The Entrepreneurs’ Chronicle
Issue Two |
Subscribers: 1,178
Editor: Ryan P. Allis,
Publisher: www.zeromillion.com
Sponsors: Center for Entrepreneurship & Technology Venturing, The Entrepreneurs’ Coalition
Entrepreneurs are simply those who understand that there is little
difference between obstacle and opportunity and are
able to turn both to their advantage. - Niccolo Machiavelli,
15th/16th century Italian
Statesman
:: CONTENTS
1. Message from the Editor:
On This Second Issue
2. Financial Ratio Analysis, from the Business 101 Series
3. CEO & Chief Executive Officer: Bootstrapping
a Company
4. Distinguished Entrepreneur Interview with Dave Rizzo, President & CEO,
MCNC
This newsletter may be
read online at http://www.zeromillion.com/echronicle/april03.html
------------------------
Section One
Message from the Editor
------------------------
Welcome
to the second issue of The Entrepreneurs’ Chronicle.
This newsletter will contain articles on topics related
to entrepreneurship, interviews with entrepreneurs,
and reviews of books appropriate for the entrepreneur.
It is published on the first day of every month and
brought to you by www.zeromillion.com, the Entrepreneurs’ Coalition,
and the Center for Entrepreneurship & Technology
Venturing at the
This
month’s issue begins with an excerpt from an article
from the Business 101 series at www.zeromillion.com entitled, “Financial Ratio Analysis.” Following
this is an article by myself on
the numerous roles taken on by a start-up entrepreneur
attempting to grow his or her business without VC funding.
Finally, the newsletter concludes with our first Distinguished
Entrepreneur Interview. David Rizzo, President & CEO
of MCNC, a
Next
month we will be publishing an article on the best
and worst parts about being an entrepreneur. If you
have any stories, anecdotes, or thoughts on what your
best and worst times have been, please do send them
to allisr@kenan-flagler.unc.edu.
The best will be published in the article.
If
you have any comments, suggestions, or would like to
contribute content to be published in the newsletter
or online, I encourage you to contact me at allisr@kenan-flagler.unc.edu.
Please do feel free to forward this newsletter on to
your colleagues and associates. On behalf of the zeromillion.com
team I thank you for being a subscriber.
Yours entrepreneurially,
Ryan P. Allis, founder
http://www.zeromillion.com
Business & Entrepreneurship Resource
P.S.: I encourage you
to join us often in the discussion community at www.zeromillion.com/community/.
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Section Two
Financial Ratio Analysis
Contributed by YoungEntrepreneur.com
--------------------------------------------------
The
Balance Sheet and the Statement of Income are essential,
but they are only the starting point for successful
financial management. Apply Ratio Analysis to Financial
Statements to analyze the success, failure, and progress
of your business.
Ratio
Analysis enables the business owner/manager to spot
trends in a business and to compare its performance
and condition with the average performance of similar
businesses in the same industry. To do this compare
your ratios with the average of businesses similar
to yours and compare your own ratios for several successive
years, watching especially for any unfavorable trends
that may be starting. Ratio analysis may provide the
all-important early warning indications that allow
you to solve your business problems before your business
is destroyed by them.
Balance
Sheet Ratio Analysis
Important Balance Sheet
Ratios measure liquidity and solvency (a business's
ability to pay its bills as they come due) and leverage
(the extent to which the business is dependent on creditors'
funding). They include the following ratios:
Liquidity
Ratios
These ratios indicate the ease of turning assets into cash. They include the
Current Ratio, Quick Ratio, and Working Capital.
Current
Ratios
The Current Ratio is one of the best known measures of financial strength.
It is figured as shown below:
Current Ratio = Total
Current Assets / Total Current Liabilities
The main question this
ratio addresses is: "Does your business have enough
current assets to meet the payment schedule of its
current debts with a margin of safety for possible
losses in current assets, such as inventory shrinkage
or collectable accounts?" A generally acceptable
current ratio is 2 to 1. But whether or not a specific
ratio is satisfactory depends on the nature of the
business and the characteristics of its current assets
and liabilities. The minimum acceptable current ratio
is obviously 1:1, but that relationship is usually
playing it too close for comfort.
If you feel your business's
current ratio is too low, you may be able to raise
it by:
-
Paying some debts.
-
Increasing your current assets from loans or other borrowings
with a maturity of more than one year.
-
Converting non-current assets into current assets.
-
Putting profits back into the business.
