A Brighter Future – Maybe

This was the title of an Article in today’s Wall Street Journal in the Small Business section (page B5 of the print edition).

A Brighter future for small business






Some interesting tidbits:

They estimate the number of American small businesses at nearly 30 million.  There are a lot of us out there!

Companies loosen their purse strings – a little:

Many of the outlays will be geared toward improving sales without hurting cash flow.  That means investing in technology to reduce overhead, and increasing productivity through work-force training and development..

Sounds to me like there needs to be some serious cash flow planning going on.  Time to jump on the SurvivalWare bandwagon!

The bad news:

Continued weakness in the housing market is still a challenge for many business owners, who are prevented from tapping home equity or from using their homes as collateral for secured bank loans.

The good news:

Small business loan approvals by small banks and credit unions have climbed steadily since the start of the year and are now roughly half of all applications…

This in contrast to an approval rate of 10% from banks with assets of more than $10 billion.  I know where to target my next loan application!

Here is the full article: http://online.wsj.com/article/SB10001424052970204720204577126672345172312.html

Career Bureaucrats at OMB Analyze Loan Deals for DOE

This was meant to be published in September.  At the end of the day, not too surprising an outcome.

Solyndra is still in the news as a congressional committee holds hearings into how such a thing could happen.  The last line in an article that appeared in today’s Washington Post (“Lawmakers assail Solyndra loan decision – Administration officials defend efforts to rescue failing solor company” pg A15, 9/15/2011) gives a clue.  “At the end of the day, OMB staff used their best expetise.”

The way the process works for the $38.6 billion loan guarantee program (part of the American Recovery and Reinvestment Act passed in 2009) is that companies negotiate with the Department of Energy (DOE) for a government loan guarantee.  Then the Office of Management and Budget (OMB) must sign off on the guarantees, often changing terms.

In the private sector, we call this the blind leading the blind.

DOE claims the program has saved 33,000 jobs so far.  Guess where that number came from?  You don’t want to know.

What is Financial Modeling?

Definition of Financial Modeling

 Wikipedia defines financial modeling as the task of building an abstract representation (a model) of a financial decision making situation. 

I prefer a more inclusive definition:  financial modeling is the task of building a financial model, or the process of using a financial model for financial decision making and analysis.  I would agree that a financial model is an abstract representation of a financial decision making situation.  By abstract representation, we really mean a mathematical model, and to be practical, a computer based mathematical model.  The model usually represents an ongoing business, or a project that requires investment.  Financial models are not limited to profit making entities.  Non-profits, governments, personal finances – all can be represented by financial models. 

What is Financial Modeling used for?

 Financial modeling is used to do historical analysis of a company’s performance, and to do projections of its financial performance into the future.  Project finance is another area that lends itself to financial models.  A project (such as a real estate investment, or a new factory) can be analyzed using a financial model.  It does not have to be complete business.

 Financial Modeling is not just for the accountant or financial consultant, who are called upon to develop financial projections, but also for business owners and managers.  With improved user interfaces and heavy use of graphics, it is now feasible for non-technical people to use a financial model to test options and make decisions based on the projected impact on profits and cash flow.

 How does a financial model work?

Some financial models are “black boxes” with their logic hidden or poorly understood by the users of the model.  Most spreadsheet models fall into this category, because the time it takes to find and understand the relevant formulas is daunting for most users.

However, the more you understand about how a financial model works, the more confident you can be in using its results.  In the next four blog posts, I’m going to explain how financial models work for each of the four main kinds of financial models:

1. Transaction based models

2. Discounted Cash Flow models

3. Financial Statement models

4. Consolidation Models

But first (you can skip this part)..

My Introduction to Financial Modeling

Financial modeling is my passion.  I was introduced to it 35 years ago when I went to work for a company called Comshare, which sold computer timesharing services to corporate customers.  We targeted financial analysts, controllers, and CFO’s who were frustrated at having to go through their IT departments for management reports and analysis.   Some things never change.

Back then a new class of higher level software deemed “third generation” was all the rage.  (The first generation was assembly language, second generation was general purpose programming languages such as Fortran and Cobol.  Who knows what generation we are in now!)  Part of this new wave of software was the genre known as the financial modeling language.

These languages let you construct financial models using English like statements instead of obscure lines of code.  Today, some of us old timers consider spreadsheets – with their obscure cell formulas – to be a step backward, at least when it comes to constructing financial models that are maintainable and understandable.

