I have to admit that I have an addiction to reading online news stories. Every night, I come home from work and surf between MSNBC.com, CNN.com & FoxNews.com to read the same stories and the different spins from each news organization. At first, I thought this was a relatively safe habit, not nearly as dangerous as being hooked on drugs, alcohol or some other vice. Yet I am starting to worry that my mental health is at risk and before long I will actually start believing the negative blather populated in those headlines rather than taking the time to understand the true story of what is happening in our economy.
Here is a perfect example of what I am blogging about. The below link is to a story on CNN.com with the title, For Stores, a Very Unmerry Holiday.
http://money.cnn.com/2008/12/26/news/economy/holidaysales_finalnumbers/index.htm?postversion=2008122611
I will let my readers peruse this link on their own time and make their own judgment whether these sales figures really represent a reason to be unhappy, or worse yet, whether this is a sign of Economic Armageddon. I'm sorry, I take that back. I can't let this one slide by without some commentary.
$470 Billion in projected sales for a holiday season and we are upset? In a nation of about 305 million people, that equates to about $1,540 per person. That's not yearly, that is just for the holidays. Hey Mom and Dad, I know I am over 18, but you gave me less than average gifts this year. Luckily, my children don't pay attention to my blog, because I am also below average in gift giving. Thanks CNN for highlighting another one of my inadequacies!
It really is all about spin. But when it comes down to it, there is no denying the statistics show that reality is not nearly as dire as what the headlines implicate. People are still earning money and people are still spending money. Our economy is a fast moving animal and trying to take a snapshot of where it stands now requires some high speed analysis that will be outdated the moment it makes it to the presses.
Here is a little thought that I would like to throw out there. Every year consumer buying habits will fluctuate. And while the spinmeisters will give global economic theories on what is happening, the basic fact is that they just don't have a clear understanding of the emotions of the American consumer as a whole. Furthermore, what our emotions were yesterday, will change tomorrow. We are all complex individuals with complicated and fickle emotions that influence us to make purchasing decisions.
Don't believe me. Explain to me the past fervor over Atari? Cabbage Patch Dolls? Tickle Me Elmo? Wii? Every year there are hot items that consumers want that defy all logic for the mass demand and often includes pricing that just defies economic theories on demand elasticity. Remember the bidding wars for some of these items? Those events also defy logic, but it happened in the past and some new magic item will warrant this type of spending frenzy in the future.
In the aforementioned CNN article, I found a line that just shows how little the experts understand the psyche of the American public. The reporter refers to a discussion with a consumer strategist with Global Hunter Securities. She notes in her article that Richard Hasting said, “there's no enthusiasm to shop if you really don't need anything.” I dare anyone to take an inventory of all our holiday gifts that we actually needed. Insert your own fruitcake or soap on a rope joke here! With apologies to Mr. Hastings, his comment was probably one line taken out of context from a discussion, but it still shows how the media chooses to spin their understanding of our consumer's psychology.
To all the small business owners who are looking for a ray of hope to weather this economic storm, remember that purchasing is not about needing. It is about wanting! Find out how to deliver at a profit what everyone wants and you can rule the world. Excuse the hyperbole, but obviously, this is impossible. Still, we can aspire to sell at a profit what some of the market wants.
Every year during the holiday season consumers buy things that are not necessary staples of sustenance. This season was no exception. I still encountered throngs of holiday shoppers as I defiantly ignored the gloom and doom prognosis for our economic future and went to the mall to get my daughter the purple, Chuck Connor's Converse sneakers that she absolutely needed. (I was all for spending that money on a practical pair of snow boots, but hey, we really don't need that in the North Country according to the logic of my daughter).
To all the small business owners out there who are reading the news, I encourage you to get past the negative spin and figure out what you can do to be more successful next year. You can spin this economy any way you want, but spin is reactionary. Demand will change all the time and there may be no logical reason. Ultimately, you will only succeed if you think about your existing and potential customers and fulfilling their wants. Be proactive and position your business to meet the fluctuating market demands.
People will always want things. Those wants are based on the emotional state of the consumer. That also changes over time. It is obvious that all the spin in the media is sparking some fears in consumers and this in itself is changing demand. Can you figure out how to fight this?
So the challenge is how can you convince your customers that they still want what you sell? Can you create an emotional message to help maintain the demand for your products or services? Can you sell something else that they want if you your demand falters with existing product or service lines? I'm asking more questions and my answers are sparse. But I am not the one running your business and it is your responsibility to find the path to success.
I do add this bit of advice. People talk about bear and bull markets. Now is not the time to feed the bears! If a product or service line is not producing, consider making a change.
It's obviously easier said than done, but in a competitive marketplace, those who move to meet the demand will ultimately succeed. Just remember that in our marketplace, emotion will always trump logic. Now, more than ever, you have to develop a compelling marketing strategy. I would love to tell you what the marketplace will want in the coming months or years, but I refer you to this Bertrand Russell quote, “The demand for certainty is one which is natural to humans, but is nevertheless an intellectual vice.”
Saturday, December 27, 2008
Friday, December 12, 2008
The Bravery of Being Out of Range
Everybody seems to be weighing in with their opinion of what went wrong with the economy. We all have our opinions, but focusing on what went wrong won’t necessarily fix the problem. That is not to say that we can’t learn lessons from our mistakes, but the solutions to improving our economy will not come from placing blame or pointing fingers. We have to roll up out sleeves and get to work to make things better.
I’ve stated in numerous posts that I am against all of the bailout plans. They are too complex and they utilize the resources derived our tax dollars for the benefit of a few select businesses. Another issue with the bailouts is that they do not address solutions to one of the key fundamental problems with our economy.
This problem is that too many people are making key financial decisions with the “bravery of being out of range.” What I mean by that is that those who are running these companies into bankruptcy are not suffering the consequences for their failures. These executives have the so called “golden parachutes” in their compensation packages to ensure they can live a life of luxury well into the future, whether their companies succeed or fail. Meanwhile their employees get laid off, usually with minimal severance packages and a complete loss of health benefits.
Entrepreneurism, whether on a large scale or small scale, refers to a very simple concept of running enterprises to be profitable. By definition, entrepreneurs are people who have possession over companies, enterprises, or ventures, and assume significant accountability for the inherent risks and the outcome. (http://en.wikipedia.org/wiki/Entrepreneur, target="wikipedia"). Yet if we look at the leaders of the companies at the forefront in this economic crisis, you will see compensation packages that eschew all risk and accountability. How else does a CEO fly a luxury jet to Washington to ask the government to help them from failing? How else does an executive ask for a $10 million bonus after losing billions of dollars and laying off thousands of workers (yes, I am referring to John Thain from Merrill Lynch, who has since come to his senses and withdrew that request).
I have to admit that I feel quite a bit of anger that people who don’t get it, somehow got placed in these positions of great power. But anger won’t solve the problem, so I’ll get over it.
Now comes the solutions part. I am a firm believer in Occam’s Razor, which refers to a principle that basically states, “All other things being equal, the simple solution is the best.”
So I’ve come up with 3 simple steps we could take to help fix our economy:
1. Invest in assets that will generate revenue. I wrote quite some time ago about the simple genius of this strategy that is covered in Robert Kiyosaki’s book, Rich Dad, Poor Dad. If government wants to invest in turning the economy around, then government has to put more thought into the development of its assets and how it derives income from those assets. Things like our highways, ports, our military and our national parks are all assets that could be generating more income. We have to change the paradigm of how our government invests so we continue to be innovative in developing these assets to provide more lucrative revenue opportunities. For our government, that means using the development of our assets to generate jobs and income opportunities (user fees at National Parks, resource development on government owned lands, selling of government funded technology, etc.). As for the private sector, this step will happen out of necessity. There is an old saying that cream rises to the top. Eventually the last investors standing will be those who are wise enough to follow this basic strategy.
2.Make accountability a part of all financing and investment decisions. Everybody talks about regulation, whether we should increase it or decrease it to spur the economy. To me, there is no need for this debate if accountability is included in all investment decisions. Consequence is an amazing regulator. Our problem is that we have allowed too many people to be insulated from the consequences of their poor decisions. We could change this by having shareholders demand that executive compensation be tied to company performance. There could also be an insistence by all lenders that there is some form of personal investment made in any financial investment deal to make sure decision makers have some “skin in the game.” If I had my say with our Congress, I would make sure that all executives who are making decision with bailout money have some of their personal assets pledged as collateral. Then we would find out how confident they are in their ability to properly utilize that public investment. Those who are not willing to be accountable should not ask for handouts and should wait this crisis out on the sidelines.
3. Increase financial education. William Durant wrote, “Education is a progressive discovery of our own ignorance.” One of the things that we have learned in this economic crisis is that quite a few people had losses in the marketplace and they really had no clue in regards to the level of risk they were taking with their investments. The use of mutual funds and IRAs as an investment tool really didn’t gain traction until the late 80’s and early 90’s. It brought millions of new investors into the marketplace, with many of them not having a clear understanding of what they stood to lose. Most people didn't realize what they should be researching or even have a clue as to whether their investments were high risk or safe. That is because times were good and they believed their advisers as long as they were making money. But now that people are watching their values dwindle, all of a sudden they are starting to take notice and ask questions. Well, let’s not forget this progressive discovery of our ignorance and insure that we learned our lesson and teach others what we have learned. The fundamentals of business and investment should be taught in all secondary schools and community colleges should make financial educational more accessible as a non-credit curriculum so anyone who wants to learn more can.
I remain optimistic about our economic situation. I am obviously over simplifying some complex issues, but this is where we have to begin. We live in a big world with quite a bit of consumers who need products or services. Eventually more entrepreneurs will recognize this and profit from their ventures. That is if they maintain the bravery to be accountable for their actions and work responsibly towards achieving success.
I’ve stated in numerous posts that I am against all of the bailout plans. They are too complex and they utilize the resources derived our tax dollars for the benefit of a few select businesses. Another issue with the bailouts is that they do not address solutions to one of the key fundamental problems with our economy.
This problem is that too many people are making key financial decisions with the “bravery of being out of range.” What I mean by that is that those who are running these companies into bankruptcy are not suffering the consequences for their failures. These executives have the so called “golden parachutes” in their compensation packages to ensure they can live a life of luxury well into the future, whether their companies succeed or fail. Meanwhile their employees get laid off, usually with minimal severance packages and a complete loss of health benefits.
Entrepreneurism, whether on a large scale or small scale, refers to a very simple concept of running enterprises to be profitable. By definition, entrepreneurs are people who have possession over companies, enterprises, or ventures, and assume significant accountability for the inherent risks and the outcome. (http://en.wikipedia.org/wiki/Entrepreneur, target="wikipedia"). Yet if we look at the leaders of the companies at the forefront in this economic crisis, you will see compensation packages that eschew all risk and accountability. How else does a CEO fly a luxury jet to Washington to ask the government to help them from failing? How else does an executive ask for a $10 million bonus after losing billions of dollars and laying off thousands of workers (yes, I am referring to John Thain from Merrill Lynch, who has since come to his senses and withdrew that request).
I have to admit that I feel quite a bit of anger that people who don’t get it, somehow got placed in these positions of great power. But anger won’t solve the problem, so I’ll get over it.
Now comes the solutions part. I am a firm believer in Occam’s Razor, which refers to a principle that basically states, “All other things being equal, the simple solution is the best.”
So I’ve come up with 3 simple steps we could take to help fix our economy:
1. Invest in assets that will generate revenue. I wrote quite some time ago about the simple genius of this strategy that is covered in Robert Kiyosaki’s book, Rich Dad, Poor Dad. If government wants to invest in turning the economy around, then government has to put more thought into the development of its assets and how it derives income from those assets. Things like our highways, ports, our military and our national parks are all assets that could be generating more income. We have to change the paradigm of how our government invests so we continue to be innovative in developing these assets to provide more lucrative revenue opportunities. For our government, that means using the development of our assets to generate jobs and income opportunities (user fees at National Parks, resource development on government owned lands, selling of government funded technology, etc.). As for the private sector, this step will happen out of necessity. There is an old saying that cream rises to the top. Eventually the last investors standing will be those who are wise enough to follow this basic strategy.
2.Make accountability a part of all financing and investment decisions. Everybody talks about regulation, whether we should increase it or decrease it to spur the economy. To me, there is no need for this debate if accountability is included in all investment decisions. Consequence is an amazing regulator. Our problem is that we have allowed too many people to be insulated from the consequences of their poor decisions. We could change this by having shareholders demand that executive compensation be tied to company performance. There could also be an insistence by all lenders that there is some form of personal investment made in any financial investment deal to make sure decision makers have some “skin in the game.” If I had my say with our Congress, I would make sure that all executives who are making decision with bailout money have some of their personal assets pledged as collateral. Then we would find out how confident they are in their ability to properly utilize that public investment. Those who are not willing to be accountable should not ask for handouts and should wait this crisis out on the sidelines.
