Year Three: Stability

Risk: Medium

Satisfaction: High

Key Challenge: Developing management and business skills

 

By your third year of business, one of three things will have happened:

1. Your business is barely surviving and you should be looking to shut it down.  If at the end of three years, you are not succeeding, your business is probably not viable…software development notwithstanding.
2. You are comfortable in your business and you have chosen not to grow.  This is where many self-employed and micro businesses remain.
3. You are continuing to grow and you can clearly see the potential in your business.

The ‘Management’ message applies primarily to that third group…growing your third year in business.  In order to grow you must begin to develop additional managerial skills.  Most people who are successful in their first two years owe their success to two factors: technical skills and marketing skills. You have successfully delivered on products or services and you have developed a customer base. Sometimes, you find businesses who can fake if for two years, but this never lasts.  In order to grow a business, the company must increase capacity, capability or both. 

Capacity relates to the ‘quantity’ of output.  This could be units of production, hours of service or even metrics such as sales per square foot.  Capacity relates to volume output.  As your business grows, you may need to increase volume output.

Capability relates to the different things you sell.  Capability represents the different products or services you can produce or provide your customers.  Capability relates to product mix. If your business is not at capacity, you may increase your capabilities to increase sales.

 

In order to increase your capacity or capability, businesses use the other two aspects of business development…Finance and Human Resources.

 

You need finance to ensure you have the ability to purchase the assets required to support growth.  This could be purchases of capital assets, such as machinery & equipment to allow for increased production or financing inventory and accounts receivable as your business grows. 

Most business owners also hire additional people to grow the company. This means developing managerial skills such as recruiting, training, supervision and motivation.  You must manage people.  For many entrepreneurs, these are new skills.  Being a great chef in one kitchen does not ensure success when managing chefs in a small restaurant chain.   Just because someone is good at selling, does not necessarily mean that they can succeed as a sales manager.  Finance, the downfall for many growing businesses, is more than getting your annual financial statements from your accountant and wondering where all of your money went.

Since your business is stable, you have the opportunity to develop your management, supervisory and financial skills.  You must transcend your technical and sales skills and develop the kinds of skills that allow you to move your business forward.  Check out your local college or business development centre for ways to develop.  As your business grows, your knowledge requirements tip from technical,  to business…from running your business to running a business.

For those who are content with operating as a micro-business or even as a ‘one person shop’, stability is a good time for developing additional skills. It is a great time to think about business development and entrepreneurial life style.  Year three is a great time to reflect on the journey of the past three years so you can enter the dangerous year four with a clear idea of direction and purpose.

Next week…the dangers of year four!

 

Year Two: Development

Risk: High

Satisfaction: High

Key Challenge:  Focus

 

It’s difficult to develop an FAQ until you have any questions.

Congratulations... you have survived your first year in business.  The second year of business is a year for growth and development.  Developing your business takes many forms.  The first is obvious…developing a customer base.  In theory, we know our target market before we start our business.  The reality is that we don’t always get it right. 

I heard a great story on this topic.  Some entrepreneurs decided to start a valet parking service in Kelowna BC over the Christmas shopping period.  The thinking was that seniors wouldn’t want to walk in the inclement weather and would use the valet parking service.  When the business started a curious thing happened.  The problem was that seniors didn’t use the service.  As children of the depression, seniors found that paying for parking a car was an indulgence.  However, there were customers for the service.  The sub-twenty-five year old crowd used the service.  They felt that this was an affordable luxury and used the service for status rather than for pragmatic reasons.

The second part of focus is your product or service mix.  As we get a better idea of who our customers are, we can also get a better sense of what our customers want.  This can mean honing,  focusing and expanding our product / service mix.  There is often a ‘disconnect’ between what we offer and what our customers actually purchase.  One metric we use in planning sessions, is to determine the most common products or services purchased by our customer. 

Think of a restaurant menu.  If you were to evaluate your menu, you would see the most popular and the least popular menu items.  You then ask why an item might be popular, or unpopular.  Is it the price?  Is it the menu design?  If there is no obvious reason, then it is an item your customers just don’t want to order from your menu.  The product mix, for goods or services, often reflects the entrepreneur and not the customer.  We start out not knowing what the customer wants, but; after a year we should have a better idea and adjust our product mix to suit the customer. The problem for many entrepreneurs is they are still running the business for themselves and not for the customer!

