Billy's Forty-Ninth Law: Use your professionals wisely!

“The minute you read something that you can't understand, you can almost be sure that it was drawn up by a lawyer.”

Will Rogers

Accountants are the pathologists of business.  They can tell what wrong six months after the business died!

Bill Erichson

 

Over the years, I have worked with hundreds of business people and I have found an important truth… business is too complex to run without professional advice.  A well run business has three key advisors:  a lawyer, an accountant and a business advisor.  The trick is how to use the advisors in order to help you run a sustainable, successful business.

The Business Advisor

Businesses need good business advice.  This is what I do for my clients.  In general, business advisors help the business owner see the big picture, mentor the owner and keep an eye out for the pitfalls that often lead a business down a dangerous path.  Some business advisors are technical specialists and focus on particular industries.  Others are business specialists, usually concentrating in on are such as marketing or finance.  A good business advisor helps you make decisions that make good business sense!  This is a critical factor when making decisions.  The advisor helps you look at things from different sides, and often looks at unforeseen risks and unintended consequences.   

The Accountant

Businesses need good accountants. Accountants, recent advertising notwithstanding address financial issues, especially around the preparation of financial statements and tax returns and around providing solid financial advice.  Many business owners simply use their accountants as tax strategists, and in truth, many accountants look at business through a ‘tax lens’.  Unfortunately, many accountants are not as expert as explaining things as they are doing things.  As one client once told me, “Five minutes into my meeting with my accountant and all I see are dancing cows.”  Accountants are essential, not only for taxes, but for helping entrepreneurs make good financial and tax decisions.

The Lawyer

Lawyer jokes notwithstanding, it is imperative to get good legal advice.  Contracts are tricky, whether we are talking about a lease, loan agreement or sales contract; all of these are contracts and are written by lawyers for judges!  They are often incomprehensible to normal people, but the language of contracts is important.  This way, the intent of the agreement between two parties is reflected in the legal agreement just in case anything goes wrong and the contract goes to court or to arbitration.  Lawyers look at your business through the legal lens just as accountants often look at the business through the tax lens.  A good lawyer is an essential part of any business.

So, what is the problem?  The problem is how many business owners use their advisors.  I have a rule.  See your business advisor first…your accountant second and your lawyer third.  The reasoning is simple.  If a decision does not make good business-sense then don’t do it.  (I am always amazed that people make decisions to spend money because they can “write it off”.  Remember, you have to write it on before you can write it off!) 

If a decision makes good business sense, then meet with your accountant so you can structure the decision to ensure it makes good financial and tax advice.  This can include buy vs. lease decisions, to structuring contracts for tax purposes.  If a decision does not make financial advice, then again, don’t proceed!

Finally, if the decision meets the first two criteria, then see your lawyer.  Ensure that the decision makes good legal advice and that you structure it correctly.  Lawyers often see the differences between an agreement, as you understand it, and the contract as written.  This is far cheaper than trying to enforce something not found in the contract, but something you are sure should have been there.

You need all three pieces of advice.  For example, if you decide to incorporate, it should make good business sense, tax sense and legal sense, and the legal agreement and shareholders agreement must reflect the intent of those involved.  A shareholders agreement is developed to protect both the shareholders and the corporation from the future disputes that will inevitably arrive.  

So use those advisors.  In my experience, they are on your side and are advocates and allies in your enterprise.  Find good advisors and then trust the advice you receive.  It will save you from harm, and help you build the kind of foundation to build a successful and sustainable enterprise.

Billy's Forty-fifth Law: The greatest founders value Enterprise over Entrepreneur

Joseph collected all the food produced in those seven years of abundance in Egypt and stored it in the cities. In each city he put the food grown in the fields surrounding it.          

The seven years of abundance in Egypt came to an end, and the seven years of famine began, just as Joseph had said. There was famine in all the other lands, but in the whole land of Egypt there was food.

Genesis 41

This law, comes back to repeatedly smack me in the head. In my years of being in the ‘business of business’ I have seen many businesses come and go.  Some were not viable to begin with.  Some ran their ‘natural course’ and faded into the sunset.  Some were perfectly good businesses which failed due the greed of the owners.

