What Kind of LLC Should I Set Up?

When running a business, the type of legal entity you choose is a complex and important decision. I recently had to research what type of LLC to set up for a married solo practitioner, or freelancer. I thought I would write about what I have learned to help my thought process and to hopefully help someone else facing a similar decision.

If this post doesn’t apply to you or anyone you advise, you can check out some of my past posts that might be more relevant by using the topic buttons (computer) or menu (mobile device) above.

LLC vs. Sole Proprietorship 

Freelancers who have a full-time job but pick up work on the side will probably start out operating as a sole proprietorship. In fact, you don’t have to do anything but earn extra income to operate as a sole proprietorship. The income becomes part of your business activities, which you report on Schedule C of your personal tax return.

The benefit is that setting it up doesn’t require anything more than any licenses and permits required to operate the business, which probably doesn’t apply to most freelance work.

The down side is there is no legal separation between you and your business, which makes you personally liable for debts, lawsuits, and actions of employees. This puts your personal assets at risk.

An LLC is a legal entity separate from its owners, or members, so the owners  aren’t personally liable for the business (with some exceptions). LLC’s are easy and inexpensive to set up and maintain. The filing fee for the LLC I set up in Utah was $70. The only maintenance needs are tax and regulatory requirements, which you’d have to do for a sole proprietorship anyway, and a $15 annual renewal fee.

If your business is anything more than small side jobs here and there, it is usually wise to set up an LLC. Search online for “how to set up an LLC in [your state]” and you’ll find many resources with step-by-step instructions. For example, see here for Utah instructions.

Types of LLCs

Once you’ve decided to set up an LLC, you’ll have to decide how it’s structured for tax purposes. There are several variations, and each state may differ slightly, but the following are 3 types of LLCs I considered:

1. Single-member LLC (Disregarded entity)  As indicated by the name, a single-member LLC is owned by one person. The owner can either file Form 1040 Schedule C like a sole proprietor (become a disregarded entity) or elect to be taxed as a corporation.

There are some disadvantages when compared to a multi-member LLC, including: - Some risk of losing the LLC personal liability protection benefit in the event of a lawsuit or audit. Courts may not recognize the person as being separate from the entity. - Possible increased risk of an IRS audit because sole proprietorships are audited more frequently than partnerships or corporations.

This article talks about these and other disadvantages.

One advantage of a single-member LLC is that it qualifies for a Health Reimbursement Arrangement (HRA) if one spouse is the owner and the other spouse is an employee. This is a program administered by a 3rd party that allows your LLC to reimburse 100% of out-of-pocket health expenses and individual health insurance premiums. The HRA is the only way I’m aware of to make individual health insurance premiums fully tax deductible. Multi-member LLC’s do not quality for an HRA.

You can read more about HRAs here.

2. Multi-member LLC (Partnership) Multi-member LLCs, obviously, are owned by more than one person and can be elected to be taxed like a partnership or a corporation. As a partnership, the LLC must file Form 1065 and provide each member with a Schedule K-1 showing their share of the LLC income, credits and deductions.

A multi-member LLC overcomes the disadvantages of a single-member LLC described above. Married couples can create a multi-member LLC by each owning a share of the company.

LLC members active in the business must pay self-employment tax on their entire share of the profits. Married couples are always both considered active members, even if one is not active in the business. The maximum earnings limit ($118,500 in 2014) applies to each spouse. If the profits are more than the maximum, and if you want to minimize this tax, you might want to assign one spouse a very small percentage.

This article goes into detail about single-member vs. multi-member LLC’s for married people.

3. LLC as an S-Corp An LLC can elected to be treated like an S Corp. This is an interesting way to minimize self-employment tax. The members don’t have to pay self-employment tax on their share of the profits, but active members (again, both spouses) must be paid reasonable compensation subject to self-employment tax.

This article talks about electing S Corp status, and here is an IRS publication that describes “reasonable” compensation.

Summary

There is much more to choosing a business entity than I have covered here, but hopefully my research on LLC’s helps familiarize yourself with the options available. Understanding the basics will allow you feel more confident in working with a professional advisor to make a final decision.

Note: I am not an attorney, and although I’m a CPA, I am not a tax accountant, so don’t take this as professional advice. I have provided this material for informational purposes only, and I encourage you to seek competent tax and legal counsel. 

3 Ways We Need to Pay the Rent Every Day

I like to leave as much margin as I can in my life to prepare for the unexpected. If the personal finance experts say we should have 3-6 months of expenses saved for emergencies, I want 6-12 months just to be safe. I schedule a blog post every Friday, and I’d like to have several weeks of posts saved up just to make sure I can keep my commitment.

I’m the opposite of a procrastinator. I err on the side of getting things done too early. Sometimes I waste time because I do things that would have taken care of themselves if I had procrastinated a little longer.

I prefer to be a homeowner over a renter. I can’t wait until I pay off my mortgage so I can truly be an owner without that monthly payment hanging over my head.

However, in many areas of life we can’t build much margin. We have to be more like renters than owners. In these areas the rent comes due daily rather than monthly, and we are limited in the amount we can save.

Here are 3 areas in which we need to show up and pay the rent every day:

1. Physical Health There’s no way to truly own our physical health, and we can only save up to a limited extent.

We can spend a lot of time and effort building muscle, getting in great cardiovascular shape, and losing all excess fat. However, if we stop paying the rent, if we stop exercising and eating healthy, we will immediately begin to lose the ground we have won (as I wrote about in my last post).

Our savings may allow us to remain reasonably healthy for a period of time, but eventually we need to start paying the rent again. It is better to show up and pay the rent every day.

2. Accomplishment I was my high school class Valedictorian and Athlete of the Year. But like Uncle Rico in Napoleon Dynamite who is stuck in 1984, no one cares anymore.

The only way past accomplishments mean anything is if we take the things we learn and continue paying the rent on future accomplishments. Past accomplishment may open doors to more opportunities, but if we don’t continue paying the rent those doors will mercilessly slam shut.

We will not continue going to a restaurant where we get bad service, even if we’ve received great service in the past. We may give the benefit of the doubt a few times, but eventually the great service in the past will mean nothing to us.

Past accomplishment does not guarantee future success. We have to show up and pay the rent every day.

3. Motivation  Zig Ziglar said, “People often say that motivation doesn't last. Well, neither does bathing - that's why we recommend it daily.”

There’s no way for us to save motivation. We need to continue paying the rent by doing things that motivate us daily.

Everyone is motivated differently. Reading or listening to stories about great people and great accomplishments (as I wrote in a previous post) motivates me to reach higher and be better. I wear my Bose bluetooth earpiece every day while driving, cleaning, etc so I can listen to inspiring books or podcasts.

Once you figure out what motivates you, go out and pay the rent every day!

Gather Our Daily Bread

In a previous post, I wrote about an address by D. Todd Christofferson called, "Give Us This Day Our Daily Bread.” This is another way to look at the principle of showing up to pay the rent every day.

He relates the experience of the Children of Israel in the wilderness. They were able to survive because the Lord gave them manna daily. They weren’t able to gather extra for the future. They had to live for today and trust that more manna would appear tomorrow.

So go out there and gather your daily bread, pay your rent, and look forward to a bright future!

Question: In what ways do you pay the rent every day? 

3 Ways to Hold the Ground You Have Already Won

I ran my first half marathon almost exactly three years ago, 5 months after some co-workers challenged each other to run the race together.

Gaining Ground and then Giving it Up It was perfect timing. My New Year’s resolution every year for the previous 10 years had been to lose the 30 pounds I gained early in college. I stayed fairly active, but I didn’t make any progress because I wasn’t eating as well as I should have.

I had been learning through books, podcasts, and blogs about how to improve my diet, and by the time the half marathon challenge came along, I was ready to implement what I had learned.

The combination of a change in diet with intense exercise worked beautifully. I hit my 30-pound weight loss goal right after the half marathon. I felt amazing and resolved to never go back to excess weight again.

However, as happens in a high percentage of cases, I have now given up 25 of the 30-pound ground that I won 3 years ago.

Why We Give up Ground

The frustration I’m feeling right now has got me thinking about why we give up ground we have won. Part of the answer is that losing ground is much easier and faster than holding or gaining ground.

Jeffrey R. Holland said, "In moments of fear or doubt or troubling times, hold the ground you have already won, even if that ground is limited.”(1)

He is speaking about holding spiritual ground. I didn’t hold the ground I won with weight and physical fitness, which most of us can relate to. But giving up ground happens in all areas of our lives.

A teenager who builds the trust of a parent from childhood can lose that trust in one late night. It takes a lifetime to build a career and reputation. Too often we see promising careers quickly destroyed by botched execution or even fraud. A lifetime of savings can disappear in a weekend of gambling or with a bad investment.

Losing ground isn’t always as dramatic as these examples. In my case, I didn’t gain back 30 pounds in one weekend of gluttony. I held ground until Christmas, during which I gained 5 pounds. I held that ground until summer, when I gained another 5 on a vacation.  I held that ground for another year until I moved from a small town to a city with more places to eat out. Within 6 months I gained another 5 pounds.

I was still down 15, but the frustration was starting to build. I resolved to lose those 15, and I thought I found an easy answer. I explain how I gained another 10 under point #2 below.

Companies often put more focus on acquiring new customers than retaining existing customers. This is a classic example of failing to hold the ground you have already won.

