Know Your Numbers: Revenue

This week and next week we are going to talk about the best known number on any of the Financial Statements and that is Revenue. To talk about Revenue, we will actually be exiting the Financial Statements to get to Revenue. At this point, you are going to point to my last 2 Wednesday articles that talk about Sarbanes-Oxley and Deferred Revenue. Most people don’t have to worry about the accounting for this and if you do, please seek the advice of professionals. It is complicated and there is an astounding amount of wiggle room in it.

But for most of us, Revenue is clear. It is the amount of money that pay you for your products and services. The real issue is the fact that Revenue is a Result of other operations within the business. Particularly in Sales. So, I want to look at those numbers and take a step backwards through them to the ways to be thinking about Revenue. After we are done with that, we will start looking at Expenses.

When you get a customer to buy, the most important information is how many transactions you require to make your Revenue Target. This relates to what is called your Average Selling Price (ASP). At this point, most business owners balk because each sale is unique. They don’t want to think in aggregate, but having an ASP is a very valuable piece of knowledge. This number drives that number of transactions required for your business. The number of transactions (let’s use a month as the basis for this discussion) creates a whole lot of significance around how you are organized. You can imagine that a business like a Grocery Store is built very differently than a Realtor. The value of each transaction is vastly different. And that is what causes changes that companies are built.

The other real difference that companies can make is in the average number of transaction per customer. You would think that this is not changeable for something like a Realtor. But even here, can the person sell Home Warranty Policies (as an example)? There are many creative ways to provide ancillary products and services for follow on business. Depending on how you look at this it could either lower your ASP (with a greatly increased number of transactions) or raise your ASP (with the same number of transactions. Either way, those type of add-ons help make a business profitable. The largest cost is in landing a customer (and we will get there next week). Once you have one, it is much easier to upsell the customer into additional products and services.

Back to the number of transactions for just a second. Think about the number of people in Sales and the time required to make a Sale. All of this dictates significant metrics around the value that each Sales Person needs to bring in and thus their quota. As I have posted about alignment in the past, this is a good way to make sure that what you are proposing for a quota structure makes sense.

So, there it is. Your number one Key Results Indicator (KRI) – Revenue.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Net Neutrality Friday

Big News. North America just ran out of IPv4 addresses. Well, it has been coming for a long time and the truth is we are not really even out now. There are places we could recover a huge number of them from if we wanted to. But folks want to use this to spur things along to IPv6. For those non-techies out there, think of this as something akin to the Y2K problem. If you are not involved in this now, then there is nothing for you to worry about.

Things have been relatively quiet on the regulatory front recently. About the only thing that is really being talked about is this notion of Gigabit Cities. I want to be clear that when I talk about this I am talking about Residential Service. Businesses need access to high speed data and often look at buildings as having the capability that they need or not when locating. This is one more requirement just like space, power, and parking to businesses.

The question is really “Does the Highest Speed Internet Service do anything to help a City?” This is a really tough question. There were a number of economic studies over the years that showed that increasing the number of telephones available per 1,000 residents was directly related to economic growth. But there are lots of studies that show the US is massively behind on Internet Services (and I think these are greatly overstated), and yet the US Economy remains strong. Does it do much on a local level? Well, are you going to move your company to a very small town to get great Internet? Probably not. You will have other problems like hiring and transportation in general.

So, where does this help? Telecommuting. As we move into the future, there is a whole push by young people to become more freelance workers. This type of location independence is fostered by Broadband Internet. Not in every job and not in every industry. But even my sister does most of her job from home. So, there may not be a great local economic impact to a town or city. There might be a lifestyle impact on individuals. I know many very small Internet Companies (even Sole Proprietors) that hire folks in India or Pakistan to do specific work.

Virtual Teams are the way of the future. Note there is a HUGE business opportunity here that is largely unaddressed now. The truth is that it is difficult to manage outsourced people and teams. Software and Services that would make this easier would be great. It is hard enough to manage employees and contractors that show up at your office. People that are half the world away are super hard to manage. Many times there are great intentions and poor communications leading to poor outcomes. Maybe having more bandwidth can help this too!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Sonoma County: News and Notes

I want to start this week with a reminder about new workshop. On October 20th, I will be co-hosting “How to Grow and Manage Your Business Profitably” with Don McMahan and Shane Campbell. The Workshop will be held at Noon at the Finley Center and Lunch will be provided. You can click HERE to register for the Workshop on EventBrite. The cost is $25 and each attendee will also receive a copy of “The Exit Strategy Workbook”. I am looking forward to seeing many of you there!