Many business owners, especially of mature businesses, treat their businesses as ‘cash cows’ …using the business as a personal ATM.  When times are good, they take money out of the business without any problem what so ever.  The problem is that once you start taking money out of a business at a certain rate, you get used to it and it is difficult to go back. 

I have some tough love for all of you entrepreneurs so pay attention, it just might save your business.

Business is cyclic:  This is probably the single most important concept in business and in economics.  Things go up, and they go down.  Sometimes they go up and down due to our own efforts.  Sometimes they go up and down and we are not in control.  We are in a business-to-business type of business.  When a client decides to retire, as several seemed to do in the same year, our business was off substantially.  We had no indication this would happen, but none the less, it did.  Although you could argue that we should have been looking for new customers (and in hindsight we should have) the reality was that we were at capacity and had no room for additional clientele. 

Some businesses are resource / commodity based.  It amazes me that these businesses do not know that commodity prices, such as oil, copper, pork etc., go up and down.  The Oil & Gas business is notorious for making huge money, and paying huge salaries when times are good; then cutting like mad when prices drop.  To be fair, when the industry is booming, there is upward pressure on wages, creating wage inflation in the industry.  Recognise the business cycle and plan accordingly.

Sometimes, we are masters of our own demise.  I had a client who had not re-calculated some of the costs for his clients.  His business was profitable, for a time, but when things turned down, and we did some investigation, we determined that he was actually subsidising some of his clients. Turning this around has taken more time than we had hoped but the legacy clientele is still less profitable than the new clients he is bringing into the business.  When times were good, he ‘took his eyes off of the ball.’  This created problems when we later discovered that his largest client was carrying the business and when that customer reduced his orders, the company began to lose money.

I recommend that entrepreneurs do three things:

·       Take a modest wage out of your business.  Take the opportunity to build your retained earnings and your cash reserves to allow you to ride through the inevitable tough times.

·       When you have a good year, pay yourself a bonus.  This is your present to yourself for a job well done.  You should never assume that this is part of your regular earnings, nor should you adjust your lifestyle.  Live off your wage and use bonuses to treat yourself, and build your personal wealth.

·       As an entrepreneur, you are self-reliant…especially when it comes to retirement. You must build wealth either inside or outside of the enterprise.  Do not assume that you can sell your business as a business.  You may need to use the wealth built in the business (at a lower tax rate if you are incorporated) and draw it down later.

Always remember that businesses, industries and economies are cyclic.  The companies with strong balance sheets, created with solid retained earnings, have the foundation that enable them to withstand the slow times.

Billy’s Thirty-Forth Law: Values Matter!

The superior man understands what is right; the inferior man understands what will sell.

Confucius

When we engage companies in strategic planning exercises, we address three areas of corporate philosophy.  They are mission, vision and values.  I define mission as what you do…vision as where you are going…and values the underlying principals defining your path.  This week, I want to talk about values.

All organizations are ‘values driven’.  Strong organizations, including enterprises, have clear and agreed upon values.  Different companies have different values.  Some are conservative, others innovative.  Some companies are smart and others arrogant. Understanding the underlying yet unstated values of a company is often the most difficult part of the planning process.  Companies have difficulty acting against their core values…even when they ought to.

Consider the following scenario – which illustrates different business values.

A business has just received a report from a consultant advising them that the company could raise their prices 1% without any effect on their unit sales volume.  That one- percent would drop right to their bottom line!  Three executives of the company were discussing what strategy they should employ in order to move forward. 

The first executive said, “We can’t raise our prices – that just wouldn’t be fair to our customers.  We are only where we are because of our loyal customer base.

The second executive said, “I think that we should raise the price and pass that revenue directly to our employees.  One percent of sales would represent a 10% wage increase!   Our employees made us what we are today and they deserve this.

The third executive said, “I think that we should increase the price and then declare a dividend to the shareholders.  They took the risk to invest in the company and they are the ones who should finally benefit from their faith in this company!