Quick
Ratios
The Quick Ratio is sometimes called the "acid-test" ratio and is
one of the best measures of liquidity. It is figured as shown below:
Quick Ratio = Cash + Government
Securities + Receivables / Total Current Liabilities
The Quick Ratio is a much
more exacting measure than the Current Ratio. By excluding
inventories, it concentrates on the really liquid assets,
with value that is fairly certain. It helps answer
the question: "If all sales revenues should disappear,
could my business meet its current obligations with
the readily convertible `quick' funds on hand?"
An acid-test of 1:1 is
considered satisfactory unless the majority of your "quick
assets" are in accounts receivable, and the pattern
of accounts receivable collection lags behind the schedule
for paying current liabilities.
Working
Capital
Working Capital is more a measure of cash flow than a ratio. The result of
this calculation must be a positive number. It is calculated as shown below:
Working Capital = Total
Current Assets - Total Current Liabilities
Bankers look at Net Working
Capital over time to determine a company's ability
to weather financial crises. Loans are often tied to
minimum working capital requirements.
A general observation
about these three Liquidity Ratios is that the higher
they are the better, especially if you are relying
to any significant extent on creditor money to finance
assets.
Leverage
Ratio
This Debt/Worth or Leverage Ratio indicates the extent to which the business
is reliant on debt financing (creditor money versus owner's equity):
Debt/Worth Ratio = Total
Liabilities / Net Worth
Generally, the higher
this ratio, the more risky a creditor will perceive
its exposure in your business, making it correspondingly
harder to obtain credit.
To read the full article and learn about income statement ratio analysis http://www.zeromillion.com/business/financial/financial-ratio.html
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Section Three
CEO & Chief Executive Janitor
by Ryan P. Allis
--------------------------------------------------
When
a company is started, unless there is ample financing,
often the owner will find himself or
herself all alone for a while until sales start picking
up and cash flow can support hiring help. Preation,
Inc. CEO and colleague of mine Aaron Houghton once
told me, "As a start-up CEO you are the Chief
Executive Officer, Chief Executive Painter, and Chief
Executive Janitor." Now, clearly this is not the
case if you are backed by venture capital or have enough
funds to bankroll a staff. However, many people simply
do not have much capital they can invest, do not have
access to venture capitalists, or simply wish to avoid
going into debt or selling off part of their company.
Office space for these people, at least at first, often
consists of dorm rooms, garages, or third bedrooms.
So how does one get past this start-up phase? What are some ways to start building
cash flow? And at what point does one invest in things like office space, intellectual
property protection, accounting software, inventory, or employees?
Well, in August 2001, I met with a man who had founded a number of companies,
and was working on his next. I'll call this man simply Mr. R. When I came aboard,
everything had been put in place and the groundwork had been done. Mr. R had
a product and had spent the past year laying the foundation for the company
that would sell that product. Only a few hundred dollars in sales had been
made to that point, but things were ready to take off.
I worked with Mr. R until August 2002. At that point it was clear to see that
he had done his groundwork well. By that time, the company had made over $800,000
in sales on that one product, with a 51% profit margin, and no outside financing
or venture capital. This was a bootstrapped company from start to finish, and
for a two person venture it surely did succeed. So what tips would Mr. R give
to someone without too much capital going through that initial start-up phase?
Well, I had the chance to ask Mr. R just this. Here's what he said.
“First
of all, if you are on a tight budget, be ever mindful
that the last thing you need is overhead. Don't put
the cart before the horse. Find a product. There are
products out there. Look through the classifieds. There
are people out there who have wonderful products but
do not know how to market them. Contact these individuals
and make them an offer. Give them a small piece of
the action and buy the product out from them or license
it. If you do not have money, find investors. Just
make sure you retain control of the company. There
are books available that can show you how to draft
sample agreements like this.
The
small entrepreneur simply needs to learn that much
can happen in their own garage. You can take a product,
spend a minimal amount of money to get a label on it
and packaging and take it out door to door to small
shops. Go to these shops and tell them you'd like to
put the product in on consignment basis. Here you may
run into trouble with stores asking for credit, but do what
you can and extend credit if you are able to get some
initial cash flow.
Then
take your product and sell it to your friends. If your
product is as good as you say it is those same friends
are going to be telling their friends. You can build
off a simple little platform like this.
Then
build your web site, get an affiliate program going,
and go from there. The key is finding a superior product
that can be manufactured at a very low cost. The typical
successful television product needs a seven times markup,
700%. Educate yourself about markups and costs.
Packaging
is essential. Spend more on your packaging and written
materials. If you cannot write, go find a copywriter
that can. Get out and talk to people and get feedback
on your product as often as you can.