3. Increase financial education. William Durant wrote, “Education is a progressive discovery of our own ignorance.” One of the things that we have learned in this economic crisis is that quite a few people had losses in the marketplace and they really had no clue in regards to the level of risk they were taking with their investments. The use of mutual funds and IRAs as an investment tool really didn’t gain traction until the late 80’s and early 90’s. It brought millions of new investors into the marketplace, with many of them not having a clear understanding of what they stood to lose. Most people didn't realize what they should be researching or even have a clue as to whether their investments were high risk or safe. That is because times were good and they believed their advisers as long as they were making money. But now that people are watching their values dwindle, all of a sudden they are starting to take notice and ask questions. Well, let’s not forget this progressive discovery of our ignorance and insure that we learned our lesson and teach others what we have learned. The fundamentals of business and investment should be taught in all secondary schools and community colleges should make financial educational more accessible as a non-credit curriculum so anyone who wants to learn more can.
I remain optimistic about our economic situation. I am obviously over simplifying some complex issues, but this is where we have to begin. We live in a big world with quite a bit of consumers who need products or services. Eventually more entrepreneurs will recognize this and profit from their ventures. That is if they maintain the bravery to be accountable for their actions and work responsibly towards achieving success.
Saturday, November 22, 2008
Too Big To Succeed
There is quite a bit of talk about the proposed “bailout” of the auto industry. Like many Americans, I have very strong reservations about some of the proposals being considered. Our nation's leaders are spending our money without enough thought in regards to what we will get in return for that spending. Let's think about this. GM and Ford are both publicly traded companies that that had billions of dollars of investor's monies available for them to operate their companies and they have not been able to develop a fiscal contingency plan to weather these tough times.
One of my favorite sayings is in a little book of wisdom by Texas “Bix” Bender entitled, Don't Squat With Yer Spurs On! A Cowboy's Guide to Life. In his little book of philosophical musings, Mr. Binder offers this bit of advice, “The first thing to do when you find yourself in a hole is to stop digging.” My question is, will the automakers stop if we give them the resources to keep digging?
I also like to use this little nautical analogy to describe the term “bailout.” Think of a person with a cup feverishly scooping water out of a boat to keep it from sinking. Well, that works if it is a little rowboat and there is a small, slow leak. Yet when the Titanic hit that iceberg, do you think a bailout plan would have helped keep that behemoth from sinking?
The pundits who support this bailout are using fear tactics to scare the public in believing this is an absolute necessity for our economy to survive. A common phrase thrown out is “too big to fail.” They like to scare us of the prospect of all the lost jobs and the local economies that will be crushed by the collapse of the US auto big three. As someone who owned a business that was directly across the street from a General Motors plant that closed in 1993, I will say that life goes on. My younger brother still owns that same business and he is thriving. The town is not a ghost town by any means and has been growing as new and different industries eventually resurrected the community. Of course there were some difficult times for some people, but the reality of life is that we have not discovered Utopia yet and there will always be difficult times for some people.
If our auto industry collapses, obviously, thousands of people will lose their jobs. Some will find other employment and some will need government assistance. Yet, as a taxpayer, I would like to know that $25 billion is available for these people to put food on their table and keep their homes while they seek new employment opportunities. Those of use with some semblance of intelligence know that if the $25 billion goes to the auto industry, only some of that money will trickle down to the employees and quite a bit of it will be spent foolishly, as they will continue making the same mistakes they have been making over the past few years.
GM had $178,199 million dollars in sales in 2007. Their cost of sales was $166,259 million dollars. That is a gross profit of $11,940 million dollars. Is there anybody but me who doesn't recognize the gross incompetence of not being able to operate a company profitably that has $11,940 million in gross profit? GM lost $4,390 million from operations on those sales. By the way, during that same period, the top 5 executives of GM who oversaw this debacle took $20.7 million in 2007 compensation (this does not include stock awards and option awards). For an executive to have the audacity to get paid $4 million dollars/year and request government assistance so they can continue operating chills my heart. Hey Congress, I will run GM for a year at a $100,000 annual salary. And I provide the guarantee that I will do better than have $4,390 million in losses (heck, I just saved $3.9 million to the bottom line with just one proposal, imagine what I could do with a little bit of time to sort out some of their other wastes of operating capital).
To me, our automakers are not too big to fail, they are too big to succeed. Yes, the automakers are faced with a changing economy with fuel costs rising, green initiatives taking hold and numerous other factors. Still, they are too big to respond quickly to these market changes. And what is the incentive to change course when those at the helm have no recourse if they do not react to market changes?
Small business owners do not get the luxury of government bailouts. When they are headed for disaster, the successful small business owners will change course. Of course, sometimes the situation is insurmountable and even a change in direction cannot avert disaster. Still, if their boat is sinking, they jump ship, swim to safety and then look for the opportunity to build a new and better boat to set sail in the dangerous ocean called the marketplace. Sometimes the new boats fail, as well, but the successful entrepreneurs always find a way to eventually build better boats as they navigate the marketplace. They are quick to respond to changes and dangers out of necessity.
That is what happens in a free market society. There are no guarantees for safe passage. Yet we do not develop great captains by rewarding them for navigating their ships into trouble. They must either learn from their mistakes or from the more experienced captains who have already survived such challenges.
I say let the auto industry get themselves out of this jam. Necessity will require them to find a better way to operate or they will fail. Even if they fail, eventually, some wise entrepreneurs will find some value in the infrastructure that remains and rebuild better companies that provide vehicles to get our great population across this great nation. These vehicles will be innovative and profitable. That is what the market demands and that is what the wise entrepreneur will develop.
I would like to conclude by saying that we are not in a great economic crisis. There is an old Chinese proverb that states, "A crisis is an opportunity riding the dangerous wind." We are in dangerous times, but opportunity abounds for those who can ride the winds of innovation.
One of my favorite sayings is in a little book of wisdom by Texas “Bix” Bender entitled, Don't Squat With Yer Spurs On! A Cowboy's Guide to Life. In his little book of philosophical musings, Mr. Binder offers this bit of advice, “The first thing to do when you find yourself in a hole is to stop digging.” My question is, will the automakers stop if we give them the resources to keep digging?
I also like to use this little nautical analogy to describe the term “bailout.” Think of a person with a cup feverishly scooping water out of a boat to keep it from sinking. Well, that works if it is a little rowboat and there is a small, slow leak. Yet when the Titanic hit that iceberg, do you think a bailout plan would have helped keep that behemoth from sinking?
The pundits who support this bailout are using fear tactics to scare the public in believing this is an absolute necessity for our economy to survive. A common phrase thrown out is “too big to fail.” They like to scare us of the prospect of all the lost jobs and the local economies that will be crushed by the collapse of the US auto big three. As someone who owned a business that was directly across the street from a General Motors plant that closed in 1993, I will say that life goes on. My younger brother still owns that same business and he is thriving. The town is not a ghost town by any means and has been growing as new and different industries eventually resurrected the community. Of course there were some difficult times for some people, but the reality of life is that we have not discovered Utopia yet and there will always be difficult times for some people.
If our auto industry collapses, obviously, thousands of people will lose their jobs. Some will find other employment and some will need government assistance. Yet, as a taxpayer, I would like to know that $25 billion is available for these people to put food on their table and keep their homes while they seek new employment opportunities. Those of use with some semblance of intelligence know that if the $25 billion goes to the auto industry, only some of that money will trickle down to the employees and quite a bit of it will be spent foolishly, as they will continue making the same mistakes they have been making over the past few years.
GM had $178,199 million dollars in sales in 2007. Their cost of sales was $166,259 million dollars. That is a gross profit of $11,940 million dollars. Is there anybody but me who doesn't recognize the gross incompetence of not being able to operate a company profitably that has $11,940 million in gross profit? GM lost $4,390 million from operations on those sales. By the way, during that same period, the top 5 executives of GM who oversaw this debacle took $20.7 million in 2007 compensation (this does not include stock awards and option awards). For an executive to have the audacity to get paid $4 million dollars/year and request government assistance so they can continue operating chills my heart. Hey Congress, I will run GM for a year at a $100,000 annual salary. And I provide the guarantee that I will do better than have $4,390 million in losses (heck, I just saved $3.9 million to the bottom line with just one proposal, imagine what I could do with a little bit of time to sort out some of their other wastes of operating capital).
To me, our automakers are not too big to fail, they are too big to succeed. Yes, the automakers are faced with a changing economy with fuel costs rising, green initiatives taking hold and numerous other factors. Still, they are too big to respond quickly to these market changes. And what is the incentive to change course when those at the helm have no recourse if they do not react to market changes?
Small business owners do not get the luxury of government bailouts. When they are headed for disaster, the successful small business owners will change course. Of course, sometimes the situation is insurmountable and even a change in direction cannot avert disaster. Still, if their boat is sinking, they jump ship, swim to safety and then look for the opportunity to build a new and better boat to set sail in the dangerous ocean called the marketplace. Sometimes the new boats fail, as well, but the successful entrepreneurs always find a way to eventually build better boats as they navigate the marketplace. They are quick to respond to changes and dangers out of necessity.
That is what happens in a free market society. There are no guarantees for safe passage. Yet we do not develop great captains by rewarding them for navigating their ships into trouble. They must either learn from their mistakes or from the more experienced captains who have already survived such challenges.
I say let the auto industry get themselves out of this jam. Necessity will require them to find a better way to operate or they will fail. Even if they fail, eventually, some wise entrepreneurs will find some value in the infrastructure that remains and rebuild better companies that provide vehicles to get our great population across this great nation. These vehicles will be innovative and profitable. That is what the market demands and that is what the wise entrepreneur will develop.
I would like to conclude by saying that we are not in a great economic crisis. There is an old Chinese proverb that states, "A crisis is an opportunity riding the dangerous wind." We are in dangerous times, but opportunity abounds for those who can ride the winds of innovation.
Tuesday, November 4, 2008
An Election of Hope and Opportunity
Early this morning, I exercised my privilege to vote. It is a right that I did not earn, as I was fortunate enough to have been born in the United States of America. Still, I am forever grateful that I was bestowed this right to exercise my opinion in a free society.
Every election, I step into the voting booth and hope that my vote will make a difference. I’ve lived all over this great country and have had the opportunity to cast my votes in places as metropolitan as Central New Jersey and in areas as remote as Wasilla, Alaska. I’ve watched as my votes represented more than one half of a percentage point in a local election to less than one hundred millionths of the electorate. Yet in each case, that vote held equal importance to me.
Every vote is an opportunity to be part of a great societal process. Whether my candidates of choice win or lose, I was able to bring my opinion and influence to the governance of my town, county, state and country. It is a great honor.
The tally of our votes will be counted and we will have some changes in leadership of our governmental entities. Some of my preferred candidates will win, some will lose. I will not mourn my losses, because no matter who gets elected, they are still required to govern all their constituents, not just those who voted for them.
So I plan to keep a dialogue with the leaders who have earned the privilege to serve in public office. The rights bestowed to me in this great society do not whither the day after the election. Whoever gets elected can expect to hear my opinions outside of the voting booth. Of course, most of those opinions will relate to entrepreneurship, innovation and small business development, as that is an area that holds great importance to me.
I will also say that I am one of the many who is glad the campaign is coming to a close. Now the rhetoric will end and the action will begin. We all know that not all of the seeds of promise planted during the campaign will bear fruit. Still, we can nurture the rooting of good ideas by sharing either our support or better perspectives.
The great warrior Sun Tzu once said, “Opportunities multiply as they are seized.” I will add that opportunities are easier seized if there is an army of support. At some point, necessity will bring those with differing opinions together towards a common cause. As we have found at numerous times during our history, our great nation has united in the face of national and international challenges. I expect no difference in the future, no matter who we elect.
Every election, I step into the voting booth and hope that my vote will make a difference. I’ve lived all over this great country and have had the opportunity to cast my votes in places as metropolitan as Central New Jersey and in areas as remote as Wasilla, Alaska. I’ve watched as my votes represented more than one half of a percentage point in a local election to less than one hundred millionths of the electorate. Yet in each case, that vote held equal importance to me.
Every vote is an opportunity to be part of a great societal process. Whether my candidates of choice win or lose, I was able to bring my opinion and influence to the governance of my town, county, state and country. It is a great honor.
The tally of our votes will be counted and we will have some changes in leadership of our governmental entities. Some of my preferred candidates will win, some will lose. I will not mourn my losses, because no matter who gets elected, they are still required to govern all their constituents, not just those who voted for them.
So I plan to keep a dialogue with the leaders who have earned the privilege to serve in public office. The rights bestowed to me in this great society do not whither the day after the election. Whoever gets elected can expect to hear my opinions outside of the voting booth. Of course, most of those opinions will relate to entrepreneurship, innovation and small business development, as that is an area that holds great importance to me.
I will also say that I am one of the many who is glad the campaign is coming to a close. Now the rhetoric will end and the action will begin. We all know that not all of the seeds of promise planted during the campaign will bear fruit. Still, we can nurture the rooting of good ideas by sharing either our support or better perspectives.
The great warrior Sun Tzu once said, “Opportunities multiply as they are seized.” I will add that opportunities are easier seized if there is an army of support. At some point, necessity will bring those with differing opinions together towards a common cause. As we have found at numerous times during our history, our great nation has united in the face of national and international challenges. I expect no difference in the future, no matter who we elect.
