Billy's Seventh Law: There are two ways to go broke. No profit is the slow painful way – no cash flow is the fast painful way!

Financial Statements are the blinds drawn by accountants to keep the mangers in the dark.

John Cleese:  The Balance Sheet Barrier

 

Of all the concepts I have taught and consulted on over the years, the most important is Cash Flow.  Now I know what many of you are thinking…I don’t like ‘financial stuff’…I don’t understand ‘financial stuff’ … I don’t do financial stuff.  As John Cleese said in the Video Arts production The Balance Sheet Barrier “We leave the financial arrangements to the financial people just as we leave the catering arrangements to the canteen people…We believe in trusting people.”

As an entrepreneur, you need to understand all aspects of your business.  As your business grows and develops, this concept becomes increasingly important. Cash flow is one such area.  Just because a business is profitable, doesn’t mean it has positive cash flow…and you need to have positive cash flow, or the ability to finance negative cash flow to keep your business running.

There are two places cash hides in a profitable business. (It doesn’t take a PhD in finance to see that a non-profitable business will eventually have a cash flow problem.)  The first is Accounts Receivable and the second is Inventory. 

The reason for the problem is that of simple timing.  With an Account Receivable, you make a sale, send the invoice and then later (sometimes much later) you get the cash. The Collection Period is he time taken between sending the invoice and receiving payment. You often incur cash expenses and other costs as a result of making the sale but before the subsequent collection. This creates a shortfall; the cash collections have not yet caught up to the cash outlays.  The period, between the cash expenditure running the business and the time taken to collect the cash creates a cash shortfall. You must either have sufficient cash to survive this temporary shortfall, or you must have sufficient borrowing capacity to finance the shortfall. 

I have a short video on the effects of collection period on your cash flow found by selecting the link below:

http://youtu.be/bYFSA8uQoVY

The second common place cash hides is in inventory.  Inventory is the cholesterol of business...it clogs up your cash flow arteries and kills your business.  In most cases, you don't sell your inventory before you pay for it. This again creates a time lag between payment for inventory and sale of inventory. 

When too much cash is absorbed in inventory and accounts receivable, there is not sufficient cash to pay the bills. Since you recognize sales on sending the invoice, and not on collection, and since you do not recognize purchases of inventory as and expense until you make the sale, the business may have a profit, and at the same time, no cash. 

Every business, especially a growing business, must manage cash and measure working capital regularly.  As your business grows, take time to plan.  Forecast your revenues and expenses and then, for goodness sake,  please, do a cash flow.  It might well be the difference between success and failure.  If you don’t know how, you can go to the Small Business BC website and take my cash flow workshop.  These are now offered as a ‘Webinar Option’ so it doesn’t matter where you are, the seminar comes to you.  Go to http://www.smallbusinessbc.ca/seminars and search for Cash Flow, part of the Business Viability Series.

A final thought, from Charles Dickens’s novel David Copperfield:

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six…result happiness.  Annual income twenty pounds, annual expenditure twenty pounds ought and six…result misery.

Billy's Sixth Law: The Paradox of Strengths and Weaknesses

Your Greatest Strength may be Your Greatest Weakness

Consider the following description of a potential new employee:

• She is a self-starter...She is a loose cannon.
• She is detail oriented...She is 'hung-up' on minutiae.
• She works independently...She keeps important information to herself.

The greatest strengths are the greatest weaknesses.  This dichotomy comes to light as entrepreneurs grow and develop their businesses.  Sometimes the personal characteristics that make an entrepreneur great while starting a business are the same characteristics that prevent them from operating the business.

Sometimes in a job interview we hear the question, "What are your strengths and weaknesses?"  Well they are often the same.  Those same characteristics which are strengths are also weaknesses.  I recently read an article in Bloomberg Business week about Jeff Bezos of Amazon.  He is demanding, smart and constantly driving his company forward.  He is also mercurial, condescending and harsh.  He was once quoted in a meeting rhetorically asking “Did you take your stupid pills this morning?" 

I am working with a company where the implications of this law are revealing difficulties today.  The owner and founder of the company is a great guy.  He believes in providing the best products, the best service, the best terms and the best prices.  He is always willing to help out, even helping competitors who get into a jam. 

These very strengths and strongly held beliefs have drawbacks.  He had a slow paying customer who was having trouble paying.  He gave my client the line "I just need to wait until I get paid." and "Don't worry, it's just a temporary problem." and later on "If you cut off supply the company won't survive and all these people will be out of work."   The result was my client wrote off a $400,000 account receivable. 

Customers often ask for rush jobs. Since service is a core company value, he incurred an additional overtime cost to deliver the rush.  You would think that people would be grateful, but many of his customers began to ignore agreed upon lead times and the rush job became the norm.

