Tag Archives: Administration

Strategy, the Accounting Equation and the failure of Arrium

If I remember rightly, the very first thing you learn in Accounting in first Year Uni is the Accounting Equation.  The fundamental framework that underlies the recording of a business’s activities.

Assets = Liabilities + Shareholder Funds

It means that for everything a company has, there is a claim on it by either the owners of the company, or by those that the company has a liability to (i.e. its suppliers of labour, inventory, cash etc).

But its actually more than this.  Bear with me, its actually the basis of strategy!

Everyone’s heard the lie line “the purpose of the company is to increase the wealth of the shareholders”.  So the Board of Directors can believe they are acting correctly and ethically when they pay out dividends, even if this slowly compromises the company’s ability to survive.   Almost certainly this will also shaft the suppliers to the company.  So when a Board ignores warnings and continues to give cash to shareholders, Administrators need to step in to start looking after suppliers.  i.e.  Looking back to our Accounting Equation, the shift in strategy becomes obvious – the emphasis moves from looking after shareholders, to looking after those with the Liability  (the Shareholders).

This isn’t abstract, it translates directly into the real world.  Have a look at Arrium.  Since One Steel became Arrium in 2012, it paid out a large percentage (41%+) of its profits as Dividends.   Despite plenty of warnings that trading conditions were deteriorating, despite profitability diminishing, and having to maintain crushing debt levels.  It still looked after the shareholders.  Only in 2015 did it have to call a halt to the Dividends.  There was no building a war chest to make the company more resilient.   Consequently, the Administrators have taken over and will now look after the Creditors, to the detriment of the Shareholders.

So the fundamental strategy of a company isn’t the value proposition of a company that it takes to a market segment,  it’s how it balances the competing needs of owners and suppliers so that it can survive!

Sweat Equity & the Bee Sting

Bee StingI staked out my spot in the shade at the skateboard park. Got out my book, biscuits and water bottle and prepared for a relaxing hour while the kids went completely berserk. It seemed like only 2 minutes later when all of a sudden there was that screaming that signifies pain, as compared to the scream where the sibling has done an injustice. Poor old Ben (7 yr old) had got stung by a bee.  And it didn’t muck about – he got his first ever bee sting right between the eyes.  All the adults winced – and he screamed like there was no tomorrow. Clearly he was in pain as he cried for 20 minutes solid. The problem was though that he didn’t get a swelling – not even that little white centre where the venom went in – which made it hard to appreciate his pain after his initial scream.

Which brings me, strangely,  to the topic of Sweat Equity.  Sweat Equity is real and painful and all consuming to the entrepreneur – but when an investor or new partner arrives there is little to see, little evidence to prove its real, and its in their interest to play down what may be there. So what to do?

Having bootstrapped 6 businesses in 23 years, I’ve found my involvement before profitability normally includes four things that actually matter (as compared to the venture idea), which make up my Sweat Equity:

  1. Equipment – I’ve never started a business where I didn’t supply the initial furniture and IT, or loaned in the funds to buy it.
  2. Office Infrastructure – The business own by myself and/or partners has normally started either inside my home or inside another venue I have rented for a different business, and normally using my telephone and internet.
  3. Reduced or Missing Salary – I reckon that never in the history of commerce has anyone ever got paid what they believe they could earn elsewhere.
  4. Favours and other intangibles – Almost every business I have started has cashed in favours I was owed or accessed my network for customers.

The problem with all of this though is that except in one occasion I have always had partners, either on day one or downstream that simply didn’t recognise that contribution.  I’ve had investors come in downstream who have said to me “sweat equity, your f*cking kidding me”.   Despite the fact that they were buying into a profitable business that was profitable because of what I’d previously forgone.

So after a number of years of alternatively ignoring the problem, or simply being frustrated and feeling like an idiot, I finally had the insight that solved my problem. You see when bootstrapping, I jumped in boots and all and didn’t think clearly about the roles I was playing. Not only was I the initial employee (or contractor) but I was also the initial investor – investing in kind.   This thinking was the key to the solution.

Now when I start something I new, I recognise that the business and its partners is separate from myself and my other interests.  My personal company invoices the new entity rental for:

  • Any equipment that I loan in,
  • Accommodation & infrastructure that I cover,
  • Fees for any salary I forgo, and a
  • Management fee to cover the rest.

And if the new venture can’t afford it, any assets I might need to buy are purchased my my personal company and rented in, rather than purchased by the new venture using funds I have loaned in.