Tuesday, October 28, 2008
Small Business and the Presidential Election
The role of small business in the presidential elections was brought into the national spotlight with the mention of “Joe the Plumber” during the last presidential debate. Mr. Wurzelbacher was referred to 26 times during the discussion that evening. You would think that small business would become a major component of the economic policies of each candidate based on that debate and the follow up references thereafter.
Below are links to the websites for John McCain and Barack Obama that refer to their positions on small businesses.
http://www.johnmccain.com/Issues/JobsforAmerica/smallbusiness.htm
http://www.barackobama.com/issues/economy/#small-business
I am going to let their own words speak for their positions. I will add my editorial opinion that both websites seem to be lacking in substance. There are some in depth issues that concern many small business owners that are not being addressed sufficiently.
I will also add my opinion that both campaigns spend more time talking about the other candidate’s economic policies rather than their own. I am sorry, but I don’t want to hear from John McCain what is wrong with Barack Obama and I don’t want to hear from Barack Obama what is wrong with John McCain. I want to hear what substantial policies each candidate will implement to help small businesses bring innovation to the marketplace.
Yet I am getting off topic and I want to focus more on what our leadership should be doing for small businesses. If I were given the opportunity to help either campaign, my positions on small business would focus on these issues:
• Capital Access – Making sure small businesses can get funding to implement a solid business plan. Almost all innovation in the marketplace comes from small business and innovation has risk. Banks can’t shoulder the burden of too much risk and maintain profitability. I will compliment the government, especially the SBA, for developing some good programs to make financing more available to some businesses. Still, there are flaws in the system and it is time for the US government to develop a 21rst century plan that provides not only more access to capital, but a better due diligence system that limits the risk..
• Technical Assistance – I am not saying this because I am one of the government’s technical assistance providers. I am saying this because we still have not done a good enough job of helping early stage entrepreneurs understand that developing a successful business goes beyond having a good idea and vision. It requires operational expertise, marketing expertise and financial management skills. We still have businesses getting government backed financing that do not have effective business plans with functional budgets and forecasts. These business owners need to be partnered with better mentors who can help them develop the best practices that have been utilized by those who have achieved success. Our resources have been too focused on theory and we need to get more practical technical assistance programs out there for small businesses. This would include developing a more involved direct mentoring of small business owners receiving government backed financing.
• Procurement – The government, at Federal, State and Local levels, spends trillions of dollars each year to operate. While small business owners do have the opportunity to bid on some contracts, the processes in place are archaic and do not provide a level playing field for the average small business owner. If I had the opportunity, I would develop a more streamlined process for bidding and managing procurements to provide greater access to small businesses.
• Regulatory Streamlining – Regulations are a necessity and I am not talking about deregulation here. The problem is that we have not been strong enough in providing the technical assistance for small businesses to get the answers on how to follow regulations properly or cost effectively. If the government is going to develop regulations, they should also develop the technical assistance to make it easier for businesses to comply with those regulations. Talk to just about any small business owner and you will find a disdain for some government agency because of their confusing regulations or permitting requirements. Most of these agencies have been guilty of creating a culture of non-compliance by being ambiguous in what they want and ruthless in their pursuit of perceived offenders. By creating regulations with clearer instructions and better technical assistance, we can foster better compliance. We need to change the government paradigm from being a regulatory police force to a compliance enabling force.
• Healthcare – Most small business owners want to get healthcare for themselves and for their employees. The problem is that the costs of healthcare are not only prohibitive, they are unpredictable. It is impossible to budget for the steep increases in healthcare costs each year. I know this is an area where both presidential candidates have offered very different solutions. Unfortunately, neither solution addresses the true problem (in my opinion). I wish I could offer an alternative solution, but I just don’t have one. I will say that the common denominator in both plans presented, and the major flaw in my opinion, is they see the problem as making healthcare plans more accessible. That solution will fail, as it will only drive up the cost of healthcare, because demand will become higher. Economics states that as demand increases, so do prices (if supply stays constant). And it is the same simple economics that is the problem we have to address. Healthcare has an inelastic demand. That is, people want to live, so they pursue healthcare. Here in is the problem. The demand is so powerful, people will pursue it whether they can afford it or not. So the suppliers (healthcare companies and healthcare providers) don't get paid in those situations. If this goes unchecked, it will effect their ability to stay profitable and continue supplying healthcare. Our society needs healthcare. Demand is growing, because our population is growing (not to mention, living longer) and that demand is inelastic. Like it or not, capitalism and inelastic demand don’t work very well together and that is something that a lot of people have trouble reconciling.
So I’ve identified my concerns for small business. I would invite other small business owners to comment and address issues that concern them. I would really like to stay away from getting into a debate between candidates. Let’s make a decision for who we want and accept the fact that other people are entitled to have differing opinions.
In regards to my opinion, I obviously have some social leanings that can't be hidden in the editorial contents of my posts. I also used to own a bagel store just outside of Wasilla, AK where Sarah Palin would stop by on occasion. She really is a quality person who is intelligent, charitable and dedicated to public service.
Unlike most people who offer their opinions, I find both candidates and both of their running mates to be quality individuals who have shown dedication to serving this great nation. I don't agree with all of their opinions, but I appreciate their commitment to make this country a better place. I will conclude with the true gem that came from Joe the Plumber when asked about his presidential choice. He said, “It's between me and the button I push.”
Below are links to the websites for John McCain and Barack Obama that refer to their positions on small businesses.
http://www.johnmccain.com/Issues/JobsforAmerica/smallbusiness.htm
http://www.barackobama.com/issues/economy/#small-business
I am going to let their own words speak for their positions. I will add my editorial opinion that both websites seem to be lacking in substance. There are some in depth issues that concern many small business owners that are not being addressed sufficiently.
I will also add my opinion that both campaigns spend more time talking about the other candidate’s economic policies rather than their own. I am sorry, but I don’t want to hear from John McCain what is wrong with Barack Obama and I don’t want to hear from Barack Obama what is wrong with John McCain. I want to hear what substantial policies each candidate will implement to help small businesses bring innovation to the marketplace.
Yet I am getting off topic and I want to focus more on what our leadership should be doing for small businesses. If I were given the opportunity to help either campaign, my positions on small business would focus on these issues:
• Capital Access – Making sure small businesses can get funding to implement a solid business plan. Almost all innovation in the marketplace comes from small business and innovation has risk. Banks can’t shoulder the burden of too much risk and maintain profitability. I will compliment the government, especially the SBA, for developing some good programs to make financing more available to some businesses. Still, there are flaws in the system and it is time for the US government to develop a 21rst century plan that provides not only more access to capital, but a better due diligence system that limits the risk..
• Technical Assistance – I am not saying this because I am one of the government’s technical assistance providers. I am saying this because we still have not done a good enough job of helping early stage entrepreneurs understand that developing a successful business goes beyond having a good idea and vision. It requires operational expertise, marketing expertise and financial management skills. We still have businesses getting government backed financing that do not have effective business plans with functional budgets and forecasts. These business owners need to be partnered with better mentors who can help them develop the best practices that have been utilized by those who have achieved success. Our resources have been too focused on theory and we need to get more practical technical assistance programs out there for small businesses. This would include developing a more involved direct mentoring of small business owners receiving government backed financing.
• Procurement – The government, at Federal, State and Local levels, spends trillions of dollars each year to operate. While small business owners do have the opportunity to bid on some contracts, the processes in place are archaic and do not provide a level playing field for the average small business owner. If I had the opportunity, I would develop a more streamlined process for bidding and managing procurements to provide greater access to small businesses.
• Regulatory Streamlining – Regulations are a necessity and I am not talking about deregulation here. The problem is that we have not been strong enough in providing the technical assistance for small businesses to get the answers on how to follow regulations properly or cost effectively. If the government is going to develop regulations, they should also develop the technical assistance to make it easier for businesses to comply with those regulations. Talk to just about any small business owner and you will find a disdain for some government agency because of their confusing regulations or permitting requirements. Most of these agencies have been guilty of creating a culture of non-compliance by being ambiguous in what they want and ruthless in their pursuit of perceived offenders. By creating regulations with clearer instructions and better technical assistance, we can foster better compliance. We need to change the government paradigm from being a regulatory police force to a compliance enabling force.
• Healthcare – Most small business owners want to get healthcare for themselves and for their employees. The problem is that the costs of healthcare are not only prohibitive, they are unpredictable. It is impossible to budget for the steep increases in healthcare costs each year. I know this is an area where both presidential candidates have offered very different solutions. Unfortunately, neither solution addresses the true problem (in my opinion). I wish I could offer an alternative solution, but I just don’t have one. I will say that the common denominator in both plans presented, and the major flaw in my opinion, is they see the problem as making healthcare plans more accessible. That solution will fail, as it will only drive up the cost of healthcare, because demand will become higher. Economics states that as demand increases, so do prices (if supply stays constant). And it is the same simple economics that is the problem we have to address. Healthcare has an inelastic demand. That is, people want to live, so they pursue healthcare. Here in is the problem. The demand is so powerful, people will pursue it whether they can afford it or not. So the suppliers (healthcare companies and healthcare providers) don't get paid in those situations. If this goes unchecked, it will effect their ability to stay profitable and continue supplying healthcare. Our society needs healthcare. Demand is growing, because our population is growing (not to mention, living longer) and that demand is inelastic. Like it or not, capitalism and inelastic demand don’t work very well together and that is something that a lot of people have trouble reconciling.
So I’ve identified my concerns for small business. I would invite other small business owners to comment and address issues that concern them. I would really like to stay away from getting into a debate between candidates. Let’s make a decision for who we want and accept the fact that other people are entitled to have differing opinions.
In regards to my opinion, I obviously have some social leanings that can't be hidden in the editorial contents of my posts. I also used to own a bagel store just outside of Wasilla, AK where Sarah Palin would stop by on occasion. She really is a quality person who is intelligent, charitable and dedicated to public service.
Unlike most people who offer their opinions, I find both candidates and both of their running mates to be quality individuals who have shown dedication to serving this great nation. I don't agree with all of their opinions, but I appreciate their commitment to make this country a better place. I will conclude with the true gem that came from Joe the Plumber when asked about his presidential choice. He said, “It's between me and the button I push.”
Tuesday, October 14, 2008
Increasing Your Bottom Line
I am teaching a class this Thursday entitled, “Increasing Your Bottom Line” in partnership with the Plattsburgh-North Country Chamber of Commerce and our local SCORE chapter. For those who are unable to attend, I will give a little preview of this presentation.
As I have said in some previous posts, there are only three things you can do to increase the profitability of your business:
* Increase Prices
* Increase Volume
* Decrease Expenses
The simplicity of focusing on these three strategies would seem to make business management a relatively easy task. Unfortunately, the implementation of these strategies is complicated by the huge range of variables that may result from any decision.
For example, if you increase your prices and maintain your current volume of customer transactions, you will certainly increase your profitability. Yet we know that if you raise your prices, you become more susceptible to losing volume. What if the competition doesn't raise their prices? You run the risk of losing customers to them. That is not the only variable that comes into play. What if your customers can no longer afford your prices?
To increase volume, I like to refer to your strategy options as a two step dance. The first step is to get your existing customers to purchase more each time they make a transaction. It is no joke why fast food establishments train their workers to ask, “You want fries with that?” Every time you can add an item to a transaction, you will increase your volume and your ability to increase profit. So train your employees to offer more products or services to your customer. Don't have any more products or services to offer? Maybe that's the problem and may be missing out on an opportunity to grow your business.
The second step to this dance is to get more customers. That is also easier said than done, but we'll do some postings in the future to help seed some ideas in this area. Basically, it boils down to marketing your business. Jay Conrad Levinson, the celebrated author of Guerilla Marketing, says, “marketing is everything you do to promote your business, from the moment you conceive of it to the point at which customers buy your product.” So keep doing everything, but try to do more of it!!!
Like with raising prices, there are risks to your attempts to increase volume. By adding product lines, you may incur the costs associated with the increase of inventories. You also run the risk of “cannibalism.” Cannibalism refers to the sales of one product line eating away the sales from other areas of your own business. Adding services may increase your labor costs, decrease your productivity or carry other unforeseen costs. Another concern is the costs associated with marketing your business. While there are some great books on saving money on marketing, any plan will at the least require your time; and there is a value to your time.
The final option is to decrease your expenses. I will again reference one of my favorite humorists, P.J. O'Rourke. In his book, Parliament of Whores, he introduces the P.J. O'Rourke Circumcision Principle which simply states, “you can take 10% off the top of everything.” Can you cut some fat off of your operating budget?
You need only to go back to my first post on this blog, “You Can't Cut Your Way to the Bottom Line” to get my opinion on your prospects in this area. Still, if you can cut some expenses off your budget without that sting that I felt by just typing the word “circumcision,” you will increase your profitability.
The purpose of this posting is not to get you to make rash decisions, but rather, to encourage you to explore the possibilities. Your main responsibility as a business owner is to maximize profitability. When was the last time you reviewed your options? Can you come up with a plan of action with a forecast of the expected results? Have you done a risk/reward analysis?
