Diary of a Digital Wingman

http://mba-mondays.pandamian.com/the-present-value-of-cash-flows/

I was taught, and I believe with all my head and heart, that companies are worth the “present value” of “future cash flows”. What that means is if you could know with certainty the exact amount of cash earnings that the company will produce from now until eternity, you could lay those cash flows out and then using some interest rate that reflects the time value of money, you could calculate what you’d pay today for those future cash flows.

Let’s make it really simple. You want to buy the apartment next to you for investment purposes. It rents for $1000/month. It costs $200/month to maintain. So it produces $800/month of “cash flow”. Let’s leave aside inflation, rent increases, cost increases, etc and assume for this post that it will always produce $800/month of cash flow.

And let’s say that you will accept a 10% annual return on your investment. There are a multitude of reasons why you’ll accept different interest rates for different investments, but we’ll just use 10% for this one.

Once you know the cash flow ($800/month) and the interest rate (also called the “discount rate”), you can calculate present value. And this example is as easy as it gets because the cash flow doesn’t change and the interest rate is 10%.

The annual cash flow is $9,600 (12 x $800) and if you want to earn 10% on your money every year, you can pay $96,000 for the apartment. In order to check the math, let’s calculate 10% of $96,000. That’s $9,600 per year.

In practice, it is never this simple. Cash flows will vary year after year. You’ll have to lay them out in a spreadsheet and do a present value analysis. We’ll do that next week.

But it is the principle here that is important. Companies (and other investments) are worth the “present value” of all the cash you’ll earn from them in the future. You can’t just add up all that cash because a dollar tomorrow (or ten years from now) is worth less than a dollar you have in your pocket. So you need to “discount” the future cash flows by an acceptable rate of interest.

http://mba-mondays.pandamian.com/how-to-calculate-return-on-investment/

The proper way to calculate a return is using the “cash flow method”. Here’s how you do it. 

1) Get a spreadsheet, excel will do, although increasingly I recommend google docs spreadsheet because it’s simpler to share with others. 

2) Lay out along a single row a number of years. I would suggest ten years to start.

3) In the first year show the total investment required as a negative number (because the investors are sending their money to you).

4) In the first through tenth years, show the returns to the investors (after your share). This should be a positive number.

5) Then add those two rows together to get a “net cash flow” number.

6) Sum up the totals of all ten years to get total money in, total money back, and net profit.

7) Then calculate two numbers. The “multiple” is the total money back divided by the total money in. And then using the “IRR” function, calculate an annual return number.

Here’s what it should look like:

Here’s a link to google docs where  I’ve posted this example. It is public so everyone can play around with it and see how the formulas work.

http://sethgodin.typepad.com/seths_blog/2011/10/questions-for-a-new-entrepreneur.html

Are you aware of your cash flow? What’s your zero point? What are you doing to ensure you get to keep swimming?

Are you trying to build profit or equity? 

What’s your role? Do you want to be a freelancer, an entrepreneur or a business owner? 

Are you trying to build a team? 

Which kind of risk is okay with you? There’s financial risk, emotional risk and brand risk (among others). Are you willing to put your chips on the table daily? How about your personal reputation?

And finally, and most important, why? Why are you doing this at all?

Every Monday, we take a pithy snippet from New-York based VC Fred Wilson’s blog. Full post here.

A VP Finance is what you need when you want a leader who will keep the wheels on the bus, who will make sure there are financial controls in place, who will make sure the books, records, and reports are accurate and timely and well presented, and who will make sure you have the right amount of accountants and clerical staff on hand to manage the work of the finance organization. A VP Finance is largely about “what happened” and a little about “what is happening right now?”

A CFO is what you need when you have all that I described above but you also need a forward looking financial mind at your side, when you need deep strategic thinking in the financial function, when you need to do big transactions (both M&A and financings), and when you need someone to manage your relationship with investors (particularly public investors). A CFO is largely about “what is going to happen and how do we get there?”

Get a VP Finance onboard as soon as you can afford one. They will let you sleep at night. Get a CFO on board when you are ready to take on the world.

When people think about ‘improving how they do social media’, they jump straight to thinking – methods. Pay per click? SEO? What techniques will lead to growing the fan base?

When you question how to get more blog subscribers or ‘Likes’ on Facebook, what you’re really asking is: how do you change the power dynamic to be more in your favour?

You’re wondering how you get more Net Promoters. “Promoters” are loyal enthusiasts who keep buying from a company and urge their friends to do the same – the key metric when it comes to gauging the efficiency of a company’s growth engine, as Fred Reichheld talks about in his bestseller published by the Harvard Business School Press. Improving social media means growing Net Promoters; growing Net Promoters means making your customer’s lives better; making it easy for them to tell their friends about it.

1. Start with Why: ‘the Golden Circle’ 

Everyone knows what they do. Some know how they do it. Few people know WHY. Know why you exist as a product or service. You do X. So, who cares? Why? How are you making people’s lives better? It’s hard to articulate in ten words or less. Simon Sinek’s TED talk on the topic is here.

2. Use that to clarify the brand.

The Brand Gap View more presentations from coolstuff

3. Translate that into a ladder of engagement.

This means that you segment user interest levels down different engagement pathways (e.g. you might have a Vimeo video that the ‘kinda-interested’ can watch. This leads to people ‘liking’ it on Facebook if they’re really keen. The super-keen can join your email list or drop you a line). All the touch points need to be integrated.

4. Underpin every interaction with authenticity, transparency, and a narrative that people want to buy into.

Here are 5 social media disasters - here are some Facebook success stories. Spot the difference. It’s not about the tools, it’s about how the tools are being used, according to the culture and leadership of the organisation.

5. Do what you can, outsource what you can’t.

Some entrepreneurs think that they’re saving money by trying to build their own website or social media campaign – this depends on your tech skills, but I think opportunity cost in terms of your time is worth considering.

In summary:

This quote sums it up: “Marketing in the 80s was all about the product, and then it moved into the “new marketing” era which was about “you deserve this car because you are amazing” and now we are in the era of “us marketing”. It’s not enough to just build a community - it’s like organising a party and you don’t have a plan.”

“Successful companies in social media act more like party planners, aggregators, and content providers than traditional advertiser.” If you want ‘better social media’ - throw a better online party. If you don’t know how, brainstorm with friends. If that doesn’t work, consider asking an expert - if you can’t afford to hire them, try approaching them with a revenue-share agreement of some kind. Most of all, just keep experimenting until you find the results you’re looking for.

“In 1998, John Wood was a rising executive at Microsoft when he took a vacation that changed his life. What started as a trekking holiday in Nepal became a spiritual journey and then a mission: to change the world one book and one child at a time by setting up libraries in the developing world.

He was soon driven to leave his career with only a loose vision of the change he wanted to bring to the world. John made the unlikely marriage between Microsoft business practices and the world of non-profits to create Room to Read, an organization that has created a network of over 7,500 libraries and 830 schools throughout rural and poor communities in Asia and Africa.

The organization is now one of the fastest growing, most effective, and award-winning non-profits of the last decade. John has been recognized in the worldwide media as a “21st century Andrew Carnegie,” building a public library infrastructure to help the developing world break the cycle of poverty through the lifelong gift of education.”

Read more here. I’ve read his book, and really enjoyed it: www.leavingmicrosoftbook.com

One of the best speeches ever. Favourite parts: 

Again, you can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

Eric Schmidt and Sean Parker announced as speakers! Buy tickets here.