Wednesday, April 28, 2010
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Friday, April 23, 2010
There are so many books, blogs, videos, and CD’s out there, trying to tell you the miracle cure for success. There is a plethora of #’d lists to solve all of your problems.
10 Steps to Business Success
19 Little Things You Can Do To Turn Your Business Around
The 432 Facts About Small Business Finance
…..and so on
To be fair, a lot of these have some good tips, most of them based on common sense. I read them all the time, and I’m sure I’ll write a few of my own someday. If you already have a strong foundation, these can be very helpful to get you to the next level. But in the beginning, before you’ve reached a level of success, you have to go back to basics. In the past 20 years, I’ve noticed 1 common trait to all successful businesses, big or small. It’s also the one common factor missing in most of the businesses that don’t make it. It doesn’t involve social media, R&D, or hiring the right people. It’s much simpler than any of these things, but can be so much more difficult to get right. So, what is it?
Positive Cash Flow
Cash flow (also "cashflow") refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time. (Here’s how Wikipedia describes it)
It’s a simple concept. You want to have more money coming in than going out. I’m pretty sure a basic handling of this concept occurs the first time you get an allowance as a child. It’s one of those obvious facts of life that get neglected on a regular basis. Others include;
I should start saving for my retirement in my 20’s.
I should eat better, and exercise more.
I should stop using my credit card for take-out, and then only make the minimum payment each month.
Unfortunately, just because it’s obvious, doesn’t mean it’s automatic. In business, it’s really easy to get caught up in the wrong financial statements. When a bank, other lender, or vendor asks for financial statements at the end of a fiscal year (at least where I live), they usually focus on the same 2 statements; the Profit/Loss (aka Income Statement) and the Balance Sheet.
The Profit/Loss statement shows your income, your cost of goods sold, and your other expenses. A good result on this statement means you sold your products or services for more money than it cost you to buy them and support the business. The balance sheet shows your Assets, your Liabilities, and your Equity. Basically, how much you have or will have, whether tangible or not, and how much you owe or will owe. The difference is your equity, positive or negative.
These are very important to judge the success or failure of a business. However, focussing on these exclusively can be disastrous.
How can my Balance Sheet and Profit/Loss look great, but I’m still broke and my business is falling apart?
Let’s think about what these 2 things are telling us.
Profit/Loss: Let’s say you generate $1,000,000 in revenue this year. The products you sold cost you $500,000, and the rest of your expenses (wages, utilities, advertising, etc.) cost you $400,000. You had a 50% gross margin, and $100,000 in net profit. That’s great, and hard to find in the last couple years. Shouldn’t there be $100,000 in my bank account now? Well, no, not usually. What if 1/4 of your customers haven’t paid their account yet. You could have $250,000 in receivables (money people owe you). Maybe the increase in sales made it necessary to buy a bigger building. These 2 expenses don’t show up on a Profit/Loss, they’re over in the Balance Sheet.
Balance Sheet: Let’s say your balance sheet looks great too. You have $1,000,000 in assets, and you only owe $800,000. That’s great! My business is doing so much better than everyone else, right? Well, once again, not necessarily. Again, assets aren’t just cash. They’re made up of cash, receivables, and other items of worth (usually buildings, land, inventory, and vehicles). Receivables are only assets until you realize that the customers aren’t going to pay you. If the economy were to take a turn for the worse, and suddenly 1/2 of the customers who owed you money went bankrupt (sound familiar), then what?
As you see, it’s not hard to look great on paper, but still not have enough money to put gas in the company car. If all of your money is tied up in inventory sitting on a shelf, how do you pay for the furnace when it breaks down?
This is a topic that I could write about for days, and I think I’ll put together something more substantial, perhaps a guide or eBook. The main point is this; you need to have fast, positive cash flow in your business at all times. Just like in your personal finances, you need to have the cash available to you when disaster or opportunity strikes. Here are some examples:
- your store needs some major repairs (i.e.. furnace, plumbing, new windows)
- you ordered an expensive item for a customer, they bail, and the vendor won’t take it back
- your tax return gets reassessed, and you suddenly owe $10,000 more than you thought
- one of your vendors is offering you 35% off your order, if you pay for 3 months worth of product in advance
- a booth just opened up at the trade show you want to attend, but it’s next week and you need to fly 2 of your employees down
- a smaller competitor is struggling, and has decided to sell the business, giving you the opportunity to buy it and open a 2nd location
Ok, fine, I believe you, now what do I do?
Every industry is different, but here are a few tips that apply to a lot of businesses.