In the first 3 or 4 years after getting a degree in Industrial and Operations Engineering (a fake engineer as my wife likes to refer to it), I bounced around from job to job trying to find my niche.  When I interviewed for the job in Comshare’sArlington,Va.sales office, I told them up front my goal was to start my own company.  (Good boy – correct answer, shows initiative).

I started in the Fall of 1977 as a customer support representative.  I learned FCS, the financial modeling language sold by Comshare that was growing by gangbusters in the late 70’s. Some of the other popular financial modeling languages at the time were Prophit II and IFPS.

As I settled in, I thought I had died and gone to heaven. It seemed the perfect confluence of interest and passion for me:  computers, business, and customer support.  (Some say it is a character defect, but I genuinely enjoy helping people).

One of our customers back then was the Marriott Corporation – who used financial models to do cash flow projections for hotel projects.  They had a great formula for growth.  They would find investors to put up the money to build a hotel, and then take a management fee for running it and including it in the Marriott network.  Marriott had a dynamic young Treasurer at the time named Al Checchi, who pushed for financial discipline and fact based analysis.  Financial modeling was a great tool for crunching the numbers and analyzing the returns to both Marriott as well as the investors.

Another customer was the First American Bank ofMaryland.  They used a financial model for overall corporate planning.  They put in assumptions about interest rates, average loan balances and deposits by category and by branch – and computed a complete income statement and balance sheet for each branch and the consolidated bank.  The model had to handle the simultaneous equation involved in computing the bank’s cash position each month.  In banking, since cash is also inventory, they have accounts called Fed Funds Purchased or Fed Funds sold depending on whether or not they needed to borrow from the Fed.  I could never remember which account meant you had excess funds.  I seem to remember it was counterintuitive.  The financial model sorted it all out.

Yet another customer was Fairchild Industries, a Fortune 500 aircraft manufacturer and NASA contractor.  They had several independent divisions, and used financial modeling to consolidate the financial reports on a monthly basis, and to prepare budgets.

In addition to helping the customers learn the modeling language and developing models for them, I worked with Comshare’s sales representatives to go out and find new customers.  I’ll never forget a sales call we made at McCormick, the spice company inHunt Valley,Md.  They asked if FCS could interface with their General Ledger (i.e. accounting software) that ran on their mainframe computer.  My answer (with a straight face) was yes, of course it interfaces.  You print out the financial reports from the general ledger, and type in the numbers on the computer terminal. I seem to remember that we did not get the business.  That was the state of the art of automated interfaces at the time.

The disadvantage of financial modeling back then was something we referred to as the “ouch point.”  Computer timesharing was priced based on usage.  In Comshare’s case, there was a charge for the length of time you were “logged on” to the computer, plus some measure of CPU seconds.  These charges included a fee to go to the software company that developed the financial modeling language.

Since financial models gave the finance department freedom from the internal IT department, things got done quickly, and usage soared.  The “ouch point” occurred when the monthly timesharing bill was big enough to be noticed by senior management.  Any IT manager worth his pocket protector would try to use the expense as an excuse to bring the application in-house, and the renegade users back onto the IT reservation.  This was a pre-cursor to the Personal Computer vs. Mainframe battles soon to come.

Comshare made a big mistake and promoted me to branch technical manager in early 1979.  All of a sudden I had all the headaches of being a manager, but not much difference in the amount of pay.  I figured if I was going to put up with the BS, I may as well do it on my own.  So I put in my notice, and to make it a smooth transition, I wound down my involvement from 5 to 4 to 3 to 2 days a week in the waning months of 1979, and was fully on my own by January, 1980.  This was just in time for the steepest recession since World War II, the 2nd Oil Price shock, and a prime rate that peaked just shy of 20%.  Timing has never been my forte.

The company I started was called Ferox Microsystems, Inc.  Ferox was short for ferrous oxide.  Iron oxide.  Rust.  My name is Rusty.  So yeah – it was my ego trip: I wanted to get my name into the company without sounding like a one man band.

My original plan was to develop small business accounting software or something else simple enough to fit on the Apple II computer I had bought that summer.  With a second mortgage, a working wife, and no kids – I had about a 6 month horizon to make it work.

To make a long story short, I found that the Apple computer was much more powerful than I anticipated, especially when they released Apple Pascal, a programming language that allowed you to write programs that were bigger than the computer’s memory.  It did all the swapping for you behind the scenes.  At the same time I had some consulting customers who were reaching their “ouch points” and pushed me to find a lower cost way to do financial modeling.

The result was RCS – The Micromodeler, a financial modeling language that ran on the Apple II computer, and sold for $1,500 a pop in mid 1980.  RCS was short for “Rusty’s Computer System.”  Entrepreneurial ego knows no bounds.

