Endowments Outperform Up and Down Markets?

I've written before about the interesting financial allocations that Harvard's Endowment and others like it (read Princeton and a few others) have used recently. They include higher than normal investments in private equity (11% of total), timber and agriculture (9%) and real estate (9%). Likewise, they show a mere 12% allotment to domestic stocks, well below normal, while a full 20% was invested in foreign and emerging markets stocks (normal recommendation is around 10%).

In the relatively up markets of recent years (until this year!) these allocations have served the endowments well, with overall performance beating a "normal" portfolio with 65% stocks and 35% fixed income handily, and regularly beating the SandP 500 index (e.g. fiscal 2007 ended June 30 Harvard up 23%, SandP 500 20.6%).

Now with a deep Bear market, Harvard has announced it is down 22% through October, and expects to be down by 30% through fiscal 2009. We'll have to wait and see if this beats the normal allocations, but they are ahead of the SandP 500 performance, down 24% 4 months through October.

If these results hold up Harvard will be able to boast that it beats normal allocations in both up markets and down markets, and we'll start to see more copycat portfolios in the market. Something to watch, and emulate?

Sources, NY Times, Google Finance, www.bloggingstocks.com, and CNN Money.

Clarity is not Enough

As usual, the Bush folks don't know what to do with what they have been granted by Congress (see Wars Afghanistan, Relations Rest of World, etc.). As Fair Game columnist Gretchen Morgenson writes today, what the administration is doing with the Troubled Asset Relief Program is not working. They have invested several hundred billion dollars into banks and others too big to fail. They are certainly not doing what the title of the program says, or maybe they are, that is giving relief to the banks and others who hold the bad mortgage assets. They are really not giving relief to the engine of the economy, that is the bank's customers - individual consumers (who are losing their sources of income) and companies (losing customers) - the ones who need the most help and who generate more than 87% of GDP (individuals via consumption, companies via direct investment).

It now looks like we will have to wait for Obama's guys to use the money appropriately. Would that be to bail out the auto companies? Not so fast, they might be better going through bankruptcy - see Steel companies, US for a surviving example.

What proof do the markets display to us about what will work? On the downside, the decline in the markets since the election have been serious, and are primarily due to the uncertain actions by the existing folks. The uptick this past Friday was a reaction to the guy Obama will appoint as the new Treasury Secretary. Certainty is good, certainty about an experienced dude is very good. Still, even including Friday the equity market is down 45% so far in 2008. For a full year it hasn't been down that much since 1931. We'll see what the remainder of the year holds, but from the current actors don't expect much.

Bailout is more Transparent

One of my favorite sources, Fair Game, noted on Sunday that "The secrecy and opacity that have surrounded some of the trickier decisions...do not engender trust." Indeed neither of these ways of doing things, especially as regards the bailout or Troubled Asset Relief Program ("TARP"), engender any kind of trust or confidence. The markets are still roiling partly because of continued uncertainty.

And now the administration has learned that it can't continue to be opaque about TARP. They are asserting that the $700 Billion will not be used for the purchase of bad assets (read troubled mortgages), rather the funds will be used in other ways to pump up the financial system (i.e. buying bank stock). So it's not gonna be another Asset Resolution Corp. (like it was in the 80's for the S&L's), rather we're moving more like Socialist Sweden, taking equity and pumping up balance sheets? Is that a good thing? I'm not sure, but lets be clear what it is at least.

Now that we have more transparency, will it help? Maybe, but if you are in need of lines of credit or financing in general, try alternative sources, as described by Steve Strauss on the NFIB website. These may be your best bet.

The Rating Agencies Blow, but We Knew that Already

As Gretchen Morgenson points out in her recent Fair Game column, the overseers are all complicit for the current economic mess. Put in this category the regulators (think SEC, the Fed, etc.), the Boards of these failed financial companies (who didn't understand the products they were pedaling), and the rating agencies. Today lets look at the latter and figure out why anyone cared about their ratings anyway.

Rating agencies rate debt issues. They analyze the risks and assign a grade representing your likelihood of getting your principal and interest back in full. Banks, as lenders and holders of debt make the same calculations when deciding who to lend money. Now, other than the big real estate debacle back in the 80's, lenders to companies have not had the meltdown like now. Why is that? I believe it's because they use more sophisticated devices than the rating agencies. How could this be? It's because they consider the signals from the public equity markets as well as balance sheet analysis.

When I was as banker, we used some type of Z score for our public company relationships. It would measure equity volatility of the target creditor. If the entity's stock was tanking or simply volatile, or low compared to it's competitors, we would stay away from any type of credit exposure, including swaps of any kind. As we have seen with AIG and Lehman Bros, the debt is as exposed as the equity when things go bad.

Lesson, not all is what it seems, only the Gov't is a AAA+ credit because it can tax and print money, so if you want safe try Treasuries, otherwise consider the equity risk of a company who's debt you are investing in, if you want to sleep more soundly.

Back in the Saddle

I haven't had much to add lately - all that is going on with the Fed, the economy, the banks, whew!!! Where to turn for good news? Look to the optimists as described here by the NYTimes on Sunday. A few of them even sound rational. Maybe it's not that bad on Main street. Of course when the ETF that follows the US Dow financial sector is down from 120 a year ago in half to $60 currently, portfolio's are hurting. It must be hurting Main Street in their retirement funds. Or maybe they just invested in Gold, looks good now but long term stocks are the best option - see below...

So Sad

The news has been unusually depressing since Labor Day, so much so that it's been hard to write anything worth while for small companies. But no doubt, Wall Street is hurting more than Main Street. Keep the faith.

You are probably better off than the big boys out there. But if you needed a cash infusion in this time of low rates, would you pay 17% interest? That is Goldman Sacks agreed to if you read the wonderful blog The Big Picture I follow regularly. It must be scary out there for the big boys who are used to reaming money from the little guys. What comes around, goes around.

In a longer look, could this be the end of dollar hegemony? Could this be the end of American economic leadership? For you folks in the manufacturing world, it sure has seemed so over the past 10 years. If the high-value-add manufacturing sector, services sector and new economy companies don't win us back some power then we maybe in a slow decline, time will tell.

Another Reason to Keep Employees Happy?

Inc. magazine reports on it's website that while job-related fatalities declined by 6% in 2007 to 5,488 in the US, workplace murders increased 13% to 610.

Another reason to consider Open Book Management or at least focusing your efforts on maintaining a good HR department?

Benefits of Open Book Management

Secrecy is one of the enduring factors for family-owned companies, and for privately owned companies in general. Command and control is the norm, giving workers only the information they need to know for their direct job functions. The problems of this approach are described nicely in Ann Meyer's Chicago Tribune article Keeping workers in the know this week. She describes how small business owner Paul Scriba overcame his challenges by employing Open Book Management ("OBM") techniques. And recent studies have confirmed that firms employing OBM realize accelerated top line growth and higher productivity from the workforce.

