How does Bane eat? – Insider’s Myopia

Most people I know have watched The Dark Knight Rises – and like with its predecessor, The Dark Knight, there has been lots of talk about its main characters on the internet. While there are countless debates and analyses [link] about who the greatest villain is – the Joker or Bane –  there are also some discussions which focus on Bane’s most noticeable feature: his mask.

Bane

People seem primarily interested in the reason why he needs a mask – and the most common explanation is to control his level of pain, so that he can function. That’s where most debates end – he needs it for that, makes sense, got it. Also, this is part of the official storyline, which means that it is part of the official character concept.

Recently, however, I must have been somewhat bored because the following thought popped into my mind: how does Bane actually eat with his mask? In order to confirm that I am still sane I checked the internet again to see whether other people also thought about this – and they did!

As silly as this little story may sound, it did make me think about the following: How dangerous is it to have a concept or product evaluated solely by people who are intimately involved in designing it? If you have spent a very long time building something your reasoning is structured in a certain way – and will most likely support the current logic and design of whatever it is you are building. You have got a case of insider’s myopia!

Something similar might have happened when the movie character Bane was designed – I think the folks simply did not think about the question how he eats, or at least I have not heard any official statement on the matter.

So what does that mean for your product designers or business strategists? Simple: Every now and then you should show your current draft version to an outsider (i.e. not a member of that team and not impacted by its success or failure) and ask them what they think.  I have done this many times and almost always got a comment or question which was completely new to me.

Advertisements

Can Better Resource Management Actually Save Costs?

One of the frequently mentioned truths of resource management is that, if done the right way, it saves costs. However, a more sceptical person might want to know how exactly this happens – can those cost-saving opportunities be identified? And, just as important, which criteria does resource management need to fulfil for it to happen? This article answers both questions by using basic logic.

How exactly does resource management save costs? 

There are multiple ways in which process management can lead to cost savings:

  • Resource management can reduce the time required to carry out a task
  • It reduces ongoing management needs
  • It reduces the amount of required resources (human and non-human)

Better resource management will lower the need for active management while a project is running, enabling the team to complete a task within a shorter period of time, hence saving costs.
Secondly, actively managing resources during a process is a cost itself – it requires additional management resources for monitoring and re-assigning resources. Resource management can help lowering these costs as detailed resource allocation plans are in place and re-adjustment processes are to a certain degree automated.
Finally, better planning and resource allocation prior to starting a project will usually enable a team to be more efficient in reaching their goals, lowering the amount of total resources needed for a given task – again another direct way to save costs.
These statements may sound a bit generic at first, but they sum up the main areas where resource management can make a crucial difference on the cost side. Having identified these areas, we can move on to the next question.

Which criteria does resource management need to fulfill to become a profit centre?

The answer is based on the points above:

  • The resource management tool needs to be easy to use
  • Operational costs must be lower than cost savings achieved
  • Resource management is most useful when adopted by the entire organisation

The resource management tool needs to be hands-on and easy to use so that training efforts do not consume much time – otherwise it would offset the efficiency gains mentioned previously.
The overall costs of acquiring and running the system should be lower than the cost savings achieved by it.
Usage of the system needs to become a standard procedure across an organisation to unleash its full potential, and hence it needs to offer collaboration across different departments to maximise planning effectiveness.

Summary
The conclusion is that it is relatively easy to identify how resource management can save costs – resources are used more efficiently while ongoing management efforts are minimised.

In order for this to return a profit, the costs for implementing and running the resource management system need to be lower than the cost savings generated. Therefore, the cost benefits of resource management primarily depend on the quality and user friendliness of the resource management tools as well as their effective usage within a company. The resource management tools of http://www.ganttic.com were built with these realisations in mind and offer a highly flexible, cost efficient of managing resources across the entire organisations.

Financial Modeling: Part 3 – All About the Looks

This post is part of the series on Business Development Essentials. These posts provide an overview of the fundamental areas of business management. Feel free to contact me directly should you have any questions or need help in any of these areas!

