduate level language according to the Flesch–Kincaid grade level test, yet it is written for people without a college degree, do you see a problem here???” I agreed and he changed the language. That book went on to win the Axiom Best Business Book of the Year Award in 2009 a long side Peter Drucker, Seth Godin and others. I never did that again…

The old way of thinking was that people want to sound smarter than their reader in written text (and in life!). They want to use their “verbal advantage[1]” language to wow the customer into thinking how smart they are. This gives them perceived intellectual authority. The problem is that this works well only in certain select circumstances – primarily when the buyer is gullible, but it has the opposite affect on those individuals who are reasonably intelligent.

If you’re the CFO of a company interviewing two bankers, one asks a few strategic questions to really understand the issues and then the client does most of the talking; the other launches right into their finely crafted presentation and asks no questions. Who do you think the CFO will buy from?

Let’s say they both get to the end, and the client asks “is it the right time to raise capital in the bond markets?” Examine at these two responses below:

Banker 1

“Recent market research data would suggest that the noise in Europe and the risk premium that global markets are now charging – gives some companies pause when contemplating the market. Once they have digested the data, a wise treasury staff would determine that, while nothing is ever certain, it is fear rather than investor demand piloting the uncertainty that exists in the markets today. If you’re willing to take a modicum of risk, then coming to market should be a consideration.”

Banker 2

“The market hasn’t been perfect since 2006; however, it’s in reasonably good shape. We recommend that you come to market as soon as possible. You never know what’s going to happen in the future…”

This happens a lot and actually happened right in front of me – I was Banker #2! I wrote down (as fast as I could) what Banker #1 was saying on the client conference call because the other banker was known for his ostentatious display of words, and I needed material for this article!

So, when dealing with clients keep it clear, otherwise they will not trust you. I’ll end this article with my favorite quote on the subject:

The great enemy of clear language is insincerity. When there is a gap between one’s real and one’s declared aims, one turns instinctively to long words and exhausted idioms.
~George Orwell

 

[1] A program that helps people learn and use difficult to understand words correctly in everyday speech.

Financing Growth – Three Things all Great Companies Focus On

by Leave a Comment

Debt is like medicine. Too much and the patient gets sicker. Not enough and the patient does not get stronger. Just right and the patient becomes investment grade…

-Geoff Schmidt

 

How do you run the debt book of your business? Surprisingly, more often than not, the company leadership at SME’s (small to medium sized enterprises) does not have a specific plan. They look for the cheapest price, they look at current needs, and if it works, great. Contrast that with the SME’s big brother, LME’s (I just made that one up, but it stands for large to medium sized enterprises) and the way their treasury staff approaches funding is night and day. They actively look at the optimal ways for financing growth.

LMEs optimize for three variables:

  • Tenor
  • Price
  • Terms

Tenor – would you take out a mortgage where you had to refinance every 12 months? Of course not, yet SMEs do this all the time. Whether explicitly (i.e. the borrower has to re-apply every 12 months and can potentially be turned down!) or implicitly (i.e. the loan is evergreen, but can be called at anytime and for whatever reason and/or the rate is reset based on the current Prime Rate (common for SMEs) or LIBOR (less common). In either case there is no locking in for 5, 7 or 10 years or more.

Price – price is important, but only directionally*. This means institutional versus personal funding costs. The difference is stark and is the difference between professionals who run a low risk, highly profitable business and newbies trying untested methods in a business with little to no operational history, with management trying to develop clients and still pay the bills. In other words, one looks like a mortgage payment, the other like a credit card payment. Financing growth means funding in the institutional market.

Terms – this is the one that trips up almost all SMEs. Terms do matter, more than the amount and more than the price in most cases. Yet terms are almost an afterthought for those trying to get a business off the ground, but the seasoned treasury staff is able to translate the needs of the company’s long-term strategy into terms that allow the company to grow. The terms are the first hurdle to be agreed for large companies and the last hurdle to be agreed for small ones. That statistic, in and of itself, should focus the mind at the leadership at the SME.