The third focus issue is the promotional message.  Even when we get our customer and our product right, customers often buy for reasons other than those we considered.  In our valet parking example, the business owner should shift the marketing message to a status message from a pragmatic message.  In businesses where multiple parties make decisions, it is important to create messages for each decision maker rather than an overarching marketing message.  These multiple messages become clear once we see how real customers make decisions.

Selling software to businesses is a good example. This type of sale requires three distinct marketing messages. 

Message one is the user message.  This message focuses on what the software done, and how it helps the users of the software. This user based message is the most common message provided by software companies.  This message is for the product user.   

Message two is the business message.  This is the business case for using the software.  The message is on issues including increased productivity and cost savings.  This message influences the owners, managers and accountants in the customer organization.

Message three is the technical message.  This is the technical case for the software.  This is all of the geeky stuff that the technical people need.  Issues such as compatibility with other programs and systems, customer support and security are often included in this message.  This is the addressed to the Chief Information officer or systems professional whose job it is to install and integrate the software.

The first message is often accurate, but it takes time to develop the technical and business message until you have real users.  There are often hidden advantages we learn from customer usage that we can never learn during the start-up phase.  Updating the message is critical to ensure business growth.

Evaluate your client base...Analyse your product mix...Re-visit your message.  These three strategies are essential ingredients to business development in year two.  Focus takes time and discipline, but focus is an important building block on your road to developing a sustainable business.  

Next time, we move into the third year, the management year.

Year One: Start-up...A Great Beginning

If you started a businesses because you hate your boss and after six months you still hate your boss…seek professional guidance!

Risk: High

Satisfaction: High

Major Challenge: Ramping up sales

 

 

Starting a business…especially for the first time is, quite frankly terrifying.  People start businesses for a variety of reasons.  There are two groups of commonly cited reasons for taking the plunge.  One group centres on money, the other on frustration.

Many business start-ups come about as a result of unemployment or underemployment.  My father started his business during the depths of the recession in the eighties because the firm that employed him went out of business.  His former clients actually phoned him; they needed his engineering expertise. You could say that they started the business for him!

Immigrants often start their businesses for similar reasons.  They possess a skill set, but may not be employable.  The alternative is to start a business.  Amazingly few people start businesses, especially first time businesses with the goal of getting rich.  They are really hoping that the business will survive and that they can actually support themselves.

The second group are the ‘corporate refugees.’  I started my business when a client offered me a contract.  The truth is that I never really ‘fit in’ to the larger corporations for whom I worked.  I was lucky, I had some great bosses, but others tell me that the reason they quit is that their boss was so bad that they couldn’t stand working for him or her.

Everything seems new when you first start out.  You work hard to impress your clients, especially those early larger clients on whom your business really depends.  Many businesses do not make it past the first year.  They can’t ramp up quickly enough, they can’t make a profit or the business many not have been viable in the first place.  Many survive but are not sustainable.

The Year One Challenge: From Need to Demand

Demand = Need + A Visa Card

There is an enthusiasm that comes with the start-up.  Most people start with the expectation that the world will love their product just as much as they will.  Unfortunately, that is not the case.  Many people are unable to make their case to their potential customer.   I have heard many business ideas that sounded almost perfect.  There was a real need for their product or service.  Unfortunately, there is a big difference between need and demand.

As business planner I have some bad news for you…there is almost no way to discern between need and demand when starting a business.  I tell my students and clients that their first year in business is their final step in market research.  My dad knew that there was demand because his clients found him.  Others aren’t so lucky. 

One of my seminar participants started a business providing credit and collections services for small and medium sized businesses.  During his market research he called businesses, explained his concept and asked if it was the kind of service they might need.  Everyone he called was enthusiastic about his service.  He started the business and had no clients for six months.  Those he spoke with needed the business, but they didn’t demand it…they didn’t see the need to purchase. 

Your first year is a roller coaster.  It is tough, but exhilarating at the same time.  If you can fight through and achieve success by the end of the first year, it is one of the greatest accomplishments you can make.  Then, you are ready for year two…development!

