A Life In Numbers

I blogged previously on my experience with a disputed ebay transaction and the paypal buyer guarantee.

Here’s the latest update.

Paypal investigated and found in my favour for the dispute. So far, so good.

Unfortunately, by the time they had done this the seller had taken the funds out of their paypal account and so there’s nothing for paypal to give back to me. So the paypal guarantee is pretty much worthless. If the payment had been made on a credit card then there would have been real protection and a refund of the disputed payment for goods not received.

I’ve always thought paypal was quite an effective payment method and I felt even better seeing their “guarantee” on the purchase. However, this incident is making me seriously question using it in the future. And in this case it seems it was an Ebay seller who has subsequently done the same thing to a number of other buyers, and consequently has a rapidly falling feedback rating (it was much higher when the buyers made their bids).

So, Buyer Beware, and if you’re using Paypal, Beware even more.

There’s something special about working with entrepreneurs. It can be challenging at times and it can also be extremely rewarding.

The biggest challenge for accountants working with entrepreneurs is that they don’t always follow the rules. In fact, it’s quite rare. This means that a large part of the job can be running around after them clearing up the apparent chaos they leave in their wake. Unfortunately, this can be equally true of both the good ones and the bad ones, and it’s not always apparent which is which (although you can often spot the really bad ones quite quickly).

If you look at successful entrepreneurs they have rarely followed a path of checking all necessary legislation and statutory requirements before setting off. And those that start up businesses trying to do everything by the book and do it all properly often find they fail before they even begin. They get so wound up in red tape and bureaucracy that they don’t have time to actually find clients and start the business. The ones that make it are more often than not those following the Richard Branson cry of “Screw it, let’s do it”. They’re the true entrepreneurs.

So what’s Entrepreneurial Finance? It’s really a way of making sure that the financial operations behind the entrepreneurs business really support what the company is trying to do. It means close management of cash and fast, effective reporting. It means understanding the value of expenditure and making sure that money is used as effectively as possible. It means being willing to speak out when things aren’t going to work (which can be a challenge when faced with a strong personality) and being willing to support the entrepreneur when they’re doing something a bit more risky or different.

You have to flexible and creative and ready to handle all manner of questions, challenges, ideas and curveballs. And you have to combine a “how can we make this happen?” mentality, whilst always keeping an eye on what could go wrong. You have to prepare for both the best and the worst scenarios. And one day you may be hiring and the next you could be firing. And you have to be willing to make decisions and stand by them.

Many people moving from the large corporate world into this environment find it all too much and quickly move back. And when entrepreneurs are looking for people to support them in the finance role they need to be aware of the challenges that will be faced, not just technically but on a personal front too.

If you’re looking for someone to fill your finance role in an entrepreneurial business (and if you don;t have anyone, you really should be) then you need to consider the personality and experience as well as the technical ability. Make sure that you can see the entrepreneurial element in the finance if you want to get the best finance support for your business.

I was at the BusinessLive08 exhibition yesterday and during a very interesting discussion on “Are we talking ourselves into a recession” (the answer was “yes we’re in danger of it, but we don’t really think we’re in one”), someone made an interesting observation.

He was selling IT consultancy and he said the response he was recently getting from prospects was “can we just wait a few months?”. In essence, they were saying “can we defer the decision?”.

It seems to be the default position of many people in business to go to “no decision” mode in the event of uncertainty, crisis, fear or worry. In fact, many people operate in “no decision” mode for much of their career. They tend to base this philosophy on the erroneous view that making the wrong decision could get you sacked, so making no decision at all could save your career.

The reason I moved away from big corporates and into the SME world is because I found far more willingness in SME directors to make decisions quickly and confidently. No protracted meetings, no bulky reviews or reports, no consensus debate. Just a straight “yes we will” or “no we won’t”. It saves so much time and it’s invariably much better for the business.