Each executive is displaying different values.  They are neither good, nor bad they are just different.  That is the thing about values; they must be right for you and for your business. They tell what you should do, and what you should not do.

Wal-Mart has values.  They believe that low costs = low prices.  This value drives their behavior with their suppliers and their customers. IBM values education and they recruit and develop their highly educated workforce.  This drives their recruiting policies.  Some companies foster a ‘work hard play hard’ culture.  You may or may not agree with the morality of the values, but that's the difference between values and value judgement.

Values are hard to quantify.  They define what we do and importantly what we don’t do.  Contrary to popular belief, profit is rarely the sole business value. Many companies value revenue and market share over profit.  Profit is actually a rather weak value.  Even publicly traded firms only value profit for its influence on the ultimate share price…but that is another story.

 

Understanding your own values is the foundation on which you build your business.  Communicating and living those values drives cohesiveness in your internal and external messages.  Missions change…visions evolve…but true values remain an important part of your enterprise story.

Billy's 33rd Law: Transition One - From Hunter to Farmer

All business success rests on something labeled a sale, which at least momentarily weds company and customer.

 Tom Peters 

For most business start-ups, finding initial customers is often the initial challenge.  Many businesses are successful due to the outstanding sales skills of its founder.  In the world of sales, these are the hunters.  I admire hunters.  They prospect with wild abandon...make quick pitches designed to get them a longer hearing and don't worry about rejection.  Hunters are great at executing customer acquisition strategies.

Great sales skills usually drive of business growth.  The great hunters thrive on the challenges of bringing new customers on board.  The weakness of the hunter is they are often a bit ADHD...they get bored once they have closed that sale.  That is why we have  farmers. Farmers are great at executing customer retention strategies.

Farmers (I have also heard the term shepherds) thrive on  'customer care.'  They keep the customers engaged and often look for opportunities to meet customers’ needs in an entirely different way.  They are essential for sustaining a business.

When a company develops a growth strategy, it comes from one of two sources.  You can either find new products/services, or you can find new customers.  You can of course use a combination of the two.  This is obvious - but sometimes the simple and the obvious are amazing starting points.

 

	New Customers	Existing Customers
New Products	Product Growth	Hybrid Growth
Existing Products	Stable	Marketing Growth

To add products, you must determine if you must add additional capability.  Capability represents the things you can currently make or do.  For example, an accountant may want to offer business planning services to his customers.  If this individual has the ability to do the plans, then there is no need to add capabilities.  If the accountant lacks skills in marketing, or market research, he must develop or otherwise find these skills to add business planning to the product offering mix.

Your choice is important, as you will dedicate both time and resources to the direction you choose.  Product growth is great for companies with a breadth of competencies.  Large consulting firms can offer many different services to their existing customer base, and are never short of new ways to generate income!  Companies whose 'marketing customer' is very 'farmer oriented' are often great at finding new customer needs and then developing strategies to meet those needs.

Some companies are great at finding new customers for their existing product mix.  They thrive on the Hunter style of marketing.  They are adept at re-creating their success formulae in other markets.  Franchises and chains are good examples.  Many offer a limited product mix, but can duplicate this in many different markets.  (I am amazed how many sandwiches Subway can generate from such a small area.)  These companies grow by saturating markets and finding new customers for their products or services.

No company can use a single strategy forever.  Eventually, you must find new customers and expand or revise your product offerings.  Making such changes requires many of the same needs identification skills that made your company great in the beginning.

I have seen too many companies grow their market by going from one opportunity to the other with no strategy what so ever.  Opportunism is great (and a hallmark of many great entrepreneurs) however strategic growth requires evaluating the direction that best suits your corporate strengths, culture and abilities.  It is important to understand the role of hunters (customer acquisition) and farmers (customer retention) as a part of your overall growth strategy. 