After getting to grips with the structural concept of a model last time we will now focus on something which is equally important: the looks of your model, i.e. the formatting of the sheets.

Formatting is Clarity – Or the Opposite

If you think that formatting is not as crucial as e.g. the way you write your formulas or the level of flexibility your financial model offers, think again. What good are very efficient formulas and high flexibility in a model if nobody can use it properly because they spend ages trying to find their way around it? And even if the model is not for a client or colleague but just for yourself, you should still format it properly – you will thank yourself the moment you have to make some quick calculations before an important meeting or late at night when your brain cannot deal with that extra level of complexity caused by poor formatting. In most cases though you will build something which others will use as well, and in order to make life easy for them you will need to understand their needs using empathy.

Format like your customer is a psychopath who knows your home address!

You may find this header a bit extreme, but this comes from someone who suffered other people’s bad formatting practices for many years. I spent countless hours trying to figure out someone else’s models, hours I could have spent doing something more useful or fun. While there are many good formatting tips, I thought I would focus on the ‘deadly sins’ of formatting and how to avoid them. Let’s begin.

Text Colour Coding

There are a few standard rules about how text colour coding is done in the financial industry, and here are the two most important ones which really are industry standard:

  • Inputs (i.e. everything which is not a formula but manually entered) are blue
  • Everything else is black.

Why exactly those two colours? No idea, but everyone should know about it since 90% of people use them this way. You may use more colours, for example to label certain things to make them stand out, but labeling inputs and formulas the way I described above makes it very easy for everyone to identify input areas in your model without having to search very long. Also, it keeps you from making mistakes, such as not being able to find all your inputs when you update your numbers. And finally, just in case one of the infamous 10% happens to look at your model, include a little table on the first sheet where you explain your colour code – that way everyone will know what you mean.

Background Colours

Some people like to keep their spreadsheets mostly black and white (I am one of them), while others like to use more colours to highlight different cells. While I acknowledge that there is no black and white answer to this (pun intended), one thing you should bear in mind is: be consistent. As long as your colouring is systematic and you explain what you do, other users will be able to understand it. Having said that, if you end up using 20 colours it probably will get confusing even if you are consistent, so you may want to limit the use of background colours to maybe 5 or so to keep it simple. If you feel that more clarification is required you can always use more extensive labeling or comments to make sure it is clear.

Borders

Borders are another example of things which are helpful when used in moderation. Some folks like to use borders around pretty much everything – I find this to be too hard on the eye and it makes your spreadsheet look a bit cluttered. Personally I use borders primarily to separate label rows (e.g. dates on the horizontal top line, or line item labels in the label column) from the corresponding data, or to mark key line items (e.g. the sum line in a cash flow). Also, I always use them for the key structure of tables – again, without giving every cell or even every column a border, but to separate the data area from its labels.

HINT: I always turn off the grid lines so that the spreadsheet is simply white – it looks a lot cleaner and helps me a lot when I work on it for many hours since my eyes feel more relax. Try it out!

Hiding lines or columns

Ever tried finding a cell which was referenced in a formula and it just seemed to be invisible? Welcome to the sin of hiding lines and columns! I honestly do not know why people do it – if you do not want a line or column to appear, you can group it! And everyone will be able to see the little icon on the side next to the line number or column letter which indicates “something is grouped here”. You can then ungroup it with a click on the icon, and re-group it again by doing it again – easy. Hiding lines or columns, on the other hand, turns it into a hide and seek game, driving other users (and sometimes even the spreadsheet’s creator) insane! My advice is simple: just don’t do it. Get familiar with grouping lines and columns, and your life will be a lot easier.