If you want to join our discussion this Thursday, here is the link to more information on this event:
http://www.northcountrychamber.com/MBTP/eventspage.cfm?ID=150
As I have said in some previous posts, there are only three things you can do to increase the profitability of your business:
* Increase Prices
* Increase Volume
* Decrease Expenses
The simplicity of focusing on these three strategies would seem to make business management a relatively easy task. Unfortunately, the implementation of these strategies is complicated by the huge range of variables that may result from any decision.
For example, if you increase your prices and maintain your current volume of customer transactions, you will certainly increase your profitability. Yet we know that if you raise your prices, you become more susceptible to losing volume. What if the competition doesn't raise their prices? You run the risk of losing customers to them. That is not the only variable that comes into play. What if your customers can no longer afford your prices?
To increase volume, I like to refer to your strategy options as a two step dance. The first step is to get your existing customers to purchase more each time they make a transaction. It is no joke why fast food establishments train their workers to ask, “You want fries with that?” Every time you can add an item to a transaction, you will increase your volume and your ability to increase profit. So train your employees to offer more products or services to your customer. Don't have any more products or services to offer? Maybe that's the problem and may be missing out on an opportunity to grow your business.
The second step to this dance is to get more customers. That is also easier said than done, but we'll do some postings in the future to help seed some ideas in this area. Basically, it boils down to marketing your business. Jay Conrad Levinson, the celebrated author of Guerilla Marketing, says, “marketing is everything you do to promote your business, from the moment you conceive of it to the point at which customers buy your product.” So keep doing everything, but try to do more of it!!!
Like with raising prices, there are risks to your attempts to increase volume. By adding product lines, you may incur the costs associated with the increase of inventories. You also run the risk of “cannibalism.” Cannibalism refers to the sales of one product line eating away the sales from other areas of your own business. Adding services may increase your labor costs, decrease your productivity or carry other unforeseen costs. Another concern is the costs associated with marketing your business. While there are some great books on saving money on marketing, any plan will at the least require your time; and there is a value to your time.
The final option is to decrease your expenses. I will again reference one of my favorite humorists, P.J. O'Rourke. In his book, Parliament of Whores, he introduces the P.J. O'Rourke Circumcision Principle which simply states, “you can take 10% off the top of everything.” Can you cut some fat off of your operating budget?
You need only to go back to my first post on this blog, “You Can't Cut Your Way to the Bottom Line” to get my opinion on your prospects in this area. Still, if you can cut some expenses off your budget without that sting that I felt by just typing the word “circumcision,” you will increase your profitability.
The purpose of this posting is not to get you to make rash decisions, but rather, to encourage you to explore the possibilities. Your main responsibility as a business owner is to maximize profitability. When was the last time you reviewed your options? Can you come up with a plan of action with a forecast of the expected results? Have you done a risk/reward analysis?
If you want to join our discussion this Thursday, here is the link to more information on this event:
http://www.northcountrychamber.com/MBTP/eventspage.cfm?ID=150
Wednesday, October 1, 2008
Another "Main Street" Opinion
I feel compelled to weigh in with my “Main Street” opinion on our current fiscal crisis. I welcome comments with contrary opinions; I just ask that you please keep them courteous. I also give two disclaimers. One is that this is my personal opinion and it doesn't reflect the opinions of my place of work or any affiliated organization. The second disclaimer is that I am not an economic expert, nor am I in any position to make a decision on what happens with the bail out process (except with my personal vote this November and I address that later in this posting).
Recently, I have been telling anyone who will listen to remember the words of Albert Einstein, "We cannot solve the problems we face at the same level of thinking as when we created them."
The issues I have with the "bail out" plan, as proposed, is not that I am against investment in our economy. There is no doubt that our tax dollars are a contributing factor in our economy and there is no way around that. My problem with the plan is that it does not appear as if our tax dollars are being invested. As proposed, our dollars are being used to purchase worthless assets from private companies who made poor decisions so they have capital to continue investment in wiser opportunities. The principal behind that is that the taxpayers need to do this to insure there is capital available for future investment. That is fine by me, but if the taxpayers are going to put up money to ensure the continuing flow of credit, shouldn't the taxpayers reap the rewards of that investment?
The "bail out" plan relies too much on a good faith assumption that a successful economy created by private firms making money will reward the taxpayers. Well, in my opinion, past performance is the best predictor of future behavior. Over $126 billion was pledged to bail out the Savings and Loans in the late 80s and early 90s and we watched that industry recreate itself, develop amazing wealth and then squander it through poor judgment to lead us back to where we stand today.
I remind you that just two years ago, some of the same companies that are seeking a taxpayer bailout were handing out huge bonuses. See this link to some of the corporate bonuses that were doled out in 2006 by some major players in this industry:
http://www.bankersball.com/2006/11/06/2006-bonuses/
How much of that wealth trickled down to the average taxpayer? Why wasn't that money socked away for a rainy day such as today?
So I've stated the problem, but what is the solution? Unfortunately, I don't have the answer. I am spinning my wheels trying to help come up with a good suggestion. But I am not an economics expert and I tend not to make decisions of this magnitude without some thought and research. Yet here in lies another problem; everyone seems to think we need to fix this by next week. To be frank, for the President, the taxpayers or the press to expect Congress to just turn over $700 Billion of taxpayer monies in one week to an industry that created a financial mess that was years in the making is just an unreasonable expectation. Even more ludicrous is the belief that Congress can make an educated decision in this time frame that carefully projects likely outcomes of of this appropriation. I’m not very comfortable with the odds for success.
Still, I am going to try to throw something out there and the best suggestion I can make is that we could follow Robert Kiyosaki's advice for a best practice of investment strategy, as outlined in his book, “Rich Dad, Poor Dad.” As noted in a previous post, he suggests that investment should be in assets that are likely to generate income. So let’s invest taxpayers dollars in those types of assets instead of the worthless junk that we are proposed to be buying. At least with this model, the taxpayer’s investment will stand a chance to yield the taxpayer some rewards.
Unfortunately, there is no mechanism in place to make decisions on investing so much public dollars into private industry wisely and prudently. So many people will throw out my suggestion because the world is on the verge of collapse and it is just not timely enough of a solution.
Keeping that in mind, I feel that we are faced with these alternatives:
1. Congress can act now and throw taxpayer dollars at a poorly conceived, reactionary bail out plan
2. Congress can actually work on a bipartisan, proactive plan that ensures the flow of credit is available after developing a mechanism to wisely invest public capital into private industry
3. We do nothing and let the private sector continue with its fascinating, Darwinian “survival of the fittest” economy
Here is what I foresee to be the results of each alternative:
1. Come November, the largest number of incumbents who lose Congressional elections is realized due to people like me who can't see the benefit of Congress bailing out Wall St. (especially when no government solutions were offered to me when I made poor investment decisions)
2. The Devils win the Stanley Cup since home ice advantage is obviously in hell because it just froze over.
3. Some people will lose a lot of money; some people will make a lot of money. Credit will tighten in some markets; credit will loosen in other markets. Some people will lose opportunities, some will gain opportunities. In other words, on a macro level, nothing will change.
For those who need me to be more literal about my editorial opinion, I am obviously in favor of letting the market sort things out. I am a bit cynical with my belief that our government is not capable of pulling politics and favoritism out of their decision making process. I am even more fearful that too many Congressional leaders do not have a strong enough understanding of finance to be making such a large “investment” decision, especially with other people's money.
I do not buy in to the global economic meltdown theory. In my opinion, it is like a law of thermodynamics: "The economy cannot be created or destroyed." The economy is still there, it just gets moved around in different ways.
I am well aware of the fact that there will be tragic stories of loss should government not act and I can empathize with those who stand to lose so much. But some of us have already had tragic stories of loss and the government left us to pull ourselves up by our own bootstraps. And can anyone think of a solution in our economy where everyone wins? Our competitive marketplace does not allow for that, which is the main reason why I stand firm in my belief that government should keep as much distance from this mess as possible. For the government to choose who wins in this game is too dangerous.
As P.J. O’Rourke once wrote, “The mystery of government is not how Washington works but how to make it stop.”
Recently, I have been telling anyone who will listen to remember the words of Albert Einstein, "We cannot solve the problems we face at the same level of thinking as when we created them."
The issues I have with the "bail out" plan, as proposed, is not that I am against investment in our economy. There is no doubt that our tax dollars are a contributing factor in our economy and there is no way around that. My problem with the plan is that it does not appear as if our tax dollars are being invested. As proposed, our dollars are being used to purchase worthless assets from private companies who made poor decisions so they have capital to continue investment in wiser opportunities. The principal behind that is that the taxpayers need to do this to insure there is capital available for future investment. That is fine by me, but if the taxpayers are going to put up money to ensure the continuing flow of credit, shouldn't the taxpayers reap the rewards of that investment?
The "bail out" plan relies too much on a good faith assumption that a successful economy created by private firms making money will reward the taxpayers. Well, in my opinion, past performance is the best predictor of future behavior. Over $126 billion was pledged to bail out the Savings and Loans in the late 80s and early 90s and we watched that industry recreate itself, develop amazing wealth and then squander it through poor judgment to lead us back to where we stand today.
I remind you that just two years ago, some of the same companies that are seeking a taxpayer bailout were handing out huge bonuses. See this link to some of the corporate bonuses that were doled out in 2006 by some major players in this industry:
http://www.bankersball.com/2006/11/06/2006-bonuses/
How much of that wealth trickled down to the average taxpayer? Why wasn't that money socked away for a rainy day such as today?
So I've stated the problem, but what is the solution? Unfortunately, I don't have the answer. I am spinning my wheels trying to help come up with a good suggestion. But I am not an economics expert and I tend not to make decisions of this magnitude without some thought and research. Yet here in lies another problem; everyone seems to think we need to fix this by next week. To be frank, for the President, the taxpayers or the press to expect Congress to just turn over $700 Billion of taxpayer monies in one week to an industry that created a financial mess that was years in the making is just an unreasonable expectation. Even more ludicrous is the belief that Congress can make an educated decision in this time frame that carefully projects likely outcomes of of this appropriation. I’m not very comfortable with the odds for success.
Still, I am going to try to throw something out there and the best suggestion I can make is that we could follow Robert Kiyosaki's advice for a best practice of investment strategy, as outlined in his book, “Rich Dad, Poor Dad.” As noted in a previous post, he suggests that investment should be in assets that are likely to generate income. So let’s invest taxpayers dollars in those types of assets instead of the worthless junk that we are proposed to be buying. At least with this model, the taxpayer’s investment will stand a chance to yield the taxpayer some rewards.
Unfortunately, there is no mechanism in place to make decisions on investing so much public dollars into private industry wisely and prudently. So many people will throw out my suggestion because the world is on the verge of collapse and it is just not timely enough of a solution.
Keeping that in mind, I feel that we are faced with these alternatives:
1. Congress can act now and throw taxpayer dollars at a poorly conceived, reactionary bail out plan
2. Congress can actually work on a bipartisan, proactive plan that ensures the flow of credit is available after developing a mechanism to wisely invest public capital into private industry
3. We do nothing and let the private sector continue with its fascinating, Darwinian “survival of the fittest” economy
Here is what I foresee to be the results of each alternative:
1. Come November, the largest number of incumbents who lose Congressional elections is realized due to people like me who can't see the benefit of Congress bailing out Wall St. (especially when no government solutions were offered to me when I made poor investment decisions)
2. The Devils win the Stanley Cup since home ice advantage is obviously in hell because it just froze over.
3. Some people will lose a lot of money; some people will make a lot of money. Credit will tighten in some markets; credit will loosen in other markets. Some people will lose opportunities, some will gain opportunities. In other words, on a macro level, nothing will change.
For those who need me to be more literal about my editorial opinion, I am obviously in favor of letting the market sort things out. I am a bit cynical with my belief that our government is not capable of pulling politics and favoritism out of their decision making process. I am even more fearful that too many Congressional leaders do not have a strong enough understanding of finance to be making such a large “investment” decision, especially with other people's money.
I do not buy in to the global economic meltdown theory. In my opinion, it is like a law of thermodynamics: "The economy cannot be created or destroyed." The economy is still there, it just gets moved around in different ways.
I am well aware of the fact that there will be tragic stories of loss should government not act and I can empathize with those who stand to lose so much. But some of us have already had tragic stories of loss and the government left us to pull ourselves up by our own bootstraps. And can anyone think of a solution in our economy where everyone wins? Our competitive marketplace does not allow for that, which is the main reason why I stand firm in my belief that government should keep as much distance from this mess as possible. For the government to choose who wins in this game is too dangerous.
As P.J. O’Rourke once wrote, “The mystery of government is not how Washington works but how to make it stop.”
Friday, September 26, 2008
Where's the Value?
This week, I have received over five inquiries from people interested in buying existing businesses. Each inquiry was related to getting bank financing and, in my opinion, none of the inquirers did enough research to justify whether the businesses were even worth the amount of money they wanted to borrow.
Human behavior has always baffled me. Why would someone buy a business without an in depth review in regards to the legitimacy of the asking price or a feasibility analysis of whether this will provide a reasonable rate of return on the investment? Sometimes I think people will put more thought into finding a gas station that can provide a $0.05/gallon savings on gasoline than they do in making a business purchase. I say this because I’ve had too many unfortunate counseling sessions with people who have made bad business purchases. The common denominator in most of those instances is that no proper research or planning was done during the purchase process.