How do we hold onto the ground we have already won? Here are 3 tips:

1. Focus first on holding ground before trying to gain ground We all want to progress, but sometimes we get so scattered in our pursuit of progress that we lose ground we have worked so hard to win. Before embarking on an ambitious plan to gain ground in one area, we can ask ourselves if the new direction will cause us to lose ground we have already won in other areas.

Before taking on heavier responsibilities in your career, first ask if it will risk losing ground you have won with your family or health. Before pursuing a new line of business, first ask if that pursuit will risk losing ground in your other lines.

Only move forward if you’re confident you can hold the ground you have already won.

2. Don’t think you have a free pass Holding ground is tough. Gaining ground is even tougher. Yes, sometimes people get lucky, but this is the exception.

I gained my last 10 pounds because I thought I found a free pass. I discovered the paleo/primal way of eating, and I read testimonials about fat melting away when following this plan. I didn’t need to starve myself to lose weight, and I could even cheat up to 20% of the time!

At about the same time, I found that my thyroid wasn’t working properly, which can prevent weight loss. The doctor was confident it could be corrected quickly, and given my diet and usual physical activity, I should see my weight go down quickly.

Well, I realized I had lost ground again because I let my guard down, thinking I had a free pass. The 20% of cheating became more than 50%, and my thyroid overcorrected from hyperthyroidism to hypothyroidism, which is even worse for weight loss (as I understand it).

There’s no such thing as standing still. We have to keep fighting to hold our ground, or we will quickly lose it.

3. Know yourself To hold the ground we have won, it’s important to understand our strengths and weaknesses and adjust accordingly.

Last year I read a blog post by Brad Feld called Abstainer vs Moderator (2) that helped me understand myself better. He shared how he doesn’t know how to moderate in any area - eating, working, etc. It’s much better for him to abstain.

I am the same way. I have to abstain from activities that I know will cause me to lose ground because I know I have a hard time moderating.

If I see a plate of cookies on the counter, it’s normally not hard for me to abstain. But if I take one bite, before I know it I’ve eaten the entire plate. Unless I have pressing deadlines, it’s not hard for me to keep my laptop closed after dinner. But if I open it for just a couple of emails, I’ll work late into the night. Conclusion

I learned the hard way how difficult it is to hold the ground we have won. However, we can overcome the tendency to lose ground by staying focused, working hard, and knowing ourselves.

Question: How do you hold onto the ground you have won? 

(1) https://www.lds.org/general-conference/2013/04/lord-i-believe?lang=eng (2) http://www.feld.com/archives/2013/05/abstainer-vs-moderator.html

5 Ways to Learn a New Industry

I work with a venture capital fund and several startups, and I have had to learn a completely new industry with every new project. I am involved with building materials, telecommunications infrastructure, clean energy, and mattresses, to name a few.  Lately I have been working especially hard at learning the venture capital industry. As part of this effort, I am in the process of reading The Business of Venture Capital by Mahendra Ramsinghani. It is an excellent, comprehensive look at all aspects of venture capital. This got me thinking about the approach I have taken to learning a new industry as quickly as possible. 

Many people spend a lifetime learning a particular industry. However, it’s common to change career direction many times. While nothing can replace many years of hands-on experience, it’s possible to accelerate the learning process. 

Here are some tips and tricks for scaling the learning curve in a new industry: 

1. Read books Books are a powerful way to acquire new knowledge and insert yourself into new experiences. Of course, reading is not a perfect substitute for actually being there, but being there takes time, opportunity, and luck.

In a previous post I talk about my experience listening via audio book to 4 incredible stories about the founding or turnaround of Twitter, Facebook, Blackstone Capital, and Ford. For $44 and two weeks while doing things I had to do anyway, I experienced 50 years of building or turning around 4 multi-billion-dollar companies.

2. Follow trade publications Every industry has trade publications, and they are great ways to learn and stay current on new developments. 

The mattress industry was new to me, and I work with industry veterans with 20-30 years of experience. Even though I can’t match their years of experience, I have become familiar with the industry by regularly reading the two main trade publications, Furniture Today and Bedtimes. 

3. Attend conferences and trade shows Gatherings like this can be challenging to navigate, especially for an introvert like me. But every industry has conferences and trade show where the who’s who of the industry gather in one place. At these events you can learn from speakers, panel discussions, and product/service booths. 

Building your network of contacts is just as important as learning an industry, and conferences are an efficient way to build your network. 

Attending the semi-annual Las Vegas Market for the home products industry has accelerated my industry knowledge and contacts. 

4. Participate in networking events Most industries have local get-togethers for networking and learning. 

I recently attended a networking event in Salt Lake City that I found very valuable. It was organized and attended by professionals in similar industries and career stage. The organizers invited a high-profile speaker a few years ahead of us in experience and success. We were able to build our contacts with each other and learn from the speaker's experience. 

You can find networking events through Internet searches or LinkedIn, for example. If you can’t find relevant networking events, organize one yourself! There’s no better way to get to know people and build credibility in an industry than to be a leader. 

5. Visit the front lines It’s great to gain experience in the board room or in executive meetings, but the real work happens on the front lines: stores, call centers, factories, etc. It’s impossible to understand an industry without understanding the front lines. 

When I first became the CFO of a building products manufacturer, I spent a lot of time working alongside the production team in the factory. This was challenging, but it was the fastest way to learn the processes and get to know the team. Being on the floor gave me the understanding I needed to made process improvements that cut labor costs in half. 

The speaker at the Salt Lake City networking event I mentioned talked about the turnaround he led of a local company. I was with a colleague, and we happened to be driving by this business on the way to our next meeting. We stopped in and talked to one of the front-line employees who was there during the turnaround a few years ago. 

We learned a lot as he told us about his experience, including the methods used to drive the turnaround. It was most instructive to hear the gratitude and respect in this employee’s voice as he spoke of that experience. 

Go and learn!  There’s no reason to be afraid of learning a new industry. Of course, it’s difficult to replace years of experience in a short amount of time, but you can use these tips and tricks to dive into a new industry and become a veteran in a short time. 

Question: What approach have you taken to learning a new industry? 

3 Ways to Transition from Freelancer to Business Owner

Robert Kiyosaki is the author of Rich Dad, Poor Dad, and his CASHFLOW Quadrant has shaped my way of thinking about how to make money. As shown in the image below, he describes four ways to make money: Employee, Self Employed, Business Owner, and Investor. He argues that those on the left side of the quadrant can never build true wealth in part because they are trading a finite resource, their time, for money.

I wrote a series of posts a while ago about freelancing, which is in the Self Employed quadrant. Compared to being a traditional employee, freelancing can have advantages like accelerated career development, increased income, diversification, and autonomy.

However, freelancing is still trading time for money. The benefits of freelancing are amplified for those who successfully transition to Business Owner on the right side of the quadrant. As a business owner you can multiply your income without increasing the amount of time you spend earning it.

Here are 3 ways to transition from freelancer to business owner:

1. Dedicate a portion of your time to work for yourself

Hire yourself as one of your freelance clients, and give yourself the responsibility of building a business.

I recently heard Gary Vaynerchuck give the following the advice (paraphrased): live on as little as possible and spend the rest of your money investing in yourself.

This is a variation on that theme. Trade the minimal amount of time for the money you need to live on, and then spend the rest of your time building your business until it can replace your freelancing income.

At first your time might be spent on figuring out what kind of business to build. As you begin building a business, you might need to do a little more freelancing to finance the business.

Grow slowly. Don’t take on debt to grow your business! This works for some people, but debt creates risk and kills many of the advantages of being a business owner. Instead of additional freedom and income, you will become a slave to your business, your creditors, and interest payments.

2. Look for ways to automate your expertise

When Dave Ramsey began his mission to educate the world about personal finance, he did one-on-one financial counseling. It didn’t take him long to realize that he couldn’t build a successful business this way. Growth was limited to the amount of time he had for clients, and the very people who needed help the most weren’t able to pay enough to make the business viable.

Instead, he wrote a book to automate his expertise. The only limit to the number of people he could help is how many were willing to spend $10-20 on his book. He started a radio show where he could share his expertise with many listeners at the same time. He wrote more books and developed training courses. Now he is the multimillionaire owner of a 450-employee business that helps millions of people around the world.

Many freelancing skills can be automated in a similar way. Freelance writers can write books or syndicated columns. Freelance programmers can write online software that people are willing to pay a subscription to use.

3. Hire people to leverage your time

A freelancer working alone must do everything from high-value client presentations to low-value expense report preparation. Freelancers can leverage their time by hiring help for lower-value tasks. The booming virtual assistant industry makes this cheaper and easier than ever before.

Some of the companies I work with don’t have enough transaction volume to justify hiring a bookkeeper, but they also don’t want to pay me to do bookkeeping. Instead, I turned to Elance. I found an accounting firm based in India that charges $6-8/hour, depending on the task. They handle all data entry and month-end procedures. I simply spend a minimal amount of time reviewing the financials for accuracy, and then I’m free to perform high-value tasks such as presenting to the management team insights gleaned from the financials.

It helps to look at everything you spend your time on and ask if there’s someone else than can do this almost as good as me for much cheaper. If you are paid $75/hr as a freelancer, why not spend $5-20/hr for virtual assistants to take tasks off your plate? Good candidates include travel arrangements, preparing expense reports, gathering content for social media posts, doing market research, preparing PowerPoint presentations, etc.

As you grow, you can even hire good people for the high-value tasks. As the business owner, you can earn money while you sleep or vacation.