If
you have a superior product, you'll win the battle.
If you do not, odds are you are going to lose.
Learn
to do what you can yourself. Don't walk into a lawyer's
office and spend $2500 needlessly. Find an incorporation
mill that can do it for $250. Learn how to write copy,
that's really essential.
If
you make a mistake, be sure to learn from that mistake.
If you fail, be sure you learn from the failure. I've
not known a successful entrepreneur that didn't have
four or five failures. I might be a notable exception.
I've only failed two or three times [laugh].
Just
keep punching. It's tenacity that wins.”
Very
powerful words from a man that built a very successful
company. If you find yourself in a position
without too much money, but do not want to take on
debt or sell off stock, internalize these words.
Doing the foundational groundwork for a new company can take time. Common jobs
include sourcing products, filing articles of incorporation, printing letterhead,
business cards, and brochures, writing sales copy, finding office space, developing
a web site, negotiating contracts with suppliers, purchasing an initial inventory,
registering a trademark, and buying office supplies, among many others.
In August 2001, when I began work to work with Mr. R, there was not enough
cash flow to hire any employees yet, so he and I had to do everything. The
CEO and janitor saying rang true indeed for Mr. R, while I was a jack-of-all-trades
myself. I handled all the emails, the phones, the packaging of orders, the
marketing, the walk-in customers, the affiliates, and the web site. Mr. R handled
the bankers, the forms, the accounting, and the most important customers. By
no means were we in
After incorporating, Mr. R went five months before obtaining office space and
eleven months before bringing in any outside help. After bringing me on as
an independent contractor, no one else was hired for three additional months.
Soon enough, however, we were lucky enough to begin to have enough orders for
the product to require a part-time person to package the orders and take them
down to the post office. This position soon became full-time as more and more
orders came in. This person also kept track of the inventory of all supplies
and reordered items as needed.
By February of 2002, the company had grown to the point where I was spending
much of my time answering the phones and emails instead of marketing. At this
point, the company hired someone to take care of customer service. This person
took over all the customer service emails and answered the phones, allowing
me to concentrate on growing sales. In April, the company hired was able to
hire an eventual replacement for me - someone that I could train in my marketing
methodology and practices before I left for college that August.
Finally, in July the Mr. R brought on an accountant to take over as Chief Financial
Officer. The company at that point was having trouble with the merchant account
processor and the expenses were starting to grow. The CFO handled payroll,
took checks to the bank, and went over the expense reports and merchant account
figures with a fine-toothed comb.
Mr. R recommends that once your sales get to the $100,000 per month level that
a full-time accountant should be hired. While some readers may consider it
difficult to get to this sales level, if one has a good enough product, good enough marketing systems, and has done the groundwork
well, he or should be able to get to this level in a matter of months. It took
Mr. R's company just nine.
Start with a good product, do the groundwork and due diligence well, don't
skimp on good advisors, put the proper marketing systems into place, get the
right people on your team, then mix in a little time and an ounce of perseverance.
Finally, just remember as you toil away endless days and endless nights on
your dream, on your baby, on your future million dollar company, that the entrepreneurial
gods are with you, and cheering you on every step of the way.
--------------------------------------------------
Section Four
Excerpts from the Entrepreneur Interview Series
--------------------------------------------------
In collaboration with
the Center for Entrepreneurship & Technology Venturing
(CETV) at UNC’s
Below we include the full interview with MCNC President & CEO David P.
Rizzo:
1. What attributes make a successful entrepreneur?
There may in fact be different attributes
for different people. For
me, I felt the need to do something on my own outside
of an established culture. So, first, I would say a healthy independence. Second,
a high degree of confidence. A sense that even if I fail
things will be fine. Third,
a willingness to get your hands dirty, answer the phones
if necessary. Fourth, an inherent ability
to sell yourself and your company. There
are probably many more!
2. What do you believe are the necessary elements for a business
venture to succeed?
1)
You have to provide something that people actually
want. You have
to know the answer to this, not just assume they want
what you provide. 2)
You must have an unwavering respect for your customers. Treat
them like royalty. 3)
You must be able to attract people that complement
your own personal skill sets. 4) you must be willing to let people do their jobs, you have
to let go. 5)
Cash is king, watch it like a hawk. 6)
Make sure your adequately capitalized. I’d
rather own 10% of a large enterprise than 100% of a
bankrupt one.
3. How essential do you see an undergraduate degree or MBA
being for an entrepreneur?
