Remember the Dollar?

8 October 2008

It wasn’t long ago that the strength of the Canadian dollar compared to the USD was a source of major concern for Canadian manufacturers.  With the recent turmoil in the markets, the Canadian dollar is weakening again as traders speculate that the recession will reduce demand for the commodities, oil in particular, that are the backbone of the Canadian economy.

USD/CAD currency exchange prices over the last few years.

USD/CAD currency exchange prices over the last few years.

I’m sure many in the manufacturing sector are torn between the impacts of the recession and the benefits they will get from the weakening dollar.  To survive the plunge in the US dollar from the heights of 2002 when it was trading at over $1.50 CAD to the lows in November 2007 when it hit nearly $0.90 CAD, manufacturers that sold into the US economy had to become very efficient.  It was essential to manage Canadian dollar costs to ensure profitability.  If goods were sold in US dollars, there was a double impact of falling revenue in Canadian dollars.    Many were forced to raise the prices of the goods they sold into the US.  A strengthening of the US dollar will reverse these impacts and the now efficient firms will benefit.

For most of 2008, the dollar has been trading near par but it has risen nearly 10% to $1.10 in the last three months.  [Update: As of the 10th October, the USD/CAD rate had increased to over $1.18]  That has to be a relief to manufacturers that sell into the US.  It represents free revenue in foreign exchange as well as the opportunity now to reduce US prices in the face of a recession.

The question is whether the recession will have more of an impact than the dollar.  My own guess is that the coming year will be a bad one and that the Canadian economy will again start to look good compared to the US which will reverse the trend in the dollar.  So enjoy the bump while it lasts but don’t depend on it.  More belt tightening will be required in the future.

Pragmatism Always Wins

3 October 2008

Pick your niche and stick to it.  Focus focus focus.  Stand for something. Don’t waiver. Stay on message.  Stay on target.  Damn the torpedoes.  And while you’re at it, go down with the ship.

Following the tech crash in 2001, Sun Microsystems did not change its strategy.  It continued to invest heavily in R&D at a rate nearly twice as large as its competitors.  It did not adapt its product lines to meet the customer demands for cheap off-the shelf products.  They stuck to their strategy but they lost their competitive advantage.

Now consider the Republican move to shore up the financial system. (Shore-up is a much better description than bailout, don’t you think?)  This is a clear departure from their message.  It is a socialist move that is not consistent with Republican values.  Does that make it wrong or is it more likely that these extraordinary times do not fit nicely with the policies of any political party.  New thinking is required because sticking to the message in times like these does not make sense.

Being dogmatic about your strategy in the face of external changes that affect your business is wrong.  Predict, plan, adapt is better advice. There are things that happen to businesses that require you to change.  Being stuborn and dogmatic about it won’t help you.  In these cases, pragmatism always wins.

Thanks to Seth Godin for getting me on the soap box.

MJM Consulting – Helping companies grow.

No Strategy Survives Contact with the Market

29 September 2008

The recent collapses of the financial markets highlights the existence of change as a force of nature in the business world.  Change happens. All the time.  If stability doesn’t exist, it doesn’t make sense to plan strategy around stable business markets.

To paraphrase Helmuth von Moltke the Elder, the Chief of Staff of the German Army in the 1800’s: no strategy  survives contact with the market.  Rather than indicating that strategy is pointless, the comment is meant to show that strategy must react to changes in the market.  It must be fluid rather than fixed, open-minded rather than dogmatic.  It is a game of options and optimization.

The key, then, to effective strategy development is to ensure you have options and contingency plans and that you are continuously working to develop and optimize these plans.  To quote Moltke again, “Plans are nothing, Planning is everything”.  The essence of this thought is that the plan will invariably change before it is completed so don’t concentrate on the plan, concentrate on the processes of planning.  The plan will be obsolete as soon as you e-mail it.

MJM Consulting – Helping companies grow.

The Mechanics of Money: Building Business Plans

26 September 2008

Any business plan needs proforma financial statements regardless of whether it is boot strapped or VC funded. As the owner, founder CEO, your plan must show that you are going to make money and show it in a way that other people can easily understand it. Financial statements are the key method.

(Dear reader, if you are an accountant, please read no further, it will be a waste of your time. If not, I am assuming you have a basic understanding of accounting processes.)

Generating proforma statements is not a trivial undertaking. Fortunately, spreadsheet software was invented for just this purpose which makes the complexity much easier to handle. They key to designing a good set of proforma statements lies in understanding the mechanics of how value flows around the various accounts on the financial statements. Peter Kemball, CEO at Acorn Partners, likens this to a plumbing problem. Its is a good analogy with lots of fun clichés. Use your house as an example. Water (value or wealth) flows in and flows out. Within your house, you have reservoirs (accounts) where water can be stored and pipes (the rules) which govern the flow around the system. The goal of business is, simply put, to keep more water flowing in than flows out until the house floods (which, in the analogy, would be a good thing).

Note that in the analogy, water is equated to value not cash. Cash is just one “reservoir” of value but there are many reservoirs in the company where value is stored. So, as well as cash flow, think of value flow in the company. If you can keep increasing the value, you can likely find ways to manage the cash flow. Value can be monetized and converted to cash if need be. The clear default for startups is converting equity to cash by getting investors to join the company but it not the only choice. You can also convert the value in your accounts receivable to cash using Factors or speciality investors. Sell your future subscription income, trade on tax credits – it is all possible. This is one area of accounting where creativity pays.

In designing your financial plumbing, you need to select the accounts to use and the rules that govern how the money will flow around. These decisions will eventually drive the selection and setup of your accounting software. Are you, for example, running a product business which will require inventory with accounts for finished goods, work in progress and raw materials or is the business based on a service model with no inventory? It is important to define these at a rather low level but not so low that the account becomes trivial. The point of this exercise is not to create a Rube Goldberg contraption, but to manage the complexity of the whole by breaking it down into small and simple components that are controlled by your assumptions.

Some key assumptions include:

  • Growth rates and revenue
  • Cash conversion times
  • Fixed, variable and semi-variable costs
  • Fixed asset costs & depreciation
  • Interest rates
  • R&D, Marketing, Operations and Administration costs and time lines

Once you have the plumbing designed you need to translate the design to your financial spreadsheets. Here are my key time savers:

  • Don’t worry about format of the working sheets.
  • Keep all your assumptions on one sheet along with the key summary performance graphs and data generated by the other sheets.
  • Each account needs its own sheet. Columns are set up as weeks or months and rows are the elements of plan that affect that account.
  • Some costs are too complex to model within an account. Use separate sheets for these and then link the costs back to the relevant accounts.
  • The sheets used to display the summary financials should only have links and calculations on them – you should never have to enter values on them. The balance sheet should draw all its information from the subordinate accounts with the exception of cash and retained earnings which come from the cash flow and income statements respectively.
  • Get the model working before you try to make it presentable. By working, I mean the balance sheet should always balance as you change the assumptions.
  • Generate several sheets for the presentable financial summaries and tables that you can link to in your business plan documents. Spend the time to make these sheets look good.
  • Keep data in one place. Use DDE or ODB links to connect the spreadsheet model to your documents so that the documents are updated automatically. As much as possible, keep the text in your documents vague and refer to tables and graphs that you have linked to. This will save lots of time in revising the words as you modify your assumptions.

Once all of this is done, you will have a solid model on which to assess your assumptions and build what-if cases. While you may start out with good guess at what the critical assumptions are, the model will help you identify just how critical they really are. It will also help you determine how much cash you will require to succeed and the creative ways you can use to get it.

MJM Consulting – Helping Small Business Grow.