In my opinion, the first step in purchasing a business should be assessing feasibility. A feasibility analysis will answer the following questions:
• Do you have the capital to invest into the purchase of this business?
• Do you have the skills to manage and operate a particular business (this is especially important for those who are considering purchasing a business in an industry in which they have no prior experience)?
• Do you have the time to commit to this business?
• Does this business have the potential to provide a return on investment that meets your financial goals?
Some people will argue with me that these questions can’t be answered without assessing value. The point I want to make is that before assessing value of a business you intend to purchase, you should assess the amount of money you can afford to invest. Why bother wasting your time or the seller’s time if there is such a huge gap between what you can afford and the asking price for a business? Also, anyone who purchases a business should have a reasonable expectation of earnings based on how the business will operate after the purchase. You can’t just look at the past performance, there needs to be a forecast of what will change once ownership changes hands.
After you assess feasibility, then you should begin a valuation analysis of the business you want to purchase. The most important thing to understand in doing a valuation analysis is that there is no subjective method for assessing value. There are formulas you can use to make estimates, but the value is ultimately determined by what the seller is willing to accept and what the buyer is willing to pay.
Below is a link to an article with detailed explanations of some of the different business valuation methods you can use as a guide, but I caution you not to consider any formula as an absolute indicator of a value of a particular business.
http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P11_2240
If you have already done your feasibility analysis and you have arrived at an agreed upon value, the next step in the process is a due diligence review. Due diligence is the verification of information presented to you during negotiations. It is also researching more detailed information about the history of the business. The link below contains a fairly extensive checklist of things you may wish to investigate.
http://smallbusiness.findlaw.com/business-forms-contracts/be3_8_1.html
I also strongly suggest that before a purchase is made, you ask the seller for references from some vendors and customers. While the due diligence checklist addresses getting information on customers and vendors, I suggest you take it a step further and actually script some questions on issues such as consistency in service, challenges they may have had with the company and their opinions on operations.
You should also remember that the best due diligence is your own direct observation of how the business operates. While you have to be cognizant of confidentiality issues, if at all possible, try to witness as many details as possible to ensure that you truly understand how this business functions.
As someone who is both purchased and sold businesses, I will add that it is very common to have buyer’s remorse and seller’s remorse. You always wish you negotiated a lower price when buying a business and a higher price when selling a business. As Mary Pickford once said, “The past cannot be changed. The future is yet in your power.”
Human behavior has always baffled me. Why would someone buy a business without an in depth review in regards to the legitimacy of the asking price or a feasibility analysis of whether this will provide a reasonable rate of return on the investment? Sometimes I think people will put more thought into finding a gas station that can provide a $0.05/gallon savings on gasoline than they do in making a business purchase. I say this because I’ve had too many unfortunate counseling sessions with people who have made bad business purchases. The common denominator in most of those instances is that no proper research or planning was done during the purchase process.
In my opinion, the first step in purchasing a business should be assessing feasibility. A feasibility analysis will answer the following questions:
• Do you have the capital to invest into the purchase of this business?
• Do you have the skills to manage and operate a particular business (this is especially important for those who are considering purchasing a business in an industry in which they have no prior experience)?
• Do you have the time to commit to this business?
• Does this business have the potential to provide a return on investment that meets your financial goals?
Some people will argue with me that these questions can’t be answered without assessing value. The point I want to make is that before assessing value of a business you intend to purchase, you should assess the amount of money you can afford to invest. Why bother wasting your time or the seller’s time if there is such a huge gap between what you can afford and the asking price for a business? Also, anyone who purchases a business should have a reasonable expectation of earnings based on how the business will operate after the purchase. You can’t just look at the past performance, there needs to be a forecast of what will change once ownership changes hands.
After you assess feasibility, then you should begin a valuation analysis of the business you want to purchase. The most important thing to understand in doing a valuation analysis is that there is no subjective method for assessing value. There are formulas you can use to make estimates, but the value is ultimately determined by what the seller is willing to accept and what the buyer is willing to pay.
Below is a link to an article with detailed explanations of some of the different business valuation methods you can use as a guide, but I caution you not to consider any formula as an absolute indicator of a value of a particular business.
http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P11_2240
If you have already done your feasibility analysis and you have arrived at an agreed upon value, the next step in the process is a due diligence review. Due diligence is the verification of information presented to you during negotiations. It is also researching more detailed information about the history of the business. The link below contains a fairly extensive checklist of things you may wish to investigate.
http://smallbusiness.findlaw.com/business-forms-contracts/be3_8_1.html
I also strongly suggest that before a purchase is made, you ask the seller for references from some vendors and customers. While the due diligence checklist addresses getting information on customers and vendors, I suggest you take it a step further and actually script some questions on issues such as consistency in service, challenges they may have had with the company and their opinions on operations.
You should also remember that the best due diligence is your own direct observation of how the business operates. While you have to be cognizant of confidentiality issues, if at all possible, try to witness as many details as possible to ensure that you truly understand how this business functions.
As someone who is both purchased and sold businesses, I will add that it is very common to have buyer’s remorse and seller’s remorse. You always wish you negotiated a lower price when buying a business and a higher price when selling a business. As Mary Pickford once said, “The past cannot be changed. The future is yet in your power.”
Friday, September 19, 2008
Be Like Mike
A good friend wrote a comment to my last posting and I wanted to feature it in this posting.
Mike Loiacono and I have known each other since 1973. Together, we started our very first business in 1984 (Spectrum Mobile Disc Jockey Service). He taught me many great lessons about business, while I showed him that people really will dance to “Crocodile Rock” (he almost killed me when I cued that song up at a wedding reception...surprisingly, it didn't clear the dance floor!). Mike has gone on to become a big shot CFO (chief financial officer) for a publicly traded company and I can attribute much of my accounting knowledge to discussions I have had with him. Thanks Mike!
Here's some of what he wrote in his comment:
“I would like to add to your blog if I may. Not only is it important for the business owner to 'learn not to be there' it is equally as important for the business owner to plan for one or more of their employees to 'not be there'. And what I am referring to is the importance of cross-training. A well-oiled machine works as well as the sum of all of its parts. What an organization does not want is for its operations to stumble when one part is missing.
As CFO, I have created and implemented a TCE (Train, Cross-train and Empower) program. Each of my employees are not only trained to perform their functions, but are also able to fill in when someone else in the department is out. This type of program satisfies two of my concerns as a manager:
1.) Enabling the department to run effectively even when there is absenteeism (or 'what happens if you get hit by a bus')
2.) I am NEVER backed into a corner by a potentially disgruntled employee who has a gun to my head because he/she is the only one who knows the job.
While smaller (and some larger) businesses may not have the wherewithal to produce training videos similar to those of the major fast food establishment you referred to in your post, it is indeed vital for all organizations to invest the time to develop detailed training manuals for all of the functions of the organization.
An organization cannot allow employee turnover (or absenteeism) to impact customer satisfaction. The best investments a business owner (or manager) can make are the investment of time in the hiring process and the investment of time in training and cross-training.”
Mike's advice is exceptional and I appreciate his sharing of these philosophies. The development of detailed training manuals and “cross training” are best practices that more companies should embrace.
His comment about “the only one who knows the job” is one that particularly strikes a nerve with me, as I have actually seen previously successful businesses fail when a key member of the organization leaves. Management should accept the responsibility to develop contingencies for the absences or departure of each member of their staff. If not, the odds for long term business survival are greatly diminished.
Life happens. Employees are going to miss shifts, sometimes for legitimate reasons and sometimes do to poor judgment. Employees are going to eventually leave your organization. Sometimes it will be by their choice, sometimes it will be your choice and, unfortunately, sometimes it may be due to circumstances beyond the control of either party. While you can continue to value your employees for what they offer your organization, reality dictates that they will not be there forever and your business should be prepared for the temporary or permanent absence of every member of the staff. As Charles De Gaulle once said, “The graveyard is filled with indispensable men.”
Mike Loiacono and I have known each other since 1973. Together, we started our very first business in 1984 (Spectrum Mobile Disc Jockey Service). He taught me many great lessons about business, while I showed him that people really will dance to “Crocodile Rock” (he almost killed me when I cued that song up at a wedding reception...surprisingly, it didn't clear the dance floor!). Mike has gone on to become a big shot CFO (chief financial officer) for a publicly traded company and I can attribute much of my accounting knowledge to discussions I have had with him. Thanks Mike!
Here's some of what he wrote in his comment:
“I would like to add to your blog if I may. Not only is it important for the business owner to 'learn not to be there' it is equally as important for the business owner to plan for one or more of their employees to 'not be there'. And what I am referring to is the importance of cross-training. A well-oiled machine works as well as the sum of all of its parts. What an organization does not want is for its operations to stumble when one part is missing.
As CFO, I have created and implemented a TCE (Train, Cross-train and Empower) program. Each of my employees are not only trained to perform their functions, but are also able to fill in when someone else in the department is out. This type of program satisfies two of my concerns as a manager:
1.) Enabling the department to run effectively even when there is absenteeism (or 'what happens if you get hit by a bus')
2.) I am NEVER backed into a corner by a potentially disgruntled employee who has a gun to my head because he/she is the only one who knows the job.
While smaller (and some larger) businesses may not have the wherewithal to produce training videos similar to those of the major fast food establishment you referred to in your post, it is indeed vital for all organizations to invest the time to develop detailed training manuals for all of the functions of the organization.
An organization cannot allow employee turnover (or absenteeism) to impact customer satisfaction. The best investments a business owner (or manager) can make are the investment of time in the hiring process and the investment of time in training and cross-training.”
Mike's advice is exceptional and I appreciate his sharing of these philosophies. The development of detailed training manuals and “cross training” are best practices that more companies should embrace.
His comment about “the only one who knows the job” is one that particularly strikes a nerve with me, as I have actually seen previously successful businesses fail when a key member of the organization leaves. Management should accept the responsibility to develop contingencies for the absences or departure of each member of their staff. If not, the odds for long term business survival are greatly diminished.
Life happens. Employees are going to miss shifts, sometimes for legitimate reasons and sometimes do to poor judgment. Employees are going to eventually leave your organization. Sometimes it will be by their choice, sometimes it will be your choice and, unfortunately, sometimes it may be due to circumstances beyond the control of either party. While you can continue to value your employees for what they offer your organization, reality dictates that they will not be there forever and your business should be prepared for the temporary or permanent absence of every member of the staff. As Charles De Gaulle once said, “The graveyard is filled with indispensable men.”
Sunday, September 14, 2008
Learn to Not Be There
I was at a local business the other day and had a bad experience. I've always had good service at this business on previous occasions, but this time, I was very disappointed with my service. One of the reasons why this experience was bad is because the owner was not there on this particular day.
This is an endemic problem with many small businesses. The business has a good model for success, as long as the ownership team is present, but once unsupervised, things fall apart. It gets to the point that where the ownership team feels they need to be there during every hour of operation.
The stories of small business owners working 80 – 100 hours per week are true, no doubt, because sometimes that’s what it takes to get the job done. I have to admit that not only did I do that, but I was guilty of wearing that as a badge of pride in my early days as a small business owner.
Yet working that many hours is often a sign of poor operations management and could be a tell tale sign that a business is not investing enough time in training their employees. Small business owners who have employees and still work that many hours should question whether they could delegate more of their duties.
It wasn’t long after working the countless hours in my stores that I learned that nothing I did was really that specialized of a skill. I was always the guy who made the bagel dough and baked the bagels in the first few years of operation. On the days I did turn it over to my partner or an employee, I would have this foolish pride in the fact that a few regular customers would notice that someone besides me made the product, because it wasn’t as good as when I made it.
It didn’t take long for me to have the epiphany that if I wanted my business to improve, as well as my quality of life, I could not make myself so mission critical to success. Rather, I should invest the time in training my employees to be as good, if not better, than me in helping out with operations.
I referenced the fact that I worked for a major fast food establishment in a previous post. One of the things that I remember from my experience there is that I had to watch 30 minute training videos before working in any of the stations. Whether it was working the grill, the fryer, the cash register or on janitorial duty, there was a video of how to properly work that station. I still remember how all the employees hated janitorial duty (it was called “lot and lobby”) where we had to change ashtrays, take out the garbage, sweep/mop and clean the bathrooms. Still, we watched a video on how to properly perform all those tasks to this company’s standards.
The realization that these videos were pure genius struck me years later when I told one of my employees at my bagel store to mop the front area floor. I went to do something in the back and returned to the horror of a floor that looked much worse after the mopping than before. You see, I forgot to tell this employee that before you mop a floor, you have to sweep up all the loose dirt. While that may seem like common sense to some, those of us who have had employees learn quickly that for there to be common sense, there needs to be common experiences and training. This particular employee never had to mop a floor before and this was his first experience. I may have made the same mistake the first time I mopped a floor had I not watched that training video at my first job.
Of course, you may have in mind delegating significantly more responsibility to your employees than just a mopping a floor. That is fine as long as you are committed to training your employees to accept those responsibilities.