In
today’s economy, where low value-add jobs get shipped
offshore, I think an advanced degree is critical. I
don’t believe it necessarily means that it has to be
an MBA. High value
add companies are going to have to focus on
innovation as a constant process. I
think it would be highly desirable to have some form
of technology or science in ones background coupled
with an MBA.
5. What role has academic education played in your own life
versus the role of experiential learning and what has
been the relative importance of each?
I majored in Economics and that discipline
is excellent in that it really teaches the concept of
trade-offs and scarcity. At the time I went through college and into
the working world an MBA or advanced degree was not as
important as it is today. Had
I to do it over I would have pursued both my MA in Economics
and an MBA. I
did have the opportunity to pursue significant professional
development at the
6. What are the three most important lessons you have learned
about business and entrepreneurship in your lifetime?
1) I would rather be 80% right and
make a decision today, than 100% right and make one six
months from now. 2) Hire a CFO a year before you think you need
one. 3) Fire people
six months before you think you should….their peers are
watching while you wait.
8. What have been the keys to your success?
1) Hiring good people. 2)
Market timing. 3) Ability to attract capital.
9. What advice would you give to an aspiring young entrepreneur?
Don’t go it alone, it’s lonely. If you can’t find an experienced entrepreneur,
find some friends to start with you. Ask for help when you need it. Everyone wants young companies to be successful. Form
a good Board. Dot your I’s and cross your t’s on all the legal stuff so it does not come back to bite
you later.
10. What books would you recommend to aspiring entrepreneurs?
Which books have influenced you the most?
Crossing the Chasm by Geoffrey Moore
11. Describe some of the biggest challenges or obstacles you’ve
have encountered as an entrepreneur? How were these
overcome?
The
downturn in the economy was huge. It
required the shedding of non-essential business lines
and a refocusing on core activities. It
also fundamentally changed the capital markets requiring
more focus on M&A activities.
12. What memorable mistakes, if any, have you made in business?
What did you learn from them and how can they be avoided?
Remember an IPO is nothing more than a financing
event. Don’t get swept up in investment banker hype. NEVER,
spend sales and marketing dollars solely to influence
Wall Street. Keep
your sales and marketing dollars focused on near term
customer acquisition.
13. What trends and
changes do you see occurring in business today? What
new technologies and industries will everyone be talking
about in twenty years?
Business are much more willing
to source labor offshore. As
a result, its critical that you focus on value add propositions that
are unique to the customers business environment. I
don’t think we will see revolutions in technology. Rather,
I think we will see continuing evolutions but at an
increased pace.
14. What are the best
and worst things about being an entrepreneur?
Other than the stress of initial startup there are no bad things about being
an entrepreneur. You have control over
your destiny, your calendar, and the vision is yours. What’s not to like?
15. Would you comment
briefly on the importance (or unimportance) of the
following attributes to an entrepreneurs.
Persistence - Very important, if you have a tendency to give
up when things get tough…don’t jump in the water.
A College Degree - More important now than in the past but creativity
and intelligence can come in all forms. Not necessarily required.
Knowledge of Accounting
and Finance - Not that important
at least initially, you can buy this help.
Knowledge of Marketing - Knowledge of your markets is critical. Knowledge of marketing less
so, again, you can buy this.
Confidence - Critical, not only for your personal well being,
but your customers will place a lot of value on your
own level of confidence.
Leadership and the Ability
to Inspire - Essential, if you can’t
convince others, you’re going nowhere.
Ability to Communicate
Effectively - You either
have to have this or you have to have a partner that
is outstanding at this. You
must be able to articulate the value proposition.
Integrity - What could be more
important? If
you don’t have this, you won’t last six months.
Having the Right Advisors - Critical, you have
to know what you don’t know and complement it. Good
Advisors can also open doors.
Good Networking Skills - Pretty important but sometimes overrated.
Motivation and Ambition - If you
don’t have this what’s the point of starting your own
business?
Having a Good Idea or
Plan - This is important but its also important to have flexibility
in the plan. The
one thing you know about a plan after you write it
is that it’s wrong.
Being Able to Build
a Solid Team - Unless you’re
a one person show, this is perhaps the most important
skill you will need.
Being Able to Execute
- Again Critical
Having a Bias towards Action - Critical but not like
a cowboy. Thoughtful action is appropriate.
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This
concludes issue two of The Entrepreneurs’ Chronicle.
We'll see you in May.
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(www.entrecoalition.org)
and the Center for Entrepreneurship & Technology
Venturing at the Kenan Institute for Private Enterprise
at the
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"The successful person makes a habit of doing what the failing
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scientist