A definition of OBM could include these factors:

* Give employees training to understand the financial information
* Give employees all relevant financial information
* Give employees responsibility for the numbers under their control.
* Give employees a financial stake in how the company performs.

Point four is optional, but at a minimum the company needs to address the top three issues. Benefits accrue from employees who take the responsibility for results under their control. And "relevant" means pertinent, no they don't need to know your salary, but if you are running a leaky ship with unadvised payments to family members, maybe OBM is not for you, but then again neither is running a vibrant company.

Gaining Capital without Losing Control

From Forbes

A nice quick read from Jim Casparie, a founding principal of Angel Strategies (the first national organization for angel investors) about convertible notes.

As discussed, this is a great way for newish companies, which need an infusion of capital, to raise funds without having to prove that your growth will actually occur. An investor may be willing to lend money, with a belief in some upside. In the meantime you are paying them are regular debt return in interest. But at their option (in the case of good performance or when a venture capitalist is coming on board) to convert their investment to equity at a favorable price. In effect, you can price the conversion to get the maximum at the conversion date, say in two years when things are singing along! In the meantime the note should have an interest rate below what you would normally pay without this option.

Your CFO should be aware of these types of options as you approach the market for funds.

Sobering View

With a tip of the hat to one of my favorite bloggers The Big Picture, here is a sobering 3 minute review from the International Herald Tribune as to where we are now due to the housing crisis, which is effecting everyone.

The SBA and How This Administration Does Business

I cannot tell you how peeved I am at the SBA. Big supporter up to now as a solid option for small businesses who need capital. Still a supporter, but as a tax payer very mad. This excellent expose by Gretchen Morgenson looks at the recent fraud involved with a big operation active in Michigan which leaves the tax payers with a huge, albeit local, possible loss, reminds me of the days of the Savings and Loan bailout. She describes the nut:

"The S.B.A.’s own Office of Inspector General examined the agency’s oversight of BLX (recently the 2nd largest SBA lender in the country!!). That inquiry preceded the federal investigation of the company in Michigan, which found that BLX’s operation in that state had made $76 million in fraudulent loans. Last year, Patrick Harrington, a former BLX executive, pleaded guilty to fraud. Since then, 35 people not employed by BLX have been indicted and charged with being co-conspirators, Michigan prosecutors said."

Unbelievable, and she makes a case for very lax oversight. And to think I thought the SBA was underfunded - now we see some very badly mismanaged situations. To allow this much fraud to go on, and to not immediately fix it, is outrageous. Fat chance Congress will be impressed with the recent for increased funding.

From Bad Times to Worse for Small Business

According to this blog I site regularly:

- Business bankruptcies have tripled since the first quarter of 2006
- Nearly 29,000 companies filed for bankruptcy in the first half of 2008
- Given an estimate that as few as 1/3 of "deaths" go through bankruptcy, it is estimated that up to 90,000 businesses failed during the first half of 2008.

"The vast majority of these failed companies are among the nation's 23 million small businesses, with fewer than 100 employees.", according to recent analysis from McClatchy.

These failures are a primary force driving unemployment higher. The article makes the point that the BLS is under counting failures while over counting new business establishments. Regardless, the "death" statistics are very scary, especially for the small business community, and reinforce the need to hunker down, save some capital, and cut remaining fat to keep the business going.

Open Source Solutions to Your Challenges

The recent article in the NY Times Science section entitled If You Have a Problem, Ask Everyone, describes how companies are using the concept of open-source science to monetarily provide incentives for anyone to contribute to an unsolved problem. As noted the government has done this in space race issues by funding prizes for the best invention to solve a particular problem (like finding a cheap way to launch heavy payloads into orbit). This approach has application for small businesses in two distinct ways, one old and one new.

You might have a cloud of knowledge surrounding your operation already, including resources like your attorney, accountant, financial adviser. But is this group big enough to provide all your answers, and more importantly are they incented to do so. The obvious move is to get all you can from these outside sources by making them partners, that is put them on your board (board of directors or advisory board) and make them think regularly about your challenges.

From a product perspective, you may need broader knowledge. Can you solicit advice in the marketplace to improve your product without endangering your trade secrets? Do you have a technical challenge needing outside help? You could benefit from a service like Innocentive which uses outsiders who are paid to solve product issues, and fully one third of its solvers have PhD's. It's worth a shot in this day and age.

So now there are new ways to solve your technical problems to go along with the old ways to fix your corporate challenges. It's worth examining both to see if you can maximize the resources devoted to your success. Your shareholders will be glad you did.

One Exit Gone

It's not that the IPO market is gone forever, but it is closed for business currently. This has caused problems for venture-backed firms needing liquidity, but also makes it harder for small business owners looking to sell. With the IPO market closed, sale prices will be lower. If you can wait for better times you will garner a better selling price, but it will be a longish wait.

If your business plan lists an IPO as near term exit strategy, you can forget it. Oh, the market will come back, just not any time soon. At least according to the folks polled by Inc. magazine. Of the Venture Capitalists polled, 79 percent said IPO activity won't pick up again until 2010!

According to C/Net News, not one IPO was launched during the second quarter 2008 in the US. As they noted in a piece dated July 1,

"The broader pullback in the economy is affecting corporate spending and is clearly impacting the M&A market," Jessica Canning, global research director for Dow Jones VentureSource, said in a statement. "Corporations might be out looking for venture-backed companies to acquire, but many are either doing so quietly or choosing to hold off on entering into negotiations."

Since March, for example, 10 companies have yanked their IPO registrations. Currently, 22 companies still are registered to launch an IPO, but are waiting for the markets to improve before going out, Canning said.

All this means you may want to sit tight until the market rebounds, but you may be waiting a few more years (not just months) for that to happen.

Raise Your Delivery Costs?

In a June article Forbes make recommendations regarding surging fuel prices, Should You Tack On A Fuel Surcharge? Their general recommendations - if you are a transport company, then yes, customers expect it. If not, yes, but bury it in your general product prices. I couldn't disagree more.

Your customers are looking at your invoices carefully, they can see any increase. Why hide it, just call it what it is. You are sending something big or heavy, it costs more, they will understand. The article quotes Robert Moment, a small-business consultant as recommending that as you place this extra price burden on your customers you:

"make up for it with better quality and customer service,"

yeah like you're not doing this already?! Just tell them what it's for upfront, they will appreciate your honestly.

Senate Restores SBA Funding, Expands Programs to Veterans and for Micro-loans.

Good news has arrived for the small business community. While the Bush Administration has reduced the SBA's operating budget by 30% since 2001 (source INC.com), the Senate has restored more than $100 million in funding for this important source of small business capital.

The Senate Appropriations Committee voted to increase the SBA's core small business programs by 45% over the President's request for 2009. The bill increases funding for Small Business Development Centers by 24%, Women's Business Centers by 13%, microloans to $20 million from zero, contracting assistance by 87%, and veterans outreach programs by 62%.