Extend credit very carefully:
Some of you eBay sellers and convenient store owners don’t run into this. However, there are still a lot of small businesses that give credit to their customers on some level. This is especially true when your customers tend to be other businesses. Be very careful who you offer terms to. Think of it as giving them cash out of your pocket, or giving them the keys to your car. Would you do that with a stranger?
If you are in an industry where this is a necessity, at least follow this advice.
- Keep the terms for repayment short. Instead of giving them 30, 60, or 90 days to pay you back, offer them 7 or 14 instead. Consider offering discounts for early or pre-payment.
- Have a credit card and drivers license on file.
- If it’s business, get some referrals from their other vendors, and have them fill out a vendor application.
- If it’s an individual, run a credit check, and have them sign a credit agreement.
In the moment, it’s a bit more paperwork, but it will save you a lot of trouble in the future.
Having $1,000,000 of inventory on the shelves looks great on a Balance Sheet, until the products get old, or the fad dies off, and now they’re only worth $500,000. Sure, it’s good to buy in bulk to get the discount, but there’s a fine line you need to walk. If you’ve been in business for a few years, sit down this weekend and look over your sales figures for the past few years. If there are items that sell well, year after year?
- Talk to your vendor, and negotiate a really big discount on buying 3, 6, or even 12 months worth of that stock.
- Try to get them to give you good repayment terms, so you’re paying more during the busy season, and less when business is dead.
- Never buy fads in large volume, unless you can afford to lose big. For every Tickle-Me Elmo, there are a hundred Segways rotting away in warehouses.
Run your business the same way you run your house. If you have $1000 in the bank, would you go out and spend it all on toilet paper, even if you know you’ll use it eventually? Of course not. You’d be broke, and having thousands of rolls of toilet paper on hand wouldn’t do much to appease your impending hunger.
Buy vs.. Lease or Rent:
There are a lot of opinions on this debate. I also know that there are lots of tax implications that come into play, which is a topic that could take up a bookshelf, so let’s avoid that for now. Let’s discuss this as it pertains to cash flow.
Before you make a large asset purchase, like a building or a vehicle, consider your current cash position. If you have to go into significant debt, or spend all of your emergency cash, I would think twice. In the first few years, especially in a micro or small business, financial agility is very important. I understand the value of owning the building. The long term benefits of an asset that goes up in value as the amount you owe goes down is obvious. However, unless your trust fund is paying for this, you’ll want as much money in reserve as possible. Renting and leasing the equipment, vehicles, and building gives you a consistent monthly payment, and frees up your cash and credit for inventory, emergencies, and opportunities. Here are a few quick points:
- Renting an office can save you from repairs and maintenance on a building you own
- Sign shorter leases (if any) if you think you’ll outgrow the office quickly
- Upgrading rental equipment and tools is much easier than selling and buying
Look, if your business has a war chest like Apple or Microsoft, you can approach this much differently. The point of this is to get you from where you are, to where they are. Companies like Apple are powerful because they have that kind of cash to spend if they need to. They can weather a big lawsuit, buy a rival company, or test out crazy product ideas, without worrying too much. However, we’ve seen plenty of times when a big company has fallen because they were too focused on profit margins, but didn’t have any money in the bank when they needed it.
You want every dollar you have to be working as hard for you as possible. Instead of buying extra inventory to store in the back, why not invest some of it, or pay off the company credit card? As a small business owner, you have to spend every dollar as if it were your own, because most of the time, it is.
Tuesday, April 20, 2010
I ran across this video this morning, and thought I’d share it. Fear of failure has to be on the top of most peoples list of “Why I Don’t Want to Start My Own Business”. You’re leaving the comfort of a 9-5, regardless of how demoralizing that job may be, and embarking on a terrifying journey.
What if the business fails? What if I can’t afford to pay the bills?
True, that’s a possibility. Are you telling me, after the last year or two, that being an employee is any safer? What about when the risk pays off? Was there any chance that you’d end up successful and independent while sitting in that cubicle? Was your boss going to show up one day, decide he was bored, and just give you the business the run as you saw fit?
Failure is inevitable. If you went through life without ever falling down, you wouldn’t appreciate the times you were standing tall. Since success can sometimes just come down to good fortune, it’s when we struggle that we learn the most about ourselves. The year I spent managing a retail store was the most demoralizing year of my business life. However, it was also the greatest learning experience to date.
Anyway, watch this short clip. The next time you feel like you’ve failed (or are worried that you might), remember that you’re in good company.
Monday, April 19, 2010
Thankfully, I seem to keep running into problems as I try to get this blog off the ground, and streamline my workflow. I say thankfully, because it makes for good blog material.