So if you want your SME to grow into an LME, then focus on the big three of funding: tenor, price and terms. Make sure they marry-up to your company’s long-term business plan. Keep focusing on these three forever, and you’re leadership team will be positioned well for financing growth.

 

 

 

 

 

*if you’re a current client, don’t worry, we’ll fight for every last basis point for you – this is for illustrative purposes only 🙂

10 Examples Where Asset-Liability Matching Fails

by Leave a Comment

“Match long term assets to long term liabilities.” Throughout the annals of time, this was a tried and true strategy for companies that fund an asset heavy business. I heard it as a CPA, I heard it in Business School and today I hear it helping companies fund themselves, but not as often as one might think…

When the theoretical world of case studies collides with the real world of business, the real world will win every time. In the battle of education over experience, I’ll back the treasury team not the textbook. Asset-liability matching has its place, and is a fundamental cornerstone of any business funding strategy, but I can think of at least 10 examples where a company should fund shorter (or longer) than the asset life:

  1. Revenue from the asset is variable – Imagine if you run an oil extraction company that owns offshore drilling rigs and oil fluctuates in price (as it does). When prices are high, generally this means the world is in an inflationary environment, which means high interest rates. When prices are low, we’re in a recessionary environment, which means low interest rates. Imagine locking in a 30 year fixed rate long-term bond on a $650 million drilling rig, only to find oil prices plummet. The company’s interest cost stay flat, while 20, 40, even 50% or more decreases in the price of oil cuts revenue deeply! While many of these drilling rigs have a life of 50+ years, any company locking in rates that long is bound to get crushed at some point. Ultra long term asset-liability matching is about the worst thing one can do with that type of asset.
  1. The company is planning on selling the asset sometime during its useful life – Locking in for the duration of the life of the asset becomes a lot less appealing if you have to unwind the borrowing in the middle. This is particularly true if you’re funding the asset with fixed rate debt, which generally has hefty early repayment penalties associated with it.
  1. The business is a regulated monopoly – Regulation ensures that customers and suppliers each have a clear line of sight to one another. Customers have no other choice but to buy from the supplier; conversely competition never enters the equation for the supplier. Under this arrangement, the regulator needs to keep things fair. This means that prices are determined by a variety of forces besides supply and demand. In return for a protected territory a company often has to negotiate its revenue based on a variety of inputs, one of which is the cost to service its debt. These prices are often “reset” every three to five years, at which time the government agency will examine the cost of capital and adjust this up or down based on current market interest rates. As a consequence, a mismatch could be quite costly for the regulated business.
  1. It’s crystal clear interest rates are going up – The week after President Trump won the election in the United States, Treasury yields went up 50 basis points. The 10 year UST had been hovering near a historical low of 1.70-1.80% (+/-) for several months, the Fed Funds rate was at 0.25% and inflationary signals were kicking in. Likewise credit spreads were in the bottom quartile of the last decade. If that was not the time to lock in debt longer than the useful life of the assets of the company, then there never would be a good time! Many companies did.
  1. The company is planning a financial restructure – As companies grow, their debt often goes from a secured to an unsecured platform to give the organization more flexibility. The problem is that no current lender wants to go first. Those that do are structurally subordinated during the conversion, which means that if something goes wrong all the secured lenders get paid out first and what’s left over goes to the unsecured creditors. Not a great place to be. If however, a company knows that it will convert at a point certain in the future, it behooves management to ensure all secured debt does not mature past the conversion date, or it will face resistance from the unsecured lenders.
  1. The company is an M&A target or is planning on being sold – Some companies, particularly single product organizations, just make good add-ons to larger, more diversified companies in the sector. Creditors almost always have a provision that will force early repayment (often with a costly, interest rate true up called “a make-whole penalty”) if a company is acquired, or merges with a larger organization that is of a lower credit quality than today’s company. That is unless this issue is contemplated up front and the company can negotiate a “par change of control put” at the time the debt terms are agreed.
  1. It’s crystal clear interest rates are going down – When the Global Financial Crisis (GFC) hit the world in 2008/09, shortly thereafter central banks globally cut interest rates again and again and again, landing on unprecedented levels. Right before that happened, it was clear that nothing was going to be the same for a long time and that governments in most westernized countries would need to force (and keep) interest rates down for years to come just to keep a great depression at bay. With that clear foresight, locking in a large portion of the company’s debt long term, even to match long term assets, would have been a big mistake that just about anyone who was paying attention could have predicted. Fortunately, there has not been a signal that strong since, nor (knock on wood) will there likely be one in the near future.
  1. The company is transformational – Some companies (and many conglomerates) start their life looking one way, but reach the “mature stage” looking completely different (Avon was a book company, Starbucks was an espresso machine distributor). If the organization is open to “any and all opportunities,” then funding shorter rather than longer might make more sense even if the assets themselves are long lived.
  1. The industry is transformational – Industries adapt to change that occurs over time. Sometimes that change happens over decades, other times it happens over a few years. If management believes its industry will get caught up in the next wave of disruptive innovation, or even unprecedented technological growth, then assets that used to have a useful life of decades might become obsolete in just a few years.
  1. The company is struggling – It goes without saying but if, by extending the maturity on the company’s debt, the increase in interest costs associated with longer-term debt causes stress on cash flow or even financial covenants, think twice. Management needs to assess the downside as much as the upside of every decision when things are tough.