Billy's Thirty-second Law: Somebody always gets screwed

“Nothing is fair in this world. You might as well get that straight right now”

― Sue Monk Kidd, The Secret Life of Bees

I have long held a theory in business that somebody usually gets screwed.  What is ironic is that this is often consistent with an organization’s values.  Since we spend a great deal of time in planning sessions on Mission, Vision and Values; I thought it interesting that values are rarely fair.  Values, when they are truly lived out by the company, are generally ‘biased’ in a particular direction of another.  Typically, these directions are the customer, employees and shareholders or owners.  These are often values that work against one another – as customer needs, employee needs and shareholder needs pull the company in different directions.



 

Fairness, and often unfairness, often results from the organization’s values with respect to each of these stakeholder groups.  In British Columbia, where I live, liquor is sold through the Liquor Control Board.  This is a government organization that holds a monopoly on liquor distribution and a near monopoly on the retail distribution aspect of the business.  The LDB does very well.  Not only is there a 10% liquor tax, but the LDB in fiscal 2013, LDB made of 30% profit on sales.  Not bad for retail these days.  The employees at the LDB have a wage of $21/hour plus government benefits.  Guess who is getting screwed?  Well, when you consider alcohol prices in the US and the UK then you guessed it…the customer is paying way too much.  Somebody gets screwed!

Now consider Wal-Mart.  Let’s accept the fact that it is a competitive world, and set aside the impact that Wal-Mart has on the retail landscape, and just think for a moment about Employees, Customers and Shareholders.  Wal-Mart is, in revenue, the largest company in the world.  They have low prices so the customer is well taken care of.  The shareholder’s do ‘OK’ but the stock has underperformed, when compared to the Dow Jones Industrial Average, and the dividend yield is only 2.5%.  But it is the employees, and the suppliers, who really get screwed.  Wal-Mart is not a great paying organization.  Its average full time employee in the US earns $12.83/ hour, according to the Huffington Post (October 23 2013).  Part time workers earn less.

It is interesting the Costco, a direct competitor, pays well $21/ hour, prices well, but is criticized for its lower profits.  The return on sales… merely 1.9%, Wal-Mart's most recent year was 5.64%,  and the dividend yield is only 1.123%.  This time, the shareholder / owner gets screwed. 

Values:  Values define what a business will and will not do.  Values provide boundaries and direction for the planning process.   Values are not good or bad, until some kind of judgment is placed on them.  Consider the following scenario – which illustrates different business values.

A business has just received a report from a consultant advising them that the company could raise their prices 1% without any effect on their unit sales volume.  That one- percent would drop right to their bottom line!  Three executives of the company were discussing what strategy they should employ in order to move forward. 

The first executive said, “We can’t raise our prices – that just wouldn’t be fair to our customers.  We are only where we are because of our loyal customer base.

The second executive said, “I think that we should raise the price and pass that revenue directly to our employees.  One percent of sales would represent a 10% wage increase!   Our employees made us what we are today and they deserve this.

The third executive said, “I think that we should increase the price and then declare a dividend to the shareholders.  They took the risk to invest in the company and they are the ones who should finally benefit from their faith in this company!

Nobody is wrong…they merely have a different take on company values.

Billy’s Thirtieth law: The Three Business Skills Every Entrepreneur Needs - Being an Analyst

I never guess. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.

·         Sir Arthur Conan Doyle’s Sherlock Holmes, A Study in Scarlet

When we facilitate planning sessions with our clients, we begin our session with the diagnostic section. Diagnostics form the second of the three important skills all entrepreneurs must acquire in order to ensure the sustainability of the business. All entrepreneurs managing in a changing environment must master the art of business analysis.

Analyzing a business is not simply using a series of metrics.  As you know, I believe that Happiness is a warm spreadsheet, but by the same token, the spreadsheet and information found are the tools…the entrepreneur is the craftsperson. Here are some key ways to use both analytics and business judgment to help you grow and develop your business.

Step One:  Determine important measures

Many entrepreneurs look at financial metrics.  There are other important metrics in other parts of the business.  Marketing, Human Resources and operations all have measures that help keeping an eye on the health of your business.  Establish a series of monthly and even weekly measures that allow you to take fast action, and annual and quarterly metrics that give you a sense of the ‘long term’ health of the business.