I would never want to change this entrepreneur.  He is truly one of the finest men I have ever met.  He must, as we all must, look at ourselves and ask, "Are my strengths weaknesses?"   A strong sense of self-awareness is an essential component of success in life and success in business. Sometimes we need help seeing the weakness in our strength.  The self-starter sometimes needs guidance...the hard worker sometimes needs help ... the extravert needs to realize that not everybody will like him and highly driven entrepreneur must be careful not to ride roughshod over his or her employees. 

I have read and heard many people pontificating on the characteristics of a successful entrepreneur.  I have also seen many different kinds of people, with different skill sets, different cultural backgrounds, genders and levels of education both succeed and fail.  In all that time I have only noticed two common themes.  Successful people tend to have a high level of self-awareness and successful people take responsibility.  Less successful people have little self-awareness and spend a disproportionate time making excuses. 

So the next time you are thinking about your strengths you bring to the world of entrepreneurship, remember that you are also bring a weakness which may very well be exactly the same.

 

 

 

 

Billy's Fifth Law: The Law of Comparative Pricing

The First Immutable Law of Price...Prices are comparative.

The only people who care about your costs are you, me and your mother...and if you are from a dysfunctional family, it's just you and me!

Price is one of the most important and at the same time least understood concepts in all of business.  On the one hand, you may know your costs cold...in fact it is crucial you know your costs, however, your customer neither knows nor cares about your costs.  The customer cares about the price they pay for your goods or services.

To truly understand price (besides taking my pricing seminar or hiring me to advise you on price strategy) begin with the single most important concept in pricing:

Price is always comparative, never absolute.

In order to form an opinion of your pricing, your customers are comparing your prices to something.  Sometimes it is a direct comparison with a competitor.  Sometimes it is with alternatives you offer the customer or with a previous price.  Sometimes it relates to some level of affordability or even a false notion of what the price should be, but in any event, too expensive or too inexpensive is  compared to something.

In a restaurant, people tend to order from the central price points of the menu.  It is amazing how often the modal price point is very near the median price point.  The comparison moves the customer towards a central price...neither too expensive nor too cheap.  The wine list is another matter all together.  The modal wine price point is the second cheapest bottle on the wine list. 

This has implications to menu design and price mix.  You can move your customers knowing where they are most likely too look.  Another tidbit, this one from William Poundstone's book Priceless. Price plays a greater role in decision making when the prices are right justified on the menu.  (The price is more distinguishable and easier to compare to other prices.)

The pricing principle of price lining is based on customers choice.  The notion of three price points representing good, better or best, tends to move the customer towards the centre, unless you move the middle price point. Moving the middle price point can affect buying behaviour, as good can look like better or better can look like best depending on where you have centred the middle price point.  

Even a sale uses the notion of price comparison.  This price is 25% off of the regular price. 

I once taught a youth entrepreneurship here in British Columbia.  We did a special version of the program at the Emily Carr University of Art + Design.  As a part of the program, we applied classic pricing theory to art marketing.  One of the participants held a gallery show about six months after the program and invited me to the opening.  As the artists entered, she enquired how they liked the art...I got, "So Bill, what do you think of my pricing?"  It was perfect. She offered a good price range, multiple items in the middle and one item at a very high price in order to frame her other paintings.  In short, she applied classic price theory to her gallery showing. 

So ask yourself, can you provide your customers with choice.  In marketing, this is affected through your product mix... in sales it can be done using your sales presentation. (A mortgage broker may not affect interest rates, but can show the customers the rate, a price for money, )  

Remember, if you do not offer your customers with choice, they will seek to find a price frame through comparative price.  Create price within, and you can keep the customer from 'shopping around' as they feel they have shopped around within your 'store'.  This provides your customer a sense of control meeting one of the most crucial needs in customer psychology.

 

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Billy's Fourth Law: Success is the intersection of the Rational and the Passionate

Love what you do and love those for whom you do it

You've got to be able to see the beauty in a hamburger bun!

Ray Krok McDonalds

 

What I have just written may not seem consistent with the previous law.  The truth is that there is a time for love, and a time for objectivity.  (Wasn’t that in an old Byrds song?)  The key to succeeding in business is truly believing in what you do – and truly believing that your customers get their money’s worth.  Without this, it is hard to look yourself in the mirror in the morning. 

Passion is powerful.  Passion often drives behaviour.  I read Steve Jobs biography by Walter Issacson.  The book is filled with example of  behaviour, often inappropriate, exhibited by Jobs in order to get the exact product he wanted.  Passion is not rational, but drives us to greater things.  Sports fans are...well fanatics. Their passion for their home teams can lead to riots in the streets, as they did in Vancouver in 2010  after the home town Canucks lost game seven of the Stanley Cup final.  Passion is powerful, and successful entrepreneurs are passionate about what they  do and harness that passion.