Full text of this release can be found here.

Finding Evidence for Customer Behavior Adjustments

One of the realities I have discovered as a financial leader is it takes some savvy to search out the Truth on which to act. You need sound data to make good decisions, yet the marketplace is not structured to provide it directly. The average news source, whether right wing, left wing, or neither, is driven by a need for readership. Readership, sadly, is a measure of people reading, and people pursue the sensational. The sensational does not usually include the Truth, maybe some small "t" truths, but not the one you seek. Luckily, the advent of blogs and special interest websites has greatly improved the sources of good information.

The price of gas, cost of oil, why it has gone up, and what you can/should do about it, is a good example. The Truth, supported by substantial evidence, is the complicated fact that the price of oil is primarily driven by worldwide supply and demand factors. While supply is relatively fixed in today's environment, demand has been growing greatly. US consumers are still a substantial part of the demand curve. So while no short fix will help much (i.e. opening ANWR would provide less than 1% of current global production), a long term reduction in consumption will. This is born out buy recent statistics on gasoline demand sited at The Big Picture, a wonderful source of macroeconomic data. Easy to see from the chart that as the price of gasoline has gone up, demand is declining, and as a result the price will start to stabilize.

Your read should focus on these real behavioral changes. Consider what a long term adjustment in driving will do to your customer base and therefore your business, and adjust accordingly.

Batten Down the Hatches, a Slowdown is Coming

David Leonhardt at the NY Times is correct about the sorry state of our economy, further bolstered by today's learned comment:

“Six straight months of job losses are the strongest evidence yet that the economy has slipped into a recession of uncertain depth and duration,” said Peter Morici, an economist at the University of Maryland School of Business.

In Leonhardt's article he rates the chances of a recession at 75%. I would tend to agree.

Leonhardt further addresses the fact that we have deeper problems going forward, the toughest one is that we are not creating enough good new jobs. It's a relative lack of innovation caused by our poor recent performance in education. As I have argued in the past, we need to keep all of the college educated folks we can, including the foreign ones, in order to create enough good jobs here. Let's see if this is something the new President will address, as "No Child Left Behind" has not been the answer.

NFIB has Some Pull Afterall, Good for their Constituents

News - the IRS has raised the standard mileage rates, good for small businesses and their driving dependent business uses. This will allow them to deduct more for all auto-related expenses, and thus save some bucks on taxes. Thanks IRS.

Back story - the NFIB (National Federation of Independent Businesses), biggest lobbying arm of the small company world had a hand in it. No surprise, since this issue came up as the second highest concern of small business owners in the NFIB's most recent survey. Cost of health insurance continues to be the biggest concern of the surveyed companies.

Strike one for the little guy.

AB In"bev" Trouble, Craft Brewers Can Keep up Double Digit Growth

The brewing industry is under pressure from rising prices. Much of the increases are due to rising fuel costs, after all the finished product, made up of mostly water, is quite heavy. However, for craft beer makers, those with total production below 5 million barrels annually (AB produces 100 million annually in the US) the cost of ingredients have been going up as well. Well documented increases in barley malt, hops, and various other ingredients are driving up production costs. These cost increases are just hitting the stores now as price rises averaging a dollar per six pack. Will this increase drive consumers away, or at least stop the rapid growth? We think not for several reasons:

1 - Mainstream lager producers are under competition from all sides, including so called alco-pops, as consumers continue to pursue better tasting libations.
2 - The recent new beers from AB and Miller, are dubious (see linked ratings from Beer Advocate), not much better than their regular beers, and in most cases worse.
3 - The approach by Inbev to aquire AB will take most of management's focus off AB's attempt to diversify. Though this will go on, they will focus more on operations for now.

A bell weather for the craft industry, Sam Adams aka Boston Beer Company, keeps growing by double digits, as described by Jim Koch for the first quarter 2008,

Jim Koch, Chairman and Founder of the Company, commented, "We achieved 12% depletions growth in the first quarter over a very strong first quarter last year. We feel good about this growth and the continued overall positive craft beer category trends, even as our whole category has raised prices in the face of significant cost pressures. This was our ninth successive quarter of double digit depletions increases. While it is too early to predict if the price increases will affect the Company's or category growth, I believe that as the leading craft brewer, we should continue to benefit from the increasing support of retailers and wholesalers for craft beers, as they recognize the potential of this fast growing and profitable category. Even in tough economic conditions, beer drinkers are continuing to trade up to better beers. I believe that the quality of the Samuel Adams brand and our distinctive, full-flavored beers position us well to meet this growing drinker interest."

Long live the continuing growth of this vital small business segment.

Let Those Techies Stay

Among the insanity and inanity of the immigration problem and resulting debate in the US is the loss of good workers, and not just the folks who pick your lettuce. It's also the workers who helped the ignored folks in Louisiana reconstruct their houses and city after the hurricane. And most importantly it's the great minds we are educating at our Universities here and then send them off to other countries to compete with us.

As this recent Kauffman Foundation Study entitled "Intellectual Property, the immigration Backlog, and a Reverse Brain-Drain" displays in great detail (and you can access the whole report for free in pdf format via the link) it's a big problem. Strikingly, due to our restrictive immigration policies, we are missing out not simply good workers, but talented entrepreneurs, as the web summary notes:

"The earlier studies, “America’s New Immigrant Entrepreneurs” and “Entrepreneurship, Education and Immigration: America’s New Immigrant Entrepreneurs, Part II,” documented that one in four engineering and technology companies founded between 1995 and 2005 had an immigrant founder. Researchers found that these companies employed 450,000 workers and generated $52 billion in revenue in 2006. Indian immigrants founded more companies than the next four groups (from the United Kingdom, China, Taiwan and Japan) combined.

Furthermore, these companies’ founders tended to be highly educated in science, technology, math and engineering-related disciplines, with 96 percent holding bachelor’s degrees and 75 percent holding master’s or PhD degrees."

We cannot afford to lose this force of entrepreneurs, whom to a great extent we have educated and propelled ahead, and must change our policies to invite more to stay. The future of our economy, to the great benefit of the world economy, and our country depends on it.

Regional Growth Rates Differ, Take Heed

The Bureau of Economic Analysis recently reported state and regional growth statistics for 2007. No surprise that the Great Lakes region showed the slowest growth overall at 0.5%. Illinois, with the most diverse economy in the region grew at 1.5%, while Michigan lagged at negative -1.2%. Nationally growth advanced by 2.0%.

Lessons for small companies, if you sell in or to particular regions or states, you must prepare forecasts and plans for the particular economic trends in the areas where you make most of your sales. Accountants can assist you planning efforts, but you and your financial staff must do the hard work of forecasting. Accurate planning assists your relationships with lenders and other investors. I can help you adjust spending, and if you can't make your revenues you must be prepared to cut elsewhere.

On the flip side, locate the areas that are growing more and target these markets. Long term trends don't lie, and they may save your business if you plan for them.