The terms for this are normally interest free with extended repayment.  And although I’m still at risk if the venture fails  – I could still lose funds owed – I can at least recover the tangible assets which is a small mercy.

My sweat equity is now fairly recorded and gone from being an intangible to something that’s perfectly reasonable there is solid evidence for.   And the bonus is that this method allows me real insight into the profitability of the new venture, without being camouflaged by favours.

Since I have started accounting for my activities in this way (the last two ventures) I haven’t had a single potential investor question the value of my sweat equity.   Its now like a big throbbing bee sting there for the world to see, rather than just me crying about it.

What happens after failure….

This is a video of a speech I did in June this year on corporate failure at AIMIA.  Rather than talk about climbing back up, or just hanging on the cliff, I decided to talk about what happens when you actually fall off and your business fails. It was probably a bit too candid.  Its not about the legals or the accounting side.  It about that thing that never gets talked about.  What do you, the entrepreneur, do before, during and after.

Failure has bad PR

Why Most Things FailIn mid February the Churchill Club ran a programme called Innovation DNA which was about making innovation a sustainable programme in Australian SME’s.  One of the panellists, Wes Sonnenreich from Deloitte, mentioned that a good failure was one that was quick and cheap.

Which got me thinking about failure again.  My assertion has been for a long time that Australian’s in business are generally terrified of failure  as it creates a stain on your reputation.  Which is fascinating as you can’t have reward without risk, and risk means there will be failure.

Science and FailureAn interesting contrast then to the business approach, is how Australian science treats failure.  Failure is absolutely a  necessary part of any experiment and just as important as success.  For example a test for a link between cancer and smoking, needs to also prove that there is no link between sucking on a tube and cancer (a failure).

The scientists understand the importance of failure and also understand how to give it good PR.  Most grant applications are to test whether there is a link between two areas, instead of trying to prove there is.  The science approach to grants means that you always have a successful outcome (either you proved there was a link, or you proved there wasn’t a link).

So back to We’s comment about good failure being “quick and cheap”.  It seems to me that at a qualitative level a good failure is one that you can learn from (which is why we do exit interviews when employees leave).  But it still leaves a problem on how do you quantitatively measure the value of failure.

Well Wes working for Deloitte gave me the clue.  It made me think how would an accountant treat the problem?  Although it was dusty and unused, I pulled the accountant hat out of the cupboard had had a go at it.  My thoughts went like this.

1.  The value of an activity is normally measured by an Accountant with a Profit and Loss statement.

2. Failure generates costs.

3. An Innovation programme will have a budget that’s used to generate lots of failures.

Cutting to the chase, here’s the idea.

Why not create a profit and loss statement to measure whether its a good failure or a bad failure.

Profit and Loss

The first thing you would do is apportion the budget of an innovation programme across a number of projects.  This would give you a notional revenue figure for each project.

You then apportion the costs of each project to its project P&L.

If the project fails quickly and with low costs, you will get a notional profit, which could be interpreted as good failure.  If you take forever to fail and commit lots of resources and get a notional loss, it means its a bad failure.

Obviously this idea needs to be tweaked for the situation, but I feel it would provide a great platform for starting to measure the value of failure, and give it better PR in commercial environments.

Cloud Money

In 1998 I stopped getting paid to be an Accountant. I came to the conclusion that being a scorekeeper wasn’t satisfying enough for me, I want to be kicking goals, not cheering from the sideline. I called it – Getting in touch with my inner salesman.

I said “stopped getting paid” rather than “stopped working” as I always seem to be keeping a closer eye on finances than anyone else, and always end up being company secretary in my ventures. So as part of my “Moving into the cloud” project, I took a particular interest in the accounting system I was going to use.

Because I am a tightarese, I looked decided to take a look at open source offerings. I started my search at www.osalt.com which is a nice website that offers up open source alternatives to commercial software. The software available seemed to be : Grisbi, jGnash, GnuCash & GFP. All of them nice packages, but much more along the lines of personal finance managers, not accounting packages. Apart from that they were all designed to run on your desktop, not on the web,

Next off to Freshmeat where a search on accounting came up with 208 hits. A closer look brought up 2 candidates: Accounting & GnuCash. Both of which were just personal financial managers Damn.