Conclusion 

Moving from Employee to a Self Employed freelancer is a step in the right direction. However, I encourage you to see if you can use these 3 methods to make the leap to Business Owner on the right side of the CASHFLOW Quadrant. Then you can enjoy the benefits of multiplying your income without multiplying the time you spend working.

Question: What are other ways to move from freelancer to business owner? 

4 Reasons Story-Telling is so Powerful

Over the past two weeks I have binge-listened to books that tell the story of startups and turnarounds. Using the the Audible app on 3x speed and my Bose Bluetooth earpiece, I have listened to Hatching Twitter by Nick Bilton, The Facebook Effect by David Kirkpatrick, American Icon by Bryce Hoffman (the Ford turnaround), and King of Capital by John Morris and David Carey (story of Blackstone Capital). (See the end of the post for similar books I've read recently.)

Each of the authors are intimately acquainted with the businesses they wrote about due to spending time with the company for many hours over many years. It’s amazing that we can take advantage of such extensive work for such a minimal cost.

I was drawn into these stories so deeply that I listened at every available opportunity. I listen while getting ready in the morning, driving, mountain biking, cleaning out the garage, searching for items on my list in Costco, and relaxing before going to sleep. Obviously, I thoroughly enjoyed these books.

As I listened I thought about why I enjoyed these books so much more than other books I have read recently. I realized it is the power of story-telling.  It is much more enjoyable and effective to learn principles from stories rather than lists of principles themselves.

Sometimes we get impatient and try to cut out the fat and get right to the meat. But it’s the fat that gives the meat flavor and substance. Here are 4 reasons why story-telling is so powerful.

1. Enjoyment A good story is enjoyable to listen to. We are more engaged and attentive when we are enjoying ourselves. We’re also more likely to spend time doing things we enjoy. There’s no way I would listen to four dry books in two weeks. I wouldn’t be motivated to listen at every opportunity.

I tend to start many more books than I finish. Even if the content is valuable, I have a hard time continuing if I’m not enjoying the content at the same time. There are so many valuable AND enjoyable books out there, so why would I waste my time?!

2. Motivation  Stories are motivating because they take the mystery out of an incredible result. They tell us how characters get from A to B, and in most cases, the characters are just normal people.

Of course, the stories that get published are the sensational ones. If we’re not careful, we can become discouraged and demotivated by our mundane lives and meager accomplishments. Many stories are written about those who start billion-dollar companies, but only a tiny percentage of companies reach this milestone.

The rest of us struggle along with our more normal lives, but we can be motivated by these stories to reach our potential by making the most of our circumstances and opportunities.

3. Learn from others mistakes Even stories with the most sensational results include missteps along the way. We can learn to avoid the same mistakes as we create our own story.

The Twitter team worked together on a failing podcasting company before pivoting to create Twitter. The company was terribly mismanaged all along the way, but they managed to hold it together and build a multi-billion dollar company that has changed the world. The book details the mistakes that could have destroyed the company.

4. Learn what worked in real situations We can learn from mistakes, but perhaps more importantly we can also learn what led to the sensational results.

We need to be careful not to assume that whatever worked in the story will also work in our situation. But if we listen to enough stories, we can build up a bank of experience in our heads that will help us make better decisions in our own lives.

Conclusion 

Stories are a powerful way to teach and learn. Of course, reading a story is not a perfect substitute for actually being there. However, being there takes time, opportunity, and luck. For $44 and two weeks while doing things I had to do anyway, I experienced 50 years of building or turning around 4 multi-billion-dollar companies.

Question: What startup or turnaround stories do you recommend?

* Other similar books I have read or listened to over the last few months include:

• Creativity Inc by Ed Catmull (Pixar)
• The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone,
• In The Plex: How Google Thinks, Works, and Shapes Our Lives by Steven Levy
• eBoys: The First Inside Account of Venture Capitalists at Work by Randall Stross
• The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

First Impressions of the iPhone 6 Plus

As I write this, I’ve been using the iPhone 6 Plus for less than a day. I was surprised by my own reaction to it, so I thought I would share my experience. I’m even breaking my Friday release schedule to get this out earlier for those of you who are trying to make a decision.

I am an Apple guy and a gadget junkie. I love my Macbook Air, iPad, and iPhone. I’ve had the iPhone 3, 3S, 4, 4S, 5S, and now the 6 Plus. As much I love my iPad, I was excited when I started hearing rumors about a larger iPhone. I liked the idea of having a device big enough to replace the need for carrying both the iPhone and iPad.

I’ve been waiting very impatiently for the 5.5" iPhone 6 Plus. I thought the bigger the screen the better, so I didn’t even consider the 4.7” version. I didn’t stay up until midnight to be one of the first to order on September 12, but I regretted waiting until 7 am after the estimated delivery slipped from September 19 to mid-October. But Apple pulled the exceeding expectations trick. I was very excited to receive an email last Friday notifying me of the Monday, September 29 delivery (yesterday).

Until then, there was no question in my mind that I would like the big screen. But as I took it out of the packaging (an emotional experience, by the way), it hit me how massive it is. It’s huge! As I fumbled awkwardly while picking it up for the first time, I realized it might take some getting used to.

Here are some pros and cons I’ve come up with in the few hours I’ve been using it.

Pros

I don’t need an iPad. I fully expect to stop using my iPad. The screen is big enough to do anything I would have done with an iPad. There are only two exceptions I can think of, both of which are minor and can be solved by using a laptop.

First, the keyboard isn’t big enough to type with all fingers like you can with an iPad in landscape mode. This isn’t a big deal because I can type almost as fast with my thumbs, and I use my laptop for large typing jobs anyway.

Second, it’s not large enough to effectively show a group of people photos or videos. I teach a church class of 5-10 people, and I sometimes use my iPad to show videos. But even the iPad is a little small for this situation, so I don’t mind bringing my laptop.

Weight, thickness, and design. The 6 Plus is slightly thinner than the 5S, which feels good. The edges are rounded, giving it a sleeker look and feel. It’s 50% heavier than the 5S, but I don’t notice much of a difference.

Screen size. I read Forbes magazine for a while, which I normally do on my iPad, and I could comfortably read one page on the screen. It also works to turn landscape and see the two-page spread, although older eyes may have a hard time with the small print. It’s also nice to see more of each page on the Kindle app. Photos and videos look incredible.

Updated specs. None of the new specs are earth-shattering for me compared to the 5S, but I always appreciate a faster processor and upgraded camera. I look forward to Apple Pay, but I expect it to be a while before I can ditch the cards completely.

Cons

I was surprised by the cons. I thought I would love everything about it, but now I’m not so sure. I’m hoping the cons will go away as I get more used to it.

Awkward. One word describes it all. I find it awkward to pick up, carry, put in my pocket, set down, and find the right grip.

Difficult to use one-handed. I’ve got relatively big hands, and I still can’t reach all areas of the screen with my thumb while holding it one-handed. I find myself continually shifting my grip depending on the app and what I need to do. This feels awkward and increases the chances of dropping it.

This is probably my biggest complaint. I use my phone for everything, so I am used to quickly picking up my phone with one hand to add a task to Remember the Milk, write a quick note in Evernote, add a calendar item, write an email, or take a photo.

Screen size is not utilized very well. As expected, most apps just expand to fill the extra space. Apps that I could already see comfortably on the 5S, such as Facebook, now just look magnified. It reminds me of when the iPad first came out, and not many apps had been modified to take advantage of the screen size. However, I expect this to change as developers update their apps.

Lock button location. Given the way people have to grip the phone, the lock button location makes sense. It’s normally close to the index finger. I’m always tapping the top where the lock button used to be, but I’ll get used to it. Another problem, however, is the lock button doesn’t work when you squeeze a volume button at the same time. I found myself doing this often while gripping the phone with one hand.

Conclusion 

I’m still excited about my new phone. I’m just not as blown away by it as I thought I would be. I’ll probably get used to the bigger screen size and end up loving it, but perhaps I should have taken a closer look at the 4.7” version.

Hopefully this helps if you are deciding whether or not to upgrade, and if so, which size to choose.

Question: What do you think of your iPhone 6?

Update after a week. I went into AT&T last week and would have traded if they had the 4.7" available. I learned that business accounts have 30 days to return, so I decided to give it more time. I'm glad I did because I'm starting to get used to it. It doesn't feel as awkward now that I'm learning how to handle it, and I love the big screen for reading and video.

I learned to double-tap the home button to slide the screen down halfway, which allows me to reach the top of the screen with one hand. I think it's a keeper!

3 Principles for Scaling Companies

I am taking a class from the Stanford Graduate School of Business right now. But no, I haven’t had to travel to Palo Alto or pay thousands of dollars in tuition. Thanks to the MOOC concept (massive online open course), I am able to take the class for free from the comfort of my own home. The class is Scaling Up Your Venture Without Screwing Up taught by well-known professors Huggy Rao and Robert Sutton. The class follows the book written by the professors, Scaling Up Excellence, and is supplemented by short video lectures, video interviews with entrepreneurs who have successfully scaled companies (such as Ben Horowitz), and individual and team assignments.

I am taking this course because of my involvement with a venture capital fund and venture-backed companies. The goal of any venture-backed company is to scale as quickly as possible.

The class material has caused me to reflect on my own experiences in trying to scale startups over the last few years. I’ll share 3 lessons I’ve learned from my experience:

1. Interpret data correctly It is impossible to gather enough information for making a perfect decision in any business, and startups are especially uncertain. We have to make the best decisions possible given the data available. Due to the difficulty of gathering data, it is extremely important to interpret the available data correctly.