Sellers Beware

Selling a business? Volume is down according to the linked NY Times article. It quotes a recent study saying that only 10.5%, or a bit more than one in ten, of companies that are listed by selling brokers actually are sold. The article further notes,

"The main reason (for the low percentage), Mr. Vescio and others said, was that “most small business owners keep bad records,” so buyers cannot get an accurate financial picture."

Take heed, get a part-time accountant or Treasurer and keep good financial records. Get organized and stay that way, you won't regret it.

The Notion of Markup

A retail pricing concept that I have seen used in manufacturing and distribution companies as well, but can be misunderstood, is that of markup. As excerpted by Entrepreneur online, the author Ronald Bond notes that a standard "markup" for retail products is 50%. That is a retailer will double the price he paid for a product, ergo a bottle of rum bought in bulk by a liquor store at $12 per bottle would in this case go on the shelves for $24.

Now, you say, wait a minute, that's a 100% increase. So it is, but it's a 50% markup to the retailer. Why is this standard and justified? Because retailers have costs beyond their direct purchase price. There is rent, insurance, salaries, benefits, heating, lighting, etc. It's a good rule of thumb to consider when selling at retail and this 50% usually results in a net profit margin for the business of 5%-10%.

As a rule it's wise to avoid discussions of markup with your customers, what they need to understand is that you price your offerings to sustain a viable business, and if value meets or exceeds the price they won't care anyway.

Are You Raising Prices Yet?

The National Federation of Independent Businesses ("NFIB") just released it's quarterly look at the economy. Among general signs of a slowing economy, it shows that more than one third of small companies are raising prices - and the issue is inflation to some extent. Is this happening to you? Are you feeling the crunch?

Margins are being squeezed by the increases in raw materials, benefits, and all to do with transportation. Survey participants reflected a 9% decline in sales for the last three months ending April 2008 while earnings were down 28%. Clearly price increases are needed but in a tough retail environment it's not the first thing you think of doing. Yet it must be done.

Witness the micro-brewing beer industry. They have seen price increases of more than 500% on some inputs. As a premium product their offerings have more latitude to increase, but only so far.

Think hard about your competitive situation beforehand, but if it's between losing money and losing a few customers, the latter is probably best. Depend on your quality and service and you will retain the customers who appreciate you the most.

Farm Bill is a Tax on Most All of Us

One of the most egregious handout problems in the US economy is the Farm Bill. Handouts total $50 billion per year, equaling $50,000 per farmer, and the income cutoff is $2.6 million!! I know these folks work hard, but with the handouts their average income is way above the norm in the US.

In a recent The Becker-Posner Blog, Posner writes about this issue. The best near-term solution is to limit the subsidies to farmers at the income level of $200,000 or less. Posner discusses the current offer as proposed by the President, facilely. It probably won't happen, but the Dems should consider it. As I mentioned last time, it will probably take a bold change of leadership to address this kind of intransigent problem.

In the meantime, the extra money given to undeserving farmers is a tax, and an expensive one, on all other industries and persons. This is too big a group to get together and lobby, but too big an issue to continue to ignore.

Can New Leadership Revive Our Economy?

In THE POST-AMERICAN WORLD by Fareed Zakaria, he descibes the declining US influence in the world order, other than our military power. As China, India, and other countries arise, “in every other dimension — industrial, financial, educational, social, cultural — the distribution of power is shifting, moving away from American dominance.” Is this inevitable, or can the US maintain a leadership position, at least in terms of our economy? He has some good suggestions as briefly noted in this interview:

"America is “becoming suspicious of the very things we have long celebrated — free markets, trade, immigration and technological change”: witness Democratic candidates’ dissing of Nafta, Republican calls for tighter immigration control, and studies showing that American students are falling behind students from other developed countries in science and math."

He goes on to decry the intransigence of these issues as quoted by the article's author, " "economic dysfunctions in America today" are the product not of “deep inefficiencies within the American economy,” but of specific government policies — which could be reformed “quickly and relatively easily” to put the country on a more stable footing. “A set of sensible reforms could be enacted tomorrow,” he says, “to trim wasteful spending and subsidies, increase savings, expand training in science and technology, secure pensions, create a workable immigration process and achieve significant efficiencies in the use of energy” — if only the current political process weren’t crippled by partisanship, special-interest agendas, a sensation-driven media, ideological attack groups and legislative gridlock."

Indeed, we have many challenges and maybe a less divicive leadership can help solve these problems, for the better of all and particularly the small businesses in America.

BEA says it's Not a Recession Yet...

...but with GDP showing a 0.6% annualized real growth rate in the first quarter, it's pretty slow out there...

Business Valuation, Do it Before You Have To

Business Week has a "small business" area on their website, though it's not usually the best location for comprehensive vs. glossy knowledge. However, a recent article on business valuation by Jeremy Quittner (dated April 16) is quite good and comprehensive in describing the best ways to value your business. I leave it to you to hit the link so you can read it for yourself.

My beef is that folks usually wait for a crisis to hit before performing a valuation, i.e. when a sale is to occur, a partner is leaving, etc. From a value maximization perspective, the time to do so it is not right before you want to sell it, rather it's after you've had a chance to address the issues and clean up the cash flows. You generally fix up your house before putting it on the market, no?

The article mentions CPA's, business appraisers, and business brokers as possible valuation experts. Appraisers have the best tools and knowledge for the job, I would endorse them over the other two.

But It's My Baby!

Making money is not always the top focus of an entrepreneur. As described by Ann Meyer in the Chicago Tribune today, founders often fail to make the transition from startup with full control to a successful growing entity.

According to Harvard research cited by Meyer, only one in four founders are still holding the reins when a company goes public. This indicates that successful startups manage to overcome the founders grip most of the time. This is not surprising given the multiple levels of capital needed to get to the public realm. Usually a startup must go through several rounds of outside financing to build the prototype, establish production, setup template installments, and the many additional fazes of launching a business. These successful launches, the ones that go public, are greatly outweighed by companies that involve private takeouts (including acquistion) and the failed companies. The failed companies you don't hear about are the ones that suffer from founder fatigue and often implode from personnel departures.

An early offset to a strong founder is having a solid financial person in place to display and bolster the cash flow side of the business, as well as to foster good relationships with financial market partners. Your banker and accountant, along with outside investors can provide solid backing and support and help lead a recalcitrant founder down the correct financing path.

Remember, 10% of millions is a lot better than 100% of zero.

Pricing a New Product

My book of the month is Predicatably Irrational, by Dan Ariely. It's a good read. For small companies there are some interesting results from this book.

A primary point is made that our expectations are made (and set in stone) the first time a customer sees a new product. Example, the first time you went into a Starbucks. Now the prices were set higher than most coffee places, what did you think about that? Well, his reasoning goes, with a different atmosphere, much better coffee, and nice aromas in the stores, sure I'll pay $2 for a cup a joe! Now that first experience set a new level of expectation for you to compare to any other coffee store. Ariely shows that that expectation is far more important than traditional supply and demand theory! Your first price becomes your benchmark.