I think the outpouring of support for the victims of the Valley Fire has been extremely impressive. Everywhere I go, I see people, businesses and civic organizations working to help collect money and items for those that have lost everything. To date, the Valley Fire is the 3rd worst in California history. If you have provided assistance to those in need, Thank You! We all need a little help some times. It is a reminder that fire is a hazard here in California, even in years that are not a drought. I talked to a client who lost an outbuilding in the fire. He said that the biggest thing that saved their house was compliance with the fire regulations. It allowed the crews to work and save their property. Something to think about.

I was at the San Francisco Small Business Expo last week. I met lots of new folks and the level of activity was great. It looks like there is a lot of business going on out there. That is a really good sign for business over the next year or so. I wonder if there are some lessons that people could learn to help them manage that growth?

The word that I am hearing is that the grape harvest is going to be down a bit this year. Not the best economic news for the North Bay, but other sectors look to still be doing well. Hopefully, we will see this keep things going in a positive direction for us all. It is one of the reasons that I am so interested in our economic diversity. An updated forecast is coming in October from the Sonoma County EDB and the North Bay Business Journal. Good event and you may wish to go!

Finally, on a more personal note, I was saddened by the passing of Yogi Berra. I am originally from New York and am a long time Yankees fan. I always thought the world of Yogi and am a big fan of his quotes. I use one of them in my advertising: “If you come to a fork in the road, take it.” His quips always make me smile and he was a reminder of that gentler past.

Have a great week!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Know Your Numbers: Income Statement, Balance Sheet, and Cash Flow

As I said last week, it is really important to know your numbers in your Business. I want to make clear that there are 3 different Financial Statements that have 3 different purposes. They are listed in the title, but for completeness: Income Statement, Balance Sheet, and Cash Flow Statement.

The most recognizeable of these statements is the Income Statement. The goal of the Income Statement is to define the Operating Business. This is where Revenue and Profit are defined. When you read an Income Statement, you are trying to discover if the company is making money on an ongoing basis. Now there are some types of businesses where this can be more complicated. For example, I have discussed Autodesk over the last couple of Sonoma County: News and Notes posts. They are in transition to a subscription style business from a point of sale business. This means that their Income Statement is a problematic at this time. But for most Businesses this is not an issue. The core of the Income Statement is to look at Revenue during a time period and deduct costs from it to arrive at Profit. When a company is public and they announce Earnings Per Share (EPS), they talking about taking their Profit and dividing it by the number of Shares outstanding in the company (Earnings divided by Shares or Earnings Per Share).

The Balance Sheet is different. The Balance Sheet is all about Assets and Liabilities. Let me use a classic Balance Sheet item – Long Term Debt. Let’s say you use a Loan to fund your business. You make loan payments every month. This impacts your bank accounts but is not really part of the day to day operation of your business. Your employees are not looking at the loan payments when they do their jobs. The Balance Sheet confuses people because it always balances. In all cases, Assets equals Liabilities. But the balance is based around something that is outside the real world. Assets are those things that the company has or is owed. For example, Accounts Receivable is an Asset. Liabilities are things that the company owes for example, Accounts Payable. What Balances the two sides is Shareholders Equity. This means that if a company has more Assets than Liabilities then the Shareholders have positive equity (they own something).

The Cash Flow Statement is even less well known but in many ways the most important. If you think of the Income Statement as being about your day to day business and the Balance Sheet as your Investment Accounts, then the Cash Flow Statement is all about the actual dollars in your wallet. There used to be a term that people would use to describe farmers: Land Poor. They had lots of assets: Land, Buildings, Animals, and Equipment. But none of that paid for anything directly. This is where the Cash Flow Statement comes in. The Cash Flow Statement combines all the factors of the Income Statement and Balance Sheet with Investing Activities to figure out the actual cash balance at a company.