Merging Cells

Merging cells is another deadly sin when it comes to financial modeling: merged cells just cause trouble! They cause problems in formulas and also in VBA (in case you want to use code in your model). People mostly use them to center a label across different cells below. There is a clever alternative how you can achieve the same without having to merge cells: format the horizontal text orientation as “center across selection”. For that to work you need to have the cells highlighted over which you want your text to be centered – and it will look the way you wanted it without the hassle of merged cells!

Today we discussed formatting and its importance for making your model clear and understandable. Please keep it in mind whenever you do something in Excel – having good formatting standards will distinguish you from the large majority of people using spreadsheets. In the next post we will learn how to create outputs which present information in a useful way, especially to people less familiar with the details (often known as bosses).

If You Don’t Know What You Want to Do, Join a Startup

Very much to the point – some of the key reasons why working in a startup can be so much more rewarding!

David Cummings on Startups

Earlier today I was talking with a friend that’s finishing up his senior year of college this spring. He’s smart, outgoing, hard working, and talented. From a school perspective, he’s a finance major with a good GPA at a large public university. From a career perspective, his current thinking is to get a masters in finance or a masters in management (like a lite MBA) with a goal of getting a job out West.

After talking for 30 minutes I probed further with questions like “what’s the value of a one year masters if you still don’t know what you want to do?” In the end, my recommendation was to join a startup or an entrepreneurial company where he can have a ton of responsibility and get exposed to a variety of areas before spending a year getting a degree he might or might not use.

Here are some benefits…

View original post 113 more words

Financial Modeling: Part 2 – From Whiteboard to Spreadsheet

This post is part of the series on Business Development Essentials. These posts provide an overview of the fundamental areas of business management. Feel free to contact me directly should you have any questions or need help in any of these areas!

In this second part we will discuss how to get started with our model by taking it from an idea stage to a well-planned structure. Personally I find the beginning to be one of the toughest parts: you are staring at an empty spreadsheet and have no idea where to begin. There is, however, a relatively simple solution: stop staring at your screen and go back to pen and paper for now.

Everyone Loves a Wish List

A great way to start is with the list of functions you want your model to have. Here is an example for a real estate investment model:

  • Has to be able to project rental income, operating expenses (e.g. property management), general overhead costs (e.g. legal and accounting costs) and financing costs (interest, bank fees etc.)
  • Needs to let me change growth rates for both income and costs
  • Has to have the option to let empty space to new tenants
  • Should offer the possibility to change debt financing terms in future (in case you want to re-finance your property)
  • Would ideally also show sales proceeds and tax expenses

When you look at the above list you will notice that I started with the absolute ‘must haves’ before continuing with the more optional functions. Prioritising functions in this way will keep you focused when building your model in the face of time or budge constraints and make sure you do not get sidetracked building rather optional parts first.

Now that you know what you want your model to do, it is time to move to the next stage: structural design. I know this probably does not sound very exciting, but it really is vital: starting without a solid structural concept in place will most likely come to bite you later on – you will see why in a minute. We will first have to translate our list of requirements into a list of model components to get the different building parts of our financial model. In our example it could look like this:

  • Input sheet: for all growth assumptions, cost assumptions; this sheet drives the model
  • Rent roll: shows all lease contract data (start and end dates, monthly rent amounts, etc.) to calculate rental income, including new lettings
  • Calculations sheet: performs all calculations; gets inputs from input sheet and drives output sheets
  • Output sheets: profit and loss statement, balance sheet and cash flow statement; maybe a one page summary sheet with some graphs to provide a quick performance overview

Why You Really Want to do This / The First Iron Principle of Model Design

Obviously this list represents a very basic model structure and you may think that it is not even necessary to go through all this planning effort. However, for bigger projects you will find it an indispensable part of the process, and especially for beginners it is useful to make it a habit from the beginning. If you are still in doubt then you will be cured once you try doing a more complex project. Imagine you have to write hundreds or thousands of formulas in order to deliver a large number of output metrics, and you started building your model without first determining which parts should be drivers, and which should be just output sheets, and the relationships between the different sheets – it will become a nightmare!