Unfortunately, I’ve recently seen more indecision creeping into the SME market. There’s more “can we wait and see” and “I’d like to think about it for a bit longer”. It may be a factor of the times, with fears of a recession abounding even if there’s no actual recession. As Dennis Turner (Chief Economist, HSBC Bank, who was very entertaining) pointed out, we have had 63 quarters of positive growth, we have historically low unemployment and interest rates and we still haven’t had one quarter of negative growth, let alone the 2 needed to define a recession.

If you make a decision then you can move forward. It frees you up and clears your mind. And maybe it will be the wrong decisions sometimes but then you have 2 choices, you can decide to do something else or you can focus on taking the actions that will make the decision right.

I really hope that the SME world doesn’t catch the indecision disease that seems so prevalent in the world of endless meetings, reports and discussions that so often defines large corporates.

If in doubt, make a decision. You’ll feel much better for it.

There was a great article by Jonathan Moules in the FT this weekend explaining how entrepreneurs will often try and run a business without anyone to guide them on their finances. It was titled “First find a finance director, then run the business”. It gives me a perfect opportunity for a blatant plug as well as some useful pointers.

The article describes how many business owners have found they’ve struggled through worrying about their accounts, cash and finance becoming distracted from the main focus of running the business. It also highlights that many are put off by the perceived high cost of a finance director.

The reality, as many have found, is that a good finance director can easily increase the value of the company by more than their cost through identifying savings in expenditure and improving margins and contracts. They’ll also free up your time to run the company and provide new insights and ideas for developing the business.

For a growing business, more and more companies are turning to a part time finance director in the early stages and benefiting from the financial knowledge and experience they bring. Another article in the FT last week also described how a part time fd can work for a business.

It’s good to see so many people realising how effective this sort of service can be for their companies and to see entrepreneurs understanding that they can do much more with their business when they focus on what they do best.

Earlier this week BDO Stoy Hayward published a report highlighting that fraud in UK business increased by 74% over the last six months compared to the same period last year. And that’s just the fraud that’s been found out and identified which begs the questions whether there’s an even bigger increase in the iceberg under that tip.

The cost to UK business is £705m. Again this is just the reported fraud and doesn’t include fraud that has not been reported (many companies like to keep it to themselves) and the incidents that have not been found out. And all expectations are that this is set to grow even larger, especially as the credit crunch bites.

The aspect that should be most concerning for companies is that 46% of the reported fraud is perpetrated by internal management. That means the people you trust to run your business could be the very ones with their fingers in the till.

Now there are some simple steps that you can take to reduce the risk of fraud in your company. You don’t have to fill your offices with cctv cameras, employ burly security officers and frisk everyone on their way out of the office (although it has been known). What you can do is apply some basic controls and think about where the key risks are.

One of the fundamental controls is to ensure you check references and details of people you employ. Fraudsters don’t generally turn up with a striped jumper, a mask and a “swag bag” over their shoulder and it’s unlikely you’ll see reference on their CV to stints in Ford Open Prison or a Community Service Order. What does happen is that people lie about their previous employment and reasons for leaving. Checking the details and references is not a perfect solution but you’ll feel pretty silly if it could have highlighted an issue and you didn’t do it.

Another important aspect is to consider where there’s a risk that someone could cover up a fraud. This is particulalry pertinent to smaller companies where the segregation of duties (separating parts of the transaction flow) is difficult to achieve. If one person can have access to choosing a supplier, raising a purchase order, taking delivery, paying the supplier and reconciling the bank statements then you’re open to abuse.

Fraud is often committed in small drips to begin with but can easily grow as a fraudster tries to cover their tracks or just gets more audacious and confident. Recent high profile cases have seen employees take off with millions of pounds.

The most challenging aspect for companies is that often the person perpetrating the fraud may appear to be one of the hardest working, always arriving early, always staying late, always willing to take on more responsibility. And that makes it all the more difficult for directors to believe that they may be committing fraud because it could mean losing a model employee. After the truth has come to light the reason for all that apparent hard work becomes apparent, as the fraudster was trying to prevent anyone else from uncovering what they were doing.