Finally over to Sourceforge. I tend to search Sourcforge last for software because you have to really know what you want before you get there. With 135,000 Projects registered, its easy to get bogged down. Under Financial | Accounting Systems there was over 1200 projects. Flicking through (90 pages) I came across some interesting prospects such as WebERP which runs in the envirnoment I want and does everything I want plus a whole lot more. A google search for “WebERP Crap” came up with some interesting comments on it though. But at the end of the day, I didn’t like its usability as you need to to do an awful lot of configuration work before you could make anything happen.

SQL Ledger also looked promising, but after having a closer look I decided my bookkeeper would absolutely hate it and be massively inefficient for the first couple of months.

Time to broaden the search and just have a look around the web. And that’s where I ran into SAASU. SAASU is an Australian (tick) Web based system with lots of users (tick). It has a nice interface (tick) and comes preconfigured (tick). It also has some nice features such as auto generating invoices as PDF’s and emailing them off (tick). You can use it for free if your doing under 15 transactions per month, or have the unlimited versions is $59 a quarter. I went with SAASU as it was an easy choice. And now I don’t have to fart about emailing the myob files over to the bookkeeper and holding off invoicing until I get them back.

I also got to configure the chart of accounts so that I could get really useful information out of the system (people who don’t customize their chart of accounts drive me mad).

I didn’t end up getting a free a solution, but close to it. My banking and accounting now all happens online. My finances are in the cloud.

Life is good.

Dark Clouds on the Horizon……

Last time we had a recession in Australia I was working as a branch manger with an electrical components wholesaler (and re-training to be an accountant).  Our customers were generally electricians and small manufacturers of electrical components.  Life was reasonably depressing and you were used to bandying about terms such as “Provision for doubtful debts”.  When I think back to those times (go misty and fade out) I remember what used to get me really agitated.

1.     Salespeople who have compensation based on what they sell only, do not  care whether the debt is actually collected or not.  (The might say they do but they lie!).  In a recession all customers are not created equal.  Unfortunately its really easy to sell to, and get a great price from, people whom don’t intend to pay you.

2.       Customers payment terms will start slipping and all of a sudden its no payment until you chase it.   You will start hearing things like “We pay all out suppliers at 60 days” and of course “the cheques in the mail”.  Expect to see credit control courses appearing in the mailbox.  My advice is to go on one early.

3.     Customer Credit limits become important again.  How much are you prepared to risk.  Are they worth $1,000?, $2,000, $10,000 (Remember that Creditors are the cheapest source of working Capital).

4.    Credit Applications and Credit checks become a worthwhile activity, not just a chore.  If you don’t know what a Romalpa Clause is  then you better look it up.  Have a look at your terms of trade.  If you haven’t got any, then its time to get some and have customers acknowledge the new terms

5.     Know exactly who your customer is .  Just because you think you are dealing with a customer listed on the NYSE, make sure you actually are and not just a subsidiary company.  I can personally tell you $127,000 worth of reasons why you may not get the money back from the parent when the subsidiary goes under.  If you haven’t heard the expression “Lift the Corporate veil”, time to look that up as well.

6.    Understand how liquidators rank creditors and where you sit.  Its not lonely at the bottom, but its unrewarding.

7.     A debt isn’t paid until the money is in the bank, and it has cleared.  The guy that comes in and hands you a cheque to clear his account before picking up more stock is likely to burn you twice.

8.    Remember that just because the funds have cleared, doesn’t mean a liquidator can’t come and claw the money back .

Unfortunately the above 8 lessons have all been learnt with pain.  The upside is that I am sharing them for free.

Everyone can be in business

About once a month I go to the movies with a mate of mine, a kind of very tame boys night out.  Anyway, whilst we were having a beer after the movie he mentioned to me that he had run into a women who owns a couple of hair dressing salons in the UK.  Apparently she is able to travel around as much as she likes, but still has a vice like grip on her businesses.  Using webcams, a web integrated accounting system and Skype, she’s able to monitor almost every aspect of her salons in real time from her home, or from a hotel room from another country.  How cool is that?

Which got me thinking about how virtual I could make a business, and here’s what I came up with.  A business setup for under $1,000 , that can be created without leaving the house, and run from anywhere I have an internet connection.

My products will be the books that I am currently writing on business development. If my product was soft toys or say specialized lamps, I would change the warehousing arrangements.

Firstly I am going to buy a domain name to develop my own brand and make it easy for people to find my products, something like www.brendans-brilliant-business-books.com.au (maybe not that one actually). I can buy the domain name on the cheap at Intaserv or a bit more expensively at Melbourne IT .  Intaserv,  is the cheapest for com.au domain names but their domain name management tools are no where near as easy to use as Melbourne IT.   You get what you pay for, no surprises there.