I learned this lesson the hard way a few years ago with a company that manufactured product in the US and sold in both US and Canada. With the downturn in 2007, sales in the US dropped by 90% while Canada sales continued to grow. The US dollar also weakened significantly and became worth less than the Canadian dollar, which helped margins in Canada.

We started to put our focus on Canadian sales while waiting for the US to recover. However, in late 2008 and through 2009, the Canadian dollar reversed course and weakened 20-25% against the US dollar. This significantly cut into our margins. I looked at the data and found that even after the drop in US prices with the downturn, our percent margin was now higher in the US.

As a result, we turned our focus to the US. We hired a sales team and even opened a retail store. Unfortunately, our efforts didn’t lead to the boost in sales we hoped. Even more unfortunately, I realized later that even though our percent margin was higher in the US, our dollar margin was still higher in Canada due to higher prices.

Of course, we couldn’t have predicted exchange rates, but by late 2009 the US and Canadian dollars returned to about par. Due to my misinterpretation of the data, we wasted a lot of money trying to boost US sales while losing a year during which we could have doubled down on the stronger Canadian market.

2. Hire only to alleviate pain, not for pleasure I learned this lesson from experience and found it articulated well by 37Signals (now Basecamp) co-founder Jason Fried. "First, we hire late. We hire after it hurts. We hire to alleviate pain, not for pleasure. Who hires for pleasure? Any company that hires people before it needs them is hiring for pleasure. It's an indulgence we've never allowed ourselves.”

I’ve been involved in decisions several times where someone was hired too early, too fast, or just because they’re a good person who we didn’t want to lose.

3. Give ground grudgingly  This is another lesson I’ve learned from experience but found articulated brilliantly by someone else. Ben Horowitz wrote a blog post called Taking the Mystery out of Scaling a Company. In it, he compares scaling a company to an offensive lineman in American Football. While in pass protection, the offensive lineman can’t protect the the quarterback by standing his ground or moving forward, or the defensive lineman will get around him. His goal is to back up as slowly as possible, hoping to give the quarterback enough time to throw the ball.

As a team grows, it becomes necessary to put in place processes and procedures that facilitate communication, knowledge transfer, and decision making. This is necessary to run the company smoothly, but it also creates bureaucracy and complexity in the organization. The principle is to give ground grudgingly. Only add processes and procedures as they become necessary.

I joined a very small team a few years ago. I had some experience in a big company, and I thought the small company would be successful if it acted like a big company. I worked with the CEO to define the organizational structure and associated roles. We put written procedures in place for all business processes. We even started annual performance reviews. All of this was for a company with less than 10 employees.

Our intent was good. We were trying to follow the E-Myth principle by working on the business and preparing for growth. But we spent unnecessary time creating unnecessary complexity. We should have waited until growth made this steps necessary.

Conclusion 

Scaling a company is messy. Often the answers can only be found through trial and error. But some errors can be avoided by following general principles learned from others experiences.

How to Apply The Compound Effect

One of my favorite books is The Compound Effect by Darren Hardy, Publisher of Success magazine. It profoundly affected my thinking about how to make improvements in my life. I’m impatient by nature. If I decide I want something, I want it now. If I want to be a better speaker, I want to be world-class now. If I want to lose weight, I want to see the pounds melting off. The Compound Effect helped me make peace with the fact that change takes time. It also helped me realize that change can be dramatic if I put in place habits and apply them consistently over a long period of time. Small efforts, compounded over a long period of time, can yield amazing results.

We recognize the compound effect in personal finance. Small amounts invested consistently can compound to a large amount over time. For example, investing $500 per month for 30 years at a 10% return becomes over $1.1 million.

The Compound Effect applies to all areas of our lives. I’ll first discuss 3 principles mentioned in The Compound Effect and then 3 steps for getting started.

1. There’s no such thing as standing still The Compound Effect can apply positively or negatively, and there’s no in between. Either we actively apply positive habits that compound toward positive results, or our negative habits, or even lack of action, will compound in a negative way.

Our lives are like a down escalator. If we're standing still on a down escalator, we are going down. To go up, we have to fight against the downward motion.

2. Take personal responsibility  Before we can change or improve, we first have to take personal responsibility. Improvement is up to us and no one else. We will have setbacks and obstacles, but we can’t make excuses. We have to take full responsibility for our actions and their consequences

We can think of personal responsibility in terms of percentages. If you’re married, to what extent are you responsible for a successful marriage? 50%? What about the success of your company? It may depend on the size of the company and your role, but maybe 1% or 10 or 30%?

In The Compound Effect, Hardy argues that this kind of thinking is wrong. We need to take 100% responsibility for the success of anything we’re involved in. We need to act act like it’s completely up to us.

3. Obstacles are inevitable  As we take responsibility and move in a positive direction towards our goals, we will face obstacles.

I recently went to a speech by Chad Hymas. In 2001 he jumped on a tractor to feed the elk on his farm. He was in a hurry and ignored the tractor’s warning that the hydraulics were low. As he lifted a 2000-pound bale of hay with the front of his tractor, the hydraulics failed. The bale toppled on top of him, leaving him a quadriplegic.

He doesn’t let being a quadriplegic stop him from achieving his goals. By consistently applying daily habits, over time he has learned to function mostly on his own. He learned to speak so he could share his experiences and lessons learned, and he is now one of the most popular speakers in the world.

As we face challenges, we can continue on by sticking with our habits one day at a time. In the book Lone Survivor, the author quotes a senior officer speaking during the intense Navy SEAL training.

“First of all, I do not want you to give in to the pressure of the moment. Whenever you’re hurting bad, just hang in there. Finish the day. Then, if you’re still feeling bad, think about it long and hard before you decide to quit. Second, take it one day at a time. “Don’t let your thoughts run away with you, don’t start planning to bail out because you’re worried about the future and how much you can take. Don’t look ahead to the pain. Just get through the day, and there’s a wonderful career ahead of you.”

If we want to make positive changes, how do we get started?

First, we need to decide where we want to go To illustrate this point, Hardy quotes the exchange between Alice and the cat in Alice in Wonderland. "Would you tell me, please, which way I ought to go from here?" "That depends a good deal on where you want to get to," said the Cat. "I don’t much care where--" said Alice. "Then it doesn’t matter which way you go," said the Cat. "--so long as I get SOMEWHERE," Alice added as an explanation. "Oh, you’re sure to do that," said the Cat, "if you only walk long enough."

Where do you want to go? Do you want to lose weight or become a better speaker, spouse, parent, leader, or employee?

Second, establish habits  Once you decide where you want to go, establish habits that will get you there over time.  Jim Rohn said, “Motivation is what gets you started. Habit is what keeps you going."

If you want to lose weight, maybe your habit could be going without sugar 6 days per week while exercising 30 minutes per day. If you want to become a better speaker, join and actively participate in Toastmasters. If you want to improve your marriage, tell your spouse something you appreciate about him or her every day.

Our bodies and minds are structured for consistency over time. If you have a project that will take 20 hours, will you get a better result by working on it in one 20-hour stretch or 2 hours per day for 10 days?

Our bodies need 2000 calories per day, give or take. We can't eat 14,000 calories once per week or 700,000 calories once per year. Our bodies need to absorb the nourishment nourishment consistently over time.

I’ve applied the compound effect by setting habits in areas I want to improve in. I want to be a better writer and thinker, so I write a blog post once per week, which takes me just over an hour per week.

I want to be a better speaker and communicator, so I attend a local Toastmasters club every week and give a formal speech at least once per month, which takes about two hours per week.

I want to learn as much as I can, so I have a habit of listening to books or podcasts any time I don’t have to be focused on something else (while driving, while getting ready in the morning, etc). Over the last week I’ve listened to 3 books that are a total of 25 hours long (on double time so it only took me 12.5 hours).

The changes are frustratingly slow, even imperceptible day-to-day. Speaking has been particularly frustrating for me over the last few months as I’ve been involved in Toastmasters. Focusing on speaking has made me painfully aware of what a weak speaker I am. I wish I had started working on it earlier in my life, and I wish my efforts now were yielding quicker results. But it’s only been a few months. I know the effect over years will be dramatic and well worth the small amount of time that I’m spending on it now.

Third, stick to it.  The Compound Effect only works if applied constantly over a long period of time. Sometimes we think we can keep going on sheer willpower. However, Hardy argues that we don’t need willpower. We need “why-power.” We need a strong “why,” or reason for doing what we’re doing, that will keep us going through the obstacles and mundane routines.

Why do you want to lose weight? Is it enough to want to look better, or is it more powerful to want more energy to spend time with your kids or to avoid the early-age heart attacks that run in your family.

As we stick to it we will build momentum. Think of a merry-go-round loaded with kids. It’s hard to get started, but once it’s going it only takes a light push to keep it going. The momentum also makes it hard to stop

So go out there and build positive momentum in your life. Figure out what you want to accomplish, develop daily habits that will lead you towards your goals, and see the dramatic effects of your efforts compound over time.

Question: How has The Compound Effect helped you in your life?  

4 Ways to Run a Startup Like a Navy SEAL Team

I recently read the book Lone Survivor. It is the story of a 4-member Navy SEAL team sent on a mission in Afghanistan. 3 of the 4 were killed during the operation, and 16 more were killed trying to rescue them, making it the worst special operations catastrophe in history. The author, Marcus Luttrell, is the lone surviver. He tells the story not only of the operation and his survival, but also how he became a SEAL. As I learned how the military selects and trains SEALs, I realized that the startup companies I’m involved in would be more successful if I, and those I work with, operated more like Navy SEALs.

