Ideas Matter – Focus on Generating Good Ideas

Generating more value in a company (e.g., positive cash flow) requires the right company projects.  And, the right company projects require good ideas.  This was a concept reinforced in a Coursera (click here for information on Coursera) course I recently completed (Introduction to Finance; taught by Dr. Gautam Kaul, a Professor of Finance at the University of Michigan).  Professor Kaul, an outstanding teacher, stressed over and over that value is initiated only with good ideas that lead to successful projects.

Small company owners that associate themselves with idea generation report better company success (growth and profits).  In a study done by Shelley M. Farrington, at the Nelson Mandela Metropolitan University, 383 small company owners returned a survey with answers that revealed their personality characteristics and their perceptions on their company’s success.  A statistical analysis by Farrington indicated the personality characteristic, openness to experience, “… is strongly correlated with perceptions of performance, and enhances firm performance.”  “Openness to experience” is a personality category, used by psychologists, and characterized by having such traits as originality, open-mindedness, and likely to seek out new ideas.  To read this study, click here (PDF file).

In a recent analysis that I did, I found that gross profits and research and development expenses correlate in the chemical industry.  The analysis was done because of an interest in examining the concept that a company's R&D expenses can represent how well a company’s “good” ideas (with R&D expenses reflecting such ideas) correlate with how well a company generates value.  The assumption is made that if there is such a correlation, than the R&D expenses as a percentage of revenues would show a correlation with gross profit margin percentages (GPM %) for a series of chemical companies.  I believe that the analysis that I did shows good correlation between research and development expenses and gross profits.  And, if so, good ideas, represented by research and development, are associated with company value generation (gross profits).  Click here to read more about this analysis.

A small business owner should be opened to and accepting of new ideas.  New ideas do not need to come only from the owner – the owner should not expect to be the only generator of company ideas.  Besides employees, look to outside “consultants” – accountants, information research specialists, marketing specialists, and others for ideas.  Attend conferences and network events for the purpose of generating new ideas.

Use the Small Business Owner’s Personal Credit Score to Judge the Business’s Credit Worthiness

The credit score company Experian has found a correlation existing between the personal credit scores of small business owners and the credit worthiness of the owners’ business.

Evaluating the credit worthiness of a small company can be difficult.  Because perhaps the business has only been in existence for a short time, and for other reasons, little, or no, data is available to judge the business's credit worthiness.  However, the owner may, often does, have a long personal credit history.  Based on Experian’s findings, an owner’s personal credit score correlates well with the owner’s payments of his/her business bills.   This gives vendors (other small companies) a good opportunity for being able to judge a small business credit risk, when no other data exists.  Ask the owner of the small business you are selling to for a copy of his/her personal credit score and use this data to evaluate the risk of selling to the person’s company. 

Experian’s correlation conclusions were based on a study of thousands of its records dealing with small business owners.  You can read more about this study by clicking here (Section III) (PDF file).