1. Google Reader
I’ve run into a frustrating snag when it comes to Google Reader. As I mentioned before, one of the steps in my process involves emailing important articles from Google Reader to GMail. Usually, when every couple of emails, it brings up a Captcha to prove that I’m not spamming myself. Usually, I was doing these in small batches, so no big deal. Since then, I’ve been trying to catch up on my work, so I’ve been emailing quite a few articles at a time. Both times Google has temporarily locked me out of my Reader account. It seems they think I’m some bot trying to spam the world with Reader articles. With all of their algorithmic power, you would think they’d notice that it’s me emailing my own GMail account from the same IP address. Unfortunately, not the case.
So, what the heck do I do about this? For a blog of this stature (I get double-digit reads some weeks!!), you would think that Google would do all that it could to appease me. Just in general, there aren’t enough good ways to get content into Google Docs. I really like the service, although it’s still not powerful enough to ditch Office completely. I can’t even get the Chrome extension “Send to Google Docs” to work properly.
I wanted a quick and easy way to send out a tweet every time I posted something on my blog. Sure, I can just as easily do this myself with a quick message and a bit.ly link. The problem is, I’m trying to write more posts in advance, and schedule them in the future. I’m certain that with my bad memory I’ll forget, so it’s just easier to have a service that does this for me.
Twitterfeed was the first result back from a Google search, and seemed to be exactly what I needed. At the time when I signed up, I was still using a .blogspot domain for the blog. It was only a few days later that I switched everything over to my own domain. When I signed up for Twitterfeed, I used my OpenID from Blogger to sign in. When I switched over to the new domain, Twitterfeed kept working fine, so I assumed everything transferred over properly.
I’m having a weird problem. I wanted to change the settings on how it tweeted. It was including a quick snippet from the first line of my post. I wanted to change it to just say “New Blog Post: Post Title bit.ly link”. When I went to sign in, it wasn’t showing my blog, just a form to enter a new blog for the service. I signed in with both OpenID’s, and still nothing, but it was still tweeting after every blog post. I tried entering my blog again, in hopes that this would override any previous settings. Nope. Now it was tweeting twice. I went back into the Blogger dashboard, and revoked any permissions that Twitterfeed had to my account. When I opened up Twitter this morning, it had still tweeted my new post.
It’s not the end of the world. If I hadn’t wanted to tweak the output of the tweet, I wouldn’t have been bothered. Have any of you had this problem before? Any suggestions?
update: I checked this morning, and Twitterfeed managed to post 2 tweets; one with just the title, and another the old way. It looks like I’m going to have to email them and get this fixed.
Sunday, April 18, 2010
I just finished reading yet another great post from Get Rich Slowly, “Spend Based on Who You Are, Not Who You Want to Be”. It goes against a lot of the business wisdom I grew up with, and really made me think.
I was raised on the notion that you should always “dress for the job you want”. That quote always meant more than just clothes. To me it implied that you should always live slightly above your means in order to get the attention of your bosses and peers. There is some wisdom to that. If you want to be CEO, showing up to work in a hoodie and sandals won’t give off the right impression. I recently finished reading a book by Donald Trump “Think Big and Kick Ass in Business and Life”. A recurring theme throughout was the idea that you should always plan for greatness, always buy the best, never accept second best.
The theory breaks down when you assume more money = more success. Like I said, you don’t show up for a corporate job dressed like you’re in search of a hacky sack circle to join. That doesn’t mean you have to show up in a $5,000 suit either. On the same level, buying a $500 driver doesn’t make you a better golfer, and a $500 stroller doesn’t make you a better parent. There are extremes you want to avoid in either direction. You need a clean suit for the office, a computer capable of running the programs you use, and a car that gets you safely and affordably from point to point. Anything beyond this becomes vanity. Unless you are in a career where image and status directly affect your bottom line, what good are you doing by spending more than you can afford?
There have been many projects I’ve started over the years that turned into nothing more than debt. Do any of these sound familiar?
I really should be better at home improvement, so I should go down and spend hundreds on tools.
Sure, the computer I need NOW is $500, but maybe I want to do video editing someday…..I should by the $2,000 one instead.
If I spend the extra and buy the nice one, it will force me to get out there and work harder.
If any of those lines you fed yourself actually worked, more power to you. They sure didn’t for me. So, what do you think? Should you dress for success, buy the best, regardless of your current state? Or, should you be modest, and buy what you can truly afford NOW, and hope that your hard work and attention to detail (not the cost of your shoes) earn you the respect and success you seek?