Here are 4 ways that startup teams can operate more like Navy SEALs.

1. Only work with “A” players

Startups can’t be successful with dead weight. It may feel heartless to get rid of a “B” player, but it’s worse to allow them to drag down the rest of the team. “A" players want to work with other “A” players, and you won’t be able to retain or recruit “A” players if you keep the “B” players.

The Navy SEAL qualification program is designed to weed out all but the top “A” players. Anything less than the best can threaten lives during a mission.

After eight weeks of Navy boot camp, aspiring SEALs go through several weeks of training in part designed to weed out all but the best. Luttrell’s group started with 164. It was down to 111 after 2 weeks and 54 by the start of the infamous Hell Week. Only 32 survived 6 days of constant training and only a few hours of total sleep.

I’m not suggesting that you put your team through something like Hell Week, but you can recognize those who don’t step up to the pressures of building a startup. You can recognize those who don’t bring top performance every day.

2. Train diligently 

Navy SEALs go through months of qualification and training before embarking on their first mission. Between missions they are constantly trained on all aspects of their duties, including fitness, weapons, hand-to-hand combat, etc.

Startups can’t afford to send their employees to months of training before putting them to work. However, they choose team members who have been well trained through education and past experience. They can also make training a part of their day-to-day activities for minimal time and cost.

One startup I work with has an “Education Plan.” All employees are authorized and strongly encouraged to spend a half hour per day, at work, studying educational material related to their job, such as books, trade magazines, etc. Education meetings are usually held monthly where one team member will spend up to an hour training the rest of the team on a relevant topic, such as by reviewing a book they have read.

Every Monday morning the entire team joins a conference call to report on progress from the past week and discuss plans for the upcoming week. Often they will hold “PK” (product knowledge) sessions at the end of these meetings. One team member will train the rest of the team on one of the company’s products so everyone will become familiar with all products.

3. Tackle the toughest challenges

Navy SEALs are brought in for the toughest missions because they are so carefully selected and well-trained. They face these challenges with confidence and courage because they know they are prepared and no one else can handle it.

To be successful and make a difference in the world, startup teams should be willing to tackle the toughest challenges. The low-hanging fruit in business was plucked long ago.

Elon Musk is a courageous entrepreneur. He was part of the Paypal startup team that disrupted the lucrative payments industry. Now he is tackling three incredibly difficult challenges (and succeeding) - commercial space travel, electric automobiles, and high-speed trains.

4. Never give up because it’s too hard

I added “because it’s too hard” because saying “never give up” without qualification can be dangerous. There are times when it’s good and necessary to change direction. It’s not wise to throw good time and money into a hopeless venture.

However, in many cases startups simply need to weather the tough times with confidence and courage. The history of any successful company that I’m aware of includes many ups and downs and even near-death experiences.

Most of us know the basics of Apple’s history. Michael Dell famously said in 1997, when asked what he would do to fix the struggling company, that he would shut it down and give the money back to shareholders.

In its early years, Google executives bet the company on an ad deal with AOL. If the deal had gone wrong, the company could have gone down with it. Instead, the deal became the foundation of its core business: search advertising.

Conclusion

Most startups don’t have the resources or time to replicate the Navy SEAL experience for their teams. However, startups can learn and apply principles from the Navy SEAL program. They can become an elite team that has the respect of competitors, customers, vendors, and shareholders.

Question: What other lessons can we learn from Navy SEALs?

4 Dangers of Raising Money

Every startup needs some money to get going. Often founders start with their own funds and then turn to outside sources when they need more. Outside sources may include banks and credit cards, friends and family, angel investors, and venture capital firms. Entrepreneurs are often so enthusiastic about and confident in their startup that they believe money will solve all their problems. However, they should beware of these 4 dangers of raising money.

1. Dilution

Dilution means the founders own less of the company. For example, two founders may own 50% each until an angel investor takes 10% in return for an investment. Now the founders only own 45%. This may not seem like a big deal, but most companies need additional rounds of investment. Each round will reduce the founders’ ownership.

A venture capital firm might take 20% of the company for the next round, which means the founders own 36% each, and the angel investor owns 8%. Founders can be left with a tiny percentage of the company after several investment rounds.

Dilution isn’t necessarily a bad thing. A small piece of a huge pie may be better than a big piece of a tiny pie. The trick is to make sure the investment grows the pie and doesn’t continue to divide the small pie.

2. Loss of Control

Loss of control is related to dilution. In theory, each owner has influence over the company in proportion to their ownership stake. In practice, owners elect a board of directors to represent their interests. When founders start a company, they have complete control. Each new investment gives someone else input into company decisions.

Some investors will require more control than their ownership stake would normally allow. For example, venture capital funds that own a minority share in the company might have a guaranteed seat on the board of directors and veto power over certain decisions.

As with dilution, lack of control isn’t always a bad thing. Investors can (and should) use their influence, experience, and contacts to help the company succeed. The trick is to find “smart money,” or money from investors who can actually help the company succeed.

3. False sense of security

Some teams believe that money will solve all their problems. They celebrate the closing of an investment round as if they have made it.

The truth is that money doesn’t solve problems. An associate of mine often says, “if money will solve the problem, it’s not a real problem.”  It might simply give the team more time and resources to throw at the problem, but it doesn’t solve the problem.

Instead, teams should celebrate the revenue and profit growth enabled by the investment.

4. Acceleration in the wrong direction

Investment is to companies what rocket fuel is to spaceships. Engineers and astronauts spend months or even years preparing for a visit to space. They make sure all their plans are solid, and then adding fuel is one of the last steps in the process. The fuel enables the acceleration to the destination that they have prepared for.

What if the engineers don’t know what their destination is? Or what if they know where they want to go, but they don’t know the route to get there? The rocket fuel still has the same amount of power, but it won’t send them to where they want to go.

Entrepreneurs should know what direction they want to go before taking outside money.

The Antidote - Lean Thinking

One of the antidotes to the dangers of fundraising is lean thinking, which I wrote about here. Eric Ries also writes about lean principles in his book, The Lean Startup. Companies should start small, evaluate and test as they go, make continuous improvements, and build slowly.

Outside money should come into the picture only after entrepreneurs prove their ideas and discover the tactics that work. Following lean thinking principles will prevent the founders from being diluted by outside money that is used to discover a strategy. It will prevent founders from losing control of their company before they can figure out what direction they’re going. It will prevent teams from having a false sense of security and from accelerating in the wrong direction.

Question: What are other dangers of raising money? 

3 Strategies for Dealing with Uncertainty

All of us face uncertainty in our lives. Working with startup companies, as I have done for several years, can be particularly uncertain. The last few months have been especially uncertain for the companies I work with, which has led me to think a lot about how to deal with uncertainty.

The following 4 strategies have helped my sanity in the face of uncertainty.

1. Don’t suffer from things that haven’t happened

It is important to anticipate and plan for the future, but sometimes this causes us to suffer from things that haven’t even happened yet. I like Mark Twain’s quote, "I've lived through some terrible things in my life, some of which actually happened.”

We live today, not in the future.

D. Todd Christofferson addresses this topic well in an address he gave called, "Give Us This Day Our Daily Bread.” He relates the experience of the Children of Israel in the wilderness. They were able to survive because the Lord gave them manna daily. They weren’t able to gather extra for the future. They had to live for today and trust that more manna would appear tomorrow.

He tells the story from the book and movie, Lone Surviver, and quotes a senior officer speaking during the intense Navy SEAL training.

“First of all,” he said, “I do not want you to give in to the pressure of the moment. Whenever you’re hurting bad, just hang in there. Finish the day. Then, if you’re still feeling bad, think about it long and hard before you decide to quit. Second, take it one day at a time. One [phase] at a time.

“Don’t let your thoughts run away with you, don’t start planning to bail out because you’re worried about the future and how much you can take. Don’t look ahead to the pain. Just get through the day, and there’s a wonderful career ahead of you.”

Likewise, sometimes we need to recognize that we’ve done all we can to prepare for the future. All we need to worry about is getting through today.

2. Consider the worst case scenario

During uncertain times it helps to imagine the worst case scenario. This isn’t being pessimistic. Rather, it shows that even the worst case scenario is manageable.

During the financial crisis, the US Treasury Department officials needed to identify which banks needed capital and how much. They came up with the idea of a stress test, but they were afraid the tests would reveal a hopeless situation, creating financial panic and meltdown. They realized that the worst case scenario would only confirm what the public already believed, and better results would create confidence.

They were correct; the banks weren’t as bad off as everyone feared, and information gained from the tests allowed them to take the first informed steps toward recovery.

3. Don’t think too much

There are times to think about the future, and there are times to focus on the task at hand. I find myself too often neglecting what I need to do today because I’m thinking about the future. This thinking is not always productive planning. Often it’s imagining various scenarios about how my life could turn out and worrying that it won’t turn out like I want it to.

Sometimes I have to force myself to stop thinking and get working. It helps me to set aside specific times to think about the future. It doesn’t always work, but I try to focus on the tasks at hand during the week and save my future thinking for Sunday morning. During this time I review my goals and my progress towards them.