Step Two:  Look for changes

Spotting trends and changes is an essential part of analyzing the business. For example, a drop in sales may represent a downturn, or simply a seasonal shift.  Comparisons to the previous year help reduce these seasonal factors.  Changes can come due to three factors.  Internal factors are changes to the metrics caused by internal actions of the company.  External factors are changes to the metrics caused by outside forces.  Anomalies are random fluctuations with no identifiable cause.  A single change does not necessarily indicate a trend, but may have no cause. 

Step Three:  Take Action

Once you have examined and sorted the changes, create strategies, or execute tactics to overcome these changes.  Alternatively, take action adapting to the change.  For example, if sales are down, execute a marketing strategy to increase sales, or reduce staffing levels.  In the case of an anomaly, keep an eye on the metric involved and see if there are any underlying factors that are driving change to the metric and to your business.

Underlying Conditions / Assumptions

When performing your analysis over a longer period of time.  For example US consumption of soft drinks is off by 20% over the past ten years.  This trend indicates a change in the ‘underlying conditions’ under which beverage companies are operating.  Demographics changes also change the underlying assumptions in healthcare, financial services and travel & leisure. 

Spotting these changes longer term changes is challenging.  Missing such changes often trips up large businesses. Ken Olsen, CEO if Digital Equipment Corporation (DEC) was quoted as saying, "There is no reason for any individual to have a computer in his home."  DEC went on to merge with COMPAQ and then…disappear.

Good entrepreneurs often started their businesses by sensing changes.  Great entrepreneurs, with the help of great analytics, sense these changes and adapt before the changes overwhelm them.

Billy’s Thirtieth law: The Three Business Skills Every Entrepreneur Needs. Skill One, develop great Tactical Skills

As I previously wrote in The Eighteenth Law, the entrepreneur must develop his or her skills ahead of the development of the enterprise. We can look at specific business aspect skills; learning more about finance, management, marketing and the operations of the business. Development also includes developing skill sets in three important components of business planning. These skills are Analytical, Strategic and Tactical.

Analytical Skills include all aspects of measuring, and interpreting those measures to make more effective business decisions.

Tactical Skills include all aspects of achieving goals set by the company.  These include everything from performing tasks to the systems and workflows that efficiently get things done. 

Strategic Skills are the planning, goal setting and visioning aspects of your company.  Strategies set direction while tactics get you to the destination.   

To use a simple example, when you take a vacation, strategy is deciding where to go, tactics is deciding how to get there and analysis tells you how long it will take. These three skills are taken from business theory; but don't let that scare you. You are already using each skill on a regular basis. The challenge is developing skills and building on the skills in which you may be weak. Over the next three blogs, I will shed light on each skill, why they are important to your firm and how these skills are essential parts of developing your enterprise.

Tactics:  Most Entrepreneurs' Strongest Skill

Strategy requires thought, tactics require observation.

·         Max Euwe, Chess Grandmaster & Mathematician

Most of the entrepreneurs I have met have little idea of why they are successful.  They attribute success to creativity, insight, hard work and other factors popularized by the press.  When I look at successful business owners they do not invent a better mousetrap, but rather build and sell mousetraps better than their competitors.  Successful entrepreneurs deliver well and deliver early.  This simple fact is not exciting, but it is the truth. 

In a previous blog, I suggested that success was more than simply hard work.  Successful entrepreneurs combine hard work with great tactics, especially when the goals (strategies) in the early stages of business development are quite straight forward. 

Tactical thinking is essential to success…especially early success.  An entrepreneur with whom I worked was in the solar control business.  This industry uses window tinting and roller blinds to reduce heat and glare in both buildings and automobiles.  The owner got his start installing tint automobiles and recreational vehicles.  He was extremely good at it, got a good reputation in the industry and built a profitable business. 

He didn’t invent window tinting.  He didn’t apply it to an entirely new industry.  He just found a better way of doing thing others were not doing well, and then building on it. There are tactics in production…finding better ways to produce your products or deliver your services.   There are marketing tactics, ways to influence your customers in ways that help you achieve your sales and profit goals. 