One of the best ways to spot fraudulent activity is to be able to really understand the finances of your business. If you know the patterns and you have a good idea of what to expect then you can more easily spot anomalies that point towards something being wrong.

Fraud is not something that’s going to go away, from the inside or the outside. What you have to do as a business owner is to make sure you know the best methods of prevention and detection or find someone who can show you. If you just ignore it and hope it doesn’t happen you could easily find yourself another statistic on next year’s BDO list.

Seth Godin has written an interesting blog entry today (as ever) talking about the magic of low-hanging fruit. It takes aspects of the 80/20 Pareto Principle and looks at a business perspective of where you can get the most benefit quickly.

He intially puts it in terms of changing the fuel consumption for drivers and shows how focussing on the drivers with the greatest usage provide the more beneficial outcome. He then expands this to compare the benefit of selling more to your existing customer base than selling to new customers.

In economics it’s long been recognised that a slight increase in price to all customers can vastly outweigh a cut in price to try and generate new customers. Price elasticity aside, it can be shown in simple terms that it’s better to generate £1 more on a £100 item from 100,000 customers (giving an extra £100,000) than to reduce the price by £1 and have to generate an extra 2,020 new customers at the new £99 price to make up for the lost revenue on the existing base (100,000 *1) and the extra benefit wanted (£100,000/£99).

Of course, in reality it’s not always that simple and in a very price sensitive market a 1% increase could drive away a chunk of your customer base (back to the price elasticity). However, we do spend a lot of time trying to generate new customers when you could provide enhanced service to your existing base to encourage them to spend more.

It relates back to the 3 main ways to grow a business:-

1. Increase the number of customers
2. Increase the average purchase value
3. Increase the frequency of purchase

Increasing the number of customers is usually done through an advertising or promotion campaign, which is rarely a cheap option. So it will generally cost you money to grow this way.

To increase the average purchase you can simply suggest an additional item at the point of sale. This is the model used by McDonalds (”would you like fries with that?”; “do you want to go large?”), Starbucks (”would you like any pastries?”) and the Electronics retailers (”would you like an extended warranty?”). Online, you see it with Amazon’s recommendations and “other people who bought this also bought …”). There are also other very effective ways to do this for services and products. It’s a very low cost method of increasing business and the customers feel they are being given a choice.

Increasing the frequency of purchase is generally achieved through education of the customer from the simple “your toothbrush is more effective at preventing gum disease if you replace it every three months, and just to make it easy for you it’ll change colour when it needs replacing” and the ever reducing “use by” dates in supermarkets to the more sophisticated bundled package for carpet cleaning or car servicing where you get a lower average cost per event if you buy a set and use them in a set time period. If done correctly (which may be questionable with the product warranties) the customers can feel that they are being looked after and given better service.

Think about where you can use these ideas in your business. Is there more you can do for your existing customers or are you always seeking to chase the new ones? Are you looking for the low hanging fruit or are you off planting new trees?

I was reading on A VC’s blog that Fred Wilson has lost his Nokia N95 and it has all his social networking links on it, allowing direct access for someone to post to any of his accounts. This highlights a significant danger in the Web 2.0 world, of Social Identity Theft. Where somebody hijacks your access or even creates an account in your name.

They may not take out a loan in your name but they could create a personality variant.

Given the ubiquity of social networks and the much debated longevity of anything posted on the web (especially those sites without a real delete option) this could be one of the most significant threats of the future. With more and more employers using social networks as a research device to identify character flaws, past indiscretions and questionable views this could be a whole lot more damaging than a bad credit record.

Like Identity Theft, security is only as good as the weakest link in the chain (which these days seems to be major retailers, banks and government departments). Social Identity Theft will suffer the same issues. The credit card companies and banks have found that it’s still better for them to make it easy to take a credit card or get a loan and take the hit on ID theft and bad debt than it is to make loans and credit cards hard to get hold of (thus reducing spending and interest payments). I suspect the social networks will find the same, as the number of entries to Twitter may significantly decline if you have to go through a 5 level security check and give your mother’s maiden name and date of birth for each entry. And a Facebook retina scan may not be a popular option either.