So, there it is 3 different statements all with slightly different views of your company. We will be starting with the Income Statement and going from there. Our first topic will be Revenue!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Sonoma County: News and Notes

Tomorrow I will be at the Small Business Expo in San Francisco at Fort Mason. If you are around, feel free to stop by booth 342 and chat. Some of my FocalPoint colleagues will be putting on a Small Business Growth Workshop at 11:15. All of this is free so come on by.

I also want to announce that I will be doing workshop with Shane Campbell of B2B CFO and Don McMahan of Flycloud Consulting on October 20th at the Finley Center. The title of the event is: “How To Grow And Manage Your Business Profitably”. This event will be at Lunch on the 20th and we will even feed you! The cost is $25 and I will sending out emails about this over the next month. I hope you can attend. There will be a lot of value delivered by 3 great professionals.

Last week I posted about Autodesk and I want to clarify one of the big problems in understanding their results. During the DOT.COM bubble, one of the problems was that people were accounting for contracts in odd ways. Let me give you an example. Imagine that you sign a new Cell Phone deal on October 1st. That deal is $100/month for 24 months. The question is: How much revenue does the Cell Phone Company declare for Q4 from your contract. There are 2 potential logical answers. First, you could say $2,400 – the total value of the contract. Second, you could say $300 – The amount you will pay in Q4. Under Sarbanes-Oxley, their is only one right answer $300. The rest of the contract is put into “Deferred Revenue” and goes on the Balance Sheet not the Income Statement. Deferred Revenue is an Asset, but many people never make it past the Income Statement when they evaluate a company.

Now Autodesk is changing its business from Software that you Buy to Software that you Rent. That means that Autodesk is changing the way it accounts for revenue the way the Cell Phone Company accounts for your payments. The problem is that Software you Buy is taken as Revenue all at once. So in the immediate term, Autodesk earns less money (gets a smaller payment) than it did in the past. This is true EVEN if you pay for the whole contract up front. The reality is that it ends up being the same money. The problem is trying to translate from one type of structure to another. This is especially true because Autodesk Customers could use older software for a long time. This is like driving an older car. It still works, just doesn’t have all the bells and whistles. Many customers may not convert dollar for dollar from one form of payment model. In fact, they won’t. So, there is no way to apply some formula to know how the conversion is going.

So, when I talked about Risk and Investing this is what I mean. You can’t go to Today’s Numbers and compare them to Last Year’s Numbers and get any sense of how the conversion is going. Any time you do something like this it provides an opportunity for competitors to jump in. I am not implying that Autodesk is doing badly or is doing the wrong thing. I am simply saying that traditional analysis doesn’t help us evaluate how they are doing.

There are other Revenue Problems that sprang from Sarbanes-Oxley as well. All of them meant to make things more clear to investors. I am pretty sure that this effort failed.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Net Neutrality Friday

This week is completely an opinion piece. I try to be very clear about when I am writing opinion, reporting news and trying to connect trends. Net Neutrality is an issue that requires thoughtfulness. The reason I write about it is that one of the very first links to my blog was from a Telecom Advocacy website. I looked at the article that refered to my post and it was wrong. Not the opinion, but the facts. Every single assertion was technically incorrect. My conclusion was that I owed my expertise to the community to provide a place where consumers could come read information from someone that didn’t have an agenda. I have opinions, but I am rooting for the consumer. That is my interest.

But 14 years ago today, I was driving to San Francisco International Airport to go to an Advanced Fibre Communications (AFC) User Conference. And then I wasn’t. There are parts of the events that day and the aftermath that make up the core of today’s posting. But at that time, I recall how much helplessness and confusion I felt. I didn’t know what was happening and what would happen next. I had no control over what was going to happen for the next period of my life and that sense of vulnerability is something I can still touch.

Well, that relates very well to our Broadband consumers. They are often frustrated by their options and have a complete lack of clarity on what they are actually buying. Most folks are not Telecom, Cable, or Internet experts. They don’t know ARP from DNS. But Communcations Services were big then and even now a bigger portion of their everyday lives. It is incumbent upon us as stewards of the industry to remember that we have a duty to the public to provide quality services at reasonable prices. That is true for Carriers, Equipment Vendors, Regulators and Consumers. We may disagree on many things but our mission should remain the same.