When approaching training, keep in mind the old maxim to “hire for attitude, train for skill.” Especially when delegating management responsibilities. You can train your employees to develop certain skills, but you can’t change their temperament.
Developing a training program is not easy and it will take an investment of time. Just remember that every minute invested in an effective training program will return countless minutes of your own future productivity.
This is an endemic problem with many small businesses. The business has a good model for success, as long as the ownership team is present, but once unsupervised, things fall apart. It gets to the point that where the ownership team feels they need to be there during every hour of operation.
The stories of small business owners working 80 – 100 hours per week are true, no doubt, because sometimes that’s what it takes to get the job done. I have to admit that not only did I do that, but I was guilty of wearing that as a badge of pride in my early days as a small business owner.
Yet working that many hours is often a sign of poor operations management and could be a tell tale sign that a business is not investing enough time in training their employees. Small business owners who have employees and still work that many hours should question whether they could delegate more of their duties.
It wasn’t long after working the countless hours in my stores that I learned that nothing I did was really that specialized of a skill. I was always the guy who made the bagel dough and baked the bagels in the first few years of operation. On the days I did turn it over to my partner or an employee, I would have this foolish pride in the fact that a few regular customers would notice that someone besides me made the product, because it wasn’t as good as when I made it.
It didn’t take long for me to have the epiphany that if I wanted my business to improve, as well as my quality of life, I could not make myself so mission critical to success. Rather, I should invest the time in training my employees to be as good, if not better, than me in helping out with operations.
I referenced the fact that I worked for a major fast food establishment in a previous post. One of the things that I remember from my experience there is that I had to watch 30 minute training videos before working in any of the stations. Whether it was working the grill, the fryer, the cash register or on janitorial duty, there was a video of how to properly work that station. I still remember how all the employees hated janitorial duty (it was called “lot and lobby”) where we had to change ashtrays, take out the garbage, sweep/mop and clean the bathrooms. Still, we watched a video on how to properly perform all those tasks to this company’s standards.
The realization that these videos were pure genius struck me years later when I told one of my employees at my bagel store to mop the front area floor. I went to do something in the back and returned to the horror of a floor that looked much worse after the mopping than before. You see, I forgot to tell this employee that before you mop a floor, you have to sweep up all the loose dirt. While that may seem like common sense to some, those of us who have had employees learn quickly that for there to be common sense, there needs to be common experiences and training. This particular employee never had to mop a floor before and this was his first experience. I may have made the same mistake the first time I mopped a floor had I not watched that training video at my first job.
Of course, you may have in mind delegating significantly more responsibility to your employees than just a mopping a floor. That is fine as long as you are committed to training your employees to accept those responsibilities.
When approaching training, keep in mind the old maxim to “hire for attitude, train for skill.” Especially when delegating management responsibilities. You can train your employees to develop certain skills, but you can’t change their temperament.
Developing a training program is not easy and it will take an investment of time. Just remember that every minute invested in an effective training program will return countless minutes of your own future productivity.
Wednesday, September 10, 2008
Remembering Vic Saracini
In my 17 years as the owner of bagel stores, I have had the opportunity to meet so many wonderful people. Being in retail, I've been blessed to have thousands of customers who would share more than just a business transaction with me. In this post, I am not going to talk about business, but rather, I would like to share a personal story about a customer.
Today I am thinking about a customer who came into my Pennsylvania store back in early May of 1996 and started a conversation with me. The conversation starter was a little sign that I put up announcing the arrival of my daughter, Sarah. Sarah was my second child and first girl. The customer, an airline pilot, noticed the sign and congratulated me. I made a comment how I wasn't prepared to be the father of a girl. He smiled and told me about his two young girls and how they make it so easy. “They are little princesses,” he said, “they are so loving, they are so devoted to their Daddy. It's such a great feeling coming home to them.” It was quite some time ago and I am going from memory, but I am pretty sure he used “princess” and “devoted” when describing his daughters. I think he may have said “beautiful,” as well, but I'm not sure. I really wish I could remember the conversation better.
Why do I want to remember his exact words? Because I want to share the love I heard in this man's voice for his family. I want people to know about this special person, who just came to my store for a quick snack and took the time to share a kind thought and a smile.
September 11, 2001 was a tragic day; not because an infamous event occurred, but because this kind gentleman, Vic Saracini, passed away on that day. While many people refer to that day as “Nine Eleven,” it was more than just a catch phrase, event in our history. It was a day when over 3,000 loving and caring people were senselessly murdered by cowards. I am sure there is probably a more effective way to express my emotions about that horrific day, but the words escape me.
I did not know Vic Saracini well enough for me to be able to write much more. There is a “Garden of Reflection” in Lower Makefield, PA that provides tribute to the lives forever changed on that tragic day.
Garden of Reflection
There will be various remembrances on September 11th this year and for years to come. I hope we not only unite as Americans in remembering the day, but also take the time to think of the people who perished. Their lives may have been taken, but they will never be lost if they remain in our memories.
Today I am thinking about a customer who came into my Pennsylvania store back in early May of 1996 and started a conversation with me. The conversation starter was a little sign that I put up announcing the arrival of my daughter, Sarah. Sarah was my second child and first girl. The customer, an airline pilot, noticed the sign and congratulated me. I made a comment how I wasn't prepared to be the father of a girl. He smiled and told me about his two young girls and how they make it so easy. “They are little princesses,” he said, “they are so loving, they are so devoted to their Daddy. It's such a great feeling coming home to them.” It was quite some time ago and I am going from memory, but I am pretty sure he used “princess” and “devoted” when describing his daughters. I think he may have said “beautiful,” as well, but I'm not sure. I really wish I could remember the conversation better.
Why do I want to remember his exact words? Because I want to share the love I heard in this man's voice for his family. I want people to know about this special person, who just came to my store for a quick snack and took the time to share a kind thought and a smile.
September 11, 2001 was a tragic day; not because an infamous event occurred, but because this kind gentleman, Vic Saracini, passed away on that day. While many people refer to that day as “Nine Eleven,” it was more than just a catch phrase, event in our history. It was a day when over 3,000 loving and caring people were senselessly murdered by cowards. I am sure there is probably a more effective way to express my emotions about that horrific day, but the words escape me.
I did not know Vic Saracini well enough for me to be able to write much more. There is a “Garden of Reflection” in Lower Makefield, PA that provides tribute to the lives forever changed on that tragic day.
Garden of Reflection
There will be various remembrances on September 11th this year and for years to come. I hope we not only unite as Americans in remembering the day, but also take the time to think of the people who perished. Their lives may have been taken, but they will never be lost if they remain in our memories.
Saturday, September 6, 2008
Everyone Owns a Number
The title of this post comes from a portion of a presentation I attended in Chicago made by Roger Pell, SVP of Inmatrix. Mr. Pell's company distributes a great financial diagnostic program called Optimist. I've used this software and I am offering an unabashed testimonial for its functionality in helping businesses forecast and improve financial performance.
Below is a link with some information on this software for those who are interested in learning more about it.
Optimist Information
I consider Mr. Pell a kindred spirit. Mainly because the tag-line for his company, Inmatrix, is “making business simple.” You need to look no further than a few past posts to see my claim that business success is as simple as having more income than expenses and I believe that too many businesses struggle because they lose focus and forget to pay attention to some simple financial indicators. The story is always there in the numbers, you just have to know what to look for.
One of the suggestions that Mr. Pell made during his presentation was that businesses should create a culture where “everyone owns a number.” He was referring to open book accounting, which basically encourages businesses owners to share portions of their financial information with their personnel. I have always been a strong proponent of this practice and believe that more businesses would increase their productivity if they shared financial information with their front line employees.
Before you respond with comments that question my sanity, I suggest that you read two books. The first is called The Great Game of Business by Jack Stack with Bo Burlingham. Jack Stack helped turn Springfield Remanufacturing Corporation, a nearly bankrupt division of International Harvester, into a very successful operation using an open book management system that encouraged employees to play the “game” and understand the profit centers that dictate success in their organization (A Stake in the Outcome is another great book written by Mr. Stack).
The other suggested reading is Nuts! by Kevin and Jackie Frieberg. This book is the story of Southwest Airlines and shares some of the interesting business philosophies of Herb Kelleher and his management team in developing a corporate culture that is unrivaled in the airline industry. While open book management is not the focus of this book, there are some great excerpts of how they incorporated this practice and the positive results that were generated because employees were given a stake in profitability and access to key data on performance.
Open book management gives employees incentive to perform and achieve goals, it allows for easier delegation and helps discipline an organization to pay attention to key financial data. There are many variations to implementing this process, from limited short term bonus incentives for employees to full disclosure and offering options for employee ownership (Employee Stock Ownership Plans or ESOPs).
I had my first exposure to open book management when I worked at a fast food franchise in NJ back in 1982. I was working on the cash register for minimum wage, which was $3.35/hour at the time. One night, my manager called a pre-shift meeting with the four register operators and told us we were going to have a “register race.” Whoever rang up the most sales between 5:00 and 9:00 PM would make an extra $1.00/hour for that shift; we worked a 6 hour shift, so this would be a whopping $6.00 bonus. I was up for the challenge and I remembered to ask “you want fries with that?” and to upsell the from fountain sodas to milkshakes.
My sales topped out at $800 for the period and I won the race that night. The fact that I still take pride in this silly little accomplishment evidences the power of a adding a little competition to the workplace (I will add here that part of the incentive to succeed was that I also had a silly little crush on my manager, Kathy).
Let's look at the results of that performance in a different light. I found out that night that I had usually generated $650 in sales per evening. So for an additional $6.00 cost, this corporation got an extra $150 in sales. The average food cost at this franchise in 1982 was around 22%. So when considering that all their other operating remained the same, they made an extra $111 that night ($150 - $33 food cost - $6 Rick bonus) by creating this incentive. Actually, they probably made even more, as my coworkers also were likely to have performed a little bit better than normal.
When implementing an open book management system, management still holds the keys to the amount of information that they share with their employees. You may not want to share everything, but at the least, I suggest keeping employees in the loop in regards to productivity benchmarks that you use to measure their performance.
If you don't have measures in place, now would be a good time to start. Accountants love when they hear, “you can't win the game if you don't keep score.” As part of any continuous improvement process, you should have some way to gauge productivity and efficiencies. These are often called “key performance indicators” (KPI) and they can be based on operating, marketing or financial benchmarks. An acronym often used when considering a KPI is SMART. This stands for: Specific, Measurable, Achievable, Relevant, Time bound.
Most KPIs are industry specific, so if you are not sure what measures to use, I suggest that you start reading some industry publications. You can also give our office a call and we can put our NYS SBDC Research Network to task in helping you out! I've added a link to their blog in my sidebar and suggest that you check out some of their great links to resources, as well as their interesting posts.
Below is a link with some information on this software for those who are interested in learning more about it.
Optimist Information
I consider Mr. Pell a kindred spirit. Mainly because the tag-line for his company, Inmatrix, is “making business simple.” You need to look no further than a few past posts to see my claim that business success is as simple as having more income than expenses and I believe that too many businesses struggle because they lose focus and forget to pay attention to some simple financial indicators. The story is always there in the numbers, you just have to know what to look for.
One of the suggestions that Mr. Pell made during his presentation was that businesses should create a culture where “everyone owns a number.” He was referring to open book accounting, which basically encourages businesses owners to share portions of their financial information with their personnel. I have always been a strong proponent of this practice and believe that more businesses would increase their productivity if they shared financial information with their front line employees.
Before you respond with comments that question my sanity, I suggest that you read two books. The first is called The Great Game of Business by Jack Stack with Bo Burlingham. Jack Stack helped turn Springfield Remanufacturing Corporation, a nearly bankrupt division of International Harvester, into a very successful operation using an open book management system that encouraged employees to play the “game” and understand the profit centers that dictate success in their organization (A Stake in the Outcome is another great book written by Mr. Stack).
The other suggested reading is Nuts! by Kevin and Jackie Frieberg. This book is the story of Southwest Airlines and shares some of the interesting business philosophies of Herb Kelleher and his management team in developing a corporate culture that is unrivaled in the airline industry. While open book management is not the focus of this book, there are some great excerpts of how they incorporated this practice and the positive results that were generated because employees were given a stake in profitability and access to key data on performance.
Open book management gives employees incentive to perform and achieve goals, it allows for easier delegation and helps discipline an organization to pay attention to key financial data. There are many variations to implementing this process, from limited short term bonus incentives for employees to full disclosure and offering options for employee ownership (Employee Stock Ownership Plans or ESOPs).
I had my first exposure to open book management when I worked at a fast food franchise in NJ back in 1982. I was working on the cash register for minimum wage, which was $3.35/hour at the time. One night, my manager called a pre-shift meeting with the four register operators and told us we were going to have a “register race.” Whoever rang up the most sales between 5:00 and 9:00 PM would make an extra $1.00/hour for that shift; we worked a 6 hour shift, so this would be a whopping $6.00 bonus. I was up for the challenge and I remembered to ask “you want fries with that?” and to upsell the from fountain sodas to milkshakes.