You can now use this structure to establish the relationships between the different parts: where is data entered, how do the inputs link into the calculations, how do you design your calculation sheet efficiently so it can handle many different scenarios, and how does that impact the design of your output sheets?

We will look at the details later, but there is one principle I would like to introduce at this point because it is so important: thou shalt have no more than one input sheet! All input variables should be on the same sheet, and this sheet should drive the entire model. No other sheets should contain any variable inputs (note: this does not include static data inputs, in our case lease contract data – something that does not change can be on a different sheet than the input sheet). There are two primary reasons for following this practice: Having all inputs on one sheet helps you remember to make all the necessary changes when updating your assumptions. Also, it is easier for other users to understand your model if they don’t have to go hunting for other input variables across all your sheets (thinking of more complex models again).

Using Flow Diagrams in Model Designs

For more complex models it can be useful to map out the structure of the model graphically; you can do this for example with a flow diagram to show the interaction between the different sheets and how data is processed from input to output page.
Today we have taken an idea from which we derived a list of desired functions, which we then turned into a structural design for your model. Now we are ready to get started with actually building our model. Next we will look at formatting practices and I will show you how poor formatting can render a model useless – and how great formatting can make your life incredibly easy. Check out the next post in the seriesAll About the Looks.

 

Waterstones’ Advertising – An Epic Fail?

Yesterday I was waiting for the tube when I noticed the following Waterstones advertising:

waterstones_browser

There are two kinds of advertising that get my attention – really good ones and really terrible ones. This one here I thought I could use for a spontaneous mini case study. And given that advertising is really not my specialty, I am looking forward to any helpful insights on this subject in the form of comments!

Everyone knows that book retailers are having a hard time competing with online retailers – primarily obviously with internet giant Amazon. It has not just become obvious with the more recent rise of e-books but it started long before that. This post will not focus on the shift in market shares and impact on profit margins (I will be honest: I have not even looked at those) but rather try to answer two key questions:

  1. What really is the difference in value propositions between online and offline book retail for the customer?
  2. How well does this Waterstones ad bring across the strengths of their business model?

To keep it short, both Amazon and Waterstones sell books (yes, really!), but their value propositions differ dramatically. While Waterstones offers the in-store experience of test-reading a book, touching it and taking your time in the atmosphere of a classic book store, Amazon has a different customer persona in mind. Amazon’s target customer is not inspired by the book store atmosphere or by physically touching a book so much: they want to be able to brows and test-read millions of books from the convenience of their home (very often their office when they should be working) and have the product delivered to their doorstep. They also want to see user reviews and receive suggestions for other, related products.

While this is really no big news, the following is: book retailers, especially smaller ones, do not understand that. I have had many conversations with different book retailers, and they saw Amazon as a threat for one reason, and one reason only: price. While it is certainly true that Amazon is cheaper (sometimes significantly), this is not why traditional book retailers struggle. It is because of Amazon’s not-so-secret main weapon: putting customers first! Something that nobody on the retailer side who I spoke to managed to pick up. Amazon makes it all about the customer, they are truly you-centric. Pricing is an additional edge, but that alone does not explain their tremendous success. It is the fact that they put the customer first in every possible way, while traditional retailers often put their own needs and convenience first.

What does that mean for the traditional retailers? They need to put their customers first again, and only then worry about prices. If they manage to re-invent their business model and excel in customer experience, the tables may turn again in their favour. This is a big challenge no doubt, but one that they cannot avoid if they want to remain competitive going forward.

Let’s come back to our advertising: “A browser. Much better to be one than to use one.” What does that actually mean? Does it tell us why we should go shopping at Waterstones? Does it give us some examples of what traditional bookshops have that Amazon does not? Does it appeal in a positive way to the customer’s emotions?