The challenge, as we shall discover going forward, is that strong tactics alone only take you so far.  This comes back to the hard working entrepreneur who works hard, but never really achieves much of anything.  It is fine to have your business exist to provide you with a job, if that is what you want.  There is nothing wrong with that…in fact that describes my own situation.  Many people want more…and tactics alone will not allow them to accomplish that goal. 

Good tacticians always look for a better way.  They know that there are no best practices, just best practices thus far.  In manufacturing they look at systems such as LEAN, TQM and Theory of Constraints; apply behavioral event interviewing in their recruiting efforts and apply online efforts to marketing.  Smart tacticians take from the best systems, adapt them to their unique situation and improve their ability to deliver.  

The weakness with tacticians hurt businesses in the long run.  These include a lack of the ability to delegate, assuming their tactic is the best tactic and failing to realign tactics when the company needs to change strategy.  Firms can get stuck in a ‘tactical trap’ where the means becomes more important that the ends. 

Most entrepreneurs are tactical and that is great when both the enterprise and the economics are stable.  Alas, we live in turbulent times; times that require more than great tactics, but add analytics and strategic thinking to the mix to develop a growing and sustainable enterprise. 

Billy's Twenty-Fourth Law: It really is all about the numbers!

Happiness is a warm spreadsheet!

Many entrepreneurs hold great faith in their 'gut feeling' or intuition. A well-honed gut feeling can prove to be an asset when starting your business but as your business grows you must become more systematic and analytical . Many entrepreneurs continue to use the 'seat of the pants' approach long after they ought to. Sometimes this is due to stubbornness, and other times due to a general distrust of figures.  Unfortunately, for you 'mathaphobes', analytics are important especially in a growing business in a changing environment.

When you start your business, you can keep track of what is going on in your head. You know exactly how much money is in the bank, how much you are owed by your customers and the birthdays of every employee. As the business grows, it amazes me how wrong many entrepreneurs are about their businesses. These false assumptions lead to poor decisions which, when executed, make the business worse and not better.

I had a client whose sales were declining. I asked her why she thought this was the case and she was certain that it was the lost sales were due to lost customers. She wanted to embark on a price oriented customer retention strategy. I wanted to be sure that customer retention the real problem. I performed a three-year analysis by top ranked customers.

It turns out that she was not losing many customers at all. In the three-year period, she did not lose a single of her top customers. (These customers are in the group representing the top 80% of revenue for the company.) The problem was not customer retention. The real problem was that her top customers were ordering less than they had in previous years. She then called these top customers and found out that they too had experienced a slowdown, reducing the need for my client's product. A price cut as a customer retention strategy would simply have reduced her revenue and her margins. She needed to add to her customer base and find more top clients.

Business owners must analyse the past, to determine how their business is doing, and analyse the future to make better business decisions.  I had a client add a new product to his company only to find out later that the new product increased revenue, but reduced profit.  I had another who added an entire division without doing a forecast or a break-even. 

Analytics are not solely the domain of finance.  Every business should track important metrics in Finance, Marketing, Operations and Human Resources.  Some are monthly metrics, others are quarterly and others make more sense over a year.  These metrics, also known as a ‘dashboard’ or even a ‘balanced score card’ form the basis for goal setting and progress measurement. 

One business adage, often attributed to both Peter Drucker and to Lord Kelvin is, “What gets measured gets done.”  I believe that the right metrics help.  You do not run a business with metrics, however; you can use the metrics to run a better business.

The question you may ask is, “Is there a place for intuition in decision making.”    I believe that there is.  Many people have insights they cannot explain, but are often correct.  Others say that intuition is the sub-conscious processing of information. 

Therefore, my rule is that my head must say yes…but my gut can say no.  Many ideas and decisions sound good in theory, only to go south in practice.  If it does not feel right, I do not do it. This is especially true with respect to people.  I would not hire anybody about whom I did not have a ‘good feeling’.  That said I would not hire on feeling without checking out if the candidate had the ability to perform the tasks required for the job.    

So find some key metrics that reflect those things important to you and to the success of your business. Ensure you are measuring the right things for your business and your situation.  Measure and share them, and create responsibilities around them.