My sales topped out at $800 for the period and I won the race that night. The fact that I still take pride in this silly little accomplishment evidences the power of a adding a little competition to the workplace (I will add here that part of the incentive to succeed was that I also had a silly little crush on my manager, Kathy).
Let's look at the results of that performance in a different light. I found out that night that I had usually generated $650 in sales per evening. So for an additional $6.00 cost, this corporation got an extra $150 in sales. The average food cost at this franchise in 1982 was around 22%. So when considering that all their other operating remained the same, they made an extra $111 that night ($150 - $33 food cost - $6 Rick bonus) by creating this incentive. Actually, they probably made even more, as my coworkers also were likely to have performed a little bit better than normal.
When implementing an open book management system, management still holds the keys to the amount of information that they share with their employees. You may not want to share everything, but at the least, I suggest keeping employees in the loop in regards to productivity benchmarks that you use to measure their performance.
If you don't have measures in place, now would be a good time to start. Accountants love when they hear, “you can't win the game if you don't keep score.” As part of any continuous improvement process, you should have some way to gauge productivity and efficiencies. These are often called “key performance indicators” (KPI) and they can be based on operating, marketing or financial benchmarks. An acronym often used when considering a KPI is SMART. This stands for: Specific, Measurable, Achievable, Relevant, Time bound.
Most KPIs are industry specific, so if you are not sure what measures to use, I suggest that you start reading some industry publications. You can also give our office a call and we can put our NYS SBDC Research Network to task in helping you out! I've added a link to their blog in my sidebar and suggest that you check out some of their great links to resources, as well as their interesting posts.
Tuesday, September 2, 2008
Contingency Planning
(note: I posted this before finding out that September is "National Preparedness Month"...seems even more appropriate now!)
I am heading off to Chicago later today for the Association of Small Business Development Centers (ASBDC) annual conference. I have worked in three other SBDC networks and this conference provides the opportunity for me to visit with some old friends from Alaska, Arizona and Indiana. I also look forward to reconnecting and sharing war stories with some friends I met while doing relief work coordinated by the ASBDC after Hurricane Katrina. The ASBDC recruited this effort and I was joined by personnel from Florida, Maryland, Massachusetts, Nebraska, New Mexico and Tennessee to serve in Hattiesburg, Mississippi to help some small business owners deal with the aftermath of that storm (http://cccsbdc.blogspot.com has some details on that experience).
With Hurricane Gustav currently pounding away at the Gulf Coast, it provides a stark reminder on how the forces of nature can wreak havoc on our livelihoods. Millions of people were evacuated over the past few days and it is unfortunate that many will return to bear witness to the powerful damage that wind and water can do to homes and businesses.
As the sun shines here in Plattsburgh today, and in many other areas of the country, the storm that is pounding the Gulf Coast is also providing us the opportunity to learn a valuable lesson. As John F. Kennedy once said, “the time to repair the roof is when the sun is shining.”
In business planning, we talk about market analysis, marketing strategy, financial forecasting and operational management. Usually, risk management is just an insurance quote that goes on our profit and loss projections. Many business owners go no further than getting their insurance policy and putting it into the filing cabinet. Yet, I learned how important my insurance agents were to my businesses in short order as they helped me through a series of difficult issues ranging from wind damage, lightning strikes, worker injuries, earthquakes, theft and vandalism (thanks Dennis Regan & Norm Tyler).
With the power of hindsight, I wish I had given risk management and contingency planning more thought. As an eternal optimist, I think more about what can go right than what can go wrong. Reality is that life happens and things do not always go as planned.
While I have faced some challenges that resulted in some fairly significant financial loss, I count myself fortunate that the results of both the natural and man-made disasters I faced were minimal relative to what others have encountered. While I am no expert in disaster preparedness, I became better over time, learning from my mistakes and developing contingencies for future events.
It became common practice for my wife and I to add to our employee manual what we would do in the case of future events. We covered things such as power outages, equipment damage, earthquakes, windstorms and snow/ice events. Another thing that we did was to prepare for economic issues. We derived our family income from our businesses, so we always had a plan to whittle down our living expenses and to earn income outside of our businesses if sales slowed or stopped due to any series of events.
All businesses could benefit from developing their own contingency plans. Hopefully, your plan will be more well thought out than the haphazard and reactionary documents that I created. Think about natural events, mechanical issues, utility issues and what it takes to keep your business running (and your family fed!). Of course, your priority should include planning to promote the safety and welfare of you and your employees.
Below is a link to a helpful website.
http://www.ready.gov
I also encourage you to spend more time with your insurance agents. They have experience in dealing with these types of issues and the have real solutions to help your business. One of the powerful images that I remember from visiting Mississippi in the aftermath of Hurricane Katrina is in the photo below. I am not promoting this one insurance company, but it sends a clear message that life goes on as long as life goes on. Being prepared for these events just makes it a little easier.
I wish those in the Gulf Coast the best as they ride out this storm.
I am heading off to Chicago later today for the Association of Small Business Development Centers (ASBDC) annual conference. I have worked in three other SBDC networks and this conference provides the opportunity for me to visit with some old friends from Alaska, Arizona and Indiana. I also look forward to reconnecting and sharing war stories with some friends I met while doing relief work coordinated by the ASBDC after Hurricane Katrina. The ASBDC recruited this effort and I was joined by personnel from Florida, Maryland, Massachusetts, Nebraska, New Mexico and Tennessee to serve in Hattiesburg, Mississippi to help some small business owners deal with the aftermath of that storm (http://cccsbdc.blogspot.com has some details on that experience).
With Hurricane Gustav currently pounding away at the Gulf Coast, it provides a stark reminder on how the forces of nature can wreak havoc on our livelihoods. Millions of people were evacuated over the past few days and it is unfortunate that many will return to bear witness to the powerful damage that wind and water can do to homes and businesses.
As the sun shines here in Plattsburgh today, and in many other areas of the country, the storm that is pounding the Gulf Coast is also providing us the opportunity to learn a valuable lesson. As John F. Kennedy once said, “the time to repair the roof is when the sun is shining.”
In business planning, we talk about market analysis, marketing strategy, financial forecasting and operational management. Usually, risk management is just an insurance quote that goes on our profit and loss projections. Many business owners go no further than getting their insurance policy and putting it into the filing cabinet. Yet, I learned how important my insurance agents were to my businesses in short order as they helped me through a series of difficult issues ranging from wind damage, lightning strikes, worker injuries, earthquakes, theft and vandalism (thanks Dennis Regan & Norm Tyler).
With the power of hindsight, I wish I had given risk management and contingency planning more thought. As an eternal optimist, I think more about what can go right than what can go wrong. Reality is that life happens and things do not always go as planned.
While I have faced some challenges that resulted in some fairly significant financial loss, I count myself fortunate that the results of both the natural and man-made disasters I faced were minimal relative to what others have encountered. While I am no expert in disaster preparedness, I became better over time, learning from my mistakes and developing contingencies for future events.
It became common practice for my wife and I to add to our employee manual what we would do in the case of future events. We covered things such as power outages, equipment damage, earthquakes, windstorms and snow/ice events. Another thing that we did was to prepare for economic issues. We derived our family income from our businesses, so we always had a plan to whittle down our living expenses and to earn income outside of our businesses if sales slowed or stopped due to any series of events.
All businesses could benefit from developing their own contingency plans. Hopefully, your plan will be more well thought out than the haphazard and reactionary documents that I created. Think about natural events, mechanical issues, utility issues and what it takes to keep your business running (and your family fed!). Of course, your priority should include planning to promote the safety and welfare of you and your employees.
Below is a link to a helpful website.
http://www.ready.gov
I also encourage you to spend more time with your insurance agents. They have experience in dealing with these types of issues and the have real solutions to help your business. One of the powerful images that I remember from visiting Mississippi in the aftermath of Hurricane Katrina is in the photo below. I am not promoting this one insurance company, but it sends a clear message that life goes on as long as life goes on. Being prepared for these events just makes it a little easier.
I wish those in the Gulf Coast the best as they ride out this storm.
Wednesday, August 27, 2008
Discounts, Coupons and Customer Service
Below is a paraphrase of a friend’s issue with her business:
“I started accepting coupons from my competitor (large National chain). I have rules about minimum purchase and people want me to honor those coupons without minimum purchase and they are also bringing in outdated coupons. I also run a promotion where I give a discount of 10% off a future purchase if a customer spends over $100. They need to bring in their receipt that has a coupon. I have customers demanding the discount from my workers without the coupon, expecting them to just remember. I would rather these customers spend their money with my business, but I feel I am being taken advantage of. How do I set the rules? What boundaries should I set?”
I will start by posting a link to a great article by Bob Phibbs:
7 Reasons Coupons Don't Work
While I don’t agree 100% with doing away with coupons and/or discounts, they should be used judiciously and they should be self created. My opinion is that accepting a competitor’s coupons is not a good strategy. You have to remember that your competitors may have better buying power to get their inventory at lower rates than your business. You are also giving your competitors control over your pricing strategy by accepting their coupons. Your pricing strategy is critical to the profitability of your business and should never be put in the hands of a competitor.
I used to accept competitors coupons at my bagel stores. Some other stores in our area ran similar promotions as us, such as “buy a dozen bagels, get 6 free,” so we accepted their coupons. However, our second year into running our store, a large national chain opened up within a mile of our location. They had a big media blitz and ran a coupon giving away a baker’s dozen with no purchase necessary.
My partners and I talked it over and we were all in agreement that it would kill our business to honor that coupon. So we stopped that practice immediately, recognizing that we would probably lose some customers for changing that policy. Our rationale was that if they came to our business expecting something for free, they weren’t really customers and we could stand to lose them.
I value customers and believe in developing customer loyalty. I am also aware of the fact that I have to convince my customers that I am better than my competitors to develop that loyalty. The reality of the situation is that I can only be better than the competition in a few ways. I can have better quality, better service, more convenience and perhaps a selection that is more tailored to my local market. I recognize that I probably can’t compete on price alone, as I just don’t have the resources to be a low cost competitor. If that is all that is important to a particular customer, then I know that this will never be a loyal customer to my business.
Yet here lies the conundrum. Isn’t it better to make a discounted sale than no sale at all? It is tough running a business and every dollar of gross profit contributes to covering the overhead. If a customer has $50 worth of merchandise that cost me $30, wouldn’t it be better giving them that purchase for $45 and take a $15 profit rather than letting them walk out with nothing and no profit?
It is difficult for me to say this, but I still will. As a business owner, I have to stand firm on my pricing and not give in to discounts that are customer driven. Discounts should be driven by my decisions. If we choose to let customers dictate our pricing, we are turning over our business plan to our customers. I love my customers and recognize that I need them to make my business successful; yet they don’t understand enough about what it takes to run my business to dictate their own pricing. They are thinking only of themselves, whereas when I set my pricing structure, it was with the intent that I could give my customers a benefit and maintain profitability.
Are you still not buying my advice? Let’s project that previous scenario a bit into the future. You give that customer her 10% discount and she buys that item for $45. It is the last one on the shelf. Your next customer comes into the store and wants that same item. She is a loyal customer who has never asked for a discount. You just lost $5 in profit potential and probably a bit of good will. Or let’s say you did have another item and you sell it to that loyal customer for $50 and she finds out someone else got the same item for $45. You just lost some more good will.
Discounts and coupons can still be a tool to help promote your business, but be selective and have a clear game plan. Are you trying to speed up the turn of slow moving inventory, trying to eliminate waste of perishable inventory or are you trying to introduce a new product line? Are you trying to increase the average ticket per customer or do you want to reward customer loyalty for reaching a certain benchmark in spending? If you have a legitimate reason, discounting and/or coupons may be a good tool for your business.
To directly answer my friend’s question, I suggest that you set clear rules for pricing based on what you feel is best for your business and stick to your guns. If you are going to discount, make sure it is a means to an end, not a reaction to a customer request. Nobody can take advantage of you unless you allow it. I refer you to my previous post.
Your customers are a precious commodity to your business and you should focus on developing a service policy that makes you stand out from the competition. Don’t confuse providing discounts with providing good customer service. After all, if your business is not profitable, you won’t be able to provide great service to any customers in the future.
“I started accepting coupons from my competitor (large National chain). I have rules about minimum purchase and people want me to honor those coupons without minimum purchase and they are also bringing in outdated coupons. I also run a promotion where I give a discount of 10% off a future purchase if a customer spends over $100. They need to bring in their receipt that has a coupon. I have customers demanding the discount from my workers without the coupon, expecting them to just remember. I would rather these customers spend their money with my business, but I feel I am being taken advantage of. How do I set the rules? What boundaries should I set?”
I will start by posting a link to a great article by Bob Phibbs:
7 Reasons Coupons Don't Work
While I don’t agree 100% with doing away with coupons and/or discounts, they should be used judiciously and they should be self created. My opinion is that accepting a competitor’s coupons is not a good strategy. You have to remember that your competitors may have better buying power to get their inventory at lower rates than your business. You are also giving your competitors control over your pricing strategy by accepting their coupons. Your pricing strategy is critical to the profitability of your business and should never be put in the hands of a competitor.