This is important for companies bringing out a new product. If you can show that your product is wholly new experience for your customers, then you can set the price you please (within reason of course), not too low because as we know it's harder to go up than down (again the first experience influence). But you may be able to get a better margin on this new product because you are setting the benchmark. So be careful, you will get what want if you do it right.

Equity Might Be Out There For You

In my Angel discussion last week, I discussed the slow-down in angel investing in 2007, presaging if not anticipating the slow-down in the financial markets this year. Apparently, while following more cautious principles than in the internet hay-days, the professional investing markets are looking forward, and making investments in selected sectors. As discussed in James Flanigan's Entrepreneurial Edge article today, equity capital is available for the right story.

One sector discussed is mobile communication devices and related software. This is clearly a growing industry in the US and something that will need continued investment. It promises solid returns for early investors, and the professional investment firms, including private equity and venture capitalists are focusing here. Likewise, "green" technologies are getting favorable attention.

So it does seem that it's harder to raise debt these days, ergo , if you have a candidate do seek out the professionals (as long as you have a technology or "green" startup, that is)!

A New Hope for Small Business Health Care

In the push/pull for more affordable health care, the forces of the status quo (read insurers) are fighting to keep their money flowing. Meanwhile, health care premium costs have soared for small businesses. A recent study by the Kauffmann-Rand Institute found that health-care costs had nearly doubled between 2000 and 2005 for businesses with fewer than 25 employees. For these companies health care costs now exceed 10% of total payroll costs. Now a bi-partisan group led by Senators Durbin and Snow are trying to break the log jam.

The Small Business Health Options Program (or SHOP Act) would enable small businesses to set up health-care insurance pools and seeks to establish a nationwide pool by 2011. It also offers tax credits of more than $2,000 per family covered for employers that provide health-care to workers under this program. The national pooling feature has been fought by insurers as well as health advocacy groups (like the American Cancer Society) which do not want to see state regulations overturned. This bill addresses those concerns and as a result may have a better chance of passing. It is supported by the National Federation of Independent Businesses, the country's largest small business advocacy group.

No easy remedies have been proposed to address the overall ballooning of costs and inefficiency of our health care system. Short of a full overhaul, this bi-partisan program is a good start for small companies. Let's see if it gets through the Congressional battles, it is there where we'll see which entrenched money maker of the current system opposes it.

Recession is Coming - Get Needed Funds While You Can

From the National Federation of Independent Businesses website - "NFIB's mission is to promote and protect the right of our members to own, operate and grow their businesses." Only now the growing part is not happening. Take heed and adjust your lookout and pursuit of funding accordingly.

The NFIB's Small Business Economics Trends April edition states quite clearly that it's leading indicators show a recession is coming. The Index of Small Business Optimism fell 3.3 points in March to 89.6
(1986=100), the lowest monthly reading since the monthly surveys began
in 1986 and the lowest reading since the second quarter of 1980 (a recession year) when it was 80.1.

The good news is that the credit crunch on Wall Street doesn't seem to be affecting "Main Street", as cost and availability of borrowing is not a problem.

Takeaway - If you are in a strong position to borrow, now is the time to do so to ride out the slowdown coming up.

Angels Spread Risk as well as Wings

Angel investors have become more conservative over the past couple of years, as reflected by the survey released recently by the Center for Venture Research at the University of New Hampshire's Whittemore School of Business and Economics. The survey reveals several concerns reflected in the data based on 2007 numbers. Potential borrowers should be aware of these trends.

The Center notes several figures of concern.

• Total investments made reached $26.0 billion, a mere 1.8% increase over 2006.
• Entrepreneurial firms receiving funding grew 12%, and the number of active investors increased 10.3%, indicating a smaller average deal size - probably an indication that investors were seeking to spread their risk further.
• Software, Healthcare, and Biotech netted 58% of total dollars invested.
• The Yield Rate, that is the number of proposals that were funded by angels, declined from 23% in 2005 to 14% in 2007, further reflecting a tightening market.

If you are considering approaching the angel market for funding, keep these trends in mind and have a full read of this study for more information.

Disintermediation - Watch Out for it in Your Business

Disintermediation - this is what is happening to the traditional music labels as they fight the changing market. The change has come about because of the proliferation of digital downloads of various types. Selling music on CD's and other physical media is declining fast. Learn some lessons from this kind of trouble, it could be you.

Middle men everywhere are in trouble. In the music business that includes the Labels, who come between the artists and the public. Their primary business is to market and distribute the music. Now artists can easily distribute themselves via the internet. The labels spend enormous money on finding and marketing bands, then make up for it with ridiculous distribution charges (the marginal cost of making a CD is less than a quarter). But if they don't distribute - all their money is gone, eh?

So although distribution has changed drastically, marketing is still needed by all but a few bands. After all, it is still a very competitive market - witness the great number and variety of acts at the recent South by Southwest festival. The labels have to find a method to get paid for their marketing prowess, that is all they have left. They may have found a solution with the recent agreement to work with Myspace.

Lesson - if you do several things well, and something or someone takes away one of your markets, you must decide to continue with what you do best, and get paid a premium for it, or find another business.

A Good Time to Review Your Real Estate Needs

Common knowledge says that commercial real estate follows the home or retail market by 12-18 months. That is, if home prices start tanking (like they have now or probably started last April) then commercial will follow. For commercial renters, this portends a good time to start negotiating for more flexible terms and/or cheaper space.

As Tery Pristin writes in the Square Feet column of the New York Times today, landlords have started to respond more quickly to smaller renters looking for space. It might not be cheaper, but you can find shorter leases and/or better options.

If your footprint needs are changing and you seek more or a different type of commercial space, now is the time to keep a close eye on your local market for good deals which should become more plentiful over the next year or so.

Launching a New Business or Product Line

Forbes (see the March 26th article by Melanie Lindner linked below left) today published in it's entrepreneurs blog a good refresher on starting a business (or from my seat a new product line). They point out the biggest issues - having a solid Value Proposition and defining your Sustainable Competitive Advantage. You do hear these two mantras ad nauseam from venture capitalists, as well as smart angels for that matter. The only way you can obtain significant start up funding is with strong answers to these two issues.

One of the big issues not mentioned in the article was Exit Strategy, what I discussed on Monday. Investors want to know how they get their money back. Do have a read of this one, it will help you from making a fool of yourself.

Think of Your Exit Before You Enter

Exit strategies - how do you make the most from your business when you want to do something else or retire? To a great extent it depends on the type of business you've built, and the market you compete in. In today's market the most active buyers are the growing web companies like Google that pay up for niche businesses that augment their business model. A great majority of companies that are sold are bought by competitors, rather than going public. Recently, a start-up launched about 10 years ago "became" exit-able.