The short answer is: no! It does not carry any value proposition whatsoever, it does not tell us what Waterstones do well. Why is it better to be a browser than to use one? Because online shoppers are stupid!? It basically says: do this, no matter the reason, just do it. The only emotion I can see here is: arrogance. Arrogance usually does not sell well at all.

I wonder what the people behind this campaign were thinking of: Creating an ad which says nothing about the USP of the advertiser but instead tries to denounce the competition, again without presenting any argument whatsoever, is from my point of view simply sad and highly ineffective. Instead of a lame word play they could have come up with something that shows that Waterstones are on the ball and are taking their customers’ needs seriously. I believe this would actually have a chance of making an impact and bringing people back into their shops.

Key points to take away: Put your customers first, focus on your own strengths and do not look down on competitors – especially if they are driving the market.

Financial Modeling: Part 1 – An Introduction to Black Magic

This is the first series of posts in a series on Business Development Essentials. These posts provide an overview of the fundamental areas of business management. Feel free to contact me directly should you have any questions or need help in any of these areas!

Financial Modeling is very often regarded as an obscure dark art practiced almost exclusively by bankers or accountants, and for some reason is perceived to have little relevance for ‘companies that build actual products’.

Unfortunately the first part is often true – and often this has quite serious consequences. Those who think that financial models are only useful for valuing a company or justify long hours in a bank’s offices largely underestimate their usefulness for decision making in literally any business. Therefore I decided to write a series on modeling basics to show you, in a nutshell, what it is all about. The posts will cover the many different uses of financial models in business and teach some best practice regarding effective and efficient model building. This knowledge will help you develop your own modeling skills and also judge those of others who may work with and for you.

Getting Out the Crystal Ball

Alright, so why do we need financial models for every sort of business? Simple: In order to run your business successfully you need to sometimes be a fortune teller! You will be expected to answer questions like this:

  • How long will your current funding last you?
  • How much revenue do you think you will generate this year, and in future?
  • How profitable are you really?
  • Are your costs growing at the same rate as your revenues?

Who wants to know these things?!, you might want to ask. Well, your investors, your employees (some of them at least), your competitors (if only!) – but most importantly: you do! And for those of you who now protest that their business is not-for-profit: you still want it to remain afloat, don’t you?

Financial models are able to help you answer these vital questions. They will not give you one universal answer (they are driven by assumptions, after all) but instead allow you to run a number of scenarios to demonstrate how your business will perform in each of those. That knowledge will give you a much better idea of what the future of your business will look like in that grey area between your best and your worst case scenario. Also, it makes you appear much more in control if you can demonstrate to your team and other stakeholders that you do not leave the company’s future up to chance – you have done your homework!

So What Do You Need to Get Started?

Of course you could do it all with pen and paper, but I strongly recommend you get your hands on some spreadsheet application. There are a number of options available, the most popular being Microsoft Excel, Numbers (Mac) or free programs like Google Docs or Open Office. While the choice is entirely yours (I will not get dragged into the religious war between Microsoft and Apple fanboys), I personally favour MS Excel. I have used it for many years and then tried Numbers, but found it to have very limited functionality compared to Excel. It works for some simpler calculations, but does not handle larger spreadsheets too well and I also find Excel to be more user-friendly. So if you are serious about building professional models, Excel has all you need.

Alternatively, instead of becoming a modeling star yourself, or tormenting your team to do so, you can get someone external for the job. This may be helpful if

  • your team does not have the skills to do it and it will take them too long to develop them
  • you need it to be done to a very high standard for an investor pitch (high quality is not optional here!)
  • you need to focus on your product and do not want to sacrifice resources at this point in time
  • it really is a one-off situation and you will never need to do it again (careful: wishful thinking!)

While I certainly think that all of those reasons are valid to bring in external help, you should make sure that this also includes some training for your team: at some point going forward (usually sooner than you think) you will be faced with a similar task again, and at that point you should be in a better position than you are now!

In the next post we will look at how to derive the framework and function set of a model based on its purpose – From Whiteboard to Spreadsheet