I used to accept competitors coupons at my bagel stores. Some other stores in our area ran similar promotions as us, such as “buy a dozen bagels, get 6 free,” so we accepted their coupons. However, our second year into running our store, a large national chain opened up within a mile of our location. They had a big media blitz and ran a coupon giving away a baker’s dozen with no purchase necessary.
My partners and I talked it over and we were all in agreement that it would kill our business to honor that coupon. So we stopped that practice immediately, recognizing that we would probably lose some customers for changing that policy. Our rationale was that if they came to our business expecting something for free, they weren’t really customers and we could stand to lose them.
I value customers and believe in developing customer loyalty. I am also aware of the fact that I have to convince my customers that I am better than my competitors to develop that loyalty. The reality of the situation is that I can only be better than the competition in a few ways. I can have better quality, better service, more convenience and perhaps a selection that is more tailored to my local market. I recognize that I probably can’t compete on price alone, as I just don’t have the resources to be a low cost competitor. If that is all that is important to a particular customer, then I know that this will never be a loyal customer to my business.
Yet here lies the conundrum. Isn’t it better to make a discounted sale than no sale at all? It is tough running a business and every dollar of gross profit contributes to covering the overhead. If a customer has $50 worth of merchandise that cost me $30, wouldn’t it be better giving them that purchase for $45 and take a $15 profit rather than letting them walk out with nothing and no profit?
It is difficult for me to say this, but I still will. As a business owner, I have to stand firm on my pricing and not give in to discounts that are customer driven. Discounts should be driven by my decisions. If we choose to let customers dictate our pricing, we are turning over our business plan to our customers. I love my customers and recognize that I need them to make my business successful; yet they don’t understand enough about what it takes to run my business to dictate their own pricing. They are thinking only of themselves, whereas when I set my pricing structure, it was with the intent that I could give my customers a benefit and maintain profitability.
Are you still not buying my advice? Let’s project that previous scenario a bit into the future. You give that customer her 10% discount and she buys that item for $45. It is the last one on the shelf. Your next customer comes into the store and wants that same item. She is a loyal customer who has never asked for a discount. You just lost $5 in profit potential and probably a bit of good will. Or let’s say you did have another item and you sell it to that loyal customer for $50 and she finds out someone else got the same item for $45. You just lost some more good will.
Discounts and coupons can still be a tool to help promote your business, but be selective and have a clear game plan. Are you trying to speed up the turn of slow moving inventory, trying to eliminate waste of perishable inventory or are you trying to introduce a new product line? Are you trying to increase the average ticket per customer or do you want to reward customer loyalty for reaching a certain benchmark in spending? If you have a legitimate reason, discounting and/or coupons may be a good tool for your business.
To directly answer my friend’s question, I suggest that you set clear rules for pricing based on what you feel is best for your business and stick to your guns. If you are going to discount, make sure it is a means to an end, not a reaction to a customer request. Nobody can take advantage of you unless you allow it. I refer you to my previous post.
Your customers are a precious commodity to your business and you should focus on developing a service policy that makes you stand out from the competition. Don’t confuse providing discounts with providing good customer service. After all, if your business is not profitable, you won’t be able to provide great service to any customers in the future.
Monday, August 25, 2008
Entrepreneurial Education
I am often asked what dictates success in small business. Normally I respond that you have to have more income than expenses. Business is really that simple. That does not mean that it is easy. Income doesn’t just happen. Not only do you have to provide a market solution, you also have to let the market know, in terms they can understand, that you are the best choice for that market solution.
Managing expenses can be equally difficult. Getting the biggest bang for your buck out of marketing dollars is just one of the challenges. There are operating costs, productivity issues and distribution costs that can easily get out of control if the business is not tightly managed. Needless to say, small business owners have quite a lot to learn if they are going to be successful.
Personally, I’ve learned a lot about small business ownership over the years as the owner and operator of my own bagel stores. I also learned quite a bit by working as a food and beverage executive for some large corporations. Most large businesses started as small businesses and their larger scale success can be attributed to the best practices they implemented and trained their managers to follow.
I started my first bagel store when I was 23 years old, along with brother, who was 21 at the time. We made our share of mistakes and our lack of business aptitude was pretty apparent in the first few months of our operations. I still remember my grandmother calling me up to ask me how the business was doing. I told her I thought we were doing pretty well.
“What are your monthly sales?” she asked. I couldn’t come up with a number. After giving her my sales from the day before, she projected it out for me. Then she started asking about my expenses. “Food costs, rent, insurance, payroll, advertising?” she asked. I gave her some figures and before the conversation was over she computed a basic profit and loss analysis for me. The whole process opened my eyes to the fact that I was not paying attention to some critical data. Believe me, the next time she called, I was more prepared with answers.
Probably the most important lesson I learned as a small business owner stems from some frustration that I was having with my younger brother. He was complaining about a worker. “She’s horrible. She’s ruining our business,” he said. “You should fire her.”
I thought about this for a moment. Why was he putting this on my shoulders? He was a partner in this business. He should fire her. He is the one who hired her. I also thought that maybe she was horrible because he expected too much from her without giving her the proper training. But then I thought about it some more. Using that same rationale, I was guilty of making my brother a partner in the business without training him as a manager. He was only 21 and just graduated college. How was he supposed to know how to do these things?
That’s when I had an epiphany. If something goes wrong, it is probably my own fault. I started to use this train of thought every time our business was faced with a problem. I chose the path of self employment. No one forced me to open up bagel stores and it was my responsibility to face the challenges that go along with small business ownership.
The responsibility of owning a small business became a very humbling experience for me. It is tough to accept blame for everything that goes wrong. Over the years, I’ve had employees steal from us, seen my store get struck by lightning, had a windstorm blow out our drive thru window and dealt with a number of serious challenges in the aftermath of the terrorist attacks on September 11th. There were so many issues that seemed beyond my control when I was running my businesses. Yet, I kept telling myself, if I were to succeed, I had no choice but to accept the challenges and find the best solutions.
I do have to admit here that it was not always an immediate realization or Zen-like approach to problem solving. I would lose my temper, get frustrated or wallow in self pity just like many others when faced with difficult situations. But eventually I would remind myself (or have my wife remind me) to calm down, accept responsibility and just deal with it.
I found the key to my own entrepreneurial education – you have to develop the solution to every problem. Blame and self pity yield no results. If you are not prepared to accept responsibility, you are not prepared for self employment.
The road to business success is simple. Get more income than expenses. Just be prepared to drive around, jump over or crash through some obstacles along the way. Erica Jong once wrote, “Take your life in your own hands, and what happens? A terrible thing: no one to blame.”
It can be humbling being a small business owner, but it is also liberating. I choose to change Ms. Jong’s quote to, “Take your life in your own hands, and what happens? A beautiful thing: there is no one to blame.”
Managing expenses can be equally difficult. Getting the biggest bang for your buck out of marketing dollars is just one of the challenges. There are operating costs, productivity issues and distribution costs that can easily get out of control if the business is not tightly managed. Needless to say, small business owners have quite a lot to learn if they are going to be successful.
Personally, I’ve learned a lot about small business ownership over the years as the owner and operator of my own bagel stores. I also learned quite a bit by working as a food and beverage executive for some large corporations. Most large businesses started as small businesses and their larger scale success can be attributed to the best practices they implemented and trained their managers to follow.
I started my first bagel store when I was 23 years old, along with brother, who was 21 at the time. We made our share of mistakes and our lack of business aptitude was pretty apparent in the first few months of our operations. I still remember my grandmother calling me up to ask me how the business was doing. I told her I thought we were doing pretty well.
“What are your monthly sales?” she asked. I couldn’t come up with a number. After giving her my sales from the day before, she projected it out for me. Then she started asking about my expenses. “Food costs, rent, insurance, payroll, advertising?” she asked. I gave her some figures and before the conversation was over she computed a basic profit and loss analysis for me. The whole process opened my eyes to the fact that I was not paying attention to some critical data. Believe me, the next time she called, I was more prepared with answers.
Probably the most important lesson I learned as a small business owner stems from some frustration that I was having with my younger brother. He was complaining about a worker. “She’s horrible. She’s ruining our business,” he said. “You should fire her.”
I thought about this for a moment. Why was he putting this on my shoulders? He was a partner in this business. He should fire her. He is the one who hired her. I also thought that maybe she was horrible because he expected too much from her without giving her the proper training. But then I thought about it some more. Using that same rationale, I was guilty of making my brother a partner in the business without training him as a manager. He was only 21 and just graduated college. How was he supposed to know how to do these things?
That’s when I had an epiphany. If something goes wrong, it is probably my own fault. I started to use this train of thought every time our business was faced with a problem. I chose the path of self employment. No one forced me to open up bagel stores and it was my responsibility to face the challenges that go along with small business ownership.
The responsibility of owning a small business became a very humbling experience for me. It is tough to accept blame for everything that goes wrong. Over the years, I’ve had employees steal from us, seen my store get struck by lightning, had a windstorm blow out our drive thru window and dealt with a number of serious challenges in the aftermath of the terrorist attacks on September 11th. There were so many issues that seemed beyond my control when I was running my businesses. Yet, I kept telling myself, if I were to succeed, I had no choice but to accept the challenges and find the best solutions.
I do have to admit here that it was not always an immediate realization or Zen-like approach to problem solving. I would lose my temper, get frustrated or wallow in self pity just like many others when faced with difficult situations. But eventually I would remind myself (or have my wife remind me) to calm down, accept responsibility and just deal with it.
I found the key to my own entrepreneurial education – you have to develop the solution to every problem. Blame and self pity yield no results. If you are not prepared to accept responsibility, you are not prepared for self employment.
The road to business success is simple. Get more income than expenses. Just be prepared to drive around, jump over or crash through some obstacles along the way. Erica Jong once wrote, “Take your life in your own hands, and what happens? A terrible thing: no one to blame.”
It can be humbling being a small business owner, but it is also liberating. I choose to change Ms. Jong’s quote to, “Take your life in your own hands, and what happens? A beautiful thing: there is no one to blame.”
Wednesday, August 20, 2008
Pricing Strategies in an Inflationary Market
Note: This was written last March, while I was working for the East Central Indiana SBDC...even though some supply costs have leveled a bit, I think this information is still relevant.
As supply costs in the food and beverage industry are inflating at alarming rates, now is a good time for effective food service managers to revisit their menus and develop some pricing strategies to position them for continued success in the marketplace. Quite a few operators are rightfully concerned about recent price increases. Still, this actually provides a nice window of opportunity to make some changes to menu prices and actually increase profit.
Having spent over 18 years as a manager in the food and beverage industry, I have heard so many of my colleagues make this erroneous statement – “You have to maintain a food cost of 33% or less or you can’t make it in this business.” Many food service managers take this to heart so much that they figure out their ingredient costs for an item and then multiply times 3 to get their menu price. This is a foolish pricing strategy, as there is significantly more involved in developing a successful menu.
The first thing to remember in pricing strategy is that it there is a difference between food cost/gross margins and gross profit. Gross margin is the percentage of the difference between your selling price and your supplier cost divided by the selling price (food cost is simply 100% – gross margin %)
Gross profit is the dollar amount difference between the selling price and the supplier cost.
Gross Profit = Selling Price – Supplier Cost
The most important thing to remember is that gross profit is what pays the bills, not gross margin!
Below is an example of two restaurant managers with a company that owns a small chain of fine dining establishments. In this scenario, their supplier raised the cost of a bottle of their most popular wine from $6.00/bottle to $9.00/bottle. Each manager has a different strategy for dealing with the price increase.
| | Original Pricing | Restaurant 1 | Restaurant 2 |
| Supplier Cost | $6.00 | $9.00 | $9.00 |
| Menu Price | $20.00 | $30.00 | $24.00 |
| Food Cost % | 30% | 30% | 37.5% |
| Gross Margin % | 70% | 70% | 63.5% |
| Gross Profit | $14.00 | $21.00 | $15.00 |
In Restaurant 1, the manager believes in maintaining his margin, so he raises his price to $30.00 per bottle. All is good in his world, as he is now making $7.00 more per bottle of wine than he was before and he is still maintaining his 30% food cost.
Restaurant 2 features a savvier manager. She knows her customers and is afraid that with such a steep increase, more of her customers will skip the wine to keep their dinner bills down. She still raises her prices to increase her gross profit, but her increase is not nearly as much as her counterpart at Restaurant 1 and she is losing a bit of her margin.
|
| Restaurant 1 Last Month | Restaurant 1 This Month | Restaurant 2 Last Month | Restaurant 2 This Month |
| Wine Bottles Sold | 100 | 50 | 100 | 100 |
| Food Cost % | 30% | 30% | 30% | 37.5% |
| Gross Margin % | 70% | 70% | 70% | 63.5% |
| Gross Profit | $1,400.00 | $1,050.00 | $1,400.00 | $1,500.00 |
By keeping her price increase at a lower level, Restaurant 2 did not lose any units sold and made $100 more dollars than the previous month even though her gross margin decreased. Restaurant 2 made $350 less than the previous month, even though he maintained his margin.
With a bit of attention to consumer spending habits, the competition and supplier costs, smart operators have the opportunity to turn the proverbial lemons into lemonade.
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