The products will be advertised online using campaigns purchased from Google Adwords and via the Sensis site .  Of course my online shop will be Search Engine Optimised so it can be found easily.

I will keep a record of what’s happing and run email campaigns using a web based CRM (Customer Relationship Management) system.  The one I have chosen in SugarCRM as; Its Open Source, which for me means its more robust and free.  The trade-off though is that the documentation can be crappy.  SugarCRM requires the same supporting technical environment as my shop.

For the online shop, I am going to use OSCommerce.  This is another Open Source product available at Source Forge or at www.oscommerce.com Again its powerful, robust and free.  It also uses the LAMP stack (Linux operating system, Apache webserver, Mysql database & Php language) as its operating environment.  I will connect the shop to my bank account using a merchant account I will setup at paypal

I going to create the company online at a company registration site such as www.incorporate.com.au  Sites such as this have a web based wizard that walks you through all the steps required then sends you the company register as a pdf document once the bill is paid.   The end result is a not big sexy leather look binder, but I’m not looking for that anyway.

The shop and CRM system need to be hosted somewhere.  I’m going to choose someone like Quadrahosting Which have customer control panels to make life easier.  For around $150 a year I can get around 20 websites hosted and my email chucked in as well.

Since I have purchased some web hosting that comes with email, I can use the control panel at Quadrahosting to setup a whole lot of email addresses that forward email to my gmail account.  I can then get my email, anywhere in the world, that is sent to addresses such as accounts@brendans-brilliant-business-books.com.au and sales@brendans-brilliant-business-books.com.au

Now since I want to be as virtual as possible, I don’t particularly want to hold stock.  I’ve decide to use an online book sales site called www.lulu.com to layout and print my book on demand.  I simply (warning : loose use of the word simple) upload a word file, and select the design and title.  I believe a 100 page hardback will cost about US$16 to produce for a
print run of one.  Lulu will effectively become my on-demand warehouse, printing and sending out books as I want.

My banking is of course easy to setup online.  Many companies now have the internet only account.  Its normally an interest paying, zero fees account that you can tack onto another fee paying account you have.   I tend to use The CBA as my other accounts are there and I like suing the one net banking interface to manage my affairs.  And as mentioned before I will also setup a paypal account that will be the gateway between my bank account and my shop.

Since I want to have a local landline number (rather than giving out my mobile) I am going to use skypeIn .  I can have a local landline number that I can forward to my mobile, or simply leave it as an internet based voice mail system.

Now I can simply have my home as the postal address or the traditional Post Office Box.  However there is now a large number of virtual office suppliers in the market.  I can have a Collins St address for as little as $10 per week.  Companies such as Silent Partner offer you the ability to have that address and rent meeting rooms on as ad needed basis.

To keep track of what’s going on I need a good Accounting System that I can create GST compliant invoices with.  A quick search reveals a number of Open Source (free and configurable) web based (accessible anywhere) solutions, including  SQL Ledger .  There are also some interesting paid solutions for nominal amounts such as SAASU at around $250 per year.

Finally since things are now working well and my overheads are minimal, I am profitable.  Therefore I need to be paying tax (both income and my GST). Just as well that he ATO allows me to do everything online at www.ato.gov.au

My estimate is that I have invested about $800 (before marketing) to get the virtual business up and running and worked for maybe 2 days in total over an elapsed time of 2 weeks.


There are lots of other options for doing all of this.  For instance if I was selling art or t-shirts I would probably use Red Bubble as my shop and warehouse, if I was selling services I probably wouldn’t use a shop,  maybe I would use a free online content management system such as Joomla to run the website.  The principle is the same though, there is now no reason (investment, physical space or time available) why every technically literate Australian can’t be an entrepreneur on the side.

From Kitchen table to IPO – Pick up the New Skills

Last week I talked about the selecting your Advisors when going public that came out of the Churchill Club programme “from Kitchen table to IPO”. which we ran on the 17th April.   We were joined by Silvio Salom of Adacel Technologies Ltd , Leon Lau of Peoplebank Ltd and Michael Abela of Mobi Ltd .

This week I wanted to pass on the main points (as noted by me) that were made by our panel around the news skills required for a public company CEO that you better get on top of:

1.    First and foremost, check your expectation as at the door.  Remember that if you end up with less than 20-30% of your business, you may no longer actually be in control.