What you do can be great or humble – but you need to see the value in it before you can sell that value to the customer.  Do you clean houses?  Then know that cleaning has huge value to the customer.  If you make computer games, then make sure that they are the most fun and challenging on the market.  If you are in consulting, you must truly believe that your customer gets their money’s worth from your counsel and advice. The first person who must be sold is you!

JJ Bean is a coffee retailer and roaster based in the Metro Vancouver Area.  Unlike many of the West Coast coffee shops, JJ Bean is a little different.  John Neate, the founder of JJ Bean is a third generation 'coffee-man'.   John's Grandfather founded Neate’s Coffee. John's Dad (John Neate Senior) helped build the company in to one of the two major restaurant coffee suppliers in the Vancouver Area.  I knew John back in my university days you will never meet a more passionate guy.  John is not only passionate about coffee, he is knowledgeable about coffee.    He grew up with coffee, understands beans, roasting processing and all of the other things that make coffee great.  He learned from his Dad, who I am convinced knew everything about both coffee and the restaurant industry he served.  This is a perfect example of the passionate meeting the rational.  The result...a highly successful business.

Sometimes you will fail.  Somebody won’t like your store, your product, your service, or your advice.  When I started doing seminars, I poured over the evaluations.  I looked for the negative things.  I didn’t care about those who loved the seminar, but rather I got upset about those who did not.  I wanted everybody to like my “product”. 

The truth is that not everybody will like your products.  Successful entrepreneurs listen and learn...they anticipate customer needs before the customer knows they know they have a need and rationally and profitably meet that need.   

This week’s quote comes from Business Week magazine:

I love children.  They are my customers.  I have to be informed about what they want to nibble, what they think and what language they speak.

Hans Riegel

 

Owner of Gummi bear maker Haribo, Who died on October 15, 2010

Billy's Third Law: The Dangers of Falling in Love

Don’t fall in love with the business too soon.

 

It seemed like such a good idea at the time!

My explaining my last stock pick to my wife

When you are getting starting in business, you need objectivity.  You can fall in love later; once you have an idea that you are sure has a chance make a profit.  But if you fall in love too early, you lose all sense of objectivity and you cannot make a rational decision. 

People in love are irrational.  Consider family Christmas letters. My friends’ children all have all-star athletes, on the honour roll, work with the elderly in their spare time and are currently being considered for a Nobel Prize.  (Never let your own children read these letters – bad for their self-esteem.)  You never hear a mother say “My kid is the ugly one three in from the left.”  You see the point, love is neither objective nor rational.  Now in the world of family – this is (to quote Martha Stewart) a good thing. In the world of the entrepreneur – it is a bad thing. 

Do not misunderstand me.  You need real passion to run your business.  You just need to be rational in deciding which business to start.  It is a little like courting.  You take time to get to know each other.  See if you are compatible, and then fall in love and then get married.  I mean, it’s not as if you appear on a television show, compete for a multimillionaire and then get married to a complete stranger at the end of the show. (Well not again anyway!)

A woman asked me to help her and her husband with the financial plan for a franchise.  I have nothing against franchises, but I had never heard of this one so the brand recognition advantage was clearly not there.   On reviewing the sales estimates, which seemed high for a first year business, I asked her where these numbers came from. She replied, “Why from the franchisor’s sales representative.  He also told me that this was such a good location that if we didn’t buy it that he might just buy it himself”.  When I dared imply that she might trust a franchise salesman’s forecast she was insulted.   “How could I be so negative – how could I be so cynical?  What kind of entrepreneur was I?”  She had a real rant  In her heart, this was a ‘done deal’ and I was just raining on her parade.

She and her husband had fallen in love with this franchise.  She had lost all sense of perspective and could see the two of them working together in their small business and living happily ever after.  Eventually she and her husband purchased the franchise, financed by a loan co-signed by her parents.  She went out of business three months later.  I may be a smart-ass, but I am not an idiot. 

At the pre-start phase, I think that everybody needs to be an optimistic cynic!  You need to know where you are going, look realistically at how you are going to get there and what obstacles will get in your way!  Remember, you don’t cut off a toe to make a shoe fit; neither should you force a business concept which cannot work just because you hope it will work.  Remember the words of my friend and business planner Elizabeth Lake:

Hope is not a strategy.

Next week, we shall see the importance of love and passion in business.

 

Billy's Second Law: The Break-even

 

Starting a business without doing a break-even is like snowboarding out of bounds in the fog.  You might have the ride of your life, but there is a good chance you’ll wind up lost, injured or dead!