4. Don’t expect perfection

I’ve heard the saying, "perfectionism is the enemy of progress.” I have a tendency toward perfectionism, and this can make it hard for me to deal with uncertainty. I find myself hesitant to start or continue down an uncertain path because I’m afraid it won’t work out perfectly.

I have been a Dave Ramsey fan since I discovered his radio show via podcast in 2005. In 2009, some friends encouraged me to start Dave Ramsey’s Financial Peace University in the community I was living in. It is a course (previously 13-week, now 9-week) that covers personal finance topics by Dave Ramsey on DVD and through group discussion led by a volunteer facilitator.

I didn’t want to start because I was afraid we wouldn’t have much interest, that I wouldn’t do a good job as a facilitator, and that it would take time away from my family or other areas of my life. I didn’t want to start something that might not be perfect.

It took some prodding from my friends, but finally I got started. Our first group was very small and consisted mainly of my parents, my in-laws, and a few close friends. We held it in a county maintenance garage. It wasn’t perfect, but it was successful.

Over the next 3 years I facilitated 3 more groups that included over 100 people. Many of them changed their lives for the better after learning important financial principles. None of this would have happened if I let perfectionism stand in the way of starting.

In conclusion, uncertainty is a part of life. The better we are able to deal with uncertainly, the more happy and successful we’ll be.

Question: How do you deal with uncertainty?

6 Things Your CFO Should Do For You

Entrepreneurs focus on identifying problems to solve, building solutions to those problems, and selling those solutions. Most entrepreneurs don’t want to be bothered by distractions from this core focus. There are plenty of necessary distractions in business, such as bookkeeping, taxes, and HR paperwork. Part of the CFO’s job is to make sure the details are handled so you, the entrepreneur, can focus on what you do best. But how do you know if your CFO is doing his job? Here are six things your CFO should do for you:

1. Keep you out of trouble

Your CFO might not be able to keep you out of trouble in every way, but she should at least keep you in favor with governments. Government regulations include tax filings, HR paperwork, business licenses and permits, environmental, and industry-specific regulations. Penalties can be severe, and governments usually aren’t very forgiving of mistakes.

The CFO should make sure all tax filings are done accurately and on time. Tax filings include payroll tax, sales tax, income tax, property tax, and other industry- and location-specific taxes. Most filings are routine and can be done by clerical staff, but the CFO should set up and monitor the systems that make sure it gets done.

Make sure your CFO doesn’t use late tax payments as a cash flow strategy. This is never a good idea. The IRS or your country’s tax agency will destroy you. I once helped a company that had been using late payroll tax payments to help cash flow. It took over a year to clean up the mess, and the penalties, interest, and liens almost took down the company.

2. Give you clean monthly financials 

You must have accurate and complete financials to make good decisions, and you need them soon after month end. Your CFO probably doesn’t do the bookkeeping, but he should design and oversee business processes that allow for immediate recording of transactions followed by an efficient month-end close process.

3. Identify, monitor, and interpret key metrics

Your CFO should provide you with monthly financials, but the financials don’t usually provide all the information you need to make good decisions. Plus, monthly is not often enough for some metrics.

Soon after joining one company, I identified manufacturing labor cost as the single most important cost to focus on. All other expenses were fixed or varied within a small range, but labor cost could vary wildly day to day due to the manual nature of the process. We set up a system to report estimated cost daily and exact cost each pay period. We found that our labor cost was double the industry benchmark. Using this data we made adjustments that cut labor cost in half.

The most important variables for a retailer I work with are daily sales revenue and gross margin. Our accounting system automatically emails a report each evening to the CEO that shows each item sold that day and the average selling price. That, combined with a more detailed monthly review of average margins by product line, allows the CEO to make adjustments quickly if the metrics get out of line.

4. Match your business to the right technology

In many businesses the CFO is responsible for technology. At a minimum, she should be tech-savvy enough to choose and use the best accounting systems for your business.

Many businesses use Quickbooks because it’s cheap, easy, and familiar. However, there are many drawbacks to using Quickbooks, such as keeping track of and backing up a data file, difficult remote access, and poor inventory management (and therefore poor gross margin tracking). Quickbooks may be right for you, but your CFO should be familiar with other options. I recommend Xero or Netsuite for many businesses because they are easy to use and are hosted online. (Read my Netsuite and Xero reviews on TrustRadius).

The primary reason I landed one client was my experience with software. They wanted to implement a sales management software system, integrate it with the accounting system, and train people to use the software. Rather than pay for a specialized consultant to run this project, I was able to take on this project in addition to regular CFO roles. Not only did this save the company money, but they also had someone in-house who was familiar with the software and how it fits into the accounting processes.

5. Help you make good decisions

A CFO should be more than just a bean counter. She should be a strategic partner that helps you make good decisions. She should combine her deep understanding of the numbers with a deep understanding of the business, the industry, and the economic environment it operates in. The CFO should be involved in and be a valuable contributor to all major decisions.

I helped the CEO of a commodity product manufacturer evaluate their business model. By reviewing the data we realized they didn’t have the scale or differentiation to compete against much larger competitors. Rather than expanding manufacturing as planned, they added product lines from other manufacturers to their distribution channels, which had led to rapid growth.

6. Prepare for growth

As an entrepreneur, your motivation is probably to make an impact on the world while getting a good return on the time and money you put into the business. Having the greatest possible impact and the greatest possible return usually means growing the business as fast as possible. Most startups are chaotic, which is okay as they build their product, feel out the market, and make adjustments.

But when they start seeing traction, they need to be prepared for growth. The entrepreneur usually drives the growth, but the CFO can make growth possible by putting efficient processes and procedures in place. Timing is critical, and it takes an experienced CFO to get this timing right. You don’t want to add unnecessary cost and complexity before the business needs it, but you need to be prepared for growth.

Conclusion 

You must have a good CFO at your right hand if you want to build a successful business. A good CFO can free you from the details and help you make good decisions. A bad CFO can destroy your business by getting you in trouble or giving you bad information for making decisions. Given the importance of the CFO role, it’s important that you understand what your CFO should be doing for you.

Question: Are there important CFO roles I am missing? 

See my other CFO-related posts here.

4 Tips for Managing Business Cash Flow

One of the most common reasons for business failure is running out of cash. This may seem obvious, but even profitable companies go bankrupt because they don’t have the cash to fund their growth. Everyone understands that a business’ revenue must exceed its expenses to survive long term (or at least it must have a feasible plan to get there with investment capital).

However, profitability alone is not enough. Manufacturers need cash to purchase raw materials and pay their overhead expenses before they ship to and collect from customers. Retailers need to purchase inventory before customers visit.

As the CFO of several startup companies, one of my top priorities is cash flow planning. The following are four things I have learned about managing business cash flow:

1. Religiously maintain short-, medium-, and long-term cash flow projections

The tighter your cash flow, the more time you’ll need to spend on projections. Cash flow is tight in all of the companies I work with. I usually spend at least some time every day updating short-term projections, every week updating medium-term projections, and every month updating long-term projections.

Long-term typically means 1 to 5 years. Cash flow projections are built into the financial models I use for generating pro forma financial statements. The models take into account budgeted profit or loss, working capital needs, capital investments or sale of assets, and expected financing to be received or repaid (notice this follows the sections of the cash flow statement). Information about projected cash excess or shortfall can be used in strategic planning decisions.

Medium-term usually means 1 to 12 months. The process is similar to long-term planning but more detailed to make sure we can handle temporary dips.

Short-term means within the next month. This is where we get very detailed. Medium- and long-term plans have to make assumptions about expected receivables, inventory, and payables balances, for example. But within the next month we need to know what invoices we expect to collect, when inventory purchases will be made, and what bills need to be paid (especially payroll!).

Diligence in this area is incredibly important. It takes time to make adjustments for cash shortfalls, such as by raising money, selling assets, or cutting costs.

2. Overestimate your needs

You’ve probably heard the following business advice: figure out what cash you think you’ll need, double it, and then double it again. In most cases, businesses take a lot more time and money to build than we expect. Especially when planning for long-term cash flow, err on the high side.

If you need cash to grow and are raising money from investors, raise much more that you think you’ll need. A little extra dilution is better than running out of cash.

3. Build an emergency fund

This is related to point 2. Hold an emergency (or reserve) fund that is double or quadruple the size you think you’ll need. It is standard advice in personal finance to have savings equal to between three and six months of expenses. I think a business emergency fund should be even higher to allow it to weather downturns and take advantage of good deals.

If your business doesn’t have an emergency fund, build one a little bit at a time. Your survival could depend on it.

Bill Gates wasn’t comfortable with Microsoft’s cash flow until he had a year’s worth of payroll in the bank. As a software only company at the time, most of Microsoft’s expense was payroll.

4. Prioritize 

Despite their best efforts to manage cash flow, many businesses have times when they simply can’t pay all the bills on time. In this case, it is important to prioritize wisely.

I again draw a parallel to personal finance. Dave Ramsey talks about taking care of the necessities of life first - food, clothing, shelter, and transportation. You wouldn’t allow your electricity to be shut off or your children to starve while you pay your credit card bill. Your credit card company may not be happy, but there’s not a lot they can do while you meet your needs in the short term.

A business is similar. First focus on bills that allow your business to keep operating. You won’t be able to pay anyone if your business fails. Payroll is usually at the top of the list. Most vendors will have some level of patience with late payments. You don’t want to risk losing credit terms, which will hurt future cash flow. But as you build relationships with your vendors you will find that some will be more patient and understanding than others.