2.    Get good at managing your time and your life as the CEO of a Public Company job layers on top of your “managing the business” job.  As a corollary, get good at finding good people to delegate to and trust them to do their job.

3.    Understand that operational management is now very much focused on hitting your forecast numbers, not just simply doing your best.

4.    Good governance and good processes are now critically important.  As a public company you are now much, much, much more likely to be sued.

5.    Understand Australian accounting standards.  Disappointing I know, but just because you want to recognize a transaction as revenue, doesn’t mean you will be allowed to.

6.    If you’re going to grow overseas, get an understanding of relevant international laws, tax and accounting standards.  Its not just Australian companies that are going to sue you.

7.    Get some media training and get good at briefing your PR agents.  The market will be unforgiving if the right thing comes out the wrong way.  Also remember you will now have at least 400 shareholders that will be happy to ring and give you advice on “their” company.

8.    Its not just managing your chairman anymore, get used to managing the entire board.  Handled right, the board can be of enormous benefit.

9.    Accept the fact that you have lost your privacy.  Your staff and competitors now know where you live and how much you earn.

10.    Finally, understand and appreciate that you operate within a stock market.  If you don’t understand the ethical and legal issues around Directors taking out margin loans to invest in your stock in an environment of continuous disclosure, then you better get on top of it.

Apparently though, the perks outweigh the pressures.

Tinkering, categorically, is allowed

In 2004, I was engaged to fix up an advertising business. They had plenty of revenue, but at the end of the financial year, the cupboard was always bare.

Coming in wearing a general manager’s hat, I had a whole series of questions to ask, including “why are we using these spreadsheets to tell us what is going on, rather than the accounting system”. Of course the owners had a whole lot of reasons, some valid, but the majority were complete bullsh*t.

One of the valid reasons was that the profit and loss statement wasn’t particularly useful.

Now having set up lots of accounting systems in my time as an accountant, I’d have to say that 99% of small businesses stick with the default installation because they don’t know what they can do and the power of a well-thought-through chart of accounts.

Packages like MYOB and Quicken always offer default charts of accounts for business types, but I would argue that you shouldn’t let yourself be seduced into using them as anything but an initial guide.

Take, for instance, your expenses. Most accounting systems come with a whole lot of default line items such as stationery, legal fees, rent, advertising and travel.

These types of classifications aren’t really useful as they only let you have a detailed view of your business, “hmm… stationery expense up last month, we’d better use less paper!”

What I like to do is take a more macro view of the business, to determine the top categories of expense, then populate each of those top categories with the line items appropriate to the business.

For instance the Churchill Club uses the following categories:

* Startup expenses.
* Financial expenses.
* Information technology.
* Marketing expenses.
* Office expenses.
* Professional services expenses.
* R&D expenses.
* Staff expenses.
* Telecommunications expense.
* Travel and accommodation expenses.

Inside each of theses categories, I have line items that reflect how the Churchill Club operates.

For instance, inside my professional services expenses category, I have line items for accounting fees and legal fees. Inside my marketing category I have line items for promotional materials, signage, website expenses and discounts given. (The website expense is there rather than in IT, because it’s a marketing activity, not an infrastructure activity.)

Because I have structured my expenses like this, I can simply compare things like, “Am I spending more on professional services than marketing?” Whoa – warning flags if that’s happening! But I can still drill down to determine how much I am spending on individual line items – for example, bloody accountant is costing me a fortune.

Also, by separating out my startup costs as a category, I can ensure that one off costs such as logo design don’t confuse my thinking about how much I am spending on marketing.

Plus, my line items are very specific to my business, rather than an attempt to use generic accounting words in an attempt to sound professional. For example, I have no staff amenities; however I do feed my advisory board once a quarter.

Those expenses are included in a line item called “advisory board amenities” listed under the staff expenses category. This is much more useful to me than thinking maybe we are going through too much coffee, or not enough!!.

Finally, I remove all those line items that always have zero values. Ask yourself; what’s the point of having a category for “overseas travel” if you never do it. Instead create line items for things you actually do, rather than shoving them somewhere they don’t fit.

If you spend lots of money on taxis and a little bit on parking and rental cars, why not have taxis as a separate line item from rental cars and parking. They can all sit under local travel so you know what this area of your business costs you.

Now the best thing about computerised accounting systems is that all is not lost. You can reorder your chart of accounts and change the names of line items, without losing all your data.

Go on; see how you can tweak your accoutning system to actually help you manage your business, not just track debtors.