The 10 examples above are not all inclusive, but many are quite rare. Under many/most circumstances it makes sense to asset-liability match as a rule, rather than an exception.

 

What is Disruptive Innovation [and How to Become a Disruptor]

by Leave a Comment

What is Disruptive Innovation

Disruptive innovation is the use of current methods of delivery that exist in other businesses and implementing them to change the game in established ones.

Business Disruptors don’t enlarge the size of the revenue pie, but rather transfer a piece to themselves by inserting their services in the middle, often providing faster or easier access or a reduced price. Here are several examples:

When Blue Nile came on the scene in the early 2000s and successfully introduced online diamond shopping, the company used disruptive innovation. It took an established old world business (the diamond trade) and introduced existing technology (online shopping), then added price and quality transparency to a market that clearly had none.

The end result is that Blue Nile took out the middleman and reduced the cost to end customers by 30-40%.

Open Table used disruptive innovation by inserting itself in the middle between the customer and the restaurant. Now, if a restaurant is not listed on Open Table, there is a good chance their tables will not fill, as customers have become accustom to booking online through Open Table.

The end result is that Open Table consolidated restaurant bookings in one easy to use platform with ratings, availability and substitutions all conveniently available on one webpage.

Uber is the ultimate business disruptor. With the use of a basic app on both the customer’s and driver’s mobile phone, Uber is on the verge of putting the taxi and black car service industries in most major cities out of business. The company contracts with millions of drivers globally and takes the “phone call” and black car service “blackout time” out of the equation. Within 30 seconds of making a selection, the nearest Uber driver calls the customer, introduces himself and arrives within a few minutes knowing exactly where to go. Further, there is no cash or credit card transaction at the end. It’s all billed to the Uber account.

With it’s virtual fleet of millions, the end result is that Uber has consolidated car/taxi service globally and has removed the two things people hate most in cars for hire: wait time and calling the car company and being put on hold.

What other Disruptive Technology is possible?

Here are five examples that I thought of while writing this article:

1. Pizza delivery
2. In home massage
3. In office shoe shine service
4. New car purchases
5. Automobile oil changes

That took me 30 seconds. Imagine what you can do it you really put your mind to it! The point is that most disruptive innovation takes old world products or services and adds a new world overlay, taking a portion of the profit out in the process.

What are five old world products or services in your community? Is there a more effective way of getting those or products/services to the end customer?