Perhaps there’s a gap in the market for an equivalent of Experian or Equifax to develop a centralised “Social Credit Score”, so you can check to see what opinions have been published by you (or someone pretending to be you).

When you’re focussed on the detail in a business it can be easy to miss something major that’s going on right in front of your eyes. It’s easy to get bound up in the day to day running of the operations and lose sight of the things that could really make a difference to the way you work.

As an example, take a look at this video of a group of people passing two basketballs and count how many passes of the basketballs are made by those in white shirts. Do not count the passes made by the people wearing black. The video takes a short while to load and you need to press the green play button at the bottom of the page.

Just watch it the one time and then go here to submit your answer and discover something very interesting.

Is there anywhere in your business where you might be too focussed in the detail to see what’s really going on? If your immediate answer is “no” then you might want to take a little longer to think about it, as that makes it even more likely you’re missing something.

Sometimes it takes an outsider to highlight the issue you’ve been missing. That’s why Non-Exec Directors can be so useful to boards. Often a person who is not too deep in the business and not spending every day there can bring a new, and sometimes eye opening perspective.

I’m currently reading Wikinomics and it’s a great insight into how collaboration is driving new ways of working. It’s the driver behind Linux, Google, Flickr, Wikipedia and the whole blogosphere. And this week we saw Nokia opening up the old psion mobile operating system of Symbian to the developer community. Large corporates are grasping what the Web 2.0 community have already seen, that collaboration and community can drive significantly faster development and create size and value quickly. There are still some challenges in determining ways to make money from this but it will follow the quality and in an open market where everyone’s a judge and has an opinion, marketing and spin alone will no longer be enough.

The biggest challenge comes for SMEs and the associated investment community. One of the first questions many investors ask is how strong the Intellectual Property Rights (IPR) are. Traditionally IPR has been seen as a key component of value as a barrier to entry and a saleable asset in its own right. In a world of open source and collaboration the lines start to blur betwen who owns what and to focus too much on IPR could lead to missed opportunities.

When I’m dealing with companies that are starting or developing their business, I often find there is a high level of paranoia about their ideas and business models. The SME world is full of (largely unenforceable) Confidentiality and Non Disclosure Agreements. However, when you enter the Blogosphere you find a cornucopia of ideas ripe for business use that are freely available and open for anyone’s use.

More SMEs need to grasp the 2.0 philosopy of opening up to customers, suppliers, and the wider world of the internet. Allow your user base to help you grow and keep giving back to them. When you have a small, growing company you need all the assistance you can get and there’s plenty out there willing to help. It gives you more flexibility and more access to knowledge and expertise that an SME generally can’t afford.

Whilst I’m on the case of dodgy dealing, I’m just in the middle of a bad ebay experience. Normally I find it’s great with only one experience of an item not being sent. Luckily I hadn’t paid for it as I got suspicious when I couldn’t contact the seller and their phone number and address turned out to be a hotel in Bristol. The latest one is someone who was selling an item that I now see used the same photo and description as another (reputable) seller. Having not received the item and after numerous conflicting email responses and another false phone number, I’ve decided to raise it with ebay’s dispute console.

I thought I was fine on this because I paid with Paypal and they make a big thing about the Paypal Buyer Protection Program where you’re supposedly covered for up to £150 on purchases. Now that I need a refund I’m reading the small print in more details. It seems that you’re covered providing the Seller still has money in their Paypal account. Now given that you have to go through a period of correspondence, waiting and chasing before you can chase for a refund and then Paypal take another 30 days, it seems likely that a Seller with malicious intent will have cleared out their paypal account before you get the issue resolved. And that would appear to mean no money for you.

If anyone has had a different experience then I’d be interested to hear it and I’ll keep you posted on what happens to my dispute.