Conclusion

Cash is King. Paying careful attention to cash flow is just as important to a company’s survival as building and selling a great product.

Question: What tips and tricks do you have for managing cash flow?

4 Reasons Startups Need a CFO

Fred Wilson, a prominent venture capitalist and blogger, said, "the CFO is largely about 'what is going to happen and how do we get there?’"(1). How can a CFO fill this role in a startup? This is an important question not only for CFOs but also for the founder, CEO, and board who hire them.

Some startup teams underestimate the value of having a CFO involved from the beginning. They are focused on building and selling a product and think they can get by with a bookkeeper until they get a lot bigger.

Some founders may recognize the need for CFO insight, but they don’t think they can afford one. As I’ve written before, a CFO doesn’t need to be full time. A startup can engage a part-time CFO for very little cost, and often that part-time CFO can get more involved as the company grows.

Here are a some ways a CFO can help a startup from the beginning know what is going to happen and how to get there:

1. Create reasonable financial projections. Notice the word “reasonable.” Founders are often blinded by optimism. This is usually a good thing because it gives them the courage to move forward with their idea. But often they need a CFO to ground them in reality.

Sometimes startups take off like a rocket with crazy margins and never look back. The reality is that most startups take several years to be profitable, if they get there at all. An experienced CFO will build a financial model with several scenarios. To humor the founder, they can show the rocket ship scenario, but they will also show the normal and worst-case scenarios so the team can plan accordingly.

2. Provide credibility for investors. Investors want to know that their investment will be carefully watched over. They will have to buy into the founder’s vision, but they will also want to know the founder has competent advisors to help carry out the vision.

They will also want to know that they will get reliable financial information on a regular basis. They will be more likely to invest and continue investing if they know an experienced and trustworthy CFO is providing this information.

3. Track and interpret data. Any bookkeeper can categorize transactions and prepare the standard financial reports. An experienced CFO can identify key metrics, create systems for tracking and reporting these metrics, and help other leaders interpret and act on the data.

4. Create scalable processes. Startups are chaotic, and to some extent this is good and necessary. A startup should rapidly experiment and adapt to lessons learned. It would be a waste of time and energy to create too many formal processes. However, as the business starts getting traction, it needs to be prepared for rapid growth. An experienced CFO can help create business processes that are efficient and scalable.

My experience 

I’ve had several experiences where I was brought in after the startup phase, and the founders have kicked themselves for not involving a CFO earlier.

I joined one company about two years after startup. Revenue grew rapidly, but they couldn’t figure out why they were struggling with cash flow. They knew what their manufacturing costs should be, but they had no system for tracking actual costs per unit produced. It took some digging into past data to find that their labor cost was double what they expected.

I put a simple system in place for tracking labor cost per unit. We cut labor cost in half after a couple of months of using that data to refine the manufacturing process. To this day we use the same tracking system, which allows us to quickly make adjustments if labor costs start to creep up again.

The CEO had said many times that they could have avoided many costly mistakes if I would have been involved from the beginning. It’s not that I’m anything special; they simply needed insight from a CFO.

Startup founders: don’t overlook the importance of involving a CFO from the beginning. You will minimize mistakes and increase your chances for success. In most situations a part-time CFO can help you get started with minimal time and cost, and often that person can grow with you until you’re ready for a full-time CFO.

Question: How has a CFO helped you in the startup stage?

(1) http://avc.com/2011/10/vp-finance-vs-cfo/

Book Review: The ONE Thing

I’m always trying to figure out how to get more done. I want to accomplish a lot in my life, and I feel constantly driven to do everything needed to reach my goals. I am a student of productivity systems and tactics and try to implement what works for me. I recently listened to the book, The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results by Gary Keller and Jay Papasan through Audible.com. This book helped me realize that I need to focus more on doing the right things and less on getting things done.

The author argues that we should focus our efforts on ONE Thing. He says we should be like a stamp and stick to one thing until reaching the destination. He compares it to a series of dominoes. We need to find the lead domino, which, if knocked over, will take care of the rest of the dominoes.

He goes through six lies that keep us from accomplishing the most important things: 1. Everything matters equally. He says we should have a success list instead of a to-do list. The majority of what you want is a result of the minority of what you do (the 80/20 rule). 2. Multitasking. Multi-tasking amounts to rapid task switching, which wears out our brain and prevents us from focusing effectively on one thing at a time. 3. Self discipline. We should use habits instead of discipline. He cites research that shows it takes 66 days rather than 21 to develop a new habit. 4. Willpower is always in will call. Willpower is limited so we should do first what matters most. 5. Balanced life. We should use counterbalance instead. We can’t always be perfectly balanced in every area, but we should never go so far away from an area that we can’t come back (i.e. family). 6. Big is bad. We shouldn’t be afraid of big results. It often doesn’t take much more effort to generate big results than small ones.

To help us identify the ONE Thing to focus on in our lives, he suggests we ask ourselves the focusing question: "What's the one thing I can do such that by doing it everything else I do will be easier or unnecessary?”

Of course, he’s not saying we should literally only do ONE Thing at a time. Most of us have multiple areas of our lives that need attention, such as family, work, community, church. etc. He suggests we ask this question for each area of our lives and within a given time frame.

Almost three years ago I read Michael Hyatt’s Life Plan ebook and spent a lot of time putting my life plan together. I identified the major areas of my life, and for each area I wrote down my purpose statement, envisioned future, supporting statements, current reality, habits, and goals.

I try to review it each week, make minor updates as needed, and make major updates and set new goals just before each new year. This has been an incredible exercise that has helped me focus on the most important things in my life. However, after listening to The ONE Thing, I realized that my life plan is out of control. I have so much detail and so many goals that I’m not putting enough focus on any ONE Thing.

I went back to my life plan and wrote one sentence that describes the ONE Thing I want to focus on in each area of my life. It’s only been a few weeks, but already I can feel reduced stress and greater sense of accomplishment. Surprisingly, I’m actually doing less and enjoying more free time because I’m focusing only on the most important things.

One of my greatest fears in life is being bored, but I am slowly realizing that down time is necessary for my mind and body to perform at the highest level possible. It reminds me of one of my favorite quotes. Heber J. Grant said to Joseph Fielding Smith, “may you be enabled to work less and accomplish more."

Question: How do you focus your efforts on the most important things in your life?

Beginner's Guide to an Online Business Presence

A small business owner recently asked me how to set up an online presence for his business. He has built a great reputation in his community over many years, and he’s always generated more work than he can handle through word of mouth. However, he recognizes that an online presence can allow him to serve his customers better and expand his influence beyond the local community.

As I wrote an email explaining some of his options, I thought that the information I was sharing might be helpful to other business owners. I’m not an expert in web development and online marketing. However, I have learned some things, first while working as a web programmer during university, and then over the last few years while working with startup companies.

There are many options for an online presence that vary widely in cost and complexity. I will review some options using the broad categories of Social Media and Websites.

Social Media

Setting up a social media site for your business is quick, easy, and free. You have many options to choose from based on your goals and audience, including the following:

Facebook: Businesses can set up a Facebook page and post information, including relevant pictures. You can invite people to like your page, which puts your posts on their news feed. Most of the world is on Facebook, making a great way to reach your audience. However, only a small percentage of your followers will see any given post unless you pay to get more reach. 

LinkedIn: You can set up your personal profile, and you can also set up a profile for your business. The business profile is similar to a Facebook page. 

Pinterest: This is a great platform if you have any kind of visual element to your product and women make the buying decisions. Users can pin your product pictures to their boards and share them with their friends. 

Instagram: Also image-focused with a large audience. 

Google+: Similar to Facebook but with far fewer users. However, a strong Google+ presence can help you rank higher on Google search results. 

Other social media sites, some with a specialized focus, include Houzz, Flickr, and Smugmug. 

The key with social media is to add value with your content and not just promote your business. You can build recognition and trust by serving your audience before asking for something in return. Your audience will quickly tune out if all you do is promote. Gary Vaynerchuk wrote a great social media book called Jab, Jab, Jab, Right Hook. A very brief summary is that you need to jab (provide value) a few times at your audience before throwing the right hook (ask for something in return). 

Some business may find that social media is a sufficient online presence. However, the down side is that you lack what Michael Hyatt calls a “home base” that you own and control. Social media sites can dictate how you interact with your audience, and they frequently change the rules. Some may fall out of favor over time (remember MySpace?). That brings me to the next option for an online presence - a website. 

Website

Having your own website provides a home base that you own and control. If you’re reading this, you know what a website is. For those not familiar with how they work, here is a brief description of the three main components. 

1. Hosting server: All websites are stored on a computer, or server, somewhere in the world. Almost any computer with an Internet connection can host a website, but most people don't do this anymore. There are many hosting services that allow you to rent space on a server. Bluehost is the best one I know of, and it's $4/month with an affiliate link. 

2. Domain name: The domain name, or web address, tells a web browser what server your website is hosted on. Many sites sell domain names, and godaddy.com is probably the most popular. Most names are $10-15/year. 

3. Site content: A website is basically a number of files stored on the server. The files are formatted in a way that can be displayed by a browser. The domain name tells the browser what file on the server to display first, and then other files are accessed using navigation links. You can build your own website by writing files in text editors from scratch using HTML and other code that browsers understand. Fortunately, many tools are available that allow a non-technical person to build websites without using any code.  

There are many options out there for simple and free websites with hosting, domain name, and content built in. Wordpress.com is a popular one. Design options and extra features are limited, and you can't use your own domain name, but it’s a good way to get started. 