Local Harvest is a focused website that maps sustainable restaurants, farmers markets, grocery stores, and the like. It is a niche business in an area where some big folks are playing, notably Google Maps, which of course didn't even exist 5 years ago. If Local Harvest can succeed in gathering and holding both locations and the customers looking for these locations, then the recent mega-wave to sustainable foodstuffs will drive it's value exponentially, and make Google, Mapquest, or Yahoo take notice and think about a bid.

Now I know most entrepreneurs don't start a business looking to sell it, and these guys probably didn't. Successful businesses are driven by passionate people who really find a market to serve. But if you were starting a business from scratch today, or revising your business, it wouldn't hurt to focus now on who might want to buy you later.

Data Good - Too Much Data Bad

In the constant balancing act between searching for good information without overloading your workers, Inc. magazine finds that an astounding 89% of an average workers' time is spent conducting research, attending meetings and searching for documents. This leaves at most 11% of the work day (probably much less) for using and acting upon information.

Challenge your staff and technology suppliers to find better, more intelligent research tools and technologies that fit your niche so that quicker, better actions can become the norm. Faster computers should enable this process.

Effective judgment and good (which I equate to rapid) decision making will continue to differentiate successful companies from those that flounder. Don't let your workforce get lost in the avalanche of data.

Credit in this Environment? - Good Luck!

The crunch isn't over yet - I was on a call with some college friends recently and they were joking about which of their firms would go down first, UBS or Lehman. After the Bear bailout, probably neither. Still - not a good sign that the financial crunch, meaning lack of credit even for good borrowers, is over.

If you are a small company looking for money in this environment - look to friends or family. The banks or other lenders are looking elsewhere for now, Treasuries anyone?

Hiring College Graduates - What's with all the Female Interviewees?

Full blown research sited by the Freakonomics folks now shows that as you hire from colleges, you are more likely to find a solid gal than a guy. This performance gap is caused by learning differences and is shown to last at least through college.

The prevalence of female graduates allows small businesses to address their diversity issues in a positive way, and could lead eventually to an evening out of opportunity. Past practices led to guys making more lifetime income than women. In any case, it should tell you small business owners that the smartest way to go is hire that gal, all other issues being equal.

Hiring a highly qualified woman can lead to a better, healthier and more diverse workforce.

Liquidity is Still King

When small businesses have cash to hold for awhile, and think about investing it, many bank and corporate based options are available. As the excellent Gretchen Morgenson wrote in the New York Times Fair Game column, an investment that was represented as "near cash", so called auction-rate notes, turned out to be anything but. These notes are a relatively new type of short term investment, offered by closed end funds, with artificially low cap rates. As she notes not all "liquid" investments are truly liquid.

I can think of many short term investments that are truly liquid no matter market conditions, like money market funds and commercial paper, where interest rates float to clear the market. Banks and brokers offer a diverse number of offerings. For the truly risk adverse there are Treasuries.

Any company worth it's salt should have an investment policy that addresses the investment parameters for short term funds. Long term funds should of course be used to pay down debt, make investments in the business using ROI analysis, or repay shareholders if there are not enough good internal or external investment opportunities.

Think long and hard about the risks involved in gaining those extra basis points by putting your money in a closed fund or anything you don't understand. As we've seen recently, even the insured funds are having trouble.

iPhone Plays with Your Corporate Environment

This is a huge deal for business users. The iPhone will shortly play in the corporate environment according to this longish March 6 announcement broadcast by Apple for the next software update. Microsoft Exchange linkage is great news for companies big and small, leading to another good cell phone choice for employees. To your benefit, RIM now has a solid competitor - they no longer have a solo playing field, and for Palm, this might just accelerate their demise.

Once again the market speaks and product providers take notice - ergo you have a choice for selecting a company wide smart phone. Unfortunately, you have to wait a bit for the reality to hit - this iPhone 2.0 update, it's not coming until June.

The Vista is Not Rosy

Buying a new PC with Vista pre-installed is one thing, but upgrading your existing office PC's is now a dead issue. Witness the comments from inside Microsoft exposed eloquently by Randall Stross in yesterday's NY Times.

More importantly, as you read this article do you really think Microsoft cares about you the customer? Is this how you would approach a product launch/release? I find it hard to surmise how they continue to get away with this behavior.

If I was your Tech adviser, I would strongly consider going Mac since I now have seen both systems in small business action. The capabilities are really similar, MS Office for Mac is robust, and Leopard really does sing. Of course there are open source solutions as well, proving the market is at work for your benefit. Enjoy.

An Early Easter is Bad for St. Pats

It's not enough that retailers struggle to find a niche to generate revenues online, now the word is that off-line retailers will also suffer a decline in year over year revenue on St. Patrick's Day. The National Retail Federation ("NRF") estimates overall revenues will decline by 3.2% from 2007 as a result of fewer customers, despite a slight increase in average per customer spending.

“Retailers and restaurants that benefit from the St. Patrick’s Day holiday are up against a double whammy of an early Easter and the holiday falling on a Monday,” said NRF President and CEO Tracy Mullin.

The 18-24 crowd are still the big celebrators and spenders, allocating an average of 20% more money per person than the average and they show much higher attendance than the average.

So if you are a bar or restaurant, I would not spend much marketing money trying to pull in families or married couples, spend those dollars luring college folks and those just out, that's your best bet for a solid return on investment.

Getting Help Selling Online

Last week I wrote about full-scale online offerings for small businesses from Yahoo and Microsoft. These hosted services promise to launch you online and get you collaborating, selling and marketing as well. What if you don't need such a comprehensive solution and just want to sell your product into cyberspace? Then have a look at the options available from Flying Cart.

With Flying Cart you can be up and selling in two minutes (or so they claim). The Madison, WI company's free offering lets you launch up to 5 products, but prices range up to $30/month for unlimited products and transactions. The offering set includes:

• Web hosting
• PayPal integrator
• Email promotion
• and most importantly Store Networking

As described by Justin Petrocelli at Entrepreneur.com;

"Flying Cart helps retailers bring traffic to their sites by promoting their stores on search engines like Google and on local classified ad sites like Craigslist. The company's philosophy is unorthodox but refreshingly simple--time spent creating too many bells and whistles for an online store is time taken away from making sales. Flying Cart encourages its clients to get their businesses online quickly and make up the rest as they go. Shah (Flying Cart's founder) says the result is an online store that promotes itself."

In addition to Google and Craigslist promotion, cross-selling with similar stores online promises to be the big bang - the long held promise of the so called "network effect" where everyone links to raise the tide for everyone. A great try if it works.

Small business retailers would be wise to consider this option pronto.

Is Your Bank in Trouble? - Then So Are You

Your community lender avoided the home mortgage problems of the big guys. They crow about it. But the alternative may be just as bad. If they get into financial distress on other assets they do have, your loan and livelihood is at risk. Does your CFO or accountant have a solid take on your lender? Are you prepared to consider a new relationship on your terms?