A year or so later I sold the North American rights to a book publisher, who renamed the product DSS/Finance or DSS/F for short. Yet another example of my proclivity for poor timing, or just plain poor judgment.

Fast forward to 2002, and I decided to start Luhring SurvivalWare, Inc. to adapt big company financial modeling technology to small company cash flow problems.  I had gone through some roller coaster years with Ferox, and wanted to help other entrepreneurs avoid some of the mistakes I had made.  By this time, I had shed the second mortgage, my wife was working part-time, and we had 4 kids, the first of which had started college.

My original thought was to focus on detailed cash planning to help entrepreneurs survive a cash crisis – but I quickly found this market segment not particularly receptive to parting with their scarce, hard-earned cash.

SurvivalWare has evolved quite a bit since those humble beginnings to include the full range of financial modeling power to do financial statement projections, consolidations, and benchmarking analysis.

Coming up next: Transaction Based Financial Models

Reverse Mentoring

A couple of posts ago, I talked about the SurvivalWare 20,000 Small Businesses Initiative.  The basic idea is to provide discounted software and training for younger people who could then help seasoned business owners and entrepreneurs apply financial modeling technology to their businesses.  

Just last week an article appeared in the Wall Street Journal:

Reverse Mentoring Cracks Workplace – Top Managers Get Advice on Social Media, Workplace Issues From Young Workers

In an effort to school senior executives in technology, social media, and the latest workplace trends, many businesses are pairing upper management with younger employees in a practice known as reverse mentoring.

The concept is the same as the 20,000 SBI.  There is a lot we can learn from younger workers, and likewise them from us.  Who better to help you harness the power of social networking than someone who spends 2 hours a day on Facebook?  And who better to coach someone on business mores and office politics, not to mention the importance of cash flow – than a 35 year verteran?

Reverse Mentoring Cracks Workplace - 11/28/2011 WSJ

Reverse Mentoring Cracks Workplace - 11/28/2011 WSJ

It seems like several large companies have set up formal programs – and that Cisco set up its “Gen Y Reverse Mentoring Program” nearly two years ago.

Of course, we entrepreneurs have been doing this informally for some time.  It is called nepotism.  Back in the old days, it meant hiring your kids to do menial tasks and learn from the bottom up, expectantly soaking up whatever wisdom you deemed willing to impart.  Now, it is much more of a two way street.  If only we could teach them not to gloat when they prove us wrong about something!

What is a KPI?

A KPI is a Key Performance Indicator.  Not just any performance indicator.  A KEY performance indicator.  The term KPI is used in business to describe the most important measures that tell you how your business is performing.

Key Performance Indicators

KPIs help you figure out where there are opportunities for improvement. 

Remember, “What gets measured, gets done.”  So your challenge is to select the KPIs that matter most to your business, and discard any that are not relevant or may promote bad performance.


Example of a Good KPI

Gross Profit Margin (Gross Profit as % of Sales) – this is a measure of how much Gross Profit you bring in for each dollar of sales.  In general, the more the better.  When would would a higher Gross Profit Margin not be better?  When it costs you sales.  If you raise prices to achieve a higher gross profit, it could be that you drive customers into the arms of your competitors. 

Another way to increase this measure is to focus your selling effort on those product lines with the highest Gross Profit Margins.  This usually is a good way to generate more gross profit.

Yet another way to increase this Indicator is to find alternate suppliers, or buy in larger quantities, or pay cash up front to existing suppliers.  You can see real quickly that focusing on a single KPI can cause things to run amuck.  That is why we have dashboards to monitor a number of KPIs at the same time.

Example of a Bad KPI

Lines of code per day

Back in the early days of computing, a measure of programmer productivity was the number of lines of code written per day.  All things being equal, this may not have been a bad measure.  We observed one company where the programmers started making their programs longer and less efficient when told that their performance was being measured based on the lines of code per day.  The lesson:  be careful what you ask for.  People respond to how they are measured.

KPI Libary

While researching this article, I came across a website / company devoted to KPIs.  They have a collection of over 6,000 KPIs from all sorts of businesses around the globe.  Some of them they offer in sets according to the type of business, or department within a business.  They collect benchmark data as well to help you see how you compare to others.   Highly recommended: www.kpilibrary.com


Of course, beware of self-reported KPIs that do not include the detail.  We recommend SurvivalWare as the first line of attack – for getting accurate data out of your accounting system and combining it with other operational data to form the backbone of your KPIs and Dashboards.  The mapping feature of SurvivalWare is what saves you from the laborious and error-prone keying of data into spreadsheets.