You can gain more control over the domain name, design, and other features if you’re willing to spend some time and money on a self-hosted site.  Wordpress.org is one way to do this. You set up hosting with a service like Bluehost, and then you install Wordpress.org on your server. You can use a control panel to build the underlying files that make up the site. You can install themes that provide the design, and you can install add-ins for various features, such as photo galleries and shopping cart. 

Wordpress.org is free, but some of the best themes and add-ins have a cost. Micheal Hyatt provides a great tutorial for setting up Wordpress.org with Bluehost in about 20 minutes. http://michaelhyatt.com/ez-wordpress-setup.html

With a website you can describe your product and services, provide testimonials, and write blog posts with helpful information related to your business. As with social media, the more value you provide, the more your audience will trust you and be willing to spend their hard-earned dollars on you. 

A website and social media can complement each other. You can use social media to drive people to your website, and your website to get people to connect with you on social media. 

Hopefully this helps you get started with an online presence for your business!

Question: How have you connected with your small business customers online?  

How to Get Started as a Freelancer

I've written a lot about freelancing lately. As I’ve described, I’m excited about this work model because of the benefits I’ve seen for me and my clients. The freelancing model doesn’t work for everyone in every situation, but I think it’s important to be aware of alternatives to the traditional employer-employee relationship.

In this post I will provide some ideas for getting started as a freelancer.

Develop deep expertise. Companies look for freelancers who have deep expertise in a particular area. Often companies use existing staff to cover general needs and hire additional generalists as they grow. Many companies, especially small ones, aren’t willing or able to hire full-time employees to fill specialized needs.

This is why the freelancing model works well for CFO’s, marketing executives, HR specialists, writers, videographers, and programmers, to give a few examples.

Gain broad experience. Aspiring freelancers should develop deep expertise, but they should also take opportunities to broaden their experience. The more a freelancer understands all areas of business, the more valuable they will be in their specialized area. It also helps to gain experience in different industries, in different locations, and with different teams.

For example, a freelance CFO may be expected to set up processes in all areas of the business from sales to order processing to shipping to bank reconciliations. A CFO is also expected to interpret data and provide strategic insight into all areas of the business.

Network. Freelancers depend on relationships and word of mouth for opportunities. Like any hire, companies take a risk by bringing on a freelancer. On-boarding takes time, and the quality of work reflects on the company.

For this reason, companies want to work with who they know or those known by who they trust. Not many freelancers get hired from a cold call.

Be a superstar. Because freelancers depend on word of mouth for opportunities, their work needs to be something worth talking about. Many successful freelancers first gain a reputation as a full-time employee for being the hardest worker and the go-person for solving problems.

Start slowly. Full-time employees shouldn’t jump ship and then go looking for clients. Look for opportunities to gradually transition a full-time role to a part-time role as new opportunities come up. Without being unfair or dishonest to your employer, take opportunities do take on freelance roles outside of regular work hours.

As I described in a previous post, my freelance career began when I had the opportunity to cut my full-time role to half time when another half-time opportunity came up.

Freelancing is a fast-growing segment of the economy. In some cases it can provide greater benefits to the freelancer and the client than a traditional full-time arrangement. Hopefully these tips help those considering making the transition to freelancer.

Question: How did you get started as a freelancer? 

Links to past freelancing posts: Here I describe how I discovered the benefits of being and using a contract CFO. Here I dig a little deeper into why companies should consider a contract CFO. Here I more broadly discuss the pros and cons of freelancing. Here I look at skills and attributes freelancers should develop.

My System for Maximizing Productivity

I like to minimize the time I spend figuring out what I need to do so I can maximize the time I spend getting things done. In this post I’ll describe the productivity system I use to accomplish this.

I use many aspects of David Allen’s "Getting Things Done” (GTD) methodology. My tools and systems revolve around his filing system principles. I have a system I trust for capturing and making readily available all of the information I need in all areas of my life. I never need to worry that I’ll forget or lose something.

Here’s an overview of my system:

Task List. Besides email, Remember the Milk (RTM) is probably the mobile app and website I use the most. I hardly do anything without checking with RTM to make sure I am following my priorities.

Using RTM may be the single biggest thing I’ve done to reduce my stress. I rarely get overwhelmed by the long list of things I need to get done because I only think about what RTM says I need to address right now. If I think of something I need to do, I’ll quickly add it to RTM with the date and priority in which I want to address it.

I’ve used RTM for about 5 years, and I have 19,626 completed and 224 uncompleted tasks. Over time I’ve developed my own system that works great for my day-to-day workflow. I won’t expand this post into an RTM tutorial, but in the future I might dedicate a post to how I use it.

I have evaluated several other programs, such as Omnifocus and Nozbe, but I keep coming back to RTM. I find its simplicity, effectiveness, and efficiency hard to beat.

Calendar. I use one Google Calendar to track my schedule. I use Google Apps for most of the companies I work with, but I link all calendars to my personal one. My wife and I share our calendars with each other so we can coordinate our schedules.

My favorite trick is the “q” keyboard shortcut for Quick Add. You can use natural language to quickly add a task, such as “Meeting with Joe at 2 pm Tuesday.”

Active Files. I use Dropbox or Google Docs/Sheets for files I am actively working on. I use Google as much as possible because I can quickly access and edit on any device, I can easily share and collaborate, and I never have to worry about version control. For example, I use Google Sheets for cash flow projections and expense reports.

I use Dropbox for other active files, such as financial models too complex for Google Sheets.

Structured File Archive. I use Google Drive for archiving files that need to be structured into folders. For example, I have folders in my personal Google Drive for each year of tax documents.

Every company I work with uses Google Drive for their filing system. We keep very little paper. Search in Google Drive is so good that I almost always use the search bar at the top rather than browsing the folders.

Dropbox would also work for an archive, but each person shared on a folder would either have to store the files on their local computer or manage Dropbox settings to specify which folders aren’t synced locally. Dropbox search isn’t as good as Google Drive, and perhaps mostly importantly, Google offers a lot more free storage than Dropbox.

Unstructured Archive. Evernote is my digital brain. I dump everything in Evernote that doesn’t need to be in a structured file system. I take notes, keep track of ideas, and maintain a journal, for example.

I don’t keep any paper. I use the Fujitsu ScanSnap iX500 Scanner to scan everything from utility bills to kids’ report cards. I don’t usually worry about tagging notes or naming files because Evernote can search text within PDFs and images (even handwritten text).

How I use Evernote can also be another full blog post, but suffice to say, it’s awesome! I can access my entire life in seconds from anywhere.

This has been a quick overview of the productivity system that helps me keep track of everything going on in all areas of my life. With RTM, I know what I need to do at any given time, and I don’t worry about everything else. With Google Calendar I never need to worry about missing an appointment or double booking myself. With Dropbox, Google Drive, and Evernote, I never need to spend time searching for anything.

Using these tools allows me to focus on getting things done rather than trying to figure out what needs to be done.

Question: What productivity tools do you find useful?

6 Skills and Attributes Freelancers Should Develop

In a recent post I described how I discovered the benefits of being and using a contract CFO. My next post dug a little deeper into why companies should consider a contract CFO. In my last post I more broadly discussed the pros and cons of freelancing. In this post I will continue that theme and look at six skills and attributes freelancers should develop. I approach this from the perspective of a contract CFO, but most skills apply to all freelancers.

1. Organized. Effective time and information management is critical. Freelancers have to keep up on what is going on with several different companies possibly in completely different industries. Clients will expect you to be up to speed and on top of responsibilities just as if you were a full-time employee. I use tools like Evernote and Remember the Milk to keep track of everything.

2. Problem solver. This sounds cliche, but the ability to quickly solve a wide range of problems is a major factor that separates a valuable advisor from a clerk. For example, contract CFOs need to be the expert on financial matters. They need to know how to account for that complicated transaction. They need to know to interpret the data. There's no one else to ask.

3. Quick learner. This is related to problem solving, but it is important for freelancers. When they take on a new client they need to very quickly learn the business and industry. The client does not want to pay a freelancer to learn.

4. Tech-savvy. This is true in any field, but tech skills can differentiate a contract CFO. There's a shortage of professionals proficient in both accounting/finance and technology. Technology is inseparable from business process, and in a small company without significant IT resources, a CFO who understands technology is valuable.

Technology has been an integral part of all my roles. I landed one role because, in addition to CFO responsibilities, I was able to lead a software implementation to integrate sales and accounting. With another company I took several separate systems, including bookkeeping in Quickbooks, order tracking in Google Drive, and CRM in Salesforce.com and implemented Netsuite to consolidate all those functions into one system.

5. Confident. Many of us suffer from impostor syndrome, meaning we are convinced that we are frauds and don’t deserve the success we have achieved. It’s easier for companies to get rid of a freelancers than employees, so freelancers need to consistently prove their value. It’s easy for freelancers to fear that their clients at any time will discover they are frauds and let them go. Allowing that fear to motivate rather than debilitate requires confidence.

6. Likable. Competence is not enough; freelancers must also be likable. Companies will only hire freelancers they like, and they will only keep freelancers they continue to like. They might put up with a challenging employee or find an assignment that suits that person better, but they most likely won’t feel that kind of a loyalty to a freelancer.

This list could be much longer, but I think it’s representative of some of the most helpful skills and attributes for freelancers.

Question: What other skills and attributes do you think are important for freelancers?