Everybody has a million dollar idea...that won't work!

Anon

Maybe it is the last vestiges of my education as a “math geek” or maybe it is just my general scepticism, but you really need to know what you need to do before you get started.  The best way to start, in my opinion, is to do your break-even.  Now to many this will sound like just some numbers oriented accounting crap that gets in the way of the creative soul of the entrepreneur.   Tough luck. 

I know what you are thinking, because I hear the same story over and over.  I had a friend (or relative, or acquaintance’s mothers sister-in-law’s next door neighbour) who didn’t do any of this accounting crap, and now they are rich.  Well, a girl I went to high school with won the $1,000,000 national lottery but I still don’t recommend lottery tickets as a part of a balanced investment portfolio.  Doing the break-even doesn’t mean your business will succeed or not succeed, but it merely tells you what it will take to succeed. Every business can succeed – but not every business will succeed. 

The break-even tells you how much revenue you need to generate to cover your fixed and your variable costs.  Your fixed costs are the costs to run the business – you know the overheads.  Overheads include telephone, wages, advertising, automobile office supplies and the like.  These are costs that you incur whether you make the sale or not.  Your variable costs, or your cost of goods, are the costs to make the product or to provide the service. 

I first learned about break even from my mother.  My mother was a nurse. She equated any purchase around the house to the number of shifts she had to work at the hospital.  If we asked for anything, Mom would ask, rhetorically of course, “Do you know how many shifts at the hospital I have to work to buy that?”  As soon as I learned to divide by $50 (a Registered Nurse’s take home pay at the time.) I just answered the question!  “Do you know how many shifts at the hospital I have to work to buy you kids’ new skis?” “That all depends Mom – 3 shifts for the Élan’s, five for the K2’s with Solomon bindings.”  “Smart ass!” she replied.   (My mother is a bit of a smart ass as well.   After my loving tribute to her at her sixtieth birthday party responded by saying that birth control should be made retroactive.  Way to go Mom!)

It is crucial that you know what level of sales you need before you start the business. Once you know this level of sales, ask yourself these three questions:

• Will my market support this level of sales? (Market Sufficiency)
• Can I physically produce or provide this level of sales? (Practical Capacity)
• Can I sell to at least this level of sales? (Sales Strategy)

If the answer to all of these is yes...you may just be on to something.  If the answer is no, then you may have to develop a new idea, change your prices, your costs or your market place. 

By the way, the break-even formulae are:

Break-even in Units =	Fixed Costs
	(Price – Cost)
Break-even in Revenue=	Fixed Costs
	Gross Profit %

By the way, the same analysis works for evaluating projects and new expenditures for an existing company.  Remember, it’s hard to succeed in business if you don’t know the target.  The break-even may not be the final destination, but it is certainly one of the steps along the way.

Next week, working along the same theme, I will post one of the most important business lessons for budding entrepreneurs, the dangers of falling in love too soon.

 

 

Billy's First Law: The Myth of Self-Employment

The Myth of Self-Employment

You’ve got to serve somebody.

Bob Dylan

There is no such thing as self-employment.  You may have to write your own paycheck and you might not make minimum wage, but everybody works for the customer!  In the years I have worked in the field of entrepreneurship, I have noticed that the reasons that people want to start a business are usually self-centered.  They want to make a lot of money they, want to have independence; they don’t want to take any crap from an anally retentive boss.  What ever it is, most people think of a business start-up from their own point of view.

Nobody out there cares about your former boss – your desire for self actualization or your need to have more quality time with your two cats.  Customers care about themselves.  Last time you made a purchase, did you think about how you are helping the business owner fulfil their dreams?  As I type this on Microsoft Word (which I actually purchased by the way) did I stop for a minute to think about how Bill Gates made a few more dollars?  Of course not.  I wanted good software to do word processing, presentations and spreadsheets.  Until that is actually available, I will use Microsoft Office. 

To paraphrase Bill Clinton “It’s the customer stupid!” What do customers want – or what will customers want. They either already know they want what you have to offer or you have anticipated what they will want in the future.

When you think in terms of starting a business, think in terms of they ways you can help customers.  It might be what they buy-- how they buy -- or where they buy. Everything depends on your ability to make enough customers happy to allow your business to succeed. 

I was doing an entrepreneurship workshop and doing my usual rant about the customer when one of the participants burst out in frustration, “You make it sound like we aren’t even starting this business for ourselves.”   “That’s right.” I said, “You start it for your customers!”

 

This week’s quote is from Theodore Levitt of the Harvard School of Business.

The purpose of a business is to create and keep a customer.