 

Billy's Twenty-Second Law: Businesses follow a seven year cycle

Many of you have heard of the ‘seven year itch’.  Seven year cycles are common in many areas in life.  The idea of the ‘seven year itch’ is that after seven years relationships become predicable and…well boring.  This leads to dissatisfaction and sometimes divorce.

Some believe that the entire human body ‘replaces’ itself every seven years.  The cells within the human body die and are replaced in seven years, meaning that we are literally not the same people we were seven years ago.

Deuteronomy 15:1 says: “At the end of every seven years you must cancel debts.” There is also the notion of the “year of Jubilee” which is the end of seven, seven-year cycles.  There are seven days in a week, and seven is the highest, single digit prime number.  There are seven-year economic cycles, from boom through bust to boom again in seven years.

What of business cycles?  In my years of working with entrepreneurs I have noticed similar cycles.  These cycles are consistent no matter when in the economic cycle the business was founded.  These cycles are:

1.       Start-up

2.       Development

3.       Stability

4.       Transition

5.       Managerial

6.       Mastery

7.       Renewal

Over the next few weeks, I will examine each of these and look at the potential impacts that the founder / entrepreneur may face as they strive to grow and develop their businesses.   I must say at the outset, that I have no empirical evidence for this cycling, however; many of the experienced entrepreneurs with whom I have shared this agree.  Businesses are cyclic as our lives and even our society is cyclic. 

So as you read though the next three weeks (two per week plus today) see if the descriptions resonate with you and if you might be better able to anticipate the path your business may travel.

Billy’s Twenty-first Law: No customer is forever!

…all good things must come to an end.

Geoffrey Chaucer

I was in my local pub, talking about business to my friend Kurt.  We were discussing business in general when he made the point that in his experience as a tool & die maker; any customer lasting for over five years was a rarity.  As business owners, we may provide the best in products and services, and think we are meeting our customers’ need while failing to realize that needs change…and customer/supplier needs change with them.

I remember my first customer.  I did a proposal for a client and he wanted to know if I would be the trainer.  The Business Development Bank, for whom I worked, was moving to a contract model.  Instead of the bank employees providing training, we would find trainers, and then contract the work to outside parties.  The client had no interest in this arrangement, and wanted to know if I would personally do the training personally.  My business was born.

About three years later, the relationship ended.  The organization in question decided that they should take their training in-house.  I was devastated as this was my main consistent bread and butter client.   I had some tough months, and then landed a government contract that lasted several years. 

The point is that nothing lasts forever.   You didn’t necessarily do anything wrong, but if often feels as if you did.  Things change…and those changes affect our businesses.

There is another side to this coin, and that is ‘de-marketing’.  That is the idea of dropping a client.  Just as our client’s change, so to do our businesses.  One of the exercises I perform in the planning process is a customer analysis.  This works especially well in business-to-business situations.  The first step is to rank the customers by revenue, and determine how dependant the client is on their top customers.  We then take the number of clients to attain 80% of total revenue and rate each one.  (It is remarkable how often the Pareto Principal holds, where 20% of the client base accounts for 80% of total revenue.)

We then rate these important customers on the following basis:

·         Profitability

·         Collection Period

·         Risk (i.e. how much waste or how many returns for quality issues)

·         PITA factor (That’s Pain In The A**)

As a group, we ask the question, “Is our company better off with these customers?”  It is amazing how many customers are not worth keeping.  They are no longer profitable, or they pay so slowly that they are destroying our cash flow. 

One of my clients was transitioning from a customer fab shop to a small run manufacturer.  Smaller clients caused huge delays in the production process due to the set-up time between jobs.  A $1,000 job caused delays in $10,000 jobs.  We had to take the counterintuitive measure of ‘de-marketing’ several smaller clients.  When we looked at the business, we needed to realize that the environment and the enterprise had chanted.  Acting like a small fab shop was hurting the business and not adding value.

Things change.  You will go through patches where you are losing clients instead of gaining them.  Marketing is always important, no matter how busy you are.  To quote a former boss of mine (Dave Forsythe of the Business Development Bank of Canada)

“You don’t get smart overnight and you don’t get stupid overnight.”

Great perspective from a good boss. Thanks Dave!