Small and mid-sized banks, those with assets less then $25 billion, have to a great extent been crowded out of the home mortgage meltdown. But not for trying. These banks were the natural home mortgage provider (taking over after the S&L meltdown of the 80's); they sat in their market, knowing the good neighborhoods and bad. The business became a big game however, where originators, many non-bankers, took over the lending portion, loosened credit standards resulting in a greatly expanded subprime home loan market. These mortgages were then sold to large administrators who managed and serviced the loans, but then packaged the assets to sell into mortgage linked investments. This new system drove out the smaller banks and forced them to seek other profitable assets.

For many banks this took the form of commercial construction and mortgage lending, as well as lending directly to home builders. These real estate assets are once removed from the direct mortgage problem the big guys have, but are now coming to roost. Signs are ominous according to the Comptroller of the Currency.

There are no hard and fast rules, but it is certainly time to examine your lender, and decide if their problems could cause them to pull the plug on your loan. Open up the dialog with those other lenders that knock on your door. Have your financial expert take a look before it's too late.

Judgments - Lets Get Down to Brass Tacks

In Findings, John Tierney explores the human decision making process in the light of a new book titled "Predictably Irrational" by Dan Ariely. Tierney writes about a "leave behind your worst options" situation from ancient China:

"Xiang Yu was a Chinese general in the third century B.C. who took his troops across the Yangtze River into enemy territory and performed an experiment in decision making. He crushed his troops’ cooking pots and burned their ships.

He explained this was to focus them on moving forward — a motivational speech that was not appreciated by many of the soldiers watching their retreat option go up in flames. But General Xiang Yu would be vindicated, both on the battlefield and in the annals of social science research."

This approach to making decisive decisions can help some stuck business owners. If we think about how a CEO makes financial decisions, it's about eliminating options to get the right one. We can apply this approach to the not-so-clear non-financial decisions.

As described by Tierney, rational subjects at MIT prove that we as humans hold on to options longer than we should. Why? Because it is painful to let go of an option, a possibility. But there are very real costs to hanging on in terms of lost focus and poor performance.

How should a business owner apply this theory. In finance theory, a rational numeric judgment is used to eliminate options. When funds are available, managers perform a Return on Investment ("ROI") analysis to eliminate poor options and determine the best one.

Return on Investment looks at the pluses and minuses of various options in monetary terms. If you have several options, you consider the expected net cash return for each to find the highest expected return. If project 1 is to purchase a new lathe with an expected ROI of 18%, project 2 is to expand the building with an ROI of 14%, and project 3 is to do nothing or invest the money at 8%, then projects 2 and 3 should be eliminated for project 1, the action with the highest return, and eliminate the others.

What about other decisions that are not subject to ROI analysis? What's the cost of firing someone versus keeping them on for awhile? What is the cost of hiring someone now or waiting until markets turn? What is the real cost of visiting your best client once a quarter versus once a month?

Many of these actions cannot be reduced to a monetary return, but you can eliminate options. If you are considering 5 good candidates for a position, think about the most important considerations and see if you can eliminate 2 and continue with the best 3. If you have limited funds and 5 businesses to support, consider whether all are strategic, if not sell the outliers. An easy rule of thumb is that strategic judgments should be made sooner rather than later. A good book on successful decision makers can be found here.

Doing it All Online

Microsoft recently joined Yahoo in another battle for control. It has stepped up its online solutions platform for small business. Microsoft recently upgraded Office Live Small Business "OLSB" (poorly named, it has little to do with the MS Office product set) to give small businesses online solutions they can put up without needing outside technical help.

According to the National Federation of Independent Businesses, only 35% of small businesses have a website, half have a high speed connection, and only 57% use the internet for business purposes. Microsoft and Yahoo are trying to bridge this gap. Microsoft's OLSB provides the following:

• A private domain website with 100 email accounts and 5G storage (free for the first year)
• A contact manager with Outlook synchronization
  
• A document manager for version control, sharing, and rights management.
• Online workspaces and a Project Manager solution.
• It even works with the Firefox browser (so even Mac users can apply)!!
  

While all the above is free, modules for e-commerce (selling your products online) and email marketing are available for a fee. A more detailed review is provided by Stuart Johnson of Small Business Computing.

This offering is a 2.0 version, much better than the original, and presumably it will keep getting better. Yahoo's services are similar, and I would be surprised if we don't see a few more entrants (Google, etc.).

If you've been waiting to go, market, or sell online, because of cost or complexity, these solutions make it much easier and cost efficient. The minimum hurdle has been lowered significantly.

Stagflation and Recession, Neither a Good Day

Ooh, the stagflation concept has come up now, remember the late 70's or early 80's? No, you missed some bad times. The problem is it's hard to keep up with inflation now.

Last year 3 month LIBOR was at 5.36%, and the CPI from Jan 2007 to Jan 2008 was high at 4.3%, but you could still make money. Now with inflation looking like it will be at the same rate, and LIBOR at 3.09%, the investor is in a negative situation.

It is helpful for the overall economy that the Fed has the reduced the interest rates, but for investors and buyers of small company products, they have less money. A negative real interest rate is bad for the investor.

I would be worried, very worried now, if I had products or solutions to sell, look for a period of suffering - if you can keep raising prices to keep up with inflation it won't be so bad - but more likely the demand curve will fall off and we head for something worse, a recession.

$168 Billion Stimulus Bill Gives Direct Assistance to Small Businesses

Last week's $168 billion stimulus bill signing did garner some good news for small businesses, witness the NY Times post by Mickey Meece. He notes that the bill gives two gifts to small businesses,

1) A bonus depreciation increase of 50% of the cost of a tangible asset for immediate expensing, (an overall tax savings estimated to cost the government close to $44 billion over the next two years); and
2) An increase in the amount allowed for Section 179 (movable assets) expensing to $250,000 for 2008, up from $128,000.

These inclusions will encourage investment in both fixed and movable assets. Limitations are in place for SUV's among other assets, so be sure to consult your accountant for particulars.

At the end of the day, this will induce increased spending where the spender is seeking to reduce their overall tax liability.

Lending Money to Employees -- a Good Thing?

The Inc.com blog Boss School throws out an interesting thought on lending your employees money. In the December 18, 2007 post entitled "This Company is not a Bank -- Or Is It?" the author suggests that it is good employee relations for the boss to lend valued employees emergency money. His example is one of an hourly employee driver who gets in trouble with the DMV. He lends the driver $5,200 to pay off the fines.

Where would this behavior fall under the concept of best-practices HR? Further, if this is a good practice, how does it fit (where, for who, in what situation, etc.)?

Under the broadest definition of employee rewards for continuing performance, we find:
-- monetary compensation, or wages and bonuses (current or near current)
-- risk based compensation, or options, phantom stock (equity or near equity schemes)
-- retirement benefit plans, like 401Ks, defined benefit plans
-- health plans, including doctor, hospital, and dental coverage
-- other benefits (vacation, group life and disability insurance, education assistance, etc.)
source: The Employee Benefit Research Institute.