One of the things I loved about AFC was that many times we provided products that brought phone service to remote locations for the very first time. I remember Martin Fornage (now the CTO of Enphase) telling me about the first UMC being installed in a village in Mexico. He was sent to service a power supply problem. He found our equipment in a hut with chickens running around it on a dirt floor. The people loved it because they finally had phone service. There were hundreds of stories like that and all of them made me be proud to be part of it.

But now think back to 9/11 (and I apologize if you are not American, as this is a very personal experience for most of us). Remember not being able to get ahold of loved ones in New York? Verizon had a huge number of facilities that were destroyed by the collapse of the World Trade Center. They were scrambling to try to restore service. Doesn’t that memory bring back how important it is to be able to connect with our loved ones, friends and the world at large?

One of the things that came out of 9/11 was the Patriot Act. When I was at Red Condor, we had potential International Customers who would not use us because they did not want their mail flowing into the US. We struggle with the lines of privacy and safety. This causes us to argue with each other, even though we are not the enemy. Remember that as well.

So as you go about your business today, I think this is a great time to reflect on the Communications Industry and our mandate to serve. Yes, we make money. But we also bring connections to people and they value that greatly.

Have a great weekend.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Sonoma County: News and Notes

For my last post of earnings season, I will focus my attention on Autodesk. I will do so in a subjective analysis and a lot less about numbers than you would like. The reason is pretty simple. Autodesk is in the middle of a massive business shift. This is a fascinating case study for business owners who want to change their business. Autodesk is changing how it sells its products. In fact, it is going to stop selling its product altogether. They are replacing this model with a rental model. This is very similar to the way much software is going with the advent of Cloud Technologies and Software as a Service. Think about it. In the old days, I would buy a copy of Microsoft Office for a few hundred dollars. I could use it as long as I liked. Today, I have a domain and a subscription to Office 365. Because of that, I no longer need to buy a copy. I rent a version of office with my domain. Of course, I need to keep renting the software on an ongoing basis.

From a financial standpoint, companies that are in this business have a significant change in how things look on their statements. When you sell a copy of software, you take the revenue immediately (or just about immediately). The same is true when you walk into a grocery store and buy a can of Coke. The store recognizes revenue when you make your purchase. Now how about your cell phone? Many of you have signed a 2 year plan that means you will be paying $100 a month (for example) for 2 years. That is $2,400 in total contract value. But companies are not allowed to put $2,400 on their revenue line for a quarter. When you sign the contract, they will put $300 of revenue in that quarter and have a Deferred Revenue of $2,100. Deferred Revenue shows up on the Balance Sheet not on the Income Statement. The reason is that future revenue is an Asset. This is a bill that a customer owes you at some point in the future. This seems a lot like Accounts Receivable. In fact, it is. But this Asset is not currently receivable (the customer does not owe money to us yes).

So, why is this a big deal from a stock standpoint. Well, Autodesk is in the middle of the transition. Some customers have the bought version of the software. Some customers have the rented version. It is hard to compare past versions of Autodesk’s finances with the current version. The same will be true of future versions. When the transition is almost complete, their will be a much more stable revenue flow as customers provide rental payments on an ongoing basis. The reason that customers will go for this transition is that this kind of software came with Maintenance contracts. The rental versions will build this cost in, so that customers are already on the latest version of the software. On top of that, they will have some rights in customer service.

What all this means that Autodesk can waive their hands and say pretty much anything they want to about their progress in the transition. There is no way to manage the transition that will make sense on their statements. What analysts and investors want to know are the answers to two questions:

– What percentage of existing customers are going to switch to the new model of business?
– How will this new model attract new customers?

These questions are not going to be answered until things settle out. What this does is that it adds risk to investors as they can’t get a handle on how things are going by comparing to past periods. This does not mean that Autodesk is a bad company or at risk of going out of business. What it means is really simple. You can not analyze Autodesk results and figure out what they mean for the future. The change in model makes sense for Autodesk if done properly. We will have to evaluate future quarters to see how things are done. For now, caution is a great way to look at Autodesk stock.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!