I'm going to say that since the lending CEO or CFO makes an employee loan with the full intention to get back the money, and get it back promptly at that, then this is an "other benefit", akin to subsidizing a mortgage or MBA. As such it's a fourth or fifth level offering, crucial to certain employees, meaningless to others. The likeliest users would be hourly employees, and younger ones who have fewer resources amassed.

Would lending your employees money fall under a must-have offering? Certainly, especially in a small business where you have an employee base with above characteristics. I wouldn't consider it a higher target than offering group health care or some variation thereof, but many workers might value this benefit more than a 401K - where the dollars seem way far off. Afterall, you value, know, and trust these folks, why not help in a pinch?

Good reason to hold a wad of hundys in the back pocket or secret drawer, yes indeed.

The Fight for Immigration Reform

Thinking about the differences between big business and small businesses on the immigration issue (the latter against and the former for "amnesty"), it comes down to naked economic self interest. An examination of their membership and the economic position relating to immigration tell the story.

While the size of the immigration issue is really tied to the 12 million or so estimated contributing illegal workers, it would seem that all businesses need or are currently using these workers. But that view would be wrong, according to the NSBA (National Small Business Association). A 2007 survey of members revealed that a lack of qualified workers polled at 23%, or the 6th highest concern on the challenges measure, behind taxes and health care reform among others. Why is this issue of qualified workers so low?? Partly because small businesses hire immigrants at a much lower rate than their larger competitors. One measure comes from the NFIB (National Federation of Independent Business) in it's 2006 Member survey on Immigration. One finding was that a mere, "Seven percent of NFIB members have hired one or more guest workers within the last two years." The resultant positions by the NSBA and NFIB on immigration emphasize rational changes that don't impose additional expense on employers. Considerations of amnesty are discouraged.

On the contrary, if small businesses aren't hiring these folks, then it must be that large businesses are the ones. And as the economist community would say, these folks may be taking a small percentage of American jobs at the very low end, but on the whole they are contributing greatly to the American economy. Because the large business community needs these workers and needs them to stay, the US Chamber of Commerce supports immigration reform including, "...providing a way to earn legal status for undocumented workers who have been supporting our economy for the last decade or more." Notice no mention of amnesty, but that's what it would be.

Educated Professions Make the Most Profitable Businesses

It should come as no surprise that the most profitable small businesses include professional services firms including Accountants, Dentists, and Legal services. So says Maureen Farrell @ Forbes.com in a January 18 article entitled "The Most and Least Profitable Businesses to Start" (look for the article at lower left). Also high on the profitability list, Specialized Health services, Industrial and Graphic designers, and Insurance Brokers. These high performers were drawn from a list of 100,000 private business, most with less than $10 million of revenue per year. The pre-tax profit margins within this group ranged from a high of 25% to a low of 13%.

The worst performing businesses included commodity providers like bakeries, beverage manufacturers, and hotels. Their margins ranged from a low of -7.2% to 0.12%.

Economies of scale do come into play, that is covering overhead becomes easier once revenues clear the $3 million level, and further still over $10 million.

Interestingly, she writes that the profitability characteristics of these business groups tend to hold throughout the globe. Ergo education is the key to higher profitability. It makes for some deep strategic thinking when investing your time and money in a new or existing business, as bankers and CFO's can well attest.

Small businesses suffering under the current healthcare system

While large firms (those with 200 or more employees) unanimously provide health benefits to employees, not so for smaller companies. The reason is cost. As a result, it is time for small firms to add their voice to change the system.

According to the annual Kaiser Health Survey for 2007 (available at Kaiser Family Foundation) 99% of large firms provide coverage, and of those 95% cover at least 50% of the premium cost for families. With small firms (3-199 employees) coverage is provided by only 59% of the firms, and for those that do provide coverage they only cover 63% of premiums. Why is this discrepancy happening?? Cost increases are the obvious reason. From the Kaiser Survey we see that since the Spring of 2000 health premiums have risen more than 80% in total, or more than 10% annually, well out-pacing inflation and employee earnings.

What is this doing to small businesses? It is forcing them to drop coverage in increasing numbers. It is also pushing creative solutions including funding health costs outside of traditional programs. In many cases employees are forced into individual high deductible plans, which are fine for healthy consumers, but devastating for health challenged workers. In either event, these issues help make these firms look unattractive to new workers when compared to larger firms.

Would a national health plan fix this discrepancy, yes, but only if the overall costs per capita are the same or lower. More study is needed, but it looks like small businesses should be looking for a change in policy compared to their larger competitors.

As I have argued before, we cannot keep paying the increasing costs of the broken US health care system, and we can now see that it's finally time for small companies break with the US Chamber of Commerce, which advocates augmenting the current system, and add their voice to the Physicians for a National Health Program.

Bush not a friend to Small Business

The figures from the Bush 2009 budget are stark; despite a solid reputation as a friend to small businesses, the figures say otherwise.

As the budget describes it, discretionary spending from 2001-2009 (the latter year as proposed) increased by an annual average rate of 5.5%, well out-pacing inflation which has averaged 2.7% since 2001, for a total increase of 53.4% over the period.

Meanwhile, the Small Business Administration budget has declined by 3.9% annually, or a full 27.0% over that time. It was the biggest percentage decline of any Agency.

Now, I get the free market and all, big fan, and the Administration's cuts at Labor and the EPA were not a surprise, but where is the love for small business, got to find your success on your own I guess. While the big tuna's like Agriculture continue to increase and bring in big bucks, not to mention the big cahuna Defence, the SBA is on it's own.

This will not change much this year, but stay tuned for what the Dems will do in this final Bush year to set things up for the new guy/gal whoever that might be.

Bush still doesn't get it on Iraq

The Good and True: (following are quotes from the text of President Bush's State of the Union Address on Monday, January 28, 2008 as transcribed by the Federal News Service)

"In Afghanistan, America, our 25 NATO allies, and 15 partner nations are helping the Afghan people defend their freedom and rebuild their country. Thanks to the courage of these military and civilian personnel, a nation that was once a safe haven for Al Queda is now a young democracy where boys and girls are going to school, new roads and hospitals are being built, and people are looking to the future with new hope. These successes must continue, so we’re adding 3,200 Marines to our forces in Afghanistan, where they will fight the terrorists and train the Afghan army and police. Defeating the Taliban and Al Qaeda is critical to our security, and I thank the Congress for supporting America’s vital mission in Afghanistan.". This is good work, we should be doing it, and focusing on it.

"When we met last year, Al Qaeda had sanctuaries in many areas of Iraq..." Forget not, there was no Al Qaeda in Iraq when we entered, they came in to attack us.

Let us hope that whoever the next White House occupant is, they remember that attacking Iraq was a huge mistake, there was no Al Qaeda, no